馬斯科 (MAS) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Masco Corporation's second-quarter 2015 results conference call. My name is Carol, 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 the Director of Investor Relations, Irene Tasi. Irene, you may begin.

Thank you, Carol, and good morning to everyone. Welcome to Masco Corporation's 2015 second-quarter 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 would limit yourself to one question, with one follow-up. If we are unable to take your question during the call, please free to call me directly, at 313-792-5500.

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 have described these risks and uncertainties in our Risk Factors and Other Disclosures in our Form 10-K and our Form 10-Q that we have filed with the Securities and Exchange Commission.

I'd like to remind you that the results we will review today exclude our Installation Services segment, reflecting our spinoff of TopBuild Corp, the business comprising that segment, on June 30.

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 adjustment measurements to GAAP in our quarterly press release and presentation slides, which can be found in the Investor Relations section of our website, www.Masco.com.

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

Thank you, Irene, and good morning, everyone, and thank you for joining us today. Turning to slide 4. I'm very pleased to review both our second quarter results, as well as our recent accomplishments which demonstrate the strength of our business' execution and the strategies we have in place to drive shareholder value.

Once again, all of our segments contributed to top line growth, resulting in North American sales increasing 7% and International sales increasing 5% in local currency. We delivered this growth while expanding our operating margin to 14.5%, our strongest operating margin in over a decade.

Our exceptional operating leverage in the quarter was the result of our disciplined cost management. Additionally, our margin was aided by Cabinetry's accelerated turnaround, favorable price commodity, and the timing of promotional expenses.

Our results were supplemented by the achievement of some key milestones we set out for ourselves in 2015. Notably, our Cabinetry business accelerated the pace of its turnaround plan and surpassed its 2015 annual operating profit target in the second quarter. The demand for higher ticket repair and remodel items continues to improve and we've aligned our cabinet business to capitalize on this trend.

Our KraftMaid brand continued to gain share at retail, while our dealer exclusive KraftMaid Vantage product line drove sales in the dealer channel, clearly resonating with designers and dealer principals. We've also restored Merillat's industry-leading lead times, to position the brand for anticipated higher growth from new construction in the back half of this year. We're extremely proud of the results the team has delivered and we now expect that our Cabinet segment will achieve operating profit of approximately $25 million for 2015.

In our Plumbing segment, Delta faucet and our Watkins spa business both broke sales records in the quarter, demonstrating the strength of their brands and the effectiveness of their growth strategies. Delta's focus on key influencers in the wholesale channel, as well as the successes of their innovation pipeline continues to enable this above market growth. Hansgrohe, despite currency headwinds, continues to leverage their global leadership, as they further expand into emerging markets and drive sales and profit growth.

In our Decorative Architectural segment, Behr paint grew core sales with their innovative new product, Behr Marquee, their ongoing expansion into the Pro segment, and their award-winning customer satisfaction levels. This growth is a testament to Behr's brand and innovation leadership in the DIY industry.

In our Other Specialty Products segment, Milgard Windows, the leading window brand in the Western United States, had a tremendous quarter. They continue to capitalize on improving market dynamics, including new home construction growth, repair and remodel growth, and increased demand for their higher end offerings, including their recently introduced Essence doors.

From a capital allocation perspective, during the quarter we continued to execute on our commitment to shareholders by repurchasing approximately 3.8 million shares of stock. Year-to-date, we have repurchased approximately 7.8 million shares, returning over $270 million to shareholders through share repurchases and dividends.

Reflecting confidence in our future outlook, we were pleased to announce this morning our intent to increase our annual dividend by $0.02 per share, to $0.38 per share, beginning with the fourth quarter of this year.

And finally, we completed the tax-free spinoff of TopBuild Corporation, a pivotal point in Masco's history. We look forward to TopBuild's continued success as a standalone, publicly traded company.

Now I'll turn the call over to John, who will go over our operational and financial performance in detail. John?

Thanks, Keith, and good morning, everyone. Please turn to slide 6. As Irene mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges.

We continued our positive momentum coming out of first quarter. I'm pleased to report the second quarter was our 15th consecutive quarter of year-over-year sales and profit growth. Excluding the impact of foreign currency, sales increased 7% and we experienced sales growth in all four segments. On a reported basis, sales grew 3%. Foreign currency translation negatively impacted our sales in the second quarter by $77 million, principally due to a weaker euro compared to the US dollar.

Sales in North America were up 7% for the quarter. We continue to experience growing demand for our new home construction and repair and remodeling products, including our big ticket kitchen and window products. With the spinoff of TopBuild complete, repair and remodeling now represents approximately 82% of our total sales.

International sales increased 5% in local currency in the quarter, driven by the continued strength of our international plumbing and window businesses. International sales now represent approximately 23% of our total sales.

And we delivered strong bottom line performance, as operating income increased 22% in the quarter to $280 million, with operating margins expanding 230 basis points, to 14.5%. In the quarter, foreign currency translation negatively impacted operating profit by $19 million, and we incurred approximately $5 million of interest carry costs from our March 2015 debt issuance. Our EPS was $0.38, an improvement of $0.10, or 36%, compared to Q2 of last year.

Turning to Slide 7, you can see that our Plumbing segment sales were flat for the second quarter. The strength of the US dollar once again masked the continued strong performance in our Plumbing segment. Excluding the $63 million impact of foreign currency translation, sales increased 7%, driven by growth in faucets, spas, and new program wins with key trade and retail partners.

As Keith mentioned earlier, both Delta and Watkins enjoyed record sales quarters in Q2 and contributed to our North American sales growth of 8%. We experienced strong growth in the trade channel in the quarter, as both our Delta and Brizo brands drive consumer demand for our innovative new products and we continue to take share in this category.

The growth at Watkins, our leading spa business, was due to the strength of our Caldera and Hot Springs brands, as well as our acquisition of Endless Pools. Watkins achieved its record quarter excluding the impact of this acquisition.

Our European businesses has outperformed, delivering 4% sales growth in local currency. Hansgrohe continues to drive trade channel growth through the strength of its brand, design and innovation.

As we said in our Q1 earnings call, operating margins in the second quarter improved to their recent historical levels. Foreign currency translation negatively impacted the Plumbing segment's operating profit by $12 million in the second quarter.

Please turn to slide 8. In our Decorative Architectural segment, second quarter sales increased 4%, driven by the performance of our new Behr Marquee interior products and growth in our Behr Pro business. Excluding the effect of foreign currently transition due to a stronger US dollar versus the Canadian dollar, segment sales increased 6%. Foreign currency translation negatively impacted this segment's operating profit by $7 million in the second quarter.

Operating profit increased 18% in the second quarter, due to increased volume, a favorable price commodity relationship, and effective cost management. This segment also benefited from lower promotional expense of $6 million in the quarter related to the Fourth of July sales event at the Home Depot, which began in July this year, as opposed to June last year.

As a result of this and other investment, we will incur an incremental $25 million in promotion, program costs, such as our successful Behr Pro initiative, program resets, including new program wins at Liberty Hardware, and advertising expense in this segment's third quarter, as compared to the third quarter of last year. This investment demonstrates our strong commitment to grow this business.

Turning to slide 9, you can see our Cabinet segment sales increased 6% in the quarter, due to improved performance in the KraftMaid brand in the home center and dealer channels, partially offset by lower sales to the direct to builder channel, as we continue to exit lower margin business.

The segment returned to profitability in the second quarter and the bottom line improved $23 million over the prior year. This was primarily driven by improved mix, as our higher price point KraftMaid brand continued to experience strong growth, improved pricing dynamics in the direct to builder channel, the reduction of the prior year's incremental spend on ERP inefficiencies, and the benefits associated with other cost savings initiatives.

The Cabinet team is focused on driving profitability in 2015, as we continue to introduce new products at retail and dealers and improve the execution in our Merillat business. We now believe we will deliver operating profit of approximately $25 million in 2015.

Turning to slide 10, our Other Specialty Product segment sales increased 8%; and excluding the impact of foreign currency translation, sales grew 10%. We are particularly pleased with this result, given the difficult comparison to last year's second quarter, when the segment's growth was 11%.

Our North American window business delivered low double-digit sales growth in Q2. This growth was driven by volume increases and a continued benefit of a favorable mix shift toward our premium window and door product lines.

Excluding the impact of a stronger US dollar, our European window sales increased 7%. In the quarter, we also completed the acquisition of Evolution Manufacturing, a higher price point vinyl window manufacturer in the UK. This acquisition will enable us to penetrate the greater London market.

The segment's operating profit growth in the quarter can be attributed to increased volumes, favorable mix, and effective cost management.

Turning to slide 11, we ended the quarter with about $1.5 billion of balance sheet liquidity. This amount reflects the $200 million dividend we received from TopBuild Corp on June 30. Our focus on working capital management delivered strong performance in the quarter, as working capital as a percent of sales remained relatively flat versus prior year, at 14%.

And we continue to take action to drive shareholder value. During the second quarter, we repurchased 3.8 million shares, or approximately 1% of our common stock. Reflecting our Board's confidence in our future outlook, we announced the intent to raise our annual dividend by $0.02, from $0.36 to $0.38 per common share, starting with our quarterly dividend paid in the fourth quarter of 2015. And we remain well positioned to retire $300 million to $500 million of debt in 2016.

Now I will turn the call back over to Keith. Keith?

Thank you, John. We've delivered a solid first half of the year and met key objectives we set for ourselves. We've demonstrated our ability to capitalize on improving market dynamics and our ability to leverage our industry-leading positions.

With the spinoff of TopBuild complete, we move into the second half of 2015 well positioned to continue to drive value. We expect that repair and remodel growth will continue to improve at a steady pace, while new home construction will accelerate in the back half of the year. We're confident in our ability to win in this macroeconomic environment with our focused portfolio, our commitment to operational excellence, and our discipline around capital allocation.

I'd like to thank our teams for an outstanding quarter. Your efforts drove great results.

With that, John and I will open the call up for questions.

(Operator instructions)

Mike Dahl, Credit Suisse.

Thanks for taking my questions and congrats on the progress this quarter. I wanted to start out on the Paint segment. And John, I think you mentioned there's $25 million of incremental spend in 3Q. So just rough math seems to suggest that that's talking about dropping down to something like a 14% operating margin. And so is that the right way to think about it? And then how should we think about the fourth quarter? Is any of that actually a pull forward from the fourth quarter?

Mike, to answer your question directly, we continue to believe that this is going to be a high teens margins business. Really, what happened and what's driving a lot of the spend is, as I mentioned in my prepared remarks, we had the Fourth of July event that took place. Typically, it's a 10-day event. It was a 5-day event this year with the Home Depot around the Fourth of July holiday. And we just had the benefit in the quarter of all the sales related to that promotion, but none of the expense. And so we don't think the total expense that we incurred last year is going to be any different than the expense that we incurred this year. We'll still incur it, but it's just going to be in a shorter window of time. And so that's what's driving a big amount of that spend. So I still think even for Q3, even with this $25 million of incremental expense that we talked about, I think you'll still see high teens margins from this segment.

Got it. Okay. And then shifting gears to Cabinets. Obviously, a strong performance there. I think you credited mix. But I wanted to also dig in -- because obviously, at the investor day we heard a lot about some of the initiatives and with the new leadership there. And so how much of that would you say is being driven by some of those tasks that Joe Gross came in, and from day one, it seemed like he thought there was a large bucket that was still low hanging fruit. And so how much are you already benefiting from that in the quarter and what should we expect going forward?

We're clearly seeing the benefit of Joe's leadership, and that entire team. Extremely pleased with the progress they're making. And they're laying the groundwork for this business to be even better. When we think about the outlook for the remainder of the year, as John and I both mentioned, we believe this segment will contribute $25 million of operating income in this year and then we're going to continue to drive the business beyond that.

Okay. Thank you.

Susan McClary, UBS.

Good morning. First, going back to the Cabinets for a minute. The $25 million profit for the year is not that far from where we had been going prior to this quarter. So it seems like even with the pop, you're really not changing your back half expectations a lot. Can you just help us understand how we should be thinking about that and maybe how sustainable are some of these things that you've seen?

When we look at -- I'll hit the demand pattern first and talk about that a little bit. We're seeing the new construction accelerating in the back half of the year, which is favorable for us. We have the leading new construction brand in Merillat in the Cabinet side. So that's a positive in terms of the overall volume. It does come at a little bit of a leaner mix for us. So we see some of that mix headwinds, if you will, in the back half. But we feel good about the underlying demand in this segment. Our KraftMaid brand continues to take share at retail. We feel very good about that. So when we roll that up and we look at the overall year, we believe we will come in at $25 million of operating income.

And Susan, maybe to supplement Keith's comments a little bit, I think the way we're looking at this segment and really spoke about the segment at our Investor Day is that we thought we'd deliver about $10 million of operating profit for the full year. And so we think this is a -- given the strength of the second quarter that we experienced and given what Keith just talked about, the strength of the second half that we see, we think that the $25 million new target that we're focused on is a material move upward from where we were before.

Okay. And then in terms of the share repurchase, you noted that you are increasing the dividend. Is there any thought about perhaps accelerating the share repurchase activity or increasing that authorization at all?

Recall, Susan, the authorization was just put forth in September of last year. And at that time, and we've been very consistent in saying that we'd repurchase between $400 million and $500 million worth of shares each year. And so we are, at this point, not changing that guidance at all. We expect to, in 2015, repurchase somewhere in that $400 million to $500 million range.

Okay. Thank you.

Nishu Sood, Deutsche Bank.

I also wanted to dig into Cabinets. Terrific performance there. And I wanted to understand, this improvement has happened a lot more quickly than you laid out at your investor day, and certainly, I think, than a lot of people were expecting. So first of all, starting on the revenues, you mentioned even with some trimming down of low margin business in the builder channel, there was enough pricing improvement and dealer KraftMaid sales to drive a pretty decent sales performance. So if we were to break those down, how did those weigh on the sales number? What was the main driver in driving the good sales performance there, how much pricing, how much volume, and how much of an offset might there have been from shedding some of the lower margin business?

It was a mixture, Nishu. When you think about the KraftMaid brand, we've had really nice success in the retail channel. And with that, KraftMaid sales, that's favorable mix for us. We have good margins in KraftMaid and we enjoy that volume, without a doubt.

We also launched recently the KraftMaid Vantage program, which is a dealer exclusive product line that has exceeded our expectations. It really is hitting the mark in terms of the expectations and the service that it gives the designers, as well as the owners and the dealer principals. So that KraftMaid benefit, in terms of the overall unit volume, as well as the benefits of the mix and the price point that we get it at has been very fundamental to us, for sure, in the turnaround. On the pricing and the builder direct side and the Merillat brand, that's really, I would say, a 50-50 mixture, where we are getting good results from the price increases that we're taking out to the market, and we're driving the business to be more selective in the builder direct business that we go for. And also, significant cost outs, where we are not only not incurring the cost penalties and inefficiencies that we had in 2014 associated with the ERP system, but we're also driving new improvements in terms of raw material yield rates, machine efficiencies, and labor efficiencies. So it's been multiple areas that have given us this improvement, both on the demand side as well as the cost management side, and I couldn't be happier with Joe and the team.

Got it. Great. And actually, I also wanted to ask about the cost side. That was very helpful color. At the investor day, Joe had talked about seeing a bucket of $50 million, roughly, of costs that could come out of this business. And obviously, you talked about the margin potential of the business. Any updated thoughts on that? It seems like that has gone better than expected. Any updated thoughts on the cost take out potential out of this business longer term?

Our focus is still on this year. We're going to continue to drive this business and make it all that it can be. Our target, we've moved up from $10 million to $25 million in the year. And certainly, we see the potential for this business to be better beyond that. But for now, Nishu, we're really focused, and Joe is focused, on driving this business this year.

Great. Thanks.

Keith Hughes, SunTrust.

Thank you. Looking forward, particularly in Plumbing in raw materials, do you see anything coming that's going to be a change from what we've seen from the first half of this year?

Keith, it's John. No, in terms of what we're seeing in terms of inputs to plumbing, copper has been a little bit volatile over the course of the last couple of quarters, mostly on a downward trend. But with some of the new legislation that's out there related to no-lead brass and the like, so it's changing some of our mix of product. There's some new legislation out there in terms of flow rates in California, given the drought. We're coming up with some new products that we need to introduce and are required to be introduced. So we feel good about that. I also think Hansgrohe, as we look at the International sales, they end up buying their brass or their copper in US dollars. So that will have a slightly negative impact on us, as we look forward. But I don't think it's going to be that material at all. So I feel really good about where we stand in terms of our position. We're really pleased, though, I should say, about the progress we're making in the trade channel, both with our Delta and our Brizo brands. As we mentioned earlier, we're seeing really good sales through that channel right now.

And the same question for the Paint business.

We've seen some favorable commodity read through in that segment. As we talked, we're committed to investing in that segment, because it's a great return for us. And the investments in that channel not only drive top line, but they further reinforce our brand position and customer loyalty. So there's a virtual cycle there. So we're happy to do that.

Our intention is to, as we talked about, on a year Q3 versus prior-year Q3, to invest across a wide area in that segment, from new program wins in Liberty Hardware, to advertising and promotion. We're finishing up the expense associated with the color centers. So all in, about a $25 million incremental spend when you compare Q3 of this year to Q3 of last year. So long term and in year, we expect this segment to be right there in the high teens, around 18% margin.

Okay. Thank you.

Will Randow, Citigroup.

Good morning and congratulations on the quarter.

Thanks, Will.

Just a question on regional trends. We heard about, just like most folks, demand being impacted in May in places like Texas, partly because of flooding rain. Are there any regional trends that you could call out in your business or dampening of sales driven by some of the weather activity we saw in the second quarter?

We did see a little bit of a headwind, as you might expect, in our exterior paint business in Oklahoma and Texas, with all the rain that they had. But when you look broadly across the country on a, let's take repair and remodeling first, we see a pretty steady demand across all of our markets, really. From a new home construction perspective, good growth around that southern smile in the United States, if you would, particularly in Florida and the Carolinas. So a little bit of regionality. But really, our demand patterns, when you look across repair and remodeling and new construction, have been pretty steady. When you look across our channels at retail, trade, direct to builder, we're really seeing some nice steady growth. And in particular, our trade and dealer business is strong, both in the Cabinet business, as well as in Plumbing. So we like the way the portfolio is mixed across both the demand drivers, regionally and geographically. We're seeing some good growth in central Europe. Southern Europe is starting to raise its head up a little and pick up. Real solid growth in the UK. And in China, Hansgrohe continues to win, with their brand and innovation and their strong dealer network over there. So a pretty steady story, both channel-wise and regionally.

Thanks for that. And just one follow-up, on the Cabinets business. Do you feel like you've picked up any share in the second quarter, or is the demand pace that you saw in the second quarter probably a good proxy for what we might see in the second half?

We picked up share in retail. I feel confident in saying that. The KraftMaid brand continues to resonate with the designers and the influencers. And it's a great product and it's working well for us. On the dealer side, as we've talked about in the past, it really is tough on a quarter-over-quarter basis to peg the market size there. But we feel we're holding our own to gaining slightly in the dealer channel.

Thanks again and congrats once again.

Robert Wetenhall, RBC Capital Markets.

Good morning. You guys smoked the quarter. It's got to be a great feeling. Wanted to ask you, on Paint, you had a pretty tough comp coming in and you actually put up a really good top line there. Is this due to end market growth or is this due to product innovation? And you're putting $25 million into 3Q, and my guess is that would turbo charge demand. How should we be thinking about the demand cycle, given the trends? Is this end market growth, product innovation, or just a by-product of you guys pounding away at the category?

Yes, Bob. I'll start off and at least answer part of your question, and then turn part of it over to Keith, as well. You're right, we did come in the quarter with a relatively tough comp. I think we were up 5% in the second quarter of last year. So you're right. So good performance by the Behr team. We're really proud of what they've done. I would say, part of your question is definitely innovation is helping drive the growth of Behr. The Behr Marquee is resonating well with the consumers. But then I would say our Pro initiative is continuing to gain traction over time. And obviously, it's been building over the last year or two from a relatively small number. But we're seeing very consistent growth as we penetrate the Pro channel. Keith?

Our core is doing very well, as well, Bob. The new color centers, while the installation just completed in June, for those color centers that have been in for a full quarter, we're seeing nice lift. The product is resonated, and we're really looking forward, as we move into the third quarter, to leveraging and overlaying a nice ad spend onto that new merchandising and the new products altogether. So we think it's a nice one-two-three punch to drive us into the quarter and finish the year. In terms of how much of our success here is share versus end market growth, that's, as you know, difficult, again, to peg the size of these markets and it's tough to parse that out. But we feel very good about both the underlying economics around repair and remodeling, and particular this size ticket, with paint. And we also feel very good about how we're delivering from a merchandising, product and customer satisfaction, customer experience standpoint.

Let me ask that a different way. Do you think gallon growth will track low single digit or more mid-single digit.

I think more low.

Got it. And on your Cabinets business, I would say this is a pretty V-shaped turnaround real fast. Hats off to you guys, because I'm sure that took some intense work. Putting up a 5% margin, 5.6%, massive year-over-year improvement. I'm not looking for an exact -- you went from $10 million to $25 millions of operating income. But maybe just leveraging off some of your prior commentary, at mid cycle, what kind of margin do you think you can deliver in this business and what are the steps you need to get there? Thanks very much and good luck.

I'd say high single, low double in terms of digit margins.

Any view on timeframe to realize that kind of profitability?

It's tough to nail it down to a timeframe. And I hate to do that here. I'd tell you that I think this business, we're going to continue to drive it through the year to that $25 million, and then there's upside for that, beyond that.

Yes, Bob, I think the second half of this year will tell us more about the trajectory of this business.

Got it. Good luck and great quarter. Thanks.

Stephen Kim, Barclays.

Stephen, are you there?

You might be on mute, Stephen.

I'm sorry about that. Can you hear me now? Okay, sorry. That was my fault. Just quickly in Cabinets, obviously the improvement we saw this quarter was impressive. Can you talk about how the improvement shaped up over the course of the quarter? For example, was your exit rate of the quarter, in terms of the way the efficiencies were coming together, running at a higher rate that maybe even what we saw in this quarter, or would you characterize the improvements that were achieved in the quarter as being maybe a little bit lumpy, somewhere tied to specific initiatives or specific improvements that occurred helter-skelter throughout the quarter? If you could give us a sense for what that looked like, so we can be thinking about how things shape up from here.

Stephen, it's John. I would say that the improvement over the quarter was pretty consistent, a nice upward trend as things had developed. Obviously, the sales picked up seasonally in this segment. And so I think the improvement followed that seasonal sales lift.

That's very encouraging. Great. In your Decorative arc, just a question there. Your raw material benefit, I think you -- we're just trying to get a handle on it -- I think we've talked about $25 million of incremental spend, and you've talked about maintaining the margins. I'm wondering if we could take those remarks to triangulate onto an assumption that maybe about that $25 million was about what your raw material benefit was?

Stephen, no, I wouldn't try to interpret it that way. The material benefit was far less than that in the quarter. Again, remember, we had a fair amount of promotion that we didn't spend in the quarter. So I wouldn't try to interpret it that way.

Okay. Great. Thanks very much, guys. Great job.

George Staphos, BAML.

Hello, everyone. Good morning. Thanks for all the details. A lot of my questions have been already answered. I want to take things from a little different tact, in terms of costs and margin. You had, again, very solid SG&A leverage. In the quarter, you were down, I think, 30 basis points from the year ago as a percentage of sales. How much more favorable might that ratio be able to be over the next several years? How much of that might have been, if at all, related to currency moves and how much of it was structural? And is there any point where, either because of the revenue growth or the type of market you're in from a macro standpoint, where you start to see some breakpoints in SG&A to sales has to start naturally trending higher?

Yes, George, good question. One of the things that we've been focused on for the last several years is our SG&A expense in total. To your point, we've seen some of that benefit flow through over the course of the last several quarters, and it really manifested itself well here in the second quarter of this year. Not much of the benefit, I would tell you, comes from currency. Just the way that our operations work. So I would say most of it is fundamentally structural. And a lot of it, we think, has to do with some of the cost out initiatives that we initiated over the last several years. I would tell you under Keith's leadership, under the new leadership teams, we're highly focused on managing our cost structure. And so I think cost control, cost containment is one of the things that we speak about regularly on an internal basis.

And so is there further upside from here? Yes, we think so. But is it going to be a fundamental leg up from here? No, I don't think that you'll see that. I think you'll just see regular consistent performance continuing to drive our SG&A lower. Some of that will come -- obviously, volume will help improve that metric, as well. So as we grow over time, I think we can leverage our fixed cost SG&A base pretty well. So we look forward to improving that metric over the course of the next several years, and we'll keep you informed as we make progress.

So, said differently, you have enough capacity at that line level of staffing, service, et cetera, to grow the business without seeing it go up naturally is what you're saying, as well?

That's right. Obviously, selling will flex a little bit as sales grow. But the G&A component of SG&A, we think we've got at a pretty tight level that we won't need to invest incrementally to grow the business.

Okay. And just on Paints, my follow-up, I think in answer to one of the other questions, you had mentioned that you expect low single digit growth in gallonage on a going forward basis. And not trying to get too nit picky or pedantic. If you are investing in the business to the degree which you will in the third quarter, and rightly so, given the margin, how do I reconcile low single digits, if I heard you correctly, with the reinvestment? And how important is the Pro piece of that in maintaining the growth going forward? Thanks and good luck in the quarter.

George, I think you reconcile our investment in the upcoming quarter and out quarters by taking a long view in the segment. We believe that fundamentally, R&R is going to grow in the 4% to 6% range. So that's good growth for us. We have a leading position and a great partner. And we're integrating merchandising with product and advertising, and it's a good story. So when we think about the investments in this, we don't think so much quarter by quarter. While we do want to be transparent and allow you to do the modeling as accurately as you can, we really take a longer term view of this, and we like the segment and we like our growth potential in it.

All right. Thanks, Keith. I'll turn it over.

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone, and congrats on all the progress. The first question I had was on, just going back to Cabinets for a moment. And certainly, you highlighted a few drivers of the improvement in the quarter over the year-ago quarter. Just trying to get a sense, perhaps, if you aren't able to, let's say, just say, okay, this amount of dollars came from cost outs versus mix, I was hoping to get a sense of maybe just prioritizing the drivers, what was the biggest bucket, the second-biggest bucket, if you were to think of perhaps some of the cost outs versus mix versus pure volume leverage, how to think about what's really driving the bus in an order of magnitude sort of way?

Mike, I'd start with cost. I think that's the biggest bar in the pareto. And in that, there's lack of spend on the inefficiencies that we had versus prior year with the ERP, and then real robust, if you will, new cost outs around productivity, scrap, yield, those sorts of things. That's the first bar. Volume would be the next one. Volume was a nice contributor for us in the quarter and we expect that to continue. And then the third on the pareto bar would be mix.

Okay. Perfect. And secondly, looking at some of the, let's say, non-segment line items, you continue to exact a lot of discipline on the overall corporate expense line, at around $100 million this year. How should we think about 2016, while not getting too specific in terms of guidance, obviously? But is that something that should grow more modestly in line with inflation? And any thoughts around the ongoing tax rate for this year? I believe around 40% on a blended, but I believe, in our model, at least, we have a back half of 36%. And I believe that's kind of what the ongoing number is to think about going forward, if you could you clarify those items.

Sure, Mike. In terms of the general corporate expense, I do think the $100 million number is our new run rate, down from where we've been historically to the tune of $20 million or $30 million. We feel really good about what we're accomplishing on the cost control on the general corp side of things. And to your point about the go forward, we don't see it materially changing from here. Could there be some inflation? Yes. And will we try to offset that inflation, whether it's wage or healthcare, or whatever, through productivity? Absolutely, we're going to try to do that. So we'd like to think $100 million is a good number.

In terms of the tax rate, we did have one unusual item flow through the tax rate this quarter. That had to do with an unusual item related to the spin, where we -- it actually has to do with TopBuild, but we had to incur it through continuing ops on our side. So it's a one-time event. But to your point -- and that was about an $18 million item that flowed through our tax rate. To your point, long term, I would think about this as a 36% tax rate. That should be our long-term tax rate for back half of this year and really going forward into 2016.

Great. Thanks, guys.

Dennis McGill, Zelman and Associates.

Good morning, guys. First question was just, as you think about that second half guidance for Cabinets, Keith, you mentioned the acceleration you're seeing in the business, the backlog in new construction coming through. So at same volume would be a bigger contributor as you move forward. And yet, after doing $15 million of profit, you're guiding to $10 million for the second half combined. Is there anything that we should be thinking about that would cause that deceleration, or is this just conservatism, given the choppiness of the cost outs?

I think it's more on the demand side, particularly as we see the new construction accelerating in the back half. That mix tends to be less profitable for us than, say, a more repair and remodeling driven mix. So as new construction grows at a faster clip in the back half, which we expect, than R&R, that would be a mix set. And there's also the seasonality that's inherent in the business.

Okay. So mix is positive in the second quarter, you would expect it to be a drag if new contraction plays out as you expect?

Yes, when comparing back half over second quarter, yes.

And just bigger picture on the business. I think three months ago, at the analyst day, it seemed relatively open to gauging the business at the end of the year and didn't rule out a sale, if that was in the best interest of shareholders. Would you say you feel any better about the sustainability of the business within the Masco portfolio today than you did then, or is this trajectory about what you had expected?

I feel better about the performance than I expected. We had guided to $10 million of profitability in 2015 and now we are more than doubling that. So I'm pleasantly surprised by -- not surprised, but feel good about the work that Joe and his team have done. We haven't looked at all, and we're not really thinking about any kind of potential portfolio moves. What we're really doing is driving this business for this year. That's Joe's charge. And as you can see, he's taken that on full tilt.

Okay. Very good. Thank you guys.

Stephen East, Evercore ISI.

Thank you. Good morning, guys. Keith, I know you all don't give out any more what exactly is going on through the quarter. But could you talk a little bit more broadly about how the quarter evolved with trends, thinking both separating out North America and Europe? And then one last question on the Paint. You had a competitor that did a big rollout at Lowe's. You all were also bringing out your color center impact at the same time. So can you parse out what you think maybe that first onslaught from a competitor did for you -- did to you -- and then what the color center did for you and how you all are measuring that?

In terms of the in-quarter trend, when you peel back some of the inventory fluctuations that are natural, whether you're talking about system load for a promotion or just some natural fluctuations that can happen in the channel, you pull out FX, it was really remarkably steady Eddie through the quarter in terms of a month by month look. So I would characterize, to your first question, in terms of the in-quarter trends as being remarkably steady.

Nothing really different between North America or Europe, either.

Same story over in Europe. Pretty level. And we like that. This type of demand increase and these type of macroeconomics bode well for us. We have the capacity in place, from a brick and mortar standpoint, without significant capital investment to support this kind of growth. And then with this kind of steady nature of it, our people systems respond very well to that, in terms of retaining and training our staff so that we can maintain our customer satisfaction level and our quality levels and do it in a way that has a reasonable amount of overtime and avoiding big spikes in premium freight and logistics hits. So we like this type of steady, good momentum on the growth side.

Don't really want to comment about what's happening with competitors' moves. We're focused, in terms of Lowe's impact, we're focused on being the best channel partner we can be for the Home Depot and being the best paint supplier we can be for the consumer. And it's working. The color centers were just finalized and put in in June, so it's too early to tell. But for those centers that have been in a while, particularly for the ones that have been in for some time up in Canada, we are seeing all of our research that we've conducted with the Home Depot, we're seeing it pay off. It's a better mousetrap, a better merchandising solution that takes into account how the buyer has changed over time. And we're excited about it.

Okay. Thanks. That helps me there. And then John, maybe this one directed at you. Can you talk about where you think your cash flows will be in 2015 and the buckets, prioritize the buckets, et cetera? And I know it's early for 2016, but does 2015 have a normalized feel about it, or is there something different that we ought to be able to see as we move through 2016, from a cash flow and usage perspective?

Stephen, in terms of cash flows, the only thing that's going to be unique this year is, obviously, we'll have the $200 million dividend from TopBuild that we got in the second quarter from them. But beyond that, it should be relatively normal cash flows. In terms of -- I think your broader question was around capital allocation. Our priorities really haven't changed much from what we discussed at our investor day. Obviously, continue to invest in the business is our first priority. And as Keith just referenced, we have relatively low investment requirements for that.

Beyond that, we've talked about paying down a little bit of debt next year, also balancing that with acquisitions and shareholder friendly requirements. Obviously, we just announced the dividend increase, a 6% dividend increase effective the fourth quarter. So that would be a slight use of cash, but shouldn't be significant, just given our share repurchase activity, the overall cash outflow impact isn't changing significantly at all. I feel really good about our cash flows and where we're going to be. In terms of 2016, I don't think our priority is going to change all that much for 2016. I think we'll continue to focus on investing in the business, share repurchases, acquisitions to continue to grow the business. So I think a very consistent message you'll hear from us over the course of the next 2 to 3 years.

All right. Thank you. I appreciate it.

Our final question today comes from the line of Eric Bosshard from Cleveland Research Company.

Good morning. One more question on the Cabinet business. Curious, as you look at two factors, one, the market, and secondly, your share. In terms of the market, do you feel that the repair remodel market is the same or accelerating? And then secondly, you commented that KraftMaid is continuing to gain share. We'd just love to understand how the share performance now is different than before. What's driving that, and if there's any change in promotional efforts or traction in that business?

On the market side, Eric, we feel good about R&R. There's a basket of indicators that are all positive, when you look at employment levels, consumer confidence, household formations, and importantly, improving values of existing homes, which is a key driver for this segment. So you couple those indicators with what we believe to be pent-up demand, where people have put off these types of purchases and they can now connect the dots in terms of a return on investment in their homes, we think there's good steady R&R growth that we're looking at.

In terms of our share, clearly we're doing well in the home centers. We've been steady in our promotional strategy. As you recall, a couple quarters ago, we talked about fine tuning that, and we've gotten to a very nice place where it's productive for us, in terms of driving demand, but it's also very -- it's profitable and it's sustainable. So I wouldn't characterize our promotion activity as really much different from prior quarter. And it's continuing to work. You supplement that with some of our targeted new product introductions, both in the dealer, as well as in the retail channels, it's all contributed.

I appreciate the repair and remodel market dynamics have been favorable in terms of home values and those factors, but it's felt like Cabinets has lagged other categories in participating. Are you suggesting or seeing that the cabinet market is now performing along with other categories? Or perhaps you've seen that all along. Could you give a little bit more color on that?

I think we're seeing it improving. I know we're seeing improving. The pent-up demand is starting to release, we believe, together with all those other macros. So whether or not this large ticket is way up to the rest of the market, tough for me to say. But we certainly are seeing it improving. And we're seeing it across the board, which gives me confidence. We're seeing it in our Window business, where we're having nice success with our higher end of the range there. We're certainly seeing it in Plumbing, as we drive our assortment and we pay better attention to the showroom channel. So we're seeing good uplift there, in terms of ticket. And you look at Watkins -- you don't get much more discretionary than an expensive spa -- and we're really doing well, record quarter in that business. So when I look at it from a number of different angles to try and get a feel for, in particular big ticket on the cabinet side is starting to unleash a little bit, I'd say, yes, it is. And we like it.

Great. Thank you.

Thank you for attending Masco Corporation's second-quarter 2015 results conference call. This concludes today's call and you may now disconnect.