馬斯科 (MAS) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco Corporation's third-quarter 2014 conference call.

My name is Steve, 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 Director of Investor Relations, Irene Tasi. Irene, you may begin.

Thank you, Steve, and good morning to everyone. Welcome to Masco Corporation's third-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 third-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, and 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. Please turn to slide 4.

Consistent with our performance throughout the year, Masco delivered another quarter of revenue and margin growth. I'm pleased with this performance, particularly when you consider the tough comparisons we faced.

Recall that in the third quarter of 2013, our top line increased by 12%, and our operating profit margins expanded by 260 basis points. Despite this tough comparison, we increased our top line in this quarter by 4% and expanded our profit margins by 60 basis points. This represents the best third quarter we've had since 2007.

As a result of this performance, we achieved 15% growth in EPS to $0.31 per common share. I would note that unfortunate higher medical costs and other expenses cost us $0.01 per share in the quarter.

Our performance was primarily driven by plumbing products, other specialty, and installation services segments. Similar to last quarter, our plumbing and windows businesses experienced strong sales and favorable mix, primarily in the trade and showroom channel.

In North America, the investments we've made in new products and programs continue to pay off. Delta achieved a record sales quarter in Q3.

We are very pleased with our Delta toilet program, which has sold over 0.5 million units in less than two years. This is just one example of how our consumer-focused innovations and strong brands continue to drive growth.

Despite a softening Euro zone, our international businesses fared well. Hansgrohe, for example, continued their strong execution and achieved yet another record sales quarter.

In total, our international sales were up 5% in the quarter, 3% in local currency. I'm extremely proud of both teams and congratulate them on their exceptional execution.

Our installation business delivered another quarter of solid growth by capitalizing on new home construction trends, and executing on their strategy to diversify their business into the commercial and retrofit channels. As we announced last month, our teams are working on the spinoff transaction of this business, and it remains on track to be completed by mid-year 2015.

As I've previously communicated, our cabinet segment's turnaround is a top priority. In the quarter, we took additional actions to improve the future performance of this business.

Our industry-leading lead times are a hallmark of our Merillat brand, and we have made the necessary investments to meet that brand promise. We also announced the closure of two idle facilities in the business, as we're confident that we can meet our growth plans without this capacity.

Despite our near-term challenges in cabinetry, our overall Company performance reinforces that our strategies are working. We'll continue to execute and invest in innovation, customer-focused programs, and brand to drive our business.

Let me give you some examples of how we continue to lead the industry with innovation. The Home Depot awarded Behr it's Innovation of the Year award for Marquee Interior. And the EPA named Delta it's 2014 WaterSense Partner of the Year for the third time in four years.

Before I turn the call over to John, I'd like to leave you with three key takeaways. Number one, we have taken important action at cabinets to make the business more competitive in the long term; these actions have resulted in cost variances that were higher than expected but necessary for the turnaround of the business. We have restored our lead times in Q3 and are positioning this business for growth in 2015.

Number two, I'm pleased with the overall performance in the third quarter. We posted our strongest third quarter for the Company since 2007, and I feel very good about that.

Number three, our focus on our strategic initiatives is paying off. We are being recognized as industry leaders in innovation by our customers, and we are executing successfully despite fluid macroeconomic environments in both Europe and North America.

Now, I'd like to turn the call over to John, who will take you through our segments from a financial and operational perspective.

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

Looking at the third quarter, you can see our consistent execution resulted in our 12th consecutive quarter of year-over-year sales and profit growth. Sales increased 4%, as we recorded strong sales growth in three of our five segments, and we were up against very good performance in the third quarter of last year.

Sales in North America were up 4% for the quarter. As the US economy improves, we are experiencing growing demand for our repair and remodeling, and new home construction products. As a reminder, repair/remodel activity represents approximately 70% of our total sales.

International sales increased 3% in local currency in the quarter, driven by core market growth of our international plumbing business and our UK businesses. Our focus on cost control continues to pay off, as SG&A as a percent of sales decreased 50 basis points to 17.7%, as compared to the third quarter of last year. And we delivered strong bottom-line performance, as operating income increased 9% in the quarter to $243 million, with operating margins expanding 60 basis points to 10.9%.

We continue to be pleased with the growth in our operating margins. This is one of our best quarters in several years, and it reflects the benefits of our brand strength, innovation pipeline, operating leverage, and efforts to reduce costs. Our strong operating leverage resulted in 26% incremental margins in the quarter, and our EPS was $0.31, an improvement of $0.04 or 15% compared to the third quarter of last year.

Turning to slide 7, we see the components of our operating income improvement in the quarter. The $7 million increase in net volume mix was principally driven by increased volume in our decorative architectural, plumbing, and installation segments, largely due to increased repair/remodel activity and continued recovery in new home construction. This strength was partially offset by negative mix in our decorative architectural segment, due to stronger Pro paint sales.

Net price commodity improved approximately $11 million for the third quarter, largely driven by our cabinets, installation, other specialty, and plumbing segments. This improvement was partially offset by an unfavorable relationship in the decorative architectural segment.

We captured $42 million of profit improvements gross in the quarter. These improvements were partially offset by program support, growth initiative spend, and inefficiencies in our cabinet operation.

For 2014, we expect to generate $150 million of profit improvements gross, similar to what we had delivered on average for each of the last five years, largely coming from continuous improvement in supply-chain work. We are reducing our estimate of the annual benefit from $10 million to approximately flat, due to growth investments and incremental costs we incurred in our cabinet business and other expenses.

Turning to slide 8, you can see we delivered another quarter of solid performance in our plumbing segment, with sales increasing 4%, driven by growth in faucets and showers, rough plumbing, and spas. We saw the greatest strength with our wholesale, showroom, and dealer customers.

This reflects our continued investments in the showroom and commercial segments of this channel. And as a result, we are benefiting from a richer mix of products. For example, our Hansgrohe Select line, our showroom-focused Brizo faucets, and our Highlife spas all continued to outperform in the quarter.

Our European business experienced modest gains, with sales increasing 2% in local currency, despite soft economic conditions. And we delivered strong operating leverage, with nearly 50% incremental margins in the quarter, with a substantial portion of this coming from increased volume and productivity improvements.

Turning to slide 9, you can see that we were flat in the decorative architectural segment in the third quarter. As a reminder, we were up against tough comparisons.

Our Q3 2013 performance in this segment was extremely strong, with revenue up over 9% over 2012. And we successfully launched Marquee Exterior and DeckOver.

In Q3 of this year, we successfully completed the rollout of Behr Marquee Interior product, which was awarded Home Depot's Innovation of the Year. Segment sales were favorably impacted by $6 million of load-in sales of this product.

In addition, our focused approach on expanding our Pro business continues to gain momentum. And Liberty hardware had another strong quarter, achieving solid top- and bottom-line growth, through continued share gains from successful new product introductions and program expansion in the retail channel.

Offsetting this growth was the timing of replenishment orders for Behr products at the end of Q3, which we believe reduced Q3 sales by $10 million to $15 million. Behr is now seeing strong replenishment orders, here in October.

Operating margins contracted slightly in the quarter, primarily due to an unfavorable price commodity relationship, driven by increased material costs and unfavorable mix, driven by our Pro initiative. We also incurred approximately $3 million of expense related to the rollout of Behr's new Color Center displays at The Home Depot in select markets in North America.

As we continue this rollout in Q4 and in 2015, we expect additional Color Center expense of approximately $3 million in the fourth quarter and approximately $11 million in 2015, the majority of which will be realized in the first half of the year. Also, the incremental advertising expense of $5 million was delayed from Q3, and we will now incur this expense in the fourth quarter of this year.

Turning to our cabinets segment on slide 10, you can see our cabinets segment sales grew 2% in the third quarter. Sales increased due to a favorable mix and strong international performance. Within North America, we saw improved sales in the dealer channel, as our recently introduced KraftMaid Vantage program gained traction.

It's critical that we restore our lead times, and to do so effectively and quickly. As Keith mentioned a few minutes ago, our lead times are back to industry-leading standards.

In doing so, we incurred additional costs that impacted our profitability in the quarter. We estimate the total charges due to the plant closure, ERP implementation, and the associated inefficiencies of these initiatives in this segment, will aggregate approximately $35 million in 2014: $10 million each in Q1 and Q2, $8 million in Q3, and approximately $7 million in the fourth quarter.

Furthermore, we took action this quarter to sell our two builder-focused mothballed cabinetry plants that make Merillat products. As we reviewed our capacity, we determined that we did not need these facilities.

This resulted in a one-time rationalization charge of $28 million. We expect annual savings from this action of approximately $3 million.

Turning to installation on slide 11, the segment sales growth of 8% was driven by solid results in our residential new construction, commercial, and distribution channels. Multifamily activity remains strong, and we are seeing improved mix with increased activity from custom builders.

Operating profit improved $1 million, or 5%, compared to the third quarter of last year, as a result of increased volume and a favorable price commodity relationship. It was offset by wage inflation and approximately $4 million in one-time increased medical and other insurance-related expenses.

Turning to slide 12, our other specialty product segment sales increased 8%, driven by North American window business, as we experienced continued favorable mix shift towards our premium window and door product lines. Our European window business was -- also positively contributed to this segment's top and bottom line, due to continued improvement in the UK remodeling market. This segment's operating profit rose 25%, due to favorable mix and increased volume, as a result of the stronger remodeling environment.

And turning to slide 13, our balance sheet strengthened in the quarter, as a result of the reversal of our deferred tax asset valuation allowance. We were able to reverse the valuation allowance because of our continued profitable growth and our improving outlook for our business.

Working capital as a percent of sales came in at 12.7%, a 20 basis sequential improvement from the second quarter of this year. I want to thank our supply-chain, operations, and finance teams for driving this great outcome.

And we ended the quarter with approximately $1.6 billion of balance sheet liquidity, and our credit metrics continued to improve. Now, I'd like to turn the call back over to Keith.

Thank you, John.

Moving to slide 15. Before going to Q&A, I'd like to highlight what we're doing to drive our business going forward. We are continuing to focus on strengthening our brands through customer-driven innovation. This is not only driving share gains for us, but it's also strengthening our strategic relationships with key customers.

Cost control continues to be a critical part of our strategy going forward. This enables us to expand margins, as we convert increased volume with strong operating leverage.

Fixing cabinets is a top priority. We have taken the necessary actions to position the business for improved performance. With regards to our capital allocation strategy, we will continue to execute going forward, as we are confident in the long-term prospect of our business and our ability to drive shareholder value.

Our strong performance this quarter reflects our continued execution against our strategic priorities: to drive the full potential of our businesses, to leverage opportunities across our businesses, and to actively manage our portfolio. We are confident that this will lead to increased shareholder value and position Masco for even greater growth.

With that, I'd like to open up the call for questions. Operator?

(Operator Instructions)

Garik Shmois, Longbow Research.

Just wondering, first off, if you could talk high-level, with respect to the cadence of R&R over the course of the quarter. I think, coming out of the second quarter, you were still seeing stronger growth in the lower-ticket items. Seeing better mix on the higher-ticket items. Mostly growth was coming in low ticket.

Is that still the case in the third quarter? If you could just talk about some of the variances there, that would be great.

We continue to see our R&R growth fairly steady from what we've seen in the last quarter. And going forward, we look at it at approximately GDP plus two -- in that range.

With regards to the demand as it relates to smaller ticket versus bigger ticket -- again, very similar to last quarter. We're seeing good volume on the opening price points in our retail channel on the higher end of bigger-ticket items. We're seeing good wholesale and showroom volume, so I would characterize our R&R volume as being consistent with what we saw last quarter.

Okay.

And then, now that we have several weeks since you've announced the results of your strategic review, I was just wondering if you could maybe provide a bit more color around the $30 million to $40 million worth of cost savings that you had previously announced, and what the timing of the rollout of the cost savings program is going to look like in the P&L.

As we implement that, we expect our run rate, post spend, to be in the range -- in terms of corporate SG&A -- in the range of $100 million.

Yes, Garik, to be, maybe, a little clearer on that -- our general corporate expense has been running in the range of $30 million to $35 million a quarter. Maybe you saw here in the third quarter that, on an adjusted basis, that came down to $22 million. That's probably a little light, just given the rationalization charges and the severance charges that we incurred in the third quarter -- because all the action was taken on September 30.

So as Keith mentioned just a minute ago, going forward, I think what you should expect to see from us is a general corporate expense number in the circa $100 million range on an annual basis, with a little bit of ups and downs on an individual quarter basis. Now, that said, we really won't get to that run rate until the spin is executed.

So between now and then, we will continue to experience some additional severance costs each quarter as we have some people staying through to help us with the spin. And secondly, we will be incurring between $8 million and $10 million a quarter in spin-related costs that will be running through general corporate expense as well.

So I think in the near-term, it will stay in that $30 million to $35 million range. We'll see the benefit starting in the third quarter of next year.

Okay. That helps. Thanks so much.

Stephen East, ISI Group.

Looking at your plumbing -- the sustainability of your Op margin, as you move forward. You've turned in some great results. And I know in the past, you've talked about expecting those to come down.

As you look out over the next year or two years, what would you expect the trajectory to be? How quickly do you think that's coming down? Because it's stayed up much better than what we thought.

I think a big determinant on that is, Stephen, is our mix and where the growth in the global market comes. As we see higher growth in emerging markets, that mix tends to be a little bit more dilutive.

Also, a significant contributor would be the growth rate of our adjacent products as we expand into other areas of the bath in North America. That also is a lower-margin play for us, but good return on our investments.

So the key determiner on our sustainability, if you will, on those margins in that space is the growth rate around category expansion and the growth rate in emerging markets, both of which is our focus. And both tend to be a little bit lower margin.

Okay. Fair enough.

And then looking at cabinets, I know coming need to this quarter, you thought you would have about $5 million in incremental costs and then be done with it. You're now looking at, between this quarter and next quarter, about $15 million.

Could you just talk a bit more expansively about what you're doing now, versus what you thought you would do a quarter ago? And what your mix is with your dealer profitability?

We would have expected that to give you a bit of a bump, and that didn't occur either. So maybe just give us some color on what's actually happening there?

Sure. The fundamental driver is we made a decision to more aggressively get back to our industry-leading lead times. In the Merillat brand -- again, we're talking on the builder side of the business, mainly -- we put an extreme focus on that as we listened to our customer base and understood the value of that. And in doing so, we put, mainly, labor inefficiencies in play as we made those improvements.

Okay.

And so will that just quickly evaporate then, as you get past the fourth quarter? Or is that something that we've got to anniversary in the third quarter of next year?

We think we'll see in the range of $5 million to $10 million of inefficiencies associated with this that lead into next year. And then after that, we'll be clean.

Okay. Fair enough.

We expect that to be wrapped up by middle of the year.

Okay.

Michael Dahl, Credit Suisse.

I wanted to go back to one of the first questions on the new restructuring program. And I guess, in the context of you've got the $150 million of gross profit improvement this year. Now you're saying with all these other investments, no net benefit.

Wondering if you could give some thoughts out, as we look into 2015, between additional profit improvement programs and the restructuring? What do you actually expect to see, as far as net profit benefit?

Mike, it's John.

As we have in the last several years, we've always generated about $150 million of profit improvements on a gross basis. And those profit improvements are driven by lean efficiencies, supply chain work, et cetera. And those are offset by things, generally, like wage inflation, medical benefit inflation, and other things that we incur on a regular basis with our business.

And typically, in four of the last five years, we've been about neutral on our net benefit on price commodity. This year, we were anticipating a slight benefit. I think, in the beginning of the year, we were hopeful we could get $15 million to $20 million of a net benefit.

That didn't materialize this year. We ran into some unanticipated inefficiencies at our cabinet operation that we did not, clearly, expect at the beginning of the year. And so that quickly ate into our expected net benefit to bring that down to $0, here.

So as we look forward into 2015, while we haven't finished our budgeting process yet, I would be hopeful that we could generate some net benefit. Probably give you a bit more color on that benefit at the Analyst Day in February.

But you should -- and we can layer that number on top of that $30 million to $40 million benefit that we expect to get. And that's going to be kind of a one-time benefit. And we expect to get it as a result of the headcount reductions that we announced on September 30.

So, sorry I can't give you a little bit more color at this point. We're still working through our budgeting process here.

No, that's helpful. Thanks.

My second question is, the share price performance has been a bit disappointing, post the announcement of all the spin and other initiatives and capital allocation. Have you given thought to some sort of accelerated repurchase, given, clearly, you've got enough cash on the balance sheet today?

Yes. You know, Mike, there's a number of ways to execute a share repurchase program. And we're looking at a variety of options on how to do so.

Okay. Thanks.

Keith Hughes, SunTrust.

Thank you.

Two questions on, specifically, your European business. It did very well in the quarter. You read the same headlines I read on Europe. Are you getting any sort of read from your businesses in Europe, what they believe the trajectory looks like for the next several quarters?

And then, question two -- if you can give us any kind of commentary on how October trends across the entire business have run.

With respect to Europe -- Keith, it's John -- I think we're seeing a little bit of two different stories in Europe. One, our Continental European businesses are seeing the slower growth, as evidenced by the 2% up that I mentioned in local currency in plumbing. So relatively soft growth. Good growth, compared to overall GDP that Euro zone is putting up.

That said, I would tell you that our UK businesses continue to benefit from the strength in housing in the UK. And we saw very good strength in the UK, both in our window business, our plumbing business, and our cabinet business -- from a top-line perspective.

In October, we're seeing good, steady growth. I'd characterize it as being consistent with what we've seen in this past quarter.

Okay. Thank you.

Dennis McGill, Zelman and Associates.

Keith, my first question just has to do with the inefficiencies on the cabinet side. Are you to the point now where the efficiencies are just your burden, as far as the plants just aren't running well, and you're having to incur additional cost to get the product out the door? Or are customers still feeling the effects of -- I think you said lead times were back to normal, but -- quality or anything that would impact their business?

I would say it's more the former, where we're -- it's our issue. And we're working our way back to our more normalized level of efficiencies and productivities.

We put a big focus on getting our lead times back to our customer base. Our quality is good. We're by and large over the issues with the customer, and these are internal issues that we're now focused on currently and then, certainly, into 2015 with a solid work stream of initiatives that we're driving to get that productivity back.

So there's still some into issues for customers, but for the most part, that's behind you? I'm hearing right?

We're not perfect with the customer base, but I'll tell you, we're back to our industry-leading lead times and significantly improved.

Okay.

And then, with respect to the fourth quarter share repurchases, can you, I guess, walk through what would you need to see to execute the share repurchase now? Or if you're in place and positioned to execute the share repurchase for the fourth quarter?

We're committed to what we disclosed, which is buying back 50 million shares over the next few years. In terms of our specific cadence, you'll see that as a report in our Q.

Okay. Thank you.

Eric Bosshard, Cleveland Research.

First question, on cabinet profitability. You had outlined the plans for what you are going to a compass in that business over the last two years, and you've obviously had some execution issues that you're remedying. I'm curious what you think about the path of recovering cabinet profits as we look out over the next year, once we get through what you've dealt with in 2014.

Fixing cabinets is a priority for us. There's no question about it. We view that as the best path to shareholder value creation.

We're driving -- as we talked earlier with Dennis's question, we're driving productivity and have work streams that we're focused on. We have a solid innovation pipeline and new products where we're listening to our customers and delivering on that. And we'll talk about those as they happen, but we feel good about that.

And with regards to the share gain, that it will drive. Of course, increased volume would be helpful for us.

Let me ask the question slightly differently. The improvement in profits that was expected this year -- is the recovery next year now off of the base that we're experiencing in 2014? Or can we have a more significant ramp-up? Obviously, excluding the charges and how the profit recovery plays out in the cabinet business?

I think it will be more significant, in that we don't expect those costs and the inefficiencies associated with driving from five to two ERP systems and closing down the factories that we've had. So in the range of $20 million to $25 million. We don't expect that to reoccur.

Okay.

And then secondly, in the paint business, understand the investments that are being made for Pro and for the Color Centers and the new product. But I'm curious how we should be thinking about the margin opportunity in that business in 2015.

Is this another year where margins erode a little bit, and you trade some margin for volume? Or how should we be thinking about the medium-term future of margins for the paint business?

Yes. Eric, I'd tell you that I think we look at that business consistently. And that is, we still think that this business should generate high teens margins.

Absolutely, we do. We need to make investments in this business. We do. And will we incur some expense in doing so? Yes. But we still think the margin profile of this business has not significantly changed.

Okay. Very good. Thank you.

Michael Rehaut, JPMorgan.

First question I had also was on cabinets. And I just wanted to shift the focus a second to the top line. You actually had a very difficult comp in that quarter as well, aside from the difficult comp in decorative. Yet you were actually able to grow roughly 2%.

You mentioned some of the drivers and restoring of lead times, but I was wondering if you could get a little more granular, in terms of what you're seeing in each of your different channels? And to the extent that there is, perhaps, getting back on the horse type of effect in the dealer channel with the lead times -- if that's something that you could expect to continue to positively benefit from over the next few quarters?

I'll start with the dealer channel. As you know, we've had significant new product introductions and programs aimed at providing differentiation and better service and helping our dealers make more money. And that's paying off. So we're seeing some nice, consistent growth and share gain in the dealer channel.

On the builder side, we're keeping the business we want to keep. There's some business that didn't make sense for us from a profitability standpoint.

There's some business that we've moved to more efficiently serve through our dealer network. We are enjoying the, obviously, the macroeconomics -- the some 10% gain in starts this year, versus last year.

On the retail side, we've got aggressive and made some moves, with regards to our pricing and promotion strategies. And we're working to find that sweet spot in elasticity to be more effective.

Great. That's helpful.

And just wanted to circle back, John, to the question of corporate expense. It had come down. Last quarter was down $8 million year-over-year. This quarter, $9 million.

And I think you referred to some timing charges, but I just wanted to be certain. I think you had said that you expect 4Q to get back to that $30 million to $35 million run rate, which is actually a pretty steep increase. Just wanted to make sure if that's the case, or if there would be any beginning benefits from those cost saving actions that was announced last month.

Yes, Mike. Just to circle back on that one -- and maybe you missed it.

I mentioned, we expect to incur $8 million to $10 million of transaction or spin-related costs as we move forward for the next several quarters. If you factor that out, that $30 million to $35 million drops to circle that $25 million range on an adjusted basis, absent the one-time spin-related cost.

All right. And so that $8 million to $10 million is per quarter?

Per quarter. That's right, Mike.

Okay. Thank you.

Yes.

Bob Wetenhall, RBC Capital Markets.

Keith, just wanted to understand -- if you took out the ERP costs and the impact of the polar vortex, would you guys be running breakeven in the cabinets year-to-date? And on a longer-term basis, once you finish rationalization, what's the normal way to think about profitability in terms of EBIT margins for this business?

I think it's fair to put back that $30 million to $35 million of incremental inefficiency costs that we have incurred. And then when you look at our growth rate, you can see our drop-down margin in the range of 40%. And we're focused on that on attaining share and growing with the market, so I think that's a good way to look at it.

Okay.

What kind of normalized EBIT margins do you think that implies? Just for modeling this out?

Well, I think we'll get into more detail in February, as we lay out our margins going forward into 2015, Bob.

Yes, Bob. I would guide you to think, though -- if you factor out the $35 million, but then you look at our normal drop-down margin on this business, we should be in the 30%, 35% range on growth. So you see that, going forward. As we make our way back from housing starts of circa 1 million this year to 1.5 million, you can factor that drop-down incremental margin into your model.

Okay.

On the paint business, I thought revenues would be a little bit higher. It looks like you're investing into business. Can you give us an idea of what you're seeing, in terms of ebb and flow? Sounds like October was a stronger. You were weaker last quarter because of inventory replenishment.

What are you seeing in the channel, and how are the competitive dynamics playing out? I'm aware you guys had a tough comp last year. How do we think about growth, going forward, and reinvesting behind of business?

Thanks again. Bye-bye.

We feel good about paint, and we're continuing to reinvest behind it, no question about it. We had a tough comp in the range of 9% last quarter. We had some inventory timing issues in the channel.

We're seeing good replenishment orders coming back. So we continue to be positive on the growth prospects in paint.

George Staphos, Bank of America.

Most have already been asked. I guess, the question I had related to cabinets again.

The closing of the mothballed plants -- I'm assuming that didn't have much, if any, ongoing expense until the closures. But if there was any expense, what could we perhaps build into our forecasts longer-term, in terms of some much in benefit from that?

And in turn, you were keeping these facilities mothballed, presumably, for some time on the expectation that demand would come back and you'd need that capacity. What has changed, either in your outlook or your supply chain, where these facilities can now be closed?

Yes. George, on the expense or the benefit side, you're right. We were not incurring significant costs to keep these facilities around, so we were simply continuing to appreciate them, insure them, and secure them. And so the benefit, now that we're permanently closing in those, will be approximately $3 million per year.

George, there were a couple factors in deciding to take these plants completely offline. One is our efficiencies that we're seeing in our component plants. As you recall, we closed two component plants and moved that volume into one.

And we wanted to be sure of our capacity capability in that plant, and what we're seeing is encouraging. So we have good capacity improvements versus our initial plan as we ramp that factory up.

Secondly, as John alluded to, there wasn't a whole lot of costs to keeping these plants online. And we chose to keep that for a while as a buffer to see if we were going to see a significant spike in new home construction, mainly, as this is focused on our Merillat and our builder business.

Good growth. We're seeing 10% uptick, but we wanted to make sure that we were prepared, should we see something significantly greater. And we're not seeing that. So that's why we made the decision to take them completely offline.

Thanks for that.

Quick question on decorative art. To the expect extent you can comment -- and perhaps you can't -- you mentioned orders are good replenishment's good. Do you have any sense on what retail [gallonage] growth is for your brands, early into the fourth quarter?

George, we don't have that number, here in the early fourth quarter, at this time. We haven't closed out the month of October just yet.

Do you have a view on what third-quarter looked like, from a retail standpoint?

Are you talking POS, or are you talking our volume?

POS.

No. I don't have -- I have insights, but probably wouldn't be in a position to share that with you.

Understood. Thanks, guys.

Phil Ng, Jefferies.

Your cabinets business has lagged the market in 2014. Now that you're cycled through some of these ERP issues, how do you expect your growth trajectory to stack up against the market?

Our intention is to take share. We're doing that with our products and our programs. We're going to do that with more consistent delivery on our lead times.

It was a tough year for us in 2014. We made some fundamental improvements to the business -- taking our ERP systems from five to two, shutting down two significant component plants -- taking these mothballed plants offline. We've reinvigorated our product development process, and we're focused on the customer needs, and it's paying off.

But it was a tough year, with regards to our performance. We understand more about the elasticity and our pricing and program schemes in retail, which we're going to continue to refine, which we think will drive share as well. So we plan on outperforming the market in 2015.

Got you.

So do you think most of the share gains, going forward, would be driven more on the retail side as you price your products a little more competitively? Or are you a little more upbeat on the dealer side?

I'm upbeat on both sides for different reasons that we've talked about. Certainly, the dealer section, or the dealer segment, in this industry is significantly bigger than the retail. And we intend to gain share in both segments.

Okay.

And just looking forward towards your cost take-out initiative on corporate expense, can you give us some comfort around execution risk? Because the ERP rollouts been a little tougher this year. So what's different, and what have you learned that's going to help smooth out the process next year?

I think they're completely different initiatives, when you're talking about information system that manages the complicated supply chain, versus a corporate office staff reduction. I would not characterize our corporate office staff reduction as risky.

Okay.

We've worked with our business units. We understand the business processes that we need to change. We've made those changes, and we're moving forward.

Okay. Thanks, guys.

Tim Weiss, Baird.

I think -- just turning back to cabinets again -- I think home center sales there, you mentioned, were down. And it sounds like maybe there's some inefficiencies in pricing and marketing. But I guess, more broadly, are you seeing any change in how the home centers think about cabinets business, just in terms of floor space with competing alternative products like flooring or appliances?

I don't see any big difference in our home center partners' view on the cabinet business. It's a good business for them. Certainly, there's tweaks that different customers make to their plan-o-grams and to their layouts as they work to optimize their model, but there's no question that cabinets is an important part of the home center channel. It's going to continue to be that way, in my perspective.

Okay. That's great.

Just looking into 2015, John, any specifics we should think about, just around raw materials and the price cost relationship there?

Nothing in particular, at this time. As you think about the commodity complex that impacts our business, petroleum obviously has come off recently -- very recently -- so we'll see how that plays. Copper has been in a very steady trading band. A little bit lower than it's been, but on a lower trading band.

We have been experiencing, from time to time, insulation inflation from the manufacturers. And our estimate is that we'll see some more of that, going forward into 2015.

And then in terms of paint inputs, propylene has been running a little bit high. And so that is continuing to have some cost pressures on our paint inputs.

And actually, wood and finishing materials in cabinetry have been elevated over the course of the year. And so we expect that will probably continue into 2015 as well.

Great. That's very helpful. Thank you.

Eli Hackel, Goldman Sachs.

Just wanted to talk about how you're positioning yourself for growth in multifamily, which has been a lot stronger than single-family. In the coming years, do you have any idea what percentage of that 30% that is new construction is multifamily versus single-family? Thanks.

Our share of multifamily and single-family is about equivalent as the overall market, Eli, if that's your question. So our cabinet business, our installation business, all participate in the multifamily segment of the builder channel. And our share there is consistent with our share on the single-family side.

Yes. That was it. Thank you very much.

Nishu Sood, Deutsche Bank.

This is Rob Hansen, on for Nishu.

Just wanted to ask about the other specialty segment. You mentioned that there's been some mix shift that's been helping there. Is this just slower new construction growth, or are you repositioning yourselves more to R&R there? How does that look?

Yes, Rob. We actually, as you may be aware, really did a significant repositioning of this business through the downturn. Prior to the financial crisis, this business was heavily focused on residential new construction.

And through the course of the last six or seven years, we have delivered strides to reposition the business to be a much more repair-remodel oriented business. And we are seeing the benefits of that repositioning now, over the last multiple quarters, as they've seen strong top-line growth in each of the last six or seven quarters here, largely from the remodeling efforts that they've put forth. So I feel really good about how that business is positioned in the marketplace.

Okay.

And what do you look at as stabilized operating margins in this segment?

We saw some very nice double-digit operating margins in the segment in the quarter. This has experienced good drop-downs historically -- in the 30% range. And so as we continue to grow this business, we continue to experience -- we expect to continue to experience the 30% drop-downs on this segment as well.

Okay.

Just one last quick question on that. How much have price increases been a factor? Obviously, seeing a lot of window manufacturers increasing prices, recently.

So has that been just enough to cover rising input costs? Or have you been able to capture a little bit more on prices as well?

Pricing has done a good job of offsetting some of our input costs. I would tell you that the bigger benefit has been the mix shift, clearly.

That -- we have seen upgrading of our products to our higher price point products in both windows and doors. So we're really pleased with the consumers' reaction to our new products in the marketplace.

All right. Thank you very much, guys.

Stephen Kim, Barclays.

I was wondering if you could comment a little bit about the cadence of sales through the quarter. Specifically, in cabinets, but also interested in what you've seen in plumbing as well.

When you say cadence of sales, Stephen, can you help me out?

Yes. Basically month by month. Did you see steady improvement? Was it choppy?

And also, I forgot to mention, anything on the pricing environment that we saw in the quarter? Thanks.

I think it was pretty steady. I'm thinking at it from a month-to-month basis, here, in my head. It was a steady.

Okay.

And on the pricing side?

We had some replenishment orders in paint where that volume, as we talked about in our channel, tends to fluctuate. And we're seeing that coming back in October. So there's a little bit of timing there, but by and large, and an overall demand perspective, it's been pretty smooth through the quarter.

Okay. Great.

What about pricing actions? Did you see anything there that you can speak to?

It's been -- nothing really stands out. It's been pretty calm, pretty stable, throughout the quarter.

Okay.

And then lastly, you had mentioned, Keith, I believe in your remarks earlier, that in plumbing, the gap down to your long-term margins guidance there is really attributable to emerging markets growth in adjacent products in North America. And I guess I was curious as to how you see that growth playing out?

Is this something that you expect to sort of be of a bit of a breakout year for either of those initiatives in 2015? Or is that something that you think is going to be sort of a gradual spooling up of the velocity in those businesses?

I think we're going to talk about that more in detail in the Investor Day, but I would characterize it more on the spooling upside.

Great. Thanks a lot, guys.

Mike Wood, Macquarie.

Just some clarification on the net profit improvement -- the flat for the full year. If I add the numbers up, it looks like you were negative $15 million for the first three quarters. Should we expect a positive $15 million, year-over-year, in the fourth quarter?

We are expecting some benefit in the fourth quarter, Mike.

Okay.

Just to understand that -- that would benefit the segment margins, potentially, 600 basis points. Is there any offsets to that, that we should be thinking about from initial modeling for the fourth quarter?

I'm sorry. Which segment are you talking about that should be benefiting the 600 basis points?

I'm just adding up the full-year numbers to the flat net profit improvement. And you've tracked negative $15 million for the first three quarters.

Right.

So in order to reach that goal, you'd need to be up $15 million for the fourth quarter. Which, if I just add the total segments, that a 600 basis point year-over-year operating margin tailwind in the fourth quarter.

I don't -- let me follow-up with you offline on that one, Mike.

Okay. That would be great.

Just in terms of the ERP, can you talk to us about what the service benefits are and how you benchmark, not just the initial lead time, but the response time to any quality issues? And how you compare yourselves against your large competitors and other smaller manufacturers that you compete against? Thank you.

First of all, on the lead time -- we measure it just as at the time from when we received order until the time when that order is shipped. From a fill rate perspective, we look at it -- we hold ourselves high to a line item fill rate metric. So it's extremely difficult, versus looking at it from an order basis.

Mike, refresh my memory on your other question besides the lead times.

Just a general -- how you compare against your primary competitors at that independent dealer on those service metrics now?

We have the industry lead time in the Merillat side of the business. We've had that for a long time, and that's extremely important to our dealer base. And when you look at where we are with KraftMaid, with our four week lead time, that's very competitive in the dealer base overall.

Okay. Thank you.

Megan McGrath, MKM Partners.

Just wanted to follow up a little on the paint segment. You talked about your tough compare for the Marquee Exterior and Deckover last year. But then you had the Behr Marquee Interior launch this quarter. Could you talk about, maybe, if there's any timing differences there?

And kind of compare those launches -- what are your expectations for what those businesses could reach? Is Behr Marquee Interior have the potential to be as good as the Exterior? And is it tracking as well as those launches did last year, from a same timing perspective?

Yes, Megan, we're in the initial stages. Recall that we were in about 400 or 500 stores at the end of the second quarter. We completed the rollout to about 1,800 stores in the third quarter. So we're still seeing some of the sell through issues.

And it's just gaining some traction now. Recall, it is that slightly higher price point. This is isn't a $40 to $45 a gallon range.

And we do anticipate a very good response. The initial reaction's been positive, but probably not enough data, yet, to give you an indication of whether this is going to be as successful as the Exterior launch. But we'll keep you updated as the quarters rollout, because we'll have more data, here, in 90 days, et cetera, et cetera.

Okay. Thanks.

And just final question on cabinets. I guess, just looking overall at the $35 million in costs this year and a little bit more -- so maybe $40 million to $45 million in total costs -- is all of that related to this ERP implementation, which seems, obviously, pretty high for an ERP implementation? Or was there other stuff that you uncovered at the same time that was costing you money, in excess of the ERP?

Oh, it's not all related to the ERP. If you look back to the beginning of the year, we had two significant component plants that we've taken offline. And there's efficiencies associated with that as we move business from one plant to another. And then settle the receiving plant, if you will, settle that into new volume.

As I said, one of the drivers of why we decided to take our mothball plants offline was that we're seeing our performance in the remaining component plants. So it was a combination of plant closures as well as some significant ERP implementations.

Okay. Thanks.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.