馬斯科 (MAS) 2013 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to Masco Corporation's fourth quarter 2013 conference call. My name is Janice, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.

(Operator Instructions)

I would now like to turn the call over to Vice President of Investor Relations, Maria Duey. Maria, you may begin.

Thank you Janice, and good morning to everyone. Welcome to Masco Corporation's fourth quarter 2013 earnings conference call. Joining me on our call today are Tim Wadhams, President and CEO of Masco; John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer; and Keith Allman, who will become President and CEO of Masco on Friday, February 14.

Our fourth-quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion on our website. Following our prepared remarks, the call will be opened for analyst questions.

As a reminder, we would appreciate it if you would limit yourself to one question with one follow-up. If we are unable to take your question during the call, please feel free to call me directly at (313) 792-5500.

I would like to remind you that statements in today's presentation will include our views about Masco's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in our form 10-K and our form 10-Qs that we filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures. Any references to operating profits, earnings per share, or cash flow on today's call will be as adjusted, unless otherwise noted, with a reconciliation of these adjusted measurements to GAAP in our quarterly press release and presentation slides in the Investor Relations section of our website at www.masco.com.

With that, I will now turn the call over to our President and Chief Executive Officer, Tim Wadhams. Tim?

Thank you, Maria, and thank all of you for joining us today for Masco's Fourth Quarter 2013 Earnings Call. If you would please move to slide number 4.

We are very pleased with our fourth-quarter and full-year 2013 results. We had a great year. As we have for the last several quarters, Masco's fourth-quarter results showed strong sales and profit growth compared to the prior-year quarter. You might remember that in the fourth quarter of 2012, we had a very strong quarter, with sales up 11%.

Our leadership position in the building products industry and our focused execution against the housing recovery benefited all of our segments this quarter, with all five contributing to our sales and profit growth. In North America, we continue to benefit from increased new home construction activity, and from improving repair and remodel activity, as consumers invest in bigger-ticket projects like windows and cabinets. In addition, our international sales and profits continue to increase as a result of a solid performance by our international plumbing and window businesses in a slowly improving economic environment in the Euro zone.

New products and new programs resulting from our emphasis on customer-driven innovation generated a vitality index for 2013 in excess of 30%, and helped bear Delta and Hansgrohe achieve record annual sales. We're seeing the benefit of our strict focus on cost containment, as well as our ongoing commitment to total cost productivity, as evidenced by our strong incremental margins for both the fourth quarter and the full year 2013.

Importantly, our installation and cabinet segments were both profitable in 2013. As previously indicated, returning these segments to profitability has been a top priority for Masco.

The fourth quarter was a solid close to a strong year. For both the fourth quarter and the full year 2013 our sales were up 9%, and our operating leverage drove improved operating margins, which were up over 200 basis points. Again, that is for both the fourth quarter and the full-year 2013. Those metrics helped drive EPS to more than double on a full-year basis, and free cash flow to exceed $500 million.

In addition to improving the math related to our financial results, we also accomplished each of the priorities we identified at the beginning of 2013, which are included on slide number 5. We delivered on what we said we were going to do at the beginning of the year.

We will touch on these items as we work our way through the presentation. They represent areas of focus in support of our strategic initiatives, which are included on slide number 6.

As we've communicated in the past, our strategy is focused on four key elements to drive performance. Our commitment in investment to expand our market leadership positions was illustrated by Behr's Premium Plus Ultra recently being recognized as the number one rated interior paint by an independent third party. We're also excited to announce the launch of our new Super Premium Behr Marquee interior paint and primer, which is being rolled out in select markets as we speak.

In addition, our phased introduction of new products to support our Merillat cabinet brand and our redesign of our Hot Springs spas have been extremely well received by their respective dealers. Our Company-wide emphasis on cost control as sales increase is reflected by our improvement in gross and operating margins. John will discuss that in a couple of minutes, but we're really pleased with that outcome.

Our installation segment is capitalizing on improved market dynamics that drove sales in all channels of their business. By remaining focused on profitability, they continued their trend of improving operating profit.

North American cabinetry continues to benefit from positive trends in new home construction and repair-remodel activity. As I mentioned, consumers are taking on bigger-ticket remodel projects, which is helping our KraftMaid brand, particularly in the dealer channel. The team continues to execute on their strategic plan, positioning the business for future profitable growth.

Combined, these segments -- cabinets and installation -- improved operating profit by $22 million in the fourth quarter, and by $113 million for the full year 2013, compared to 2012.

In addition, we remain committed to strengthening our balance sheet and increasing our financial flexibility. John will talk about our progress in 2013 in a couple of minutes.

These strategic highlights demonstrate our continued focus on execution, which produced another strong quarter and a great year. If you would please move to slide number 7, John Sznewajs, our CFO, will take you through our financial and operational review.

Thanks Tim, and good morning, everyone. If you could please flip to Slide 8. Before getting into the numbers, I've been at Tim's side for the last seven years and I want to thank him, acknowledge him for his leadership, and wish him a long, productive, and healthy retirement.

As Maria mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and one-time charges.

We exited 2013 with sustained momentum. Sales in the fourth quarter increased 9%, as we experienced strong sales growth in all segments. We posted this strong revenue improvement against a challenging Q4 2012 count, which was up nearly 11%. As Tim mentioned, the fourth quarter was our ninth consecutive quarter of year over year sales and profit growth.

Looking at January, our sales increased mid-single digits percent, despite the challenging weather conditions, and a difficult comparison to January of 2012, which was up low double digits -- I'm sorry, January 2013, which was up low double digits. Overall, sales in North America were up 9% for the quarter.

While we experienced the strongest sales growth in the new construction channel, we saw demand improve for our repair-remodeling products, including big ticket repair-remodel products. As a reminder, repair-remodel activity represented approximately 70% of our sales in 2013.

International sales increased 7% in local currency in the quarter, clearly out-pacing Euro zone growth, with particular strength in the UK. Gross margins expanded approximately 100 basis points compared to Q4 2012, to 27%, due to improvements in every segment. We delivered strong bottom-line performance, as operating income increased nearly 50% in the quarter to $153 million, with operating margins expanding 210 basis points to 7.7%, the strongest fourth quarter we have reported in several years.

Overall this was a great outcome, despite incurring approximately $6 million of higher insurance-related expenses in the quarter, costing us approximately $0.01 per share. Our EPS was $0.15, an improvement of $0.09, or 150%, compared to the fourth quarter of 2012.

If you turn to Slide 9, we see the components of our operating income improvement in 2013. $148 million increase in net volume mix was principally driven by the strong volume increases we experienced in each reporting segment. The strength was partially offset by an expected negative mix in our cabinet segment, as our sales to builders grew at a more accelerated rate than our cabinet sales to other channels of distribution.

Net price commodity improved approximately $54 million for the full year, or $6 million for the fourth quarter, largely driven by cabinets, plumbing, installation, and the other specialty segments. This improvement was partially offset by an unfavorable price commodity relationship in the decorative architectural segment. There is no year over year impact of our metals hedge in the quarter.

We captured $38 million of profit improvements gross in the quarter, exceeding our expectations, and these were realized in all of our businesses. These improvements were offset by higher employee-related expenses, particularly incentive compensation at the business-unit level, and the insurance-related costs I mentioned previously.

We are pleased with our full-year profit improvement initiatives gross, totaling approximately $165 million, exceeding our prior estimate for the full year. For 2014, we expect to generate approximately $150 million of profit improvements gross, similar to what we have delivered on average for the last five years, largely coming from continuous improvement and supply chain activities.

If you turn to Slide 10, please, you can see in the plumbing segment we delivered a solid performance, as sales increased 8% in the quarter. The strong sales momentum of our North American faucet and toilet business continued, as our innovative new product introductions drove consumer demand, and led to a low-double-digit percent sales growth in the quarter.

Growth in the trade channel is very strong, up mid-teens percent, and reflects our continued investments in the showroom, commercial and multi-family segments of this channel. As we have previously mentioned, we are up against a difficult comparison in the quarter, as Q4 2012 benefited from approximately $12 million of load-ins related to our retail program wins in the second half of last year.

We also experienced low double-digit growth from several other North American businesses, such as our rough plumbing and our spa business. Our European sales gains continued, with sales increasing mid-single digits in local currency, ed by Hansgrohe. Partially offsetting this growth was the exit of the unprofitable Tree Channel bathing business, and lost retail bathing programs.

These actions negatively impacted sales by approximately $10 million in the quarter, and totaled approximately $60 million in 2013. For 2014, we anticipate sales will be negatively impacted by approximately $10 million for the full year. As we complete the integration of this business into Delta, we are focused on returning this business to profitability. Operating profit increased 35% from $25 million, driven by incremental volume, a favorable price-commodity relationship, particularly in Europe, favorable currency impact, and productivity and cost control compared to the fourth quarter of last year.

If you turn to Slide 11, continued consumer demand for new product introductions such as Behr Marquee and Behr DeckOver drove strong performance in our pro business, and international sales drove a 6% increase in our decorative architectural segment in the quarter. As a result, we realized high single-digit gallon growth in the quarter.

Liberty Hardware also continues to contribute to the top and bottom lines of this segment, as a result of share gains in several new programs at retail. Our continued efforts to drive gallon growth included approximately $6 million of incremental investment in advertising, promotions, and international growth, which when coupled with an unfavorable price commodity relationship, more than offset Liberty Hardware's strong profit performance in the quarter.

Turning to Slide 12, our sustained focus on profitable growth in the cabinet segment resulted in a 9% increase in the fourth quarter. We improved our operating results by $13 million in the quarter, and expanded our operating profit margin by 580 basis points compared to the fourth quarter of last year.

The environment and market dynamics for cabinetry are improving in both the repair-remodel and new construction channels. All three of our brands are benefiting from these improved industry conditions. As a result, North American cabinet sales excluding countertops increased low double digits in the quarter, reflecting continued strength with our builder accounts, and strengthening remodeling demand.

New product launches in the first half of 2013 have made a positive impact, and contributed to strong semi-custom cabinet sales to the dealer channel. The sales to these customers increased mid-teens percent in the quarter.

We experienced terrific operating leverage in the quarter, as we delivered a very strong 62% incremental margin. This improvement was driven by increased volume, cost control, productivity improvements, and our continued leadership around disciplined promotions. This was partially offset by a higher raw material cost, and negative mix due to increased sales to production builders.

On a full-year basis, the segment was profitable, sooner than we anticipated. This operating profit improved by $57 million, further evidence that our turn-around efforts are effective, and we are positioning this business for future profitable growth.

Turning to the Slide 13, the segment sales growth of 15% was driven by a 20% increase in residential new construction, and to a lesser degree by higher sales volumes in our commercial, retrofit, and distribution channels. The 20% increase in new residential construction sales compares favorably to the 14% increase in housing starts lagged 90 days. This was the 10th consecutive quarter of year over year sales and operating profit improvement in this segment.

In addition to solid top-line performance, the Management's strong execution, focus on cost control, and a favorable price-commodity relationship delivered improved bottom-line results, with operating profit improving by $9 million, and operating margins expanding by 210 basis points in the quarter. For the full year, operating profit improved by $56 million.

This segment exhibited strong operating leverage in 2013, delivering 28% incremental margins, despite the impact of rising raw material and labor costs, and approximately $5 million of unanticipated insurance costs in the fourth quarter. The strong execution was complemented by the continued implementation of the leaner operating model that is allowing for efficiencies, and facilitating growth in new geographies. We added 15 new locations in 2013, and anticipate adding an additional 15 green field locations in 2014.

Turning to Slide 14, you see our other specialty product segment sales increased 9%, yielding another strong quarter, driven by low-teens percent sales volume growth in our North American window business. This growth was due to the continued recovery in the repair-remodel and new home construction activities, as well as share gain.

As Europe continues to show signs of improved economic stability, our UK window business produced positive volume increases, resulting from the continued success of our small composite door acquisition in the first quarter of 2013. The segment's operating profits growth in the quarter was due to increased volume in windows, and a favorable price-commodity relationship, partially offset by ERP and higher employee-related expenses.

Turning to Slide 15, we see the entire team's hard work to strengthen the balance sheet is paying off. We retired $200 million of debt in 2013, and $600 million of debt since the beginning of 2012. Working capital as a percent of sales is at a record low, 10.6%. I want to thank the team for their continued focus on this measure.

Our earnings power is evident, as free cash flow exceed $0.5 billion in 2013. We ended the year with more than $1.5 billion of balance-sheet liquidity. We find ourselves well positioned to grow with the recovery. I will now turn the call over to Keith for the outlook. Back to Tim, I'm sorry.

Back to Tim before Keith. Thanks, John. If you would please move to slide number 16. As John mentioned, and as I think all of you know, this is my last earnings call. I want to thank all of you for your support and interest in Masco over the years. I wish all of you continued success.

I believe that Masco is in a great position to drive additional shareholder value as the recovery in housing continues. I'm very proud of our performance in 2013, and I want to thank our employees across the enterprise for their commitment and dedication. Keith has an outstanding team to lead, and I am very excited about Masco's future.

Now I would like to turn the call over to Masco's new president and CEO, effective this Friday, Keith Allman.

Thank you, Tim. It has been a privilege working for Tim over the years. I think I can speak for everyone here at Masco when I say we will certainly miss him, and we appreciate all that he has done for the Company. I'm humbled and excited by the opportunity to be Masco's next CEO, and I look forward to continuing to execute on the strong strategy and foundation that Tim has put in place.

Please move to Slide 17 for a couple of comments before we go on to Q&A. The underlying fundamentals of our business remain strong, as evidenced by another quarter of sales growth and margin expansion. We expect that the positive trends in new home construction, repair and remodel, home price appreciation, and an increase in big ticket spending in North America will continue.

We anticipate new home construction and repair and remodel to improve in Europe over the coming year, as well. I should note that despite a fairly flat European market in 2013, we fared pretty well, with international sales up 4% for the year in local currency. ¶ Having said that, we recognize that there are macroeconomic factors that will challenge us going forward, including the pace of the global economic recovery. Despite these factors, we are positioned to continue growing profitably, and creating value for our shareholders.

Please move to Slide 18. Over the next year, we will continue to focus on execution., maintaining the positive momentum that started for us in the fourth quarter of 2012. We are well positioned to grow our key brands, and will accelerate our emphasis on maintaining a customer-focused innovation pipeline, improving our enterprise leverage, further penetrating international markets, and focusing on continuous improvement across our enterprise. Cost containment remains a priority, with a particular focus on SG&A costs.

Also in 2014, we plan on positioning the Company to reduce debt by $300 million to $500 million by 2016. As a reminder, we have $1.5 billion in debt maturities between 2015 and 2016. Improving our credit metrics will remain a top priority for us.

I look forward to sharing more with you in the coming months as we deploy our strategies to deliver value to the shareholders. With that, the lines will be open for questions. Operator?

In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session.

(Operator Instructions)

Your first question is from Stephen East of ISI Group.

Tim, congratulations.

Thank you, Steve.

If we look at the current trends, you talked about some about the current trends, with the new construction and the remodel-repair. I guess we could dig in a little bit more on the remodel-repair. Are you seeing -- how much of it is volume versus starting to see some mix shift up, and are you seeing any change in that combination over the last couple of quarters, and maybe even what you're seeing year to date so far?

Yes, Stephen, it's John. I think we are starting to see some improvement in volumes in our repair-remodel activity. I guess the evidence I would point to, as I mentioned in my prepared remarks, sales to our dealer channel in cabinetry, which is largely a repair-remodel-oriented channel, were up 19% in the quarter.

I think that is strong evidence. If you look across -- our other big-ticket item we see is windows. We saw nice repair-remodel activity there in the fourth quarter, as well. That, complemented with our plumbing business which was up 8% -- and that's largely repair-remodel-oriented products as well -- all leads us to believe that volumes are continuing to pick up.

Are you seeing within those pretty big numbers -- how much of that would you attribute mix shift versus pure volume?

In terms of mix, we are not seeing a whole lot of mix at this point. If anything, mix in the cabinet segment was a little bit negative, just because as I mentioned, the sales to production builders grew at a more accelerated rate than sales on the repair-remodel channels. We are starting to see a little bit higher average selling prices in some of our cabinetry products, which is indicative of consumers wanting to trade up a little bit within the segment.

Fair enough. Then on the incremental margins, your plumbing and cabinets were strong. I'm interested in your expectations for sustaining those moving forward. Then the install, paint, and other specialty were a bit lower than what we thought. What was going on there, and your expectations for those?

You're right, Stephen. You're right, incremental margins were strong in a couple of segments, both plumbing and cabinets. Cabinets, just to refresh everyone's memory, we generally drop about 30% to 35% incremental margins across the Company. Our manufacturing segments tend to be a little bit higher, closer to the 30%, 35% range.

Our installation segment tends to be a little bit lower, closer to the 25% range. Indeed, we saw about a 62% incremental margin in cabinetry in the quarter. Some of that was driven by volume increases we saw. ¶ But also some of it has to do with the fact that we have seen some reduced promotional activity out in the market place. That helped supplement when we normally see in terms of drop-down.

On the plumbing side, again, just good volume leverage across the board. On installation, you did reference something a little bit lighter in that segment. That, you may have heard, was impacted by $5 million of insurance-related expenses in the quarter, which if you factor that out, they would have there a normal 28%, 30% incremental margin there.

Our paint business, as I mentioned, was impacted by about $6 million of investments that we had related to advertising promotions and international growth. But beyond that, I think we are in generally pretty good shape in that segment.

Feel pretty good about our incremental margins for the year. We are up 33%, incremental margins. I think the Company is performing as we expected.

All right. Thanks a lot.

Your next question is from Eric Bosshard of Cleveland Research.

Two things. One, can you talk a little bit more about January. You indicated it was up mid-single digit. Can you give a little bit more color on where December was, and how that has translated into January, and how we should be thinking about what you have indicated for January?

Yes, so Eric, December was up high single digits. We had previously indicated that October- November we were up high-single digits, so December has continued that trend.

As it relates to January, a couple things. We saw a little bit better business in Europe. They're not experiencing the harsh winter that we're experiencing here. That was some strength.

Then the other area, just generally speaking, where we saw some strength is in those segments that serve the warmer climates in the United States, obviously the Midwest, the East Coast, and the Northeast a little bit more impacted by the more difficult weather conditions.

When you sift through the information there, and you think about where things go for 2014, can you isolate enough in January to see that it is weather, or is there more going on that's influencing the slower results in January?

I think it is hard to say. Again, remember, Eric, we're up against a pretty tough comp. We were up low double digits in January of 2013. Feel like -- we were pretty happy with the results in January, just given what is going on in the environment today. Remember, January is probably our seasonally our slowest quarter of the year.

That's helpful. Secondly, in the paint business, you obviously have made some investments here for the last couple of quarters. Curious in terms of how much longer the investments continue, when we should see a return to profitability improvement or better incremental margins? Then a little bit of color on the pay back you're expecting from the investments that you're making, what that should look like?

Yes Eric, a couple of questions embedded in there. But in terms of the investment going forward for 2014, we do expect to continue to invest in international growth in our pro business, so I would expect some incremental investment. We will call those out as we make those investments every quarter.

In terms of one of the things that we're focused on, we have always said that yes, gallon growth is a priority here, and that we're focused on it, particularly with our channel partner. As a result, we are willing to make these investments because they will lead to high -- they might not lead to improved operating margin, but they definitely lead to a higher ROA, and we're trying to grow operating profit dollars in addition to that.

I think that is our goal for this segment. I think we are accomplishing that. We might take a little bit lower margin to drive some of these other activities.

Great, thank you.

I would still expect those, though, to be a high-teens margin business, though, Eric.

Great. Thank you.

Your next question is from Mike Wood of Macquarie Capital.

Just touching on decorative, you mentioned that paint gallon growth was high single digits, builder hardware was up high teens, yet sales were up 6%. Can you talk to sort of what the puts and takes were in there?

Yes, so you hit on a couple of the highlights. The other thing that impacted us in the quarter is that we did have a negative price commodity relationship in the quarter.

Okay. Then on the incremental spending, we went from $10 million in 3Q to $6 million in 4Q. What should we expect going forward?

As a reference to just in the last question, we do expect to continue to invest for the full year, 2014 in some of these additional areas, such as advertising, promotions, and international pro growth, things like that. For the full year 2013, we were about $16 million, $17 million in spend. My guess is that we will be something less than that in 2014, but somewhere in the neighborhood of about $10 million or so.

Great. Thanks.

The next question, Garik Shmois of Longbow Research.

Raw material installation in the quarter, I was wondering if you could quantify that for us, and talk about your confidence and your ability to pass that through?

I'm sorry, Gary, I missed the first part of your question.

Yes, sorry. The raw material inflation installation, you called out, just wondering if you could qualify that for us, and talk about your confidence in passing that through in 2014?

Yes, sure. A number of our installation manufacturers from time to time have passed through pricing increases, and we did take -- there was another price increase announced that was effective in the fourth quarter of last year.

We did -- as you can see by the performance of the segment, they have had posted some pretty good operating results and incremental margins. As a result, we are working hard on passing pricing through when it is required.

At the same time, though, we don't just try to press price through. We also always work on working with our suppliers, working on productivity improvements in the segment, to try to offset some of those price -- that price inflation, as well.

Okay, thanks. Then just switching to cabinets, a competitor of yours has announced plans to add capacity over the next several years. Just wondering if you could speak to first off your utilization rates in that business, and your plans, if any, to have to add capacity over the next --call it two years?

Gary, this is Keith. I'll take that one. Our capacity position in cabinets is in great shape, and we expect our current footprint to be able to support 1.5 million in starts. We're in the commensurate repair and remodeling up-tick, so we're in good shape there -- and that goes across all channels.

In the builder direct channel, for example, I was just out in Las Vegas at the builder show, and clearly the number one concern from the big builders was are we going to be able to supply on time in great quality, and we most certainly will be able to do that. When you look across the competitive landscape, we have seen some of our biggest competitors actually pull out of the direct builder channel out west.

We've seen another big competitor stop bidding out there. We're not approaching that -- the team -- in that way. The team has done a great job of getting us ready for this up-tick, and we're prepared.

Great. Thank you.

The next question is from Adam Rudiger of Wells Fargo Securities.

With cabinets, can you talk a little bit more -- you talked about it being a less promotional environment. I think you said high teens to the dealer channel, and the big builders grew even faster than that.

That would to me suggest a little bit better margins say relative to the first quarter when revenues were somewhat flat. Can you just talk about maybe what I'm missing there?

I think, Adam, one of the things that you have to focus on is the fact that we kind of led the pull-back in promotional activity in the fourth quarter of last year, and so some of the benefits that we enjoyed last year anniversaried in the fourth quarter of this year.

Okay. Just to make sure, I'm going to try to get a clear picture of margins. The insurance charge, where was that in the consolidated income statement? Just to be clear, that was also in the installation segment?

On a consolidated basis, it flows generally through the P&L. Then we pushed those costs back down to our segment levels. It's in SG&A in the overall consolidated P&L, and then we pushed it down to several segments. One, the biggest one obviously was our installation segment which we mentioned, and then we also had a little bit of expense in our decorative architectural segment, as well.

Okay. Thank you.

The next question is from Stephen Kim of Barclays.

Thanks very much, guys. Earlier in your remarks you had mentioned about $150 million improvement in profit in 2014 from 2013. I assume that was just the net volume mix, which would sort of compare to the $148 million in 2013, versus 2012? I just wanted to --

No, Stephen, it is a little bit different than that.

Okay.

Every year, we talk about our profit improvements on a gross basis. In 2013, we realized about $165 million in profit improvements gross, and that netted down to the smaller number, about $19 million or so. In trying to foreshadow that same profit improvement on a gross basis would be -- for this year, I indicated that it would be approximately $150 million, about the same amount that we've averaged over the last five years.

Got it, okay. So that was related to your productivity? I just want to make sure --

Exactly. You got it.

Okay, got it. That's great. That's very helpful.

Secondly, I was wondering if you could talk a little bit about what you're seeing in terms of cabinets. You mentioned, I think, the dealer up high teens. You also said your windows were strong. I'm sorry, I didn't mean cabinets -- I meant R&R. Big-ticket R&R. You pointed to cabinet in the dealer channel being up strongly, you said cabinets ex countertops were up 10%, and dealer up high teens.

I'm curious as to whether or not those numbers are influenced by share gains or something like that -- if that sort of high-teens type number is in your view representative of the move towards big ticket, or if there is something else that is sort of influencing that number that we should be considering as we think about the market overall?

Yes, Stephen, it is not just one factor that impacts us. There are a number of things that get into it. Some of it is, to your point, it could be things like higher volume, it could be things like some higher selling prices. We did -- we are realizing some higher average selling prices out there.

We have picked up some. We do think we are doing well in terms of some of the new product launches that we came out with. The innovation that KraftMaid came out with in the first half of 2013, it seems like it is really resonating in the dealer channel. It seems like it is driving more dealer traffic. There's a number of factors that go into it. It's not just one factor that drives that top-line growth there.

Okay, great. If you had to take a stab and what you think sort of big-ticket R&R has done over year-on-year, would you estimate that it would be somewhat higher or lower than that high-teens figure?

I would say that we saw growth each quarter during the year. It was strongest in the fourth quarter, weakest in the first quarter of last year.

Okay, great. Thanks very much.

Your next question is from David Goldberg of UBS.

I wanted to talk about in the installation business the comments around the increased take per unit in upgrades. Can you talk a little bit about what is happening? Is it the kind of grade of installation people put in, the amount of installation, or are we talking about more ancillary, add-on services people are taking? Just give us a run down of what is driving that commentary?

I think there's a couple things that are driving that comment, David. Number one, we are seeing increased square footage of homes right now, so that helps drive increased take per unit. We're also seeing, as I mentioned earlier, consumers upgrade some of their products -- they may be adding a second or third fireplace in their home, so it is not necessarily, to your point, always installation that's driving that trade-up in the installation segment.

But it's not necessarily co-change or anything that are driving higher requirements for --?

Good point. There are some co-changes that are taking place that are driving it, particularly in the eastern seaboard, We're seeing some co-changes go into effect that are driving some higher installation usage in homes.

Great. As a follow-up question, I understand the desire to pay down debt in the coming year, and obviously great job de-leveraging the balance sheet this year. When you start thinking about returning more cash to shareholders, as you look out, especially since obviously the business is headed in the right direction in terms of cash-flow generation, we're probably early in the cycle here. When do we start thinking about maybe other uses of your cash-flow generation, outside of paying down debt?

Yes David, good point. As we think about capital allocation, we think about a couple of things. One, first and foremost is to always invest in the business. As you have observed, we're not a particularly capital-intense business. CapEx generally runs about 2% of sales. We will continue to make those investments in the business.

After that, as you discussed, we will probably pay down some debt here in the near term. But following those first two priorities, I think the next thing we'll be focused on are both small acquisitions, tuck-ins like we have done at our UK window business earlier in 2013. But I think we also have to balance that with some shareholder friendly activities -- probably leaning more toward the dividend first rather than share repurchases, but we will keep you informed as we refine our thinking around that.

Great. Thanks so much.

The next question is from Keith Hughes of Masco.

I got a new job, or what's the deal? (laughter)

You can start tomorrow, Keith. (laughter)

Welcome aboard. (laughter)

Should have started years ago. Questions on Milgard. The numbers you've been putting up in windows just appear a lot bigger than what we're seeing in the overall industry. Can you speak to what is going on there, why the numbers have been so good?

Yes, I think we have done a lot with share gains in the western US, Keith. One of the things that took place that we observed during the down-turn is that we saw a fair number of competitors fall out of the market place in the western US in 2009, 2010, and 2011. As a result, things are starting to pick up out there.

The Milgard team has done a fantastic job of understanding the market, delivering really good, relevant innovation to the market place as a result, taking a lot of share out there. They also have expanded nicely into some new geographies, particularly western Canada, as well as Texas. They have come up with a couple new products that we're pretty positive about. The Essence window is a fiberglass window, a higher-end window than their vinyl offering, has -- we think it has got a lot of opportunity out there.

Is that a business, when we think about bolt-ons to an earlier question, is that one that you would look to bolt on to?

To the extent it extends our geography in the right direction, Keith, yes. We probably wouldn't go all the way across the country to the East Coast and look at a transaction, but something that was complementary to our existing footprint, that might make some sense for us.

Final question. We've seen some wobble in the home builder orders in the second half of the year. Can you talk about what's kind of your (inaudible - technical difficulty) for the installed service business, in regard to that?

With the softness -- I'm sorry, in terms of just housing starts taking a bit of a pause in the back half?

Yes, how long will that impact, how much? Anything you're willing to give us on that.

Yes, well, we're still seeing the lag in our business -- the 90-day lag. Depending on the market, it is still a little bit elongated over the course of the back half of last year. There's also an impact that we have to take into account. There's increased multi-family activity in the year. In particular, that's going to impact us in the first quarter.

Because as I look at the starts composition in the fourth quarter, I think we got about 37% of all starts are multi-family in the fourth quarter, which will really impact us in the first part of the year. That will have a little bit of an impact. But what we're hearing, as Keith mentioned earlier in his discussions in Vegas with the builders, it sounds like they're optimistic about the spring selling season, so we will see how that plays out.

Okay, thank you.

Your next question is from Sam Darkatsh of Raymond James.

Tim, I wanted to also say best wishes on your next chapter; and Keith, congratulations on the new role and the new responsibilities.

Thank you, Sam.

Most of my questions have been asked and answered. Just a couple of housekeeping questions. The insurance costs, John, are they ongoing? What specifically happened in the fourth quarter? Was it just some sort of a reversal of an allowance, or will there be some ongoing impacts of these unplanned costs?

Well, it was some discrete one-time events that took place, Sam, and they were large enough that we thought that it merited calling them out.

Great, got you. I guess my final question, help me understand why the importance on gallon focus as opposed to total sales dollars. It seems as though maybe paint pricing was off, or at least price versus commodity was a negative impact. So why does gallon growth lead necessarily to higher ROA? Why wouldn't you want to maintain price, as well?

We absolutely want to do everything we can to grow this business, Sam. But as we think about incremental growth from where we're at, we've got a very solid core business in our retail paint business. As we expand internationally, as we expand into the pro, those will be more competitive environments that we're participating in, and we'll need to have sharper margins.

As a result, we want to continue the growth, but that just drives lower margins. But the return on assets as I mentioned is high, because really the incremental investment, other than working capital, you can put into the business to grow that.

So the inference being that paint margins right now are pretty much going to be here, or perhaps pressured going forward, but the returns on capital will be enhanced?

That's right. I would tell you, as I commented earlier, I think we can still maintain our high-teens margins in this paint business, but our return on capital should improve over time.

Okay. Thank you.

The next question is from Michael Rehaut of JPMorgan.

Thank you, and Tim, best of luck. Great working with you.

Thank you, Mike. Appreciate it.

Just going back to the paint question before, can you give us a sense, John, of what the pro and international sales represent as a total portion of your revenues there, and how should we think about that percent growing over time?

Mike, right now, we have been investing in those programs for the last year, 18 months or so, and those businesses are -- we have not broken out the specific dollar value of each of those programs to this point, but I can tell you they're small but growing. We're crafting our strategies to penetrate both of those markets, and we've seen some initial success.

We look forward to continuing to share with you the progress that we're making on those. But at this point, we're not going to break that out.

Okay. In terms of the margins, I appreciate the bifurcation or discussion around margins versus returns, but from a margin perspective, that high teens, you've done 18% now for a couple of years. Given that you expect to continue to do the investment, maybe a little bit of a negative margin mix shift within the business over time, that 18%, 19%, that's kind of reasonable going forward for this business?

Yes, I think so. Mike, what we try to do in this segment is really drive innovation and drive customer value innovation. That's evidenced -- Tim mentioned that we were recognized recently by a third party as the number one interior paint.

I should tell you we're also been recognized by that same party as the number one exterior paint, and the number one exterior stain. We've got kind of the trifecta going right now in terms of quality and value in that. Really good outcome for us. That's really what we're focused on in this segment in terms of driving value for our customers.

Okay, just one last one. On the plumbing side, you did a nice -- had a nice year this year, in terms of top-line growth, incremental margins. You're back at around that 13% level, which is over the last several years really the high-water mark, with the exception of about 10, 15 years ago.

I think we've talked about a more normalized margin that's low double-digit range, 12%, 13%. Is that still the case going forward? If that's the case, how would you reconcile that with the incremental margins? Are there just other costs to running the business, as in promotions or other types of spend that would kind of again keep the longer-term run rate, margin run rate for this business, around the 12%, 13% level?

Michael, this is Keith. I think that range of 12% to 13% is a good way to think about this segment. We do have some up side on the incremental as that drops down in the typical 30% range. But we also have ongoing investments that we are going to continue to make to grow the core faucet business.

When you look at the category expansion opportunities that we have, like we have executed already in toilets, those products tend to have lower margins than the base faucet and fixture market. Having said that, again, similar to our strategy in paint, the ROA is good in that product, and it's an outstanding program for us and the customers. But I think that's a good range to think about the segment, with perhaps some up side.

Great. Thanks a lot, Keith, and look forward to working with you.

Thank you.

The next question is from Nishu Sood of Deutsche Bank.

My first question is on the CapEx guidance. Now, Keith you addressed in your commentary about the cabinets business, that capacity is good for 1.5 million housing starts. I think you might have extended those comments to some of the other divisions, too. It was -- there is a noticeable up=tick in your kind of CapEx guidance, back up to the $200-million range for 2014. I just wanted to dig into that. If capacity is all set, what is driving the increase in expected CapEx for 2014?

Nishu, I will take that question. A couple of things that I think are driving that. I will tell you that, one, we have the ERP implementation at our Milgard unit that we talked about, which will have a fair amount of capital associated with that.

We typically have higher capital in our plumbing segments, and Hansgrohe is launching some new products, so there will be some higher Cap Ex associated with that. We also have some -- a little bit higher incremental CapEx in our cabinet segment, related more to finishing up a little bit of some IT implementation they're working on, and a little bit of finishing equipment.

The other thing I'd keep in mind, Nishu, is on this call this time last year, we told you we have $165 million of capital, we came in at $126 million. If anything, I think probably $200 million is a little bit on the high side.

Offsetting that might be, we may -- we're taking a look at displays out in the market place, and there might need to be some money spent to refresh some of the displays on both the paint and on the cabinet side of things.

Got it. Okay, that's helpful. In the installation business, you mentioned -- I think it was 15 new branches that you added in 2013, you expect in 2014 as well, all greenfield sites. Now historically, acquisitions has been the main way of adding branches in this business. I was just wondering if you could discuss that.

Is there some shift in the -- strategy-wise, or is there some shift in what you're seeing in terms of the market, making greenfield more attractive in acquisitions? If you could maybe just give us some more color on that?

I think it's the way the team is looking, the new team is down at MCS is looking at the way they're growing their business. They have done a very thoughtful way of making certain that they've got costs in line with sales as they grow.

The greenfield locations start out as unmanned stocking centers. As a certain market grows to the appropriate volume, then they will start to man those. So they're very closely monitoring their profitability and making certain that they have their costs in line with expenses. I think it's a little bit different view on the market place.

Does that moan that they have really de-emphasized acquisitions then, or is this just a current conditions, that's what it merits, and maybe that will change going forward?

Over time, could they look at an acquisition here or there? I don't think it is a huge part of their strategy going forward. But if there is something in particular that is a long distance away where they could not establish one of these strategic stocking centers that gets them into a new geographic location, they may look at an acquisition there, but it is not what is driving their strategy at this point.

Okay, thanks.

Your next question is from Bob Wetenhall of RBC Capital Markets.

Thinking about pretty strong end-market demand, so I'm assuming somewhere around $700 million of top-line growth in 2014. I was curious -- what gives you confidence that you can keep spending on general corporate expenses flat, given that pace of sales growth?

For Keith, how important do you view cost control on your list of 2014 priorities?

I'll take the question on general corp expense, Bob. The $130 million of general corp expense that we roughly experienced this year was about $134 million, I believe, versus $130 that we have given you some guidance. A number of things. Obviously, we're focused on very tight cost control here at the corporate office.

We did go through an [ORGA] alignment process in the fall of 2012, and we're starting to realize some of the benefits of those savings. That's really what gives us the comfort, Bob, that we can hang on to some of the cost take-outs that we've done over the course of time. I will turn it over to Keith for his view on cost containment broadly.

Bob, I would say our number one priority going forward is to deliver on the macroeconomic rebound here in North America, and to drive our businesses to their full potential and to leverage our brands. Embedded in that, certainly, is a strong dose of cost control, both from a conversion-cost standpoint in our factories, as well as in SG&A. That is an area that I have experience in, and have done at the various businesses I've been involved with. I would put that as a premium priority for myself and our team.

In addition, we're focusing on leveraging across our businesses. There certainly is a revenue component and a cost component to that. We view areas like logistics and our material buy as prime for continuing to drive costs out in that area. It's tough to say what is 1 and 1-A when you have four number ones, but certainly cost control is a priority for us.

That's helpful. I just wanted to get your view on a three-year basis. You had 600 basis points of improvement in cabinets in 2013. You had over 400 basis points of improvement installation in that business.

That's a lot of improvement in a year. Do you think it's realistic for us to expect that both cabinets and installation can get back to double-digit operating margins within the next three years? Thanks a lot.

Yes, Bob. In terms of getting back double-digit operating margins from both those segments, I think there is the possibility, it all depends on how the end markets develop, both the new construction side as well as the repair-remodel side. As we've talked about, incremental margins generally drop about 30%, 35% of the cabinet business, a little bit less than 30% on the installation business.

If you grow from the 920,000 starts in 2013 to a 1.5 million starts the long-term average, you think about the incremental revenue associated with that growth, and the associated lift in repair-remodel activity, particularly for the cabinet segments, then you consider the operating margin drop-down, or the incremental margin drop-down that we get on those businesses, you can paint a pretty clear picture of getting to clearly, if not high single-digit, low double-digit operating margins in each segment.

Bob, on the cabinet side, we're confident in being able to drive that business to low double digits. We have the best brands out there in the market place. As we talked about a little bit earlier, we have the capacity to take the growth as it comes.

We've structured that business to have a balance across all channels of direct-to-builder, repair and remodeling, and dealer, and we're making improvements in all of those areas. Those are things that the competition can't necessarily say. We're confident about the cabinet business, understanding fully that we've got a ways to go.

Janice, I think we have time for one more question.

Okay. Your next question from Dennis McGill of Zelman and Associates.

I guess the first question, with respect to weather, aside from it impacting ability for customers to get out and shop, are there any impacts on the operational side of the business that you would flag or that we should be aware of?

We have had some very slight interruptions in some of our factories. We have had to take a few half days off here and there, but nothing material.

On the installation side, we had a couple of branches down in the southeast last week during the ice storm.

So assuming the quarter plays out weather-wise in a more normal fashion from here, absorption paces or anything like that shouldn't be impacted?

That's right.

Secondly for maybe Keith, it seems like you guys might have re-entered the RTA business on the cabinet side. Just wanted to maybe understand the thought process there, and how you're thinking about that relative to your exit previously?

As we listen to our customers, it is important for us to have the right assortment for their needs, and we are looking at some product offerings that could address some of those needs for -- particularly for multi-family. There are some new product launches that we're contemplating, but we're not looking at significantly getting into the RTA business.

Is it structured differently from a cost standpoint than it was previously?

Most certainly. This would be more of an import model with a combination of different features that address specific segments, like multi-family, as I mentioned.

Okay, got it. Thank you, guys.

I want to thank everybody, again, for being with us today, appreciate your questions. Have a good rest of the day. Take care.

Thank you. This concludes today's conference. You may now disconnect.