馬斯科 (MAS) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Masco Corporation second-quarter 2014 earnings conference call. My name is Sean, and I'll be your conference operator today. As a reminder, today's conference is being recorded for replay purposes.

(Operator Instructions)

I will now turn the call over to the Director of Investor Relations, Ms. Irene Tasi. Irene, you may begin your call.

Thank you, Sean, and good morning to everyone. Welcome to Masco Corporation's second-quarter 2014 earnings conference call. Joining me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer, and Chief Financial Officer.

Our second-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 could limit yourself to one question with one follow-up. If we are unable to take your question during the call, please feel free to contact 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 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, which can be found in the Investor Relations section of our website, Masco.com. With that, I'll now turn the call over to our President and Chief Executive Officer, Keith Allman.

Thank you, Irene, and good morning, everyone. Thanks to all of you for joining us today for Masco's second-quarter 2014 earnings call. Please flip to slide number 4. As I reflect upon our results over the past six months, I'm pleased with our team's execution. Despite tepid end markets, our revenue has increased 5%, and our profit margin has improved by 100 basis points year to date. The 31% incremental margin we've experienced in the first half of the year is a testament to the effectiveness of our strategies, our team's execution, and our portfolio's strong operating leverage.

In the second quarter of 2014, we continued to grow our business and enhance our profitability. We increased sales 5% and, with solid execution, expanded our operating margins by 140 basis points, to 11%. This performance was primarily driven by our plumbing, decorative architectural, and installation segments. As a result of this performance, we've achieved 39% growth in EPS to $0.32 per common share for the quarter.

Repair and remodel, which is 70% of our business, continues to be strong for us, as our new products and program wins drove sales in the quarter. Our actions to drive improved mix and increase share are paying off. We've worked diligently on new product development, improving relationships with key influencers in our markets, and pricing. The results of this are particularly evident in plumbing and windows, where we experienced favorable mix, primarily in the trade and showroom channel, as we see consumers move up the price continuum in these categories. We anticipate that demand for repair and remodel will grow at a steady rate.

Despite the lower-than-expected growth in new home construction starts, our installation business delivered solid growth. This was driven by our continued focus on driving share and diversifying our business mix into commercial and retrofit. We expect this segment to grow with, or slightly outpace, lagged new home construction starts in 2014.

While we were pleased with our overall sales growth and operating profit margin expansion, we were disappointed with the challenges we faced in the cabinet segment. We experienced lead-time delays and incurred additional expense as a result of problems related to our new ERP implementation at one of our component plants. This impact was limited to the Merillat Classic product line, which represents approximately 20% of our overall sales in the segment. I've personally reached out to our customers and I'm aware of how this has impacted their business, as well as ours.

This level of performance is not acceptable, and we're focused on getting it fixed. We're improving, and will be back to normalized levels by the end of Q3. We had originally expected this business to turn a modest profit this year. Given the timing of the improvement actions we're implementing, we now expect the cabinet segment will be at a modest loss for 2014. While this is not a major shift to our outlook, it certainly is not the preferred direction. Nevertheless, we continue to believe that the underlying fundamentals of this business are strong, especially when considering its incremental margins of 35%, and the line of sight we have to growth in 2015.

Despite the near-term challenges in cabinetry, I'm extremely proud of our organization's overall performance in the quarter. Our plumbing segment, which represents approximately 40% of our Company revenue, and over 50% of our profit, continues to outperform. Let me give you a few examples.

Delta's luxury brand, Brizo, is up over 35% this quarter, and that's on top of a compounded annual growth rate of 25% over the past four years. Delta continues to hold the number-one share of shelf at big-box retailers, and Hansgrohe had their best quarter in their 111-year history. Our spa business, Watkins, which is the largest manufacturer of spas in North America, had a tremendous quarter, and has exceeded our expectations. This momentum leads us to believe that in the near term, the plumbing segment will continue to deliver mid-teens margins. On a longer-term basis, this segment will normalize to low-teen margins, based on our growth plans to further expand internationally and grow in adjacent product categories.

In decorative, Behr's commitment to innovation continues to pay off. Behr MARQUEE Interior has been extremely well received in the marketplace. Demand for Behr DECKOVER continues to grow, and our relationship with our channel partner is strong, and we are jointly focused on growing the business.

In other specialty, Milgard, the leading window brand in the western United States, continues to take share and has seen strong growth with our Montecito and Tuscany product lines. Our installation services team continues to impress me with their incremental margins of 37% this quarter, and their ability to target and successfully execute growth plans in the retrofit and commercial channels, which now compromise approximately 20% of the segment's sales.

Before I turn the call over to John, let me leave you with three takeaways. Number one, we've executed many important initiatives at cabinets to make the business more competitive. Some of these resulted in cost and service variances that were not planned. This will be behind us in Q3, and the business will be well positioned for 2015.

Number two, we have good momentum, as evidenced by our overall Company performance in the second quarter. And this trend is continuing into July, as we see sales for the month of low- to mid-single digits, and that's on top of a challenging comp from last year. We're positioned for continued growth in the second half, given our industry-leading brands, our robust innovation pipeline, and operating leverage.

And, finally, number three, we remain committed to realizing the full potential of our core businesses; to leveraging opportunities across our portfolio; and to actively managing the portfolio to drive long-term shareholder value. With that, please move to slide 6, where John Sznewajs, our CFO, will take you through our financial and operating review.

Thank you, Keith, and good morning, everyone. As Irene mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges.

So, as Keith mentioned, consistent execution resulted in another quarter of sales and profit growth. Sales increased 5% as we recorded sales growth in four of our five segments. Sales in North America up 4% in the quarter, as the US economy slowly improves, we continued to experience growing demand for our repair-remodel and new home construction products. As a reminder, repair-remodel activity represents approximately 70% of our sales.

International sales increased 2% in local currency in the quarter, driven by core-market growth of our international plumbing business and our UK businesses. And our focus on cost control continues to pay off as SG&A dollars were flat, compared to the second quarter of last year. We delivered strong bottom-line performance, as operating income increased 21% in the quarter to $249 million, with operating margins expanding 130 basis points to 11%. This represents our best quarterly operating margin since the third quarter of 2007, when sales were $3 billion, and reflects the benefits of our cost reductions over the last several years.

Our strong operating leverage resulted in a 39% incremental margin in the quarter, and our EPS was $0.32 per share, an improvement of $0.09 or 39% compared to the second quarter of last year. As you turn to slide 7, we see the components of operating income improvement in the second quarter. The $18-million increase in volume and mix was principally driven by increased volume in our decorative architectural, plumbing, installation, and other specialty segments, largely due to increased repair-remodel activity, and continued recovery in new home construction. This strength was partially offset by negative volume mix in our cabinet segment.

Net price commodity improved approximately $27 million, largely driven by our cabinets, plumbing, installation, and other specialty segments. This improvement was partially offset by an unfavorable relationship in the decorative architectural segment. We captured $43 million of profit improvements gross in the quarter. These improvements were more than offset by growth initiative spend, program support, and inefficiencies in our cabinet operation.

For 2014, we still expect to generate $150 million of profit improvements gross, similar to what we have delivered on average, for each of the last five years, largely coming from continuous improvement and supply chain work. We are reducing our estimate of the annual net benefit from $15 million to $20 million, to approximately $10 million, due to the incremental costs we incurred in our cabinet business in the first half of this year.

If you turn to slide 8, you can see we delivered another quarter of solid performance in our plumbing segment, as sales increased 6%, driven by growth in our trade business; our new product introductions, such as Hansgrohe Select which offers pushbutton control of shower functions and Watkins Highlife spas, which raises the bar on a luxury spa experience; and international projects, as Hansgrohe continues to win five-star projects around the globe.

Solid sales momentum continued in North America, particularly in the trade channel. This reflects increased activity resulting from our continued investment in the showroom, commercial, and the multi-family segment for this channel. Our European businesses experienced modest gains, with sales increasing low-single-digit percent in local currency, primarily led by Hansgrohe, as our core central European markets continue to recover and provide a favorable sales mix. Operating profit increased 26%, or $29 million, driven by incremental volume, our richer mix of products due to increased trade sales, productivity improvements, and to a lesser extent, a favorable price commodity relationship, particularly in Europe.

Turning to slide 9, we see consumer demand for our new product introduction such as Behr DECKOVER, and our newly launched Behr MARQUEE Interior paint, and a solid performance in our expanding pro business to about 5% sales increase in this segment. As a result, we realized mid-single-digit gallon growth in the quarter. Liberty Hardware had another strong quarter, achieving solid top- and bottom-line growth, through continued share gains. Sales in the quarter were favorably impacted by $6 million of load-in costs, due to program wins in both Behr and Liberty.

MARQUEE Interior, our most advanced interior paint, was introduced in Q1 in all 180 Canadian Home Depot stores, and will be in most US Home Depot stores by September. This premium paint product has contributed a positive growth to the DIY channel since its introduction. We are confident in its continued success, as it offers consumers a premium product that delivers consistent one-coat coverage and superior stain resistance.

Operating margins expanded slightly, benefiting from additional volume, and the retiming of the $5 million of anticipated advertising and program reset costs from Q2 to the second half of 2014. We now estimate the incremental advertising cost and program reset costs will be approximately $5 million in Q3 and $2 million in the fourth quarter. These were partially offset by an unfavorable price commodity relationship.

Turning to slide 10, our North American cabinet business experienced a difficult second quarter, as sales declined 5%. Sales were down for three reasons: the first, lower than anticipated sales to builders; second, lead-time issues as a result of the ERP implementation; and, third, our disciplined pricing and promotional strategies, which led to volume declines and share loss at retail. These were partially offset by improved sales in our dealer channel.

Our bottom line in the quarter was impacted by the lower absorption on the reduced volume, inefficiencies and costs related to the ERP implementation, and a less favorable product mix. This was partially offset by our pricing and promotion actions. We estimate that total charges related to the plant closure, ERP implementation, and the associated inefficiencies of these initiatives in this segment (inaudible)approximately $25 million in 2014, $10 million each in Q1 and Q2, and $5 million in Q3. As Keith mentioned earlier, this activity will be completed in the third quarter, and we will be well positioned for growth, going into 2015.

Turning to installation, the segment sales growth of 8% was driven by strong results in our distribution, and our residential and commercial new construction channels. While multi-family activity remains strong, we are beginning to see more work from custom builders, which positively impacts our revenue. Operating profit improved $10 million, or 125%, compared to the second quarter of last year, as a result of increased volume, and a favorable price-commodity relationship that was partially offset by wage inflation and other expenses.

Turning to slide 12, you can see our other specialty product segment sales increased 11%, driven by our North American window business, as we experienced continued share expansion in the western US, and a favorable mix shift toward our premium window and product -- and/or product lines, and selling price. Our European business also positively contributed to the segment's top and bottom line, due to the continued success of our small composite door acquisition the first quarter of last year, and improvements in the UK new home construction market. The segment's operating profit rose 7%, as profit from the increased sales in both North America and international was impacted by growth investments, including the ramp up of new employees to support our continued growth in the western US, and ERP investment.

And, finally, turning to the balance sheet, on slide 13, we continue to have strong performance in working capital. Working capital as a percent of sales came in at 12.9%, a 20-basis-point improvement from the second 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 $1.4 billion of cash -- of balance sheet liquidity, and our credit metrics continue to improve. We also anticipate that our balance sheet will continue to strengthen in the second half of this year, as we expect to reverse the valuation allowance on our deferred tax assets in either Q3 or Q4 of this year. So with that, I'll turn the call back over to Keith.

Thanks, John. Please move to slide 15 for a few comments before we go to Q&A. I'd like to talk to you a little bit about where I'm at as I approach six months in the saddle. I remain convinced that Masco has tremendous opportunity, given our strong brands, our market-leading positions, our solid operating leverage, and our capable teams.

I developed a plan when I got the job, and I've executed against that plan to spin up into the role. I now have my leadership structure in place, and we're continuing to work on our operating model and the strategy process. This strategy process includes outlining a plan to realize the full potential of our existing businesses, reviewing the role of each of our businesses within the portfolio, and refining our capital-allocation strategy. Our focus is on building shareholder value in the mid and long term. I anticipate this strategic review will be completed by the end of September, and we'll keep the investment community apprised of any major shifts.

In conclusion, as I mentioned a few moments ago, we anticipate continued growth in the second half, as we continue to grow share of our market-leading brands, drive operational leverage, and turn around our cabinet business. With that, the lines will be open for questions. Sean?

(Operator Instructions)

Keith Hughes, SunTrust.

Thank you.

Just a general question on your pace of business in the quarter. You obviously had some nice share wins here in a couple of the divisions, but how would you characterize the repair remodel business? And then going to the second half of the year, what are hearing from your homebuilder customers in terms of their starts and activity they'll be seeing as we end 2014?

In terms of R&R, I'd characterize it as steady growth but we are seeing some choppiness. The R&R market, as we're looking at it, is really a little bit different when you look at smaller ticket versus big-ticket. On the small ticket side, we are seeing good activity in our plumbing business, good traffic in that aisle. We're seeing good activity in paint.

In the bigger ticket items, we are seeing a little bit of a drag when we look at our cabinet business. We think that's driven by the fact that there's a little bit of an affluent versus less affluent play in there, in the big-ticket. What I mean by that is if you look at our spa business, which is more of an affluent business, more of an affluent buy, that's doing quite well. But when you look at cabinets we are seeing a little bit of a drag.

I think that's in part because that's hooked in with typically other term purchases that go with a kitchen remodel, for example, whether it be flooring or it be appliances, that sort of thing. So I think it's a big-ticket, smaller ticket story. The big ticket side, a little bit of a drag that we are seeing in our cabinets.

In terms of the second half on the Newco side, the customers that I am talking to are a little bit tentative, but we're seeing and believe that we'll have new construction starts coming in, in the range of 1 million or slightly above 1 million. Right in there with blue chip.

And just one quick follow-up within the paint business, the margin, the cost pressure you discussed in the second quarter, do you expect that to continue for the rest of the year where you get some price relief?

Keith, we really haven't experienced any cost pressures in the second quarter. What we did say is that we re-timed some advertising that we expected to spend in the second quarter to the back half of the year, and that will be -- so that was -- we anticipated $5 million that did not materialize this year, so that was a positive impact to the margins in the second quarter, and we will have a little bit of a drag in the second quarter. Again about $5 million into the third quarter and about $2 million or so in the fourth quarter.

We still think --

My mistake.

We see this business as a high teens business.

Okay. Thank you.

Stephen Kim, Barclays.

Thanks very much. Yes. Great results. A question I had about your longer-term plumbing commentary about mid-teens margins near term to longer-term, more like lower teen margins. I'm curious as to how much of that will be driven in your view by Hansgrohe versus the other brands, if you have any visibility. But would that primarily be driven by Hansgrohe? And if you could give us some sense for how you think about what the incremental margin will be for these new initiatives, if you could just try to separate out what you're planning and how you're evaluating future adjacency opportunities from an incremental margin perspective, that would be great.

We're seeing the improved margins really spread across the segment. Certainly, Hansgrohe is a factor in there, as we've seen core European business grow at a quicker rate than the remaining chunk of the business, so that gives us some mix favorability. We are also have a very robust cost out program called plus 21 that we drive, and have driven for years over at Hansgrohe, so they are contributing. Stateside here with Delta, our trade volume is very solid for us.

We've had a concerted effort over a period of years, really, where we have focused our new product introduction on that showroom and working with our relationship with the influencers and the designers in those showrooms. And that's good momentum and productivity, and we also have very solid cost out program that I talked about last quarter, down at Delta.

On the spa side, we talked about the volume that we are experiencing in our spa business, which is also in the plumbing segment. And of course with that, comes some nice overhead leverage. So really, the improvement, I would say, is spread across the whole segment. It's going well.

And in terms of the incremental margins on our expansion, as we drive globalization in our plumbing segment, and we tweak our assortments to be more geographically centered, just because of the nature of that business, it tends to be lower margin. When you look here in North America at the entire plumbing market and where we are growing with regard to adjacent products, to expand into the bathroom, those tend to be lower margins, as well.

Typically, our highly decorative chromed products, if you will, tend to be higher margins. So I think when you look at both the international expansion, and the assortment requirements to drive that, and you look at our category expansion here in North America, both of those initiatives tend to be lower than the faucet and shower margins, which tend to be the highest in the category.

Great. I guess what I'm trying to figure out is, obviously you're not going to have a lower margin in plumbing longer-term, if you're not going to have an attendant increase in the top line. I am just try to figure out if there's some sort of rule of thumb that we can be thinking about in terms of how much your top line might grow for any given decrement in the margins? I assume you look at the opportunities on return on investment basis. If you can you give us some parameters around how we should be thinking about that kind of give and take between top line and margin, that's really what I was hoping for.

Yes. I don't think prepared to discuss that just yet. These are relatively new initiatives they're just coming -- getting out of the ground, so clearly, as Keith mentioned, particularly the adjacent products here in North America will have a lower margin. We'll give you better guidance on that as those things mature.

Okay. That's fine. The second question relates to your comment about July. Obviously, July had a pretty tough comp. You were up low double digits, I believe, last year, in July, and you indicated, I think you were going to be up, correct me if I'm wrong, you say low single digits in July. I guess I was curious, are seeing any kind of acceleration in the business here in 3Q?

We were up mid-teens last year just to clarify that.

In the month of July.

In July. In terms of the overall demand, as I said, we are seeing steady growth in R&R, and I talked a little bit in detail about how that is choppy when you look at big-ticket versus small ticket, and that affluent buyer and some of the dynamics around that. New construction, while certainly it's below what we anticipated at the beginning of the year, it's still up, and we are targeting somewhere slightly north of the million starts.

Okay. Great. Thank you very much.

Garik Shmois, Longbow Research.

Hi. Thank you.

Just wondering if you could talk a little bit about the operating leverage in the install business in the quarter, and maybe break-out the benefits of that you have called out? I think there was some net pricing benefits, some of it was some of the leverage associated with the commercial business. And just wondering if we can get a better understanding of what drove the incrementals installed in the second quarter, and how sustainable that mid-30s level is moving forward?

Sure Garik. It's John. Yes. I think a big part of that operating leverage in the second quarter was really driven by volume, and the operational improvements that the team down in Daytona have implemented in the organization down there. So that was probably the biggest chunk of it.

A much smaller piece of it would be the pricing that we mentioned, because as I also mentioned, we did have some offsets to that, as we did experience some wage inflation. We are investing in labor. You have probably heard through your contacts that labor is a pocket to labor tightness around the United States, and we want to make certain that we have labor as we enter the busy third quarter for this business. And so, we probably do have a little bit of cost ahead of sales on that front, which probably a detracted from the margin a little bit.

Okay. Thanks for that and then just switching to cabinets for a second. Just wondered if you could provide a little bit more context around your outlook for the full year of the modest loss, given that we've had about $17 million of loss in the first half of the year and we have another $5 million of European headwinds in the third quarter.

It would, I guess, mean a pretty big snapback in the fourth quarter, with respect to profitability, to get to this modest loss. I'm just wondering if you could provide a little bit more color on what the guidance means and how confident you are in that business returning to profitability, maybe as early as the fourth quarter?

I'd peg the loss in the range of $5 million to $10 million. In terms of my confidence in this business, I remain confident for really three fundamental reasons. Number one, over the last 18 months, we have really driven significant improvements in the competitiveness of this business, from the supply chain to our product development processes.

We've worked a lot on our business models in some of the sub-segments, in countertops and builder direct. Our quality has improved, and we have driven a substantial standardization across our IT platforms, which is important, and in my view critical for our competitiveness going forward.

Unfortunately, those came with some unplanned cost of service variances. We are working very hard to get those fixed. We are improving. I will be behind us in Q3, and we'll be positioned going into next year to deliver on this business.

Okay. Thank you.

Eli Hackel, Goldman Sachs.

Thanks. Good morning. I just wanted to go back to, just, demand for a second right now. Just get a little bit more detail about -- you've touched a lot of people. How do you describe the US consumer right now? You talked about big and small ticket.

I've seen a lot of mixed results across the space. Maybe your business seems a little bit better on average. Do you think that consumer is getting better, and what would it take to drive more buyers on the big-ticket side? Is the economy strengthening at a pace where that's going to come back in the near term, or has that really pushed a little further out?

Again, I would look at it as an R&R and new construction and break that down in that way. On the R&R side, the affluent buyer is showing up. They are interested, and they're spending. As I have mentioned before, we are seeing that with empirical data, particularly when you look at a spa purchase, for example. Certainly, our initiatives are driving share, but we are also seeing that consumers show up there.

In the little more -- in the price conscious consumer, we are seeing a little bit more tentativeness. On the new construction side, we have unemployment at a 6.5 year low, consumer confidence at a 6-year high. I think it gets back to credit availability. That's a big driver in getting some real wage growth.

I think as that happens, when you look at the position of housing stock in terms of available housing, versus the population that needs it, I think that's in a good place. It's really about credit, that first-time buyer starting to move out into new homes.

And just maybe, if you could just quickly, following up on that mid-to lower end consumer. Just make sure I understand, so do you think that lower-end consumer is still struggling to some degree? Are you seeing any improvement in that lower end buyer, or is that really so far mostly being driven by the higher income buyers?

Well we are seeing -- in the low ticket items we're seeing good traffic. And that's a good chunk of our business, when you look at repairing and remodeling on the plumbing side, particularly with faucets and shower heads, when you look at paint. So we are seeing the traffic, and I think that speaks to the strength of our portfolio, where we are mixed across everything from a high-value smaller ticket Behr paint, all the way up to a luxury spa and luxury shower systems with Hansgrohe, so I would say that in the bigger ticket part of the continuum, we're seeing a little bit of drag on that less affluent buyer.

Got it. And then just second one -- just wanted to touch on Europe quickly. Clearly, your national results have been pretty strong, somewhat helped by currency. Can you just talk about your outlook for Europe in the back half of the year? Thank you.

Yes. I think Europe continues to look -- continues to look pretty steady. We're seeing very good progress in each of the last four quarters or so in Europe, and we don't expect any acceleration in demand, but just consistent growth as we've experienced over the last couple of quarters.

We have a solid infrastructure in place with Hansgrohe across multiple geographies, north of 130 markets. There's certainly political risk, obviously, we all see what's in the news. There's elections out in Brazil. There's a number of things that are going around the globe, but when you really look at where Hansgrohe is positioned with the brand, the work we're doing on our international assortment, we feel good for steady growth outside the US.

Great. Thank you very much.

George Staphos, Bank of America.

Thanks, hi, everyone. Good morning. Thanks for all the details.

I have two questions. First of all within the cabinets business, Keith, what do you think will ultimately reverse the share trends that you're seeing within retail and also the builder channel? Will they -- from what you're seeing, normally dissipate, or are there other actions you are going to need to take to reverse what's been the declining share there?

And then switching gears into decorative architecture and paints in particular, can you comment at all on the impact you're seeing from perhaps other coatings companies now targeting the pro initiatives as well? Thank you.

In terms of the actions to drive market share in cabinets, we have been working a lot on our fundamentals, as I've talked about, in terms of our product development process, or standardizing our ERP systems. We had five or six ERP systems across cabinets and now we are down to two, so we are focused on our KraftMaid line and our Merillat line. So a lot of the work for share gains in terms of the core capabilities, as well as the new products that we've introduced are already in play, and are paying off, and we're seeing it in our dealer channel, in particular.

We are working to, and have announced, a lead time reduction in our KraftMaid line. We think that's critical to drive share. We've implemented a new finishing system, which I believe is going to raise the bar in the industry in terms of the quality, that's implemented and running now, and that's a beautiful product. So that'll help drive share.

On the retail side, we remain committed to our approach on promotions, in terms of being strategic and utilizing them carefully to drive -- and get to that sweet spot for both revenue and value to the consumer, but we'll continue to tweak that. I think the timing of some of our actions, versus the competition, has led us to some share loss.

We're working with our designers and our influencers to understand their needs, and develop better relationships with them. So I think there's a number of things that we're working on now, and as we get more specific results, we'll share with them, but we're moving, and I think that's evidenced in what we've done in the dealer channel, which was our initial focus.

Keith, I know it's hard to predict, but from a timing standpoint, would you expect the share erosion to be done by the fourth quarter or first quarter?

Yes. I think we're beginning to chip away at that now. We are gaining share in our dealer channel, in terms of retail, as we tweak our promotional strategies, and continue to drive improvement there. We'll see that. It's a long purchase cycle, so it's going to take some time, but we have momentum. George, you had a question on paint?

Yes.

With regard to -- how we're doing in the pro? We are focused on the pro. And we are doing that in concert with The Home Depot.

This is obviously an important segment. When we look at our intel and the studies that we do, and it's corroborated with outside studies that Behr paint brand -- that Behr brand is strong with the pro, obviously strong in R&R, but it's also strong with the pro. We also have good pro traffic at the Home Depot, so it's an important growth initiative for us.

We have not lost shelf space at the Home Depot. And we are continuing to be successful in this pro business. It's outgrowing -- clearly outgrowing the base pro business, and we've got a good value proposition, and we are working to make it better.

Now it's not going to be -- the margins aren't going to be as high as our base repair and remodeling book of business, but it's good return on assets for us. We have a good brand to work with. And most importantly, we are in concert with our channel partner. It doesn't surprise me that our competition would see our success, and work to countermeasure it.

George, we are investing heavily behind this business. As you may know, we've got about 150 pro sales reps out in the field, calling on pro customers to drive this business. So we feel very confident in the growth that we've been experiencing, and the fact that we've got a good runway in front of us, as well.

Okay. Thank you for the thoughts. Good luck on the quarter.

Dennis McGill, Zelman & Associates.

My first question is related on the cabinet issue at Merillat. With that being resolved by the end of this quarter, how will that impact the revenue side of the equation? Because I know that you mentioned the lead times extended, and backlogs are extended. If that's fully resolved, does that mean that customers are back to their normal lead times, and if so, does that mean that you get almost a revenue catch up in the third quarter as you satisfy these orders that are in backlog?

I've reached out, Dennis, to many of our customers, and I understand the impact that our performance has had on them. We've worked hard to develop the industry leading lead time and fill rates coming out of our supply chain, and our channel partners come to rely on that. And when we fail to deliver on that process, on that promise, it's not good on their business, and certainly is not good on our business.

It has affected demand, and it's going to take some time as we get our lead times back to normal levels, to reestablish our confidence, and to get back. So I fully intended that we will get there in terms of the timing. We are committed to get this stabilized in Q3, and being working on all eight cylinders as we go into next year.

Related to your question regarding a third quarter catch up in sales as result of working the backlog, we do expect a little bit of catch-up here to hit the third quarter. But nothing really material.

Okay. And then the second question, it looked as though corporate expense was at least lower than what we were modeling, and seems to be favorable, relative to last year. How do you think about that run rate going forward? And, if you could just give some examples of where some of the savings might be coming from there?

Yes. I think the comparison is challenging, more so that we have some one-time events that occurred last year. And I think what you're seeing in the second quarter of 2014 is more indicative of our run rate.

Okay. Great.

As you may recall we had a retirement of a senior executive -- a senior executive hit 65, and that caused some stock comp expense last year.

Okay. Thank you.

Michael Rehaut, JPMorgan.

Thanks. Nice quarter.

First question, just to go back to plumbing for a moment, and appreciate the detail there. Talking about mid-teens margins for the year -- near-term, if you could just give us a sense of what you mean by near-term, if that's the second half of 2014 or would it likely going to 2015? And what's the biggest -- you mentioned the number of positive influences on the margin. What would you attribute the biggest one or two drivers to the higher levels that you're seeing right now?

Michael I'd say the mid-teens through 2015 is something that would be good to model in that range. In terms of the key drivers, boy, it's a combination of many things, but I think to narrow it down, I would say new products, and listening to the customer and driving new products, in a way that drives favorable mix. Having said that, we've also put a fair amount of attention into more of the opening price point as well, so it's a combination. But I would say new product introduction, mix, and then our cost out program.

Great. Also, the July number was pretty impressive as discussed earlier, in terms of against the tougher comp. With the comps easing in the next couple of months in the quarter, if you could just remind us what those were? And would you expect as a result, August and September to accelerate potentially? Or were there some drivers in July, either I think you've -- perhaps the continuation of some new product load in from in the paint segment, or other things that we might continue to see overall, this mid-single-digit consolidated top line for the quarter.

Yes Mike. It's John.

In terms of the additional comps in the third quarter, just to remind to everyone, that the third quarter master was our most difficult -- our best quarter in 2013, which was up 12%. So we were up mid-teens in July. Then low double digits in both August and September. So the comps, while they get a little bit easier, are still pretty challenging.

In terms of what we're anticipating going forward I think, as Keith alluded to earlier, with housing starts in the neighborhood of 1 million or so for the year, we are thinking about where we're at in the first half of the year. That would imply a pretty good clip going into the second half of the year, as well as our lower ticket repair remodel products continuing to perform well.

We are confident that the growth rate that we've been experiencing in the first half of the year feels like it should be similar to that going forward. Could be some puts and takes a little bit here and there, but as you know, we really don't give top line guidance, so it's only hard to put a finite number on it.

No. I appreciate that. And just one last one for clarification, Keith, you were good of that to give us your sense of the loss for cabinets. Just want to make sure that clarify the 5 to 10 -- that's not a loss for the fourth quarter, but a loss for the overall year?

Correct.

Okay. Thanks very much.

Mike Wood, Macquarie.

This is Adam in for Mike. Just a couple quick ones on paint. You saw the $6 million load-in benefit in Q2, and the roll-out should be finished for the Marquee Interior in some time in Q3, could you talk about the expected load-in benefit you expect in that quarter?

We are -- it should be less than the $6 million, because that was spread across both Behr as well as Liberty. Liberty has won a number of new programs at retail, so I would say it's just going to be a couple million dollars in the third quarter. Because it was really only going to have about two months worth of impact in the third quarter.

Okay. Thanks. And then just if you could talk about the negative price costs in decorative? Sort of what was driving that?

Yes. A number of things. We have seen a slight elevation in raw material costs compared to the second quarter of last year, both on TI2, as well as the engineered resins that we purchase and put into our products.

Great. Thanks.

Bob Wetenhall, RBC Capital Markets.

Nice quarter. I just want to get a little specific. You used the language in the press release, quote-unquote, realizing the full potential of your core business, by actively managing the portfolio. I was hoping you could share with us how are you defining the core business, and what are your thoughts at this juncture?

It sounds like the strategic review will be finished by September. Are you leaning more towards an asset sale or a spin? Any color would be great.

Good morning Bob. I apologize for the confusion in the press release. I think what I was trying to get across there is that as a management team, we are focused on a couple of time horizons. Number one is the longer -- mid- to longer term time horizon where we are looking at how we can drive shareholder value with our portfolio strategy, and we're running an aggressive ramp -- an additional ramp of our portfolio strategy process to determine that.

The other time horizon that we need to work on is in the here and now. In the short-term. That is to drive our existing businesses that we have in our portfolio, to be all they can be, and that's what I mean about full potential. So it's not that we are as a management team strictly looking at the long-term of the portfolio issues. We are also looking at our core businesses that we have today, and how we can improve them, and drive them -- particularly in the cabinet turnaround.

With regards to where I am leaning, really I'm not leaning. I'm letting our process determine what the optimal portfolio is for mid- to long-term shareholder value. We're intently engaged in the process. We've brought on outside counsel, to give us an external perspective of how we might unlock value.

We're looking at all options that are in front of us, and of course, we're doing it in concert with the Board. So I am not going into this process with a preconceived notion. We're letting the process work. We are open to all options, and it's going well.

That's really good color. And I don't -- this might be a jump all to you, and if John has any commentary as well -- you have a lot of cash on the balance sheet. Net leverage is the lowest it's been in a long time at 2 times. I think you were on track to generate $500 million of free cash flow. What do you want to do with the cash? And in concert with a review of the portfolio from a strategic alternative standpoint, how relevant is M&A, and what do you think about returning cash? Thanks and good luck.

Thanks Bob. In terms of capital allocation, in the near-term, we've been consistent in saying that we want to pay down some debt in the near-term, and so we do have some of the cash on the balance shot earmarked for that debt repayment. That said, to your other point, we are looking at some other uses of our cash, and we did raise the dividend in the second quarter. As you may recall, in May, we had about 20% dividend increase that we announced.

At the same time, M&A is something that we would consider for our portfolio. But right now it would be add-on bolt-on acquisitions to some of our existing portfolio of businesses, as opposed to going out and putting in a new line of business, something that we are not currently in. So don't think of it as a huge stretch of a huge acquisition at this point. That's not something that we are contemplating at all.

Great. Thanks very much.

Nick Coppola, Thompson Research Group.

I'm hoping to drill down a little bit more on what exactly happened in cabinets in the quarter. Particularly some more color on the ERP implementation, and where the additional expense is, that may have been unexpected came from. And then as a follow-up to that, do you have any view on how much revenue was missed in Q2 by the longer lead times?

In terms of the cost of variances driven by the ERP implementation, to deliver on our industry leading lead times and fill rates, information is key. You need to have a timely information of demand, and you need to have an understanding of where the product is, as we execute in a build-to-order kitchen-at-a-time environment, with no finished goods. And we are talking in the range of millions of SKUs, when you look at the configuration possibilities, across the entire assortment.

So information is key, and when you implement an ERP system and we had some issues that we didn't catch in our early testing, and it took a while to uncover those issues, and resolve them. When you have inaccurate and non-timely information flowing into the system, of that type, you tend to have backorders.

And those backorders drive you into a running off the hot list and it becomes difficult to maintain the fill rates, and the standard cost that you drive for. So it was a combination of things. But fundamentally, it was issues relating to information, in terms of demand, and knowing where we are.

Okay. That makes a lot of sense. And then, my last question for you would be about pricing at big-box, and I guess my question, to use a little promotional activity, it looks like, and whether or not there's been anything discount in there.

In terms of pricing at big-box, I think we have, as I mentioned in my remarks, I think we have lost some share when you look at the timing of some of our actions versus our competition. But again, we're committed to our approach, which is to be strategic and creative in how we use our promotions to hit that sweet spot of bringing value to the consumer, and being most productive for us so we'll continue to tweak it. But we remain committed to our approach.

Okay. Thanks for taking my questions.

Mike Dahl, Credit Suisse.

Nice job in a tough environment here. Just following up on the last comment there. Is there any -- should we interpret this as -- the comments around promotional activity, that there's still elevated promotions by competitors in the channel? Is there any way -- any color around what types of promotions you think are most effective today?

I think, in terms of, is there elevated promotion? We've seen it come down substantially from when it was quite frothy in the downturn. The price increase that we put in -- we were leaders in that. I think that also contributed to some of the issues we've had in the top line.

In terms of the most effective promotion, it really -- it varies. There are certainly promotions that are effectively to administer to push to close. There's promotions that involve incentivizing our customer base to move up, and to have a more contented product, to go into glazed finishes for example. To go into all plywood construction, and those sorts of things.

So that's what we think about. We think about how can we bring value to the consumer? How can we move them up, so it's favorable for us in terms of margin? And, of course, we look at the competitive environment.

Got it. Thanks. And then second question, just a quick one on FX. I think you talked about the sales impact there. I'm wondering what was the impact on operating profit from FX? Thanks.

Hang on. Mike, just let me pull it out real quick. It was a relatively small amount. FX overall for the Company was just a favorable of a couple million dollars.

Thanks.

David Goldberg, UBS.

Thanks. Good quarter, and thank you for taking my questions.

My first question was on the Behr Marquee roll-out and the success you have been having, and I'm wondering if you can talk a little bit about where the customers are coming from. Are these people who would've bought another Behr paint but they're trading up in terms of price point? Are you cannibalizing your own sales or are they coming from somewhere else?

That's my first question.

The roll-off is going very well for us. We started in Canada. And we've got the Marquee rolled out in the 180 stores up in Canada, and we are also starting to roll out our new color selection merchandising up there. It's going quite well. We're seeing good growth with it.

Both ourselves and Home Depot are pleased with how it's going, and we're focused on executing that rollout here in the United States. In terms of where our customers are coming from, difficult to parse that out. Clearly this is not all -- there's incremental volume here for us. This is a substantially different price point and a different product, and we like -- we like where this is going, as evidenced by our success, where it's already been rolled out.

Great. And then just as a follow-up, you talked about gaining share in the dealer channel in the cabinet business. I'm wondering if you can talk about how you benchmark execution and customer satisfaction in that business, relative to some of the other competitors?

And the reason I ask is because I would assume that is a huge driver of share gains and wins, is making sure the end user is happy, and therefore the dealers are happy. So talk about where you think you are in terms of execution of that business, and how you benchmark where you are relative to the competition?

I think we're doing very well and the results bear that out. We have put a concerted effort into the product assortment, to make sure that we have the appropriate products for this market.

We've executed initiatives focused on urban markets in big cities, which is very tightly linked to this higher-end showroom consumer. We've looked at how we attack this segment from a sales representation standpoint. We've looked at our incentives associated with our sales reps in this line of business, and so it's -- as is usually the case it's not one silver bullet, but it's been a number of initiatives.

In terms of how we gauge customer satisfaction, at the higher and in the showroom model, this tends to be an assisted sale. And we value very much the opinion of those showroom folks that are in the dealerships, that are helping the consumer, and we put a concerted effort with our programs. We bring them over the course of six weeks, nonstop we bring in showroom associates into our corporate headquarters, down in Indianapolis.

We talk to them about what new products they need, about how we can do better, from customer service to pricing and promotions, all those sorts of things. And we survey those influencers constantly, and we react to their ideas for improvement, so that's principally where we go to gauge customer satisfaction.

That's very helpful. Thank you for the color.

Philip Ng, Jefferies.

New construction is still a little bit spotty, but you sound generally a little more upbeat on the back half. Will most of the pickup be driven on the cabinet side? I know it's been a nice growth driver this past year.

Phil, it's John.

I think as we think about how the back half is going to develop again, and as I alluded to earlier, we do think that our mindset that we're going to have 1 million housing starts, a fair amount of growth will be driven by our installation business. And as we talked about earlier, with repair remodel, we have seen a little bit of a choppiness effect there, where the lower ticket items we are seeing good strength there. But to a lesser degree on the bigger ticket, so I think cabinets actually would be less of a driver in the second half of the year than the lower ticket or the new construction portion of our business.

Got you. Very helpful, and Keith, can you give us a little preview on how you're thinking about your longer-term initiatives? Are you looking more on the growth side, cost take-out or even possibly capital employment?

We are looking at shareholder value. And in the long-term, that's the fundamental lens that we are evaluating all our options against.

Okay. All right. Thanks for the color. Good luck in the quarter.

There are no further questions at this time, I'll turn the call back over to the presenters.

Well thank you very much. Have a great day and I appreciate all the questions. Thank you.

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