馬斯科 (MAS) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco Corporation's first-quarter 2014 Conference Call. My name is Tiffany, 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 will now turn the call over to Vice President of Investor Relations, Maria Duey. Maria, you may begin

Thank you, Tiffany, and good morning to everyone. Welcome to Masco Corporation's first-quarter 2014 earnings conference call.

Joining me on our call today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer.

Our first-quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations Portion of our website. Following our prepared remarks, the call will be open 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'd 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-Q that we filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures. Any references to operating profit, 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'll now turn the call over to our President and Chief Executive Officer, Keith Allman. Keith?

Thank you, Maria. Thanks to all of you for joining us today for Masco's first-quarter 2014 earnings call.

Please flip to slide 4. As we have for the last 10 quarters, Masco's first-quarter 2014 results showed year-over-year sales and profit growth and margin expansion compared to the prior year quarter. Our new products and program wins drove sales in the quarter.

We also continued to benefit from the positive trends in new home construction and improving repair and remodel activity. Plumbing, installation and other specialty performed well this quarter and we are very happy with their results.

Our international sales and profits exceeded our expectations with an exceptionally solid performance by our international plumbing and window businesses. We continue to see strengthen the European economy, particularly in Germany and the UK.

Hansgrohe did extremely well reporting their best sales quarter in history. The teams execution, coupled with new products, drove sales throughout the quarter. Hats off to Ziggy Genslam and the team at Hansgrohe

In North America, we experienced our typical first-quarter seasonal slowdown. In addition, the adverse weather conditions caused the short-term closure of multiple facilities in our cabinetry and Installation segments and a myriad of other inefficiencies, such as increased fuel cost, production and project delays, and poor painting conditions.

Despite this, our focus on execution helped to mitigate the negative impact. And regions not affect by weather, such as our window business on the West Coast and our international sales, we saw strong comps. We believe that, while the weather certainly challenged our first quarter, the demand for goods and services was not lost, but rather deferred to later periods.

Turning to slide 5. On our last call we outlined our priorities for 2014. Although it's still early in the year, we have already made progress against these objectives. We continue to grow share in our market leading brands.

Delta continues to gain share as we move into adjacent categories in the bath and they continue to hold the number one share of shelf position in big box retailers. Our North American window business, Milgard, due to its new product introduction, continues to gain share. Masco has a long history of customer focused innovation. This years no different.

We started to rollout our new BEHR MARQUEE Interior Paint in the first quarter and we'll continue to do so in the coming months, as we move into the a majority of the US and all Canadian Home Depot stores.

Our Installation and cabinetry business remain a major focus for us. We still have a lot of work to do as we move these businesses towards sustainable profitable growth.

And installation, our commercial business had a great quarter with strong volume increases. The residential portion of the business also performed well, despite the weather, with mid single-digit volume growth.

We are excited to announce that we recently won the 2014 Energy Star award from the US Environmental Protection Agency. This is the ninth time we won the award and it recognizes our industry leading commitment to energy efficiency and building science expertise. Job well done to Robert Buck and the team in Daytona.

Related to cabinetry, we continue to be pleased with our progress with the dealers and builders and are working to improve our performance in retail. The weather was certainly a substantial headwind for us this quarter.

Additionally, we incurred costs associated with the stabilization of this business, such as the previously announced plant closures and the standardization of ERP systems. We believe that our recent customer focus product launches and disciplined pricing will add value over the long term. The stabilization of this business will not happen overnight and we remain committed to the long term success of this business.

Internationally, we continue to expand and are extremely pleased with our results from the first quarter. Our international plumbing business was up mid-single digits in local currency and, as I mentioned earlier, Hansgrohe had its best sales quarter ever and is benefiting from the increased demand for luxury goods.

The UK economy is improving and we are seeing strong sales from our businesses there. Driving operational leverage across the organization is a key priority for us. We have consolidated Masco Bath into Delta and are now seeing savings in brand leverage from this move. We continue to manage costs aggressively and we are on target to achieve approximately $150 million of profit improvements gross for the year.

Our balance sheet remains in focus for us as well. Our working capital as a percent of sales is now at 13.3%, down from 14.2% a year ago. These highlights demonstrate our continued focus on execution, which produced another good quarter.

Please move to slide 5 where -- excuse me, slide 6 where John Sznewajs, our CFO, will take you through our financial and operational review.

Thank you, Keith, and good morning, everyone.

If you can please turn to slide 7. As Maria mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. We started 2014 with positive momentum from last year. As Keith mentioned, the first quarter was our 10th consecutive quarter of year-over-year sales and profit growth. Sales increased 5% as we experienced sales growth in all of our segments.

Sales in North America were up 3% for the quarter. We continued to experience growing demand for our new home construction and repair remodeling products, including big ticket repair remodel products, despite the impact of adverse weather in the first quarter. As a reminder, repair and remodel activity represents approximately 70% of our total sales.

International sales increased 7% in local currency in the quarter, with much of the strength coming from our UK businesses, as the housing market there strengthens in core market growth of our international plumbing businesses. Gross margins expanded approximately 60 basis points, compared to the first quarter of last year to 28%, largely due to improvement in the plumbing segment.

We delivered strong bottom line performance, as our operating income increased 12% in the quarter to $157 million, with operating margins expanding 50 basis points to 8%. The strongest first quarter margin we have posted in several years. Our EPS was $0.15, an improvement of $0.02 or 15%, compared to the first quarter of last year.

Turning to slide 8, we see the components of our operating income improvement in the first quarter The $21 million increase in net volume mix was principally driven by volume increases we experienced in each reporting segment, largely due to increased repair remodel activity and favorable mix in our plumbing segments. This strength was partially offset by negative mix in our cabinets, decorative, and installation segments.

Net price commodity improved approximately $12 million for the first quarter, largely driven by cabinets, plumbing, installation, and other specialty segments. This improve was partially offset by an unfavorable price commodity relationship in the decorative architectural segment. This also reflects the year-over-year impact of our metals hedge, which was $1 million favorable for the current quarter.

We captured $31 million of profit improvements gross in the quarter. These improvements were more than offset by general inflation and weather related costs, program support and growth initiative spend in paint, and inefficiencies in our cabinet operation.

For 2014, we expect to generate approximately $150 million of profit improvements gross, similar to what we have delivered on average over the last five years, largely coming from continuous improvement in supply chain work.

Turning to slide 9, you can see that we delivered solid performance in our plumbing segment, with sales increasing 5% in the quarter as our innovated new products drove consumer demand in addition to solid trade and project activity globally. Strong sales momentum continued in North America, particularly in the trade channel, which grew low double digits percent, excluding our recent exit of bathing.

This reflects increased repair remodel activity resulting from our continued investments in the show room, commercial, and multifamily segments of this channel. We also experienced low single-digit growth, sales volume growth from our other North American businesses such as rough plumbing.

Our European sales gains continued with sales increasing mid single-digit percentages in local currency, lead by Hansgrohe, with solid demand in our core Central European Markets driven by Hansgrohe' s innovative new select product lines. Operating profit increased 39% or $34 million driven by incremental volume, a favorable mix shift due to increased trade sales and strong productivity and cost control, compared to the first quarter of last year.

Turning to slide 10, consumer demand for new product introductions, such as BEHR DECKOVER and strong performance in our pro business, drove a 2% sales increase in this segment. As a result, we realized low single-digit gallon growth in the quarter.

Weather clearly affected this business in the quarter. If we exclude Canada, and the weather impacted regions of the northern US, we experienced high single-digit gallon growth in the rest of the US. Liberty Hardware experienced strong growth and contributed to the top and bottom line of this segment, with continued share gains and new programs at retail.

As we continue our legacy of driving superior innovation, we are in the process of introducing BEHR MARQUEE Interior Paint, our most advanced interior paint, offering exceptional, one coat coverage and superior stain resistance.

We started setting MARQUEE Interior in Home Depot stores in the first quarter and will be set in all Canadian Home Depot stores by early second quarter and we will be placed in most US Home Depot stores by the end of September. We pulled forward $5 million in advertising and merchandising to support this product launch and continued to invest in our international and professional growth initiatives, which when coupled with an unfavorable price commodity relationship, and negative mix due to increased pro sales, more than offset Liberties Hardware improved profit improvement.

As a result of the BEHR MARQUEE Interior product introduction and several new program wins at Liberty, we expect to incur approximately $5 million of incremental program costs in the second quarter. As we have discussed for more than a year, given our high ROA growth initiatives to grow gallons with a pro in internationally, we continue to anticipate that annual operating margins for this segment will be in the high teens, compared to historic margins.

Turning to slide 11. The environment and market dynamics for cabinetry are gradually improving in both remodeling and new home construction segments and we are pleased with the market reaction to our new product introductions. We expect the completion of our major Merillat new product rollout in the second quarter.

Management continues to drive the stabilization of this business. We generated price realization and improved sales to our dealer and builder accounts in the quarter. However, we experienced reduced sales to the retail channel. As a result, North American cabinet sales were flat in the quarter.

Our bottom line in the quarter benefited from our continued discipline around pricing and promotional activity. This benefit was more than offset by negative mix due to improved builder sales and weather related inefficiencies. In addition, we incurred IT costs as we finalized a standardization of our systems, inefficiencies as we transferred production from the announced plant closure last year, and elevated costs associated with quality to insure our new products meet customer expectations.

In the second quarter, we will incur approximately $4 million to $5 million of costs to complete the implementation of the ERP system as a final manufacturing facility. We remain confident in our management and committed to the long term success of this business.

Turning to slide 12, segment sales growth of 7% was driven by strong results in our distribution, residential new construction, and commercial channels. Delayed homebuilding activity due to poor weather conditions in parts of the country dampened our growth in the quarter. This said, we experienced robust growth in those regions of the country not impacted by weather.

Additionally, the increase in multi-family starts is a percentage of total housing starts contributed to negative mix in the quarter. We anticipate this impact will moderate as the year progresses.

Operating profit was flat in the first quarter, as a result of increased volume, profit improvements, and a favorable price commodity relationship that was offset by wage inflation, growth investments, the increased multi-family mix and weather inefficiencies. We added two new locations in the first quarter and anticipate adding an additional approximate 13 greenfield locations in the balance of this year.

Turning to slide 13, our other specialty product segment increased 13%, driven by mid-teens sales volume growth in our North American window business. This growth was driven by favorable market conditions and share gains in the Western US, which yielded strong sales increases in both repair/remodel and new home construction channels.

Our European window business positively contributed to the segments top and bottom line, due to the continued success of our small composite door acquisition in the first quarter of last year and improvement in the UK new home construction market. This segments operating profit growth in the quarter can be attributed to increased volumes in a favorable price commodity relationship, partially offset by ERP investments.

Finally, turning to slide 14, we continue to have strong performance in working capital. Working capital as a percent of sales came in at 13.3%, a 90 basis point improvement from the first quarter of last year. I want to thank the supply chain, operations and finance teams for driving this great outcome.

We ended the quarter with about $1.2 billion of balance sheet liquidity down from the year end, as we are in a traditional cash burn cycle in the first part of the year.

With that, I'll turn the call back over to Keith.

Thank you, John.

Please move to slide 16 for a few comments before we go to Q&A. Over the past two months, since assuming my new role, I've been out meeting with the investment community, as well as many of our large retailer, retail, dealer, and home builder customers. I'll continue to do so.

As I've said before, I was extremely involved in developing the strategy here at Masco in my role as Group President, and I do not have any major strategic changes to announce at this time. I'm committed to value creation and will focus on execution to drive productivity in our cost structure, our innovation pipeline, and market share.

As we anticipated -- we anticipate that the positive trends in new home construction and home improvement in North America and Europe will continue. Having said that, there are macroeconomic factors that could be a headwind for us going forward, including the pace of the global economic recovery.

Our size, scale, and relationships with our customers allow us to rapidly respond to increase demand in new home construction and repair and remodel. We're excited about the future, and we believe that Masco is well positioned for growth.

With that, the lines will be open for questions. Operator?

(Operator Instructions)

Eric Bosshard, Cleveland Research.

Good morning. Two things, thanks for the color on trends in the quarter. Just curious, you talked about how ex-weather the results looked.

I'm wondering if you can give us some sense of as we've gotten into April if that has further moderated and even if you could give us some further sense on what March might have looked like so we can start that dimensionalize what the impact of weather has been on the business and as that goes away what it looks like.

Certainly, Eric it's John. So if you think about Q1 being up 5% for the quarter, we were up pretty much mid-single digits for each month of the quarter. Here in early, in April, now it's a little bit early for us because we still have about a week to go in the month, things look like we're up low to mid-single digits. That said, I think there's a couple things impacting it.

Obviously Easter was in March last year, we had Easter here in the middle of the month and also we're up against a pretty tough comp as we were up mid-teens percentages in April of last year. So that said we are seeing some moderation or some improvement in our new construction related activities as we seem to be gaining momentum in those businesses. But that said, I think like a lot of other folks we generally think that demand was deferred out of the first quarter and will be made up in subsequent quarters.

Great and then secondly, cabinet and install profit improvement in 2013 was quite impressive and in this first quarter looks like took a pause in that. Just curious as we think about 2014 if we should continue to see meaningful recovery in those or if last year was the big progress and now the progress in 2014 is more moderate? Just trying to put that in context.

Yes, I'll take a little bit on install and then I'll let Keith talk about cabinets. So weather was a pretty significant impact in the first quarter. To give you a sense, we had 750 branch days closed in the first quarter due to weather in Q1, so if you think about that we have 190 branches and that means each of our branches on average was closed for four days during the first quarter. So that gives you a pretty dramatic sense. And as things begin to improve we do think the incremental margins that we experienced that we should experience in that 25% range maybe a little bit North of that should play out as the year rolls out here in 2014.

I'll let Keith answer a little bit on cabinetry.

Eric, the team there is executing against a solid plan and that's as a phased approach. A big part of that plan is the stabilization phase where we're working to optimize our supply chain, our manufacturing footprint and standardize our IT infrastructure across the network. We incurred some costs in the quarter to do that as we discussed: the closure of our Jackson facility in Ohio, the implementation of our IT system in our Mount Jackson, Virginia plant, and the weather as we said was a substantial headwind for us in the quarter.

We have taken down significant number of production days. We took down production shifts, we had production shifts that were interrupted and had to be cancelled due to inclement weather and of course throughout the quarter we had many cases where it was difficult for people to make it into work so obviously we don't anticipate that to continue through the year.

We remain confident in this business going forward. We continue to work to drive it towards a 10% operating income business at 1.5 million starts with commensurate repair and remodeling lift. The team is in place and actively listening to the customer and closing the gap between what we need to serve them and where we're at and we feel good about it moving forward.

Great, thank you.

Bob Wetenhall, RBC Capital Markets.

Hi, good morning. Was hoping I could get some clarification. You mentioned $150 million of improvement and I was just trying to see if you could provide us with some granularity on where that's coming from and is that just strictly internal cost savings away from price commodity and mix? Thank you.

Bob, that is internal cost savings that we're driving through our total cost productivity initiatives. It ranges from our plus 21 program in Europe that is over in Hansgrohe to drive cost and supply chain and new product development processes. Certainly material is a big component of that as we drive value engineering to better serve our customer as the appropriate price points. It includes commodity strategies and of course the Masco business system focused on labor productivity, lean manufacturing and optimizing our footprint so it really is a cost reduction initiatives that goes across the broad spectrum of the business.

And just in terms of that, how should we think about that flowing through across the year?

Bob, it's John. The way I'd think about that is the last couple years we realized about $16 million of that benefit net in 2012 and about $19 million net in 2013. So my guess is that we think we can do about the same we did last year somewhere between $15 million and $20 million net improvement over the course of this year.

Got it. Thanks very much.

Nishu Sood, Deutsche Bank.

Thanks, good morning. First question I wanted to ask was in the discussion of some of the factors that affected 1Q, was there any mention of the slowdown that we've seen in housing, housing starts generally just the trend slowdown we've seen since the second half of last year, so just wanted to dig into that a little bit. Does that mean that you aren't seeing it in your business yet because of construction delays? Was it hard to parse that impact because of the weather or, I guess really the most important part of the question is, is it something that's still coming or is it already been factored in?

Nishu, It's John. I do think that we felt a little bit of that in the first quarter. That said it is very difficult to parse the weather impact in Q1, but we feel like the other thing that we're experiencing though is extended build times in the new home construction; the cycle has extended. I think that's partly due to weather so what's traditionally a 90 day lag from the housing start announcements, we're seeing closer to -- and certainly this case is 120 to150 day lag -- so that's definitely impacted so that may have dampened the impact of that affect over the course of the first quarter.

Got it, thanks and the second question I wanted to ask was on the retail channel. In plumbing you described wholesale and trade channel doing well and cabinets builder and dealer channels doing well, and paint you've described some of the weather related weakness so all of that kind of points to the retail channel being weaker. I know you don't provide key retailer sales but I was just wondering if you could give us color on whether or not the retail side of things was particularly weak this quarter.

This is Keith, Nishu. Again it's difficult to parse out the effect of weather with extreme accuracy but I would say that the weather effect was more pronounced to the retail channel in that area than the trade channel where in paint for example, professional painters are going to paint independent of the weather versus weather could be more of an effect than the retail consumer. So I would not characterize it that we had significant issues at all in retail versus the trade channel. I think it was more weather related.

Okay, thank you.

Dennis McGill, Zelman & Associates.

Hi, good morning.

Good morning, Dennis.

I guess the first question is just on the cabinet segment and the ERP implementation. It sounds like that was maybe a bigger hurdle than was expected and maybe some of this is weather as well but just a loss on the segment accelerating. Can you just put context around what this means from an operational standpoint and how its affecting the business?

The team is executing as I said against a turnaround plan that is phased. It began with the rapid turnaround to drive the business to profitability in 2013 and we achieved that. We've moved in and are well along the stabilization phase where we're focused on optimizing the supply chain, the manufacturing footprint, and the IT platform. This is the last of our plants that we needed to standardize across the common IT platform. I'm a stickler for that.

I think we need that as a foundation as we move forward and pivot to the growth phase, so there will be some carryover costs into the next quarter as we get through the ERP implementation and through the final aspects of the production shift from our Jackson, Ohio closure. So I would expect a little bit bleed over into Q2 and then that would be it.

Aside from the cost side, Keith, is this impacting your ability to ship or revenue in the quarter in any way?

We are experiencing some issues with regards to our fill rates but the team is down there and quickly countermeasuring it. I would say having done numerous ERP implementations in my career this is what we typically see when we're doing an ERP implementation.

Just separately was wondering from your perspective, the international operations -- how much of the acceleration and strength you're seeing in Hansgrohe maybe even the windows business is the market starting to show cyclical recovery versus internal actions and market share?

I think it's a combination of both. In Central Europe the economy is coming back nicely for us. In the UK, the economy is accelerating with some of the governmental actions they're doing to support housing as well as the overall economy so there certainly is a macroeconomic effect that we're seeing; however we're also gaining market share. Hansgrohe has always and continues to put significant effort into their innovation pipeline.

John briefly mentioned in his remarks are select product which is really industry leading taking off tremendously. We have outstanding sales teams throughout Europe and internationally that are driving market share gains for us and I think the ability to grow like we have in the face of some of the issues in Russia for example, and Ukraine that we're faced with shows that we're both gaining market share as well as enjoying a macroeconomic recovery.

Thank you guys, have a nice weekend.

You too. Thank you, Dennis.

Stephen Kim, Barclays.

Thanks very much. First question I had related to paint. I think you talked about the fact that in Canada you're going to be expensing about an extra I think you said $5 million in extra costs again in 2Q for the rollout. Was curious whether or not there would be some sort of load in effect during the next quarter or two which might to some degree offset that.

So Stephen, it's John. The $5 million that we are going to incur is not just in Canada but actually across both businesses in this segment so both BEHR as well as Liberty Hardware will be incurring costs as Liberty is won a fair number of new programs and retail over the course, I guess since the beginning of the year. In terms of the load in effect for the new BEHR MARQUEE there will be a slight load in impact but generally we are anticipating is that the sell-through would be pretty good as well.

So not much load in effect then. Second question relates to your cabinets business. You've talked about targeting growth in the dealer channel and that's actually something we've been hearing a little bit more of from a number of players.

So I guess I'm curious who do you anticipate that you'll be gaining share from in the dealer channel? Are we primarily talking about private players who are at a somewhat higher price point or are you anticipating it would be somebody else that you could characterize in some way for us which would be helpful? And which brands do you anticipate leading that effort or initiative?

What we're seeing in our dealer -- this is Keith, Stephen. What we're seeing in our dealer channel is that it hasn't been so much an issue of losing dealers as it has been share of wallet in those dealers and as we intensely listen to what we need to do to serve those dealers, particularly in the area of new product introductions and programs, and we respond to that, we're starting to get traction.

In terms of the specific brands that we believe we're taking share of that's difficult for us to tell but we are definitely seeing an improvement in our share. With regards to the brands we're seeing it across both our Merillat Quality and KraftMaid brand in terms of dealers with the new home construction increase, with Merillat and the dealers that serve those we're seeing a nice lift and a share gain, as well as in our more our focused KraftMaid dealers.

To add to Keith's comments on our KraftMaid line we've come out with some products that are deliberately focused on the dealer channel so that's something we're definitely going to focus on over the course of 2014.

If you were out at the Kitchen and Bath Show you saw some of our new products in terms of style that won several awards out there and you also saw the KraftMaid Vantage program that we're launching in the dealer channel to give our dealers a differentiated capability. That was something that we heard from them in our dealer councils and the team at cabinetry responded quickly to get it to them and we're seeing and hearing very nice reports back.

Okay, great. Thanks very much guys.

George Staphos, Merrill Lynch.

Thanks, hi everyone. Good morning and congratulations on the progress. First question is on retail trends. If I heard you correctly I think you said or you implied anyway that you had lost maybe some sales momentum and market share in cabinets. Was that a function of your ERP rollout or a function of something else?

And within paints I think you said you had low single digit gallonage growth. I seem to remember some of the other coating companies this quarter putting up better percentage growth. Is that a function again of the differentiation between DIY and pro relative to your competitors, or do you in fact think you lost market share there and then I had a follow on.

Good morning, George.

Good morning.

On the side with cabinets I'll take that and John can follow-up with the paint question. I would tell you that it's difficult to nail down the market size component of the market share calculation in retail, particularly when you're talking about a volatile environment with regards to the weather and as well as a choppy environment I'll call it with regards to promotion.

We, as part of our turnaround plan in cabinets a fundamental aspect of the plan was to be a leader in correcting what we believed to be unsustainable levels of promotional activities and we're doing that and it's paying off for us; however, that discipline isn't always followed and in the quarter when some of our competitions has different approaches to promotions it can result in some temporary share loss and I think that was the key driver more so than any operational issue associated with ERP.

George as it relates to paint side as Keith referenced a little bit earlier we saw very good strengthen our pro oriented business. That said, our DIY business was a little bit softer in the quarter and we do attribute that simply to the fact it is much more difficult for a DIY'er to paint in the adverse conditions we experienced in first quarter compared to the pro painter. So my theory is there had been a little bit just because of the nature of our customer base we're a little bit differentiated from some of the other paint companies that have reported prior to us.

Okay and the second question and realizing this is a little bit like a world peace question, a lot of the other companies that we track especially in wood products, engineered wood has seen apparently a nice pick up in April versus first quarter. It sounds like your business in total has seen some sequential deceleration recognizing that you have a very difficult comparison. What do you attribute your recent percentage changes versus the year ago performance relative to the rest of the market? It would appear that you've lost a little bit of salesmen, do you think it's just the comp or something else going on? Thank you guys, good luck in the quarter.

Thanks, George. I think it is more the comp at this point. I think things are, as the weather improves we're seeing slow momentum build across our businesses so I think it's more a comp than anything else.

Adam Rudiger, Wells Fargo.

Good morning. We notice that you guys are getting back into the RTA cabinet business so was wondering if you could discuss some of the thought processes behind that.

Good morning, Adam, this is Keith. Our RTA product is a niche product we've launched for the trade and it's a product that is sold through to our distributors. It could be assembled by the distributors or assembled by us but as I said it's a niche product meeting a specific need, mainly for multifamily and our distribution channel. It's not a retail product and we're just getting started.

So it's not like the old MIll's Pride, it's a different --

It's a completely different product, model and target customer.

Then moving to paint for a second if you look at the gallon growth that you saw and you look at the mix from MARQUEE versus the other BEHR products, is there sense that the MARQUEE is an additive product or is it something somewhat cannibalizes the lower price point BEHR products? And when you think about the opportunity based upon your experience for the exterior what do you think the opportunity is on the interior side for additive growth?

I think there's good opportunity here and this is a new price point for both us and our retail channel partner because this retail price points will be North of $40. So we really don't see significant cannibalization occurring but rather appealing to a new set of consumer for ourselves and our channel partners. So we do think it is slightly additive and we recognize the [sites] going to be a main line product just given the price point it plays at, but it should be a nice move up product for those that choose to do so.

Thanks for taking my questions.

[Philip Ng] with Jefferies.

Hello this is actually [Stell]. Europe is actually starting to bounce back a bit. How should we think about the operating leverage of that business?

So the operating leverage in our European businesses is actually quite similar to all of our businesses, because we've got cabinet and several plumbing businesses over there. So in general, we see about 30% drop down on our European businesses as compared to our installation business here, so as you think about that that should be very consistent on both domestically here and as well as internationally.

Got it and in terms of margin profile and I understand last year in the back half it was a little more heavier in terms of promotion and advertising spend and seems like there's a bigger spend this first half as well so when we think about margin profile in the back half should we expect it to expand in the back half for decorative?

Speaking specifically about decorative?

That's right, decorative.

So we pulled forward advertising out of Q2 and into Q1 to support this MARQUEE launch. That said I also referenced the fact that we will have about $5 million of incremental expense in Q2 compared to last year's second quarter because of some new program and product wins. That money that we're spending in the second quarter though due to the fact we're winning new business, and we would be happy to incur additional costs like that in future periods to the extent we're gaining shelf space with new product wins and other program wins.

As it relates to the back half of the year I think our advertising spend will be fairly consistent. We did indicate earlier that we thought we had about $10 million incremental program costs in this year versus last year.

When you say fairly consistent as in fairly consistent to the first half run rate or fairly consistent to last year?

I'm sorry fairly consistent to what we said earlier about the $10 million of incremental spend.

Thanks.

Keith Hughes from SunTrust.

Yes, my question is on the Insulation segments and we seen some inflation in insulation the last couple quarters, what kind of impact did that have in the numbers? And as you look out the next several quarters in installation we've all seen the slowdown of starts. How is that going to play out in your numbers through the year?

Keith, it's John. We have seen price inflation as insulation prices have increased over the last several quarters. With that said, as I indicated in my prepared remarks we did have a favorable price commodity relationship in that segment in Q1, so while we try to always improve our internal cost structure through productivity improvement and other means we were also able in position to pass along the price.

To your second question about the slowdown in starts, as I mentioned earlier, we are seeing an elongated build cycle right now, so that will have a little bit of an impact on us in future periods. That said, what we are seeing right now is that our bid rates are building and those generally turn into activity several months out so I think as the weather breaks here in North America that we should see some consistent growth. That said, we're up against pretty difficult comps. We had some pretty strong comps in that segment throughout 2013 so if housing starts don't increase as rapidly as they did last year that will have a dampening effect growth rate at the segment.

So if we see start activity meaningfully pick up in the next quarter or two is the lag still 30 days, excuse me, 90 days, 120 days something like that before you would see activity or where do you think the lag is right now?

I'd say there's still a little tightness on the front end of the build cycle, Keith, so I'd tell you we're seeing 120 to 150 days right now. And part of it also has to do remember, Keith, with the high multifamily mix we're experiencing, it was 38% of total starts in the quarter which was up significantly. On average its been closer to 15% over the last 10 years, so that has definitely an impact on the build cycle.

Okay, thank you.

Garik Shmois with Longbow Research.

Good morning. Just a follow-up question on the international growth. You called out an improvement in the UK market but how much of the international improvement in the quarter was weather given? Europe was really dry and was there any pull forward effect at all?

Clearly as harsh a winter as we had here in North America, they had a light winter there and I think that was an effect. But I'll go back to my earlier comments on the new product introduction, how the customers are responding to those and the job Hansgrohe is doing with regards to share gain.

We don't think there's much of a pull forward effect out of Q2 or any subsequent quarter into the first quarter. We're continuing to see good strength in our European operations.

Okay, thank you and then just a follow-up question in paint. You talked about high single-digit growth in non-weather hit markets in the first quarter. Do you think that's a more representative growth figure for R&R and gallon growth over the course of the year as weather improves on other parts of the country?

Typically we see kind of mid-single digit gallon growth over the course of year. There are periods of time where it's a little more robust particularly -- second and third quarters tend to be the painting season but we generally think of this business as a GDP plus 1 to 2% type business.

Okay, thank you.

David Goldberg, UBS.

Good morning. It's actually Susan for David. You guys have discussed the improving repair on model trends that you're continuing to see and I just wanted a better sense of what you're seeing in terms of some of the consumer behavior there. Are you seeing more willingness to move up in terms of price point or select maybe some higher ticket finishes, things along that line?

Susan, this is Keith. We are in fact seeing that. You can see that within segment where there's a move up to a higher contented product. We're seeing good volume in our painted product and cabinetry, for example. We're also seeing that across our other businesses. Our window business is doing very well and that's considered a big ticket item.

Our spa business, which is a luxury certainly bigger ticket item, is moving along nicely so I would say yes we are seeing a movement up in terms of the consumer. That's balanced of course by mix shifts that we see as new construction is growing at a more rapid pace than the base business and that tends to be a little bit more decontented. So the whole issue of big ticket is the tale of two cities, a move up and confidence in the consumer for sure, but also a mix shift as new construction and multifamily become a bigger part of the mix.

Okay, and then your working capital was really impressive if this quarter especially given all of the inefficiencies that you guys faced that you discussed. Do you expect that kind of progress will continue? Were there any sort of lag effects we should look for there? How do you think about that trending through the year?

Yes, as you probably have observed we've done a very good job on working capital for the last several years and that's in large part due to the fact we've got very specific initiatives targeting working capital. So we've done a great job on receivables and payables and we continue to focus on inventory and we think there's some progress to be made there. So we finish 2013 at record low levels of working capital and are continuing to make progress.

I should also make you aware that everyone in the organization is incentivized through the variable comp on working capital as well so that will also help keep you guys focused on making progress on that metric.

Okay perfect, thank you.

Michael Dahl with Credit Suisse.

Appreciate the difficulty parsing the weather impact here, but I was hoping from a margin perspective some of the things that you pointed out as far as higher fuel costs and some of the delays. Could you bucket those out and quantify how much of an impact we saw in margins for the quarter?

Mike, it's John. We took a really hard look at that. It is very, very difficult to give you anything with any amount of rigor behind it. As Keith mentioned in some of his remarks, we had a significant number of closures of facilities, not only as I mentioned in the installation segment but across our organization. Inefficiencies on deliveries, inefficiencies on job sites, so it's really very difficult to quantify that. I wish we could give you a pinpoint number. It's just not practical to do so.

Got it and then as far as seeing performance in Q1 relative to your expectations, does that change the way you would think about incremental margin targets for the full year here or should we still expect by year-end that you're back at the normal numbers that you talk about?

This is Keith, Mike. We aren't changing our outlook on our drop down margin on the incremental volume.

Okay, thank you.

Stephen East, ISI Group.

Keith, two questions on your units. One, your plumbing margin much better than we had talked in the past what you all thought was probably the run rate. Do you think that's sustainable as we go through this year and what's happening with Europe and the recovery et cetera? And then on the installation you all talked about three factors really affecting profits. Would you mind just, John maybe this is for you, sort of bucketing those and rank ordering and how permanent and why you think multi-family dissipates in the second quarter?

On the plumbing side, Stephen, we had a lot of good guys going in our direction for the margin. Certainly the European growth that we saw, which is a higher end part of the segment principally through Hansgrohe, carries with it higher margins. We had a favorable margin mix shift to the trade. The trade tends to be higher margin for us than other channels.

And then we also had a real solid performance in total cost productivity in that segment as I alluded to earlier the plus 21 improvement process in Hansgrohe, the work that Rick Marshall and the team are doing down at Delta with total cost productivity, so we had a lot of things going in our direction, we're very happy with that and we like the performance.

Going forward, when you look at where we are expanding with accelerated international growth which requires investments both in terms of pricing as well as infrastructure, and you look at Delta Faucets' planned expansion into adjacent categories and continuing to grow what we're doing in bathing and adjacent bath categories, those are clearly lower margin products. So I think when you think about the long term in this segment as we said in the range of 11 to 12%, 12 to13% rather, with potential upside is a good way to think about it.

Okay.

And then, Stephen, on the installation side, a couple things that got to us. Obviously I talked about wage inflation, growth investments and mix and weather inefficiencies. Clearly weather inefficiency is a tough one to gauge but with our 750 branch day closures, that's clearly had a pretty significant impact on us in the quarter. Wage inflation wasn't that much. I'd tell you that's probably of the four the smallest piece of it. Growth investments was probably the highest piece followed by increased multi-family mix being the second one. Weather inefficiency is tough to gauge.

As it relates to your second question about why we think the multifamily will moderate as the year develops, we're just going to take a look at the way the starts are coming in. And it looks like if you roll back to tape to as what multifamily starts were over the last couple quarters and we see how it influenced the first quarter, we start to see more single family activity as a percent of total starts just hit the numbers and so that's why we think it will dissipate a little bit.

Okay thanks, its very helpful on that and then, Keith, I thought the slide you had about 2/14 priorities extremely helpful there and if you could touch on a couple things in it? One, how you grow share and you've talked some about your strategy for international, I don't know if you have anymore to add on that? And then your ERP that you've referenced a lot, how much more do you have to go on that, what type of size should we expect coming through on that?

In terms of the share growth, it's really about understanding our customer and closing the gap between what we provide and what they need as productively as we can. A big weapon in our arsenal for doing that is strong brands and innovation pipeline, so principally our share comes through customer intimacy and then leverage of brands and innovation.

With regards to international share when you look across the landscape particularly in international faucets you see significant white space that we have for the Hansgrohe brand. And the principal share driver on that is the good people that we have out in the markets and our sales infrastructure and the experience that we have that comes from selling in over 135 countries, but it also comes in developing a product assortment that is targeted for regional expansion. We also have international activity and growth that we're targeting with our BEHR brand and Delta faucet as well so that gives you a little bit of a flavor on why we feel good about international.

Okay, thank you.

That will have to be our last call, we have to wrap up now.

I want to thank everybody. I appreciate all the good questions and the interest and look forward to talking to many of you in May at the JPM conference.

This concludes today's conference call. You may now disconnect.