Masco Corporation (MAS) Q3 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2010 Third Quarter Conference Call. [Operator Instructions] If you have not received the press release and supplemental information, they are available on Masco’s website, along with today’s slide presentation, under the Investor Relations section at www.masco.com. Before we begin management’s presentation, the company wants to direct your attention to the current slide and the note at the end of the earnings release, which are cautionary reminders about statements that reflect the company’s views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call would be open for analyst questions. If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at (313) 792-5500. I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Thank you, Clay, and thanks all of you for joining us today for Masco's Third Quarter Earnings Call. I'm joined by Donnie Demarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO. And if you would please flip to Slide #3. Third quarter was a tough quarter for Masco, particularly for our businesses related to new home construction, repair/remodel activity, specifically bigger-ticket items. Activity which really includes our Installation and Cabinet-related businesses primarily. Our sales were off 6% to $2 billion. We had unfavorable currency translation that have impacted about 2% of that. And again, major part of our sales decline was in Cabinets and Installation Services. On an as-reported basis, our loss per share was $0.02 in the quarter, which compares to $0.14 of income in the third quarter of 2009. Gross profit margins as reported decreased 200 basis points in the quarter, and we'll take a look at reconciled EPS and margins in just a second. Working capital as a percent of sales improved to 16.2% compared to 17.3% last year, and we ended the quarter with $1.5 billion of cash. If you would please flip to Slide #4. I mentioned gross margins as reported down 200 basis points. If we reconcile gross margins and operating margins for rationalization charges in both periods and a litigation charge in the third quarter of last year, both of those metrics, gross margins and operating margins were down 80 basis points to 26.9% for gross profit and 7.2% for operating margins. On a year-to-date basis, by the way, which the reconciliation is included in our appendix, both gross margins and operating margins on a year-to-date basis reconciled for the same items would have been up 110 basis points each. Looking at our results from a big picture standpoint, reconciled operating profit was off $25 million. Sales volume contributed approximately $30 million, $35 million to that decline. We also had unfavorable price commodity relationships of approximately $30 million, and those two items were partially offset by net savings in the quarter from rationalization activities, our focus on lean of approximately $40 million. If you flip to Slide #5, this shows the reconciliation of earnings per share. Again, on the same basis as we discussed, operating margins earlier a little earlier taking out rationalization charges and normalizing our tax rate. And in that process, we would have had $0.11 per share in the third quarter of 2010, compared to $0.18 last year in the third quarter. This year's EPS in the third quarter also included about $0.02 of additional other expense, $0.01 of that is interest and then there's some miscellaneous items that impact the other $0.01. If you flip to Slide #6, this presents some of the trends that we've been tracking on a quarterly basis. We already talked about sales, gross profit and operating loss and again, these are on an as-adjusted basis. The as-reported numbers are in the appendix. Key retail sales were off 4%, reflecting declines in both small ticket and big-ticket items, and that includes $23 million in terms of products that we have exited that changed year-over-year or quarter-over-quarter, if you will, in terms of Cabinets and we'll talk about that in a second or two. We did have a decremental margin in the quarter of 20%, and that compares favorably to our contribution margin of about 30% on a company-wide basis. If you flip to Slide #7. Both North America and International sales were off 6%. I would point out that International sales increased 4% in local currencies. And when you take a look at margins, margins from a segment perspective were down from 9.7% last year to 8.6% this year, and again, these are segment margins. And I would point out that internationally, we had a very strong quarter at a little bit over 12% in ROS, obviously down from the almost 14% last year but a very strong quarter in terms of International-related operations and operating profit. If we flip to Slide #8, we'll talk about our segments and I would point out that the segment numbers are as adjusted. We've included the rationalization charges in the footnote at the bottom of the slide, and we'll start with Cabinets. Tough quarter in both North America and internationally. Sales for Cabinets were down 18%. We also had an expansion in terms of operating loss. We lost $18 million on an incremental basis compared to last year's $9 million loss and ended with an operating loss margin of 7.6%. Our decremental margin for this segment was 23%. And if you flip to Slide #9, we thought it would be helpful to break the sales decline down in terms of North America and internationally. And if you go to our guidance for this particular segment, we estimated that our sales in 2009, about 75% of those sales relate to North America. And if you apply that to the third quarter's sales for last year in 2009 and then compare that to the drop in North America of $49 million, that represents about 15%. $23 million of that decline, that $49 million decline relates to products that we have exited. And that's the year-over-year comparative number, that represents about 7%. So in terms of market activity, the $26 million, we were down about 8% compared to where we were last year. Donnie's going to talk about Cabs in a couple of minutes and go through our strategy and where we are from an integration standpoint. If you flip to Slide #10, Plumbing Products, another very strong quarter for Plumbing driven by innovation and global expansion. Sales were up modestly, and we had a 14.6 margin compares which is exactly where we were last year. And again, very strong performance from a return on sales standpoint. If we flip to Slide #10, I mentioned that our sales performance continues to be driven by innovation and global expansion. And I think, as I think all of you know, we put a lot of emphasis on innovation across Masco and obviously at Delta. And we're really pleased with the retail end cap that you see here that really demonstrates some of our really neat innovation, innovative products that we brought out over the last couple of years. This is at the Home Depot. It displays our Touch2O Technology, the MagnaTite Docking System and our In2ition Shower System. And again, very, very proud of all those products. If you flip to Slide #12, another feature that we think is certainly very important is the fact that Delta has continued significant momentum in terms of strengthening and developing the brand. We've achieved a nine point gain in unaided brand awareness over the course of the last two years, and that's a pretty significant move in a very short period of time and we're very pleased with that. If you flip to Slide #13, in terms of Installation and Other Services. This segment, as you know, is very much tied to new home construction and obviously, that area continues to be challenging. We were down 12% in sales in this segment. But we did show an improvement in terms of our operating loss. So that declined by $7 million on a $40 million drop in sales. So we're very, very pleased with that. I would remind you that we do have some start up-related costs to our Masco Home Services WellHome launch that impact this segment. That loss incrementally in this quarter was about $3 million. So again, very pleased with our performance from an operating profit or operating loss standpoint, if you will. If you flip to Slide #14. One of the things, a couple of points on Installation. Historically, we've had a very strong correlation between our sales and starts. Housing starts lagged on a 90-day basis. That relationship hasn't really held this year on a quarterly basis. We believe that's influenced significantly by variability and cycle times. We think in the first half of the year, given the cash credit that I think expired in June 30, we saw some compression in terms of the building cycle. So we think it's probably a lot more appropriate to focus on the year-to-date relationship between our sales and lag starts, which show that lag starts are up 2%, with our sales down 9%. That's a gap, if you will, of about 11%. And again, we're talking about segment sales here. We believe that a big part of that explanation is that we have seen and experienced on a year-to-date basis lower revenue per job. That's been driven by price competition, smaller homes and homes that have a much simpler design, for example, with less vaulted ceilings, lower ceilings, maybe ceilings going from 10 feet to 8 feet, which require less installation. So our feeling when we look at our revenue per job, that's down on average about high single digit, which explains part of that 11% gap. We also believe that it's likely that we may have lost a little bit of share that could be maybe three, four points on a year-to-date basis. That makes a little bit of sense to us as we think about it, given that we have closed a number of branches. We've got less coverage in secondary branches, on our secondary markets, if you will. As you know, we've tried to maintain our presence in all the major metropolitan areas and they spent some unattractive work out there that quite frankly, we have passed on that didn't make a lot of sense. So from that standpoint, that's kind of the way we see the dynamic in those particular segment. Don't have a concern over that share issue on a long-term basis. We feel very strongly that we'll get that back. If you flip to Slide #15, our Decorative Architectural Products, sales in this segment were off 2%, and both paint and builders' hardware were off in terms of top line. Margins were down in the quarter but still a very strong 22.5%, and that reflects less favorable price commodity relationship as we highlighted at the end of the second quarter. I would point out that on a year-to-date basis in this segment, margins are 22.1% compared to 23% last year. Last quarter, we talked about the tight supply of both resins and TiO2. We mentioned that costs are up, but we also mentioned that we have been able to manage through that process just in terms of the challenge, and we think we're through the worst of that from a supply perspective but costs are still up. And as we indicated back in July, we expected to have some second-half margin pressure. Obviously, we do. But we still anticipated as we indicated that we'll have solid margins, and we did have solid margins in the third quarter and we anticipate that we will in the fourth quarter as well. If you flip to Slide #16, Other Specialty Products. Sales were down in this segment 4%. We saw margin decline from 9.6% to 6.9%, and that's driven by lower sales volume, a little bit of the unfavorable relationship between commodity costs and selling prices, and some increased promotional and marketing expenses related to both new window product introductions as well as fastening tools. And if you flip to Slide #17, this shows our product line that we recently launched. We call it the Arrow R.E.D. line. R.E.D. stands for Reliable. Ergonomic. and Durable. And you can see we've used the red color. [Audio Gap] That's receivables plus inventories less payables. If you flip to Slide 19. I'm going to turn the presentation over to Donnie, and Donnie's going to talk about our Cabinet-related business.

Okay, thank you, Tim. And as Tim mentioned, I'd like to take a few minutes to update you on our Cabinet strategy. Slide #20. The Cabinet industry in 2009 was estimated at $10.6 billion, down approximately 30% from 2006. However, the industry is expected to rebound and by 2014, get back to north of $15 billion. On Slide #21. The U.S. Residential Cabinet market is split into three channels. The dealer channel represents approximately 70% of the total opportunity, with direct to builders sales and sales by home improvement retailers making up the remaining 30%. In the direct to builder channel, we are number one in sales and increasing our share. At home improvement retailers, we are also number one in sales and believe that we are maintaining our share to being down 1% to 2%, primarily due to a reduction in sales from non-core products that we chose to access. At 70% of the market, the dealer channel represents a significant opportunity and even though we are number two in sales, we estimate our market share to be less than 10%. Slide #22. I'd like to take a moment to walk you now through our six key initiatives in our Cabinet strategy. Slide 23. First, we are focused on executing a seamless business integration. We have reduced our fixed cost by $140 million since 2006 while exiting non-core product lines. We are completing our ERP implementation and shipping Quality and Merillat from a common architectural platform. And just yesterday, we began moving people into our new consolidated headquarters located in Ann Arbor, Michigan. We have achieved some major milestones and we remain on track to deliver an additional $30 million in annualized integration savings by 2012 as we have previously communicated. Slide #24. We have launched the winning brand portfolio featuring Quality, Merillat and KraftMaid. Our brands cover all key price points and cover the top three purchase drivers of Cabinets. We are building these brands by generating demand on TV, print and the web. We are promoting and innovating. Our distinct brand positions and new organizational structure allow us to manage our messaging more effectively, while opening the door to further supply chain efficiencies. Slide #25. We believe the Cabinet industry is ripe for innovation, and we plan to reinvent the category with innovative solutions. We are working out process innovations such as our Virtual Selection Center and product innovation like our CoreGuard Sink Base. Our innovation pipeline is building, and we can't wait to our share our new products with you as they launch in the market. Slide #26. The countertop industry was estimated to be a $15 billion market in 2008, and we plan to establish countertops as a growth engine. Our ProCision System allows the countertops to be templated at the same day the Cabinets are measured, thus allowing the finished cabinet and custom countertops to be delivered and installed on the very same day. This reduces complexity for our builders and reduces cycle times, while guiding higher cabinet and countertop retention rates for Masco. By emphasizing the consumer, we plan to grow our leadership position at home improvement retailers. We're looking to deploy virtual technology to simplify the purchasing experience. We are promoting our brand, innovating and launching new styles and designs. Slide #27. We recently launched the largest new product introduction in the history of KraftMaid, 38 new door styles, 32 new finishes and six new bath collections. Slide #28. We have added more feet on the street to drive and accelerate dealer growth, where 1% increase in share is worth an approximate $80 million in top line sales. And we are adding new dealers through our Dealer Advantage Program, which is designed to drive foot traffic with higher conversion rates. Slide 29. Where we have dealers, we've added a brand. With 126 current customers adding another Masco brand. Where we're underpenetrated, we've added new dealers with 50 new dealers coming on board already. Together, 176 dealers have added the Masco brand, representing 241 showrooms, all the while, while not having lost a single customer due to the Cabinet integration. We are excited to share our Cabinet strategy with you today and look forward to updating you all on our progress. And with that, I'll turn the call back up over to Tim.

Yes, thank you, Donnie. Just a couple of quick comments before we go to Q&A. Obviously, the macro environment continues to be challenging, and we anticipate that that's going to be achieved for the near term. Consumer confidence, unemployment and uncertainty, whether it's the political climate, foreclosures, home prices, continue to impact our markets. Having said that, we expect that during the near term, repair/remodel activity should be a little bit stronger than new home construction. And we continue to anticipate starts in 2010 to be in a range of 575,000 to 625,000. Having said that, we'll continue to focus on what we can control to improve our execution and strengthen our brands. That includes driving the Masco Business System across our enterprise, continuing to emphasize innovation and continuing to aggressively manage our fixed costs. We estimate by the end of this year, we will have taken out approximately $500 million of fixed cost going back to the start of the downturn. A lot of that has impacted our Installation and Cabinet business. We continue to manage those businesses very aggressively. I think Donnie did a great job of talking about some of the exciting things that are going on in Cabinets. But having said all that, we really need some additional volume in both of those segments, and we believe we're very well positioned when the economy picks up. We will continue to manage both of those segments aggressively. There's more that we can do and more that we will do. We continue to be very optimistic about the long-term fundamentals for our markets. We believe we can create significant value by continue to drive customer satisfaction, working to take market share and longer term, focusing on global expansion. And certainly, appreciate the efforts of the Masco team across our businesses for making all that happen. And with that, we'll open up the lines for Q&A.

[Operator Instructions] We'll go first to Keith Hughes with SunTrust.

First, in Cabinets. Now that you're deeper into this restructuring, just wanted to see what you looked at for 2011 in terms of reduced fixed overhead costs heading into the new year?

I think the Cabinet fixed cost reduction that we have achieved or will estimate by the end of this year would sound about $180 million. I think it was about $180 million, Keith, as of the end of this year. Now I don't think that includes the closure of the two plants that relate to our ready-to-assemble related business. So there'd be some additional related cost reductions there. I think that's about $20 million if I'm not mistaken.

That's over several years, correct?

Since 2006.

Yes, that goes back, Keith, to the start of the downturn. This is really comparing our fixed cost structure at the end of 2006 to where we would estimate that we'd be at the end of 2010.

So just roughly, if you look at the '11 fixed cost versus '10 fixed cost, how much will be down in '11?

2011 versus 2010?

We'll have to look at the number, Keith.

I would guess though, it's at least probably 30 because you've got the two Cabinet playing.

Well, I think that the cost related to the two Cabinet facilities in this year are in the 180.

So that's in the $180 million. So yes, Keith, the number as of the end of 2010 is probably $160 million. There'd be another $20 million or so related to the closure of the two Cabinet plants that manufacture the ready-to-assemble and in-stock assembled. And my guess is as we continue to work our way through the integration, I would expect that we're going to find additional costs there. The cost related to the integration, John, if I'm remembering right, we're anticipating about $30 million of reduction and most of that's probably in the fixed cost side, isn't it?

That would be, yes, fixed cost side.

So that would add another $30 million to that $20 million. So that basically be about $50 million but then it would be more by 2012, Keith.

The two plants, the two RTA plants when would they closed by?

Probably early second quarter.

Sometime in the second quarter next year, Keith.

And then going to the press release, you had a comment in the outlook saying it appears a recovery in certain of your markets to be slower than previously anticipated. Could you just expound upon that? And is that a view you had three or four months ago and you're just reiterating it? Is it a new view? Just any detail on that would be great.

That's a good question and I think it really is a continuation of what we started to see in the end of the second quarter. And specifically, as I think most folks are aware, estimations or forecast for new home construction have continued to come down over the course of the last several months. And really, what we're referring to there is what looks like a slower period relative to new home construction. Obviously, we've got a lot of uncertainty around foreclosures and how that's going to play out and the timing of that. But basically, that would be what we're referring to at a point when house prices still have not stabilized, I think the repair/remodel activity probably is going to be deferred until that happens. And we start to see a pickup in consumer confidence. So I think if anything, it's probably from our perspective compared to where we were a couple of three months ago, looks like it's going to be a little further out.

We'll go next to Ivy Zelman with Zelman & Associates.

This is after your forecast you showed in Slide 20 that showed the Cabinet industry getting back to $15 billion, which is pretty much equal with the peak of '06 at $15 billion and I kind of want to understand what expectation do you have was embedded in there for the new construction market. Do you assume that starts to get back to where we were in '06? And then understanding that, you've got significant cost reductions that you've had since '06, $180 million that you've outlined and more to come. What capacity are you basically leading in place in order to get to that $15 billion assumption with respect to -- I guess what I'm trying to ask is how many housing starts can you ultimately manufacture with your current footprint? And would it be possible that you're being too optimistic to get back to the levels that we were able to achieve back in '06? And that there could be significant more cost reductions? And then just to follow on that, the Paint business, you indicated that we saw weakness in paint, which we're wondering is that destocking as it relates to your large customer? Or is it more consumer-driven and recognizing that that's been one of the best performing areas, really, I want to understand what you're seeing there. So if you can start with the first then hopefully answer the latter.

Yes, I'll do well, I think, paint. That's more consumer-driven, we believe, Ivy, at this point and not related to destocking. That would be more of a consumer issue. I don't have any knowledge of any concerns around destocking. And in terms of the $15 billion that was projected for 2014, that's a Freedonia estimate in terms of -- they did a big market study that came out I think a couple of months ago. And that's their estimate in terms of what the market might look like in 2014. I think in response to your question about housing starts, at that point in time, I mean, we would again, we haven't made an estimate. But I guess just off the top of my head for 2014, I'd be real surprised if we're not back to a level of somewhere around 1.2 to 1.4 I would guess at that point in time, assuming that we get a little bit of traction going forward. You've obviously got some estimates out that I think go through 2013, if I'm not mistaken, that would suggest that, that trend might make a little bit of sense. And our sense is that that's something that would be achievable. But again, we've got to get some traction here in terms of new home. Donnie, do you want to take the capacity side of the Cabinet?

Yes, on the capacity side, we certainly aren't holding on capacity based upon a real growth outlook. As a matter fact, our capacity issues have been more supply chain related given the complexity that we had with the three brands and the fact that each of them had a separate supply chain, and even really a separate manufacturing philosophy. So we've worked hard to kind of drive that efficiency throughout the platform. That was really a key driver in our decision to bring the organization together. We think there's opportunity to continue to get at the fixed cost structure, but we're certainly not holding on the capacity for the hope that we're going to get back to where we once were and feel the need to serve it. So right now, where our heads are at is let's drive the efficiencies out, let's take the cost out and really be ready for the rebound. And to the extent that some point in the future, five, six years out, things are a bit better than we think they might be, then we'll jump for them at that time.

I think what Donnie's really saying there is we're going to manage a little bit more aggressively for the near term. We ought to be able to react on the upside to the extent that there is additional opportunity and things may be come back a little quicker than we think.

Just one more follow-up on the question related to Cabinets. You mentioned that you had $23 million that was related to businesses that you exited. Can you give us an idea what percent the retail sales figure of 4% decline would have looked like had you not have those decisions to exit those $23 million of business?

Yes, that would represent about 1% theoretically about $2 billion of sales last year. So that would have been about 1%, Ivy.

We'll go next to Ken Zener with KeyBanc.

I wonder if you could comment on the three to four points you estimated you lost in the Installation business. In the market side, you were an X for your closing sites. Can you talk about the logic? Was it really just pricing because I know you guys have commented that you got better purchasing on the let's say on the installations, so could you talk about kind of the logic and how that might be shifting?

Yes, Ken. This is Donnie. it's very, very hard for us to come up with a share loss in this segment because there's been extreme volatility in the cycle times. What we have done now is we've gone back and looked at the locations we've shut, and we had sales plans in place within those locations to maintain sales coverage but from facilities that would have been a little bit farther away. So we're really increasing our coverage ratio. We also took a significant reduction in our fixed cost by driving out cost to really spend the operating losses. As we go back today and really look at sales specifically by market, we think that we probably were too aggressive in taking some of these sales people out. And so we are now addressing some of those markets where we just don't feel that the coverage has been sufficient where we had plans to maybe keep it at a little bit higher level. So we're shifting gears a little bit and that's put in some feedback on the street. We want to make sure that any share loss we had there that we can recover. And to the other point of your question, we have seen pricing on jobs that is unattractive. So as the market has continued to be depressed for a longer period of time, we have seen competitors willing to work for wages and really chase work in areas that we just don't feel is attractive for us at any price.

And I guess just a follow-up on Windows. Can you talk about the strategy? I know you guys have talked about extending the product offering kind of from the higher into the more value-oriented. Can you talk about the success and challenges you've seen in there relative to competition?

Yes, on the Windows side, we actually have two new products. We launched Simplicity a little bit over probably about 18 months ago now and really, a less featured line for our new build customers. And that has grown in market share and we have seen a mixed change to Simplicity. We also just recently had launched our new wood fiberglass line, which is Essence, and that just launched in the showrooms in the third quarter. So we're excited about that opportunity. So we have seen a mixed change to more of the Simplicity product, primarily in the new home construction side. We haven't seen any change really the dealer market.

I think the other thing there, Ken, too is that since the downturn in new home, we've made a significant shift from new home construction to repair/remodel in terms of our Window business in North America.

We'll go next to David MacGregor with Longbow Research.

Just a couple questions. First of all, going back about a year ago, you'd offer us kind of your assessment of the break even on the Installation business as being at about 750,000 starts. So I'm just wondering if it's possible to get an update on where you think that might be today, if it's changed at all?

Yes, at this point, David, we would still see that number around 750,000 to 800,000 as we mentioned. We're continuing to work very hard to try to lower that. That's really a segment number though, and I think it's important to note that, that includes the launch related to Masco Home Services and our WellHome business. We've got a Framing business thing there as well as a Distribution business. So that's a segment-wide number. My sense is that we've got some opportunity going forward to bring that down a little bit more, and we'll be working hard to do that. But we're still looking at a number that's approximately in that same range.

Secondly on the Cabinet business. As you roll out your new brands under KraftMaid, is there more of a focus on home centers or dealers? I know you've talked a lot here in the presentation today about the importance of the dealer channel. And what do you think this might give you in terms of price opportunities just to address some of the inflation in that category?

Strategies really across all three channels, and we're doing a really nice job with our Merillat, Quality brands at the direct to builder. And on the home centers, we've done a nice job with KraftMaid, but we think there's some opportunity there to really focus on innovation and the purchasing experience and really drive sales through that channel. The dealer side for us is probably the one that represents the most opportunity. We're number two in dealers but have a relatively small share position. And we think that, that channel is one that we've been underrepresented in and we put more feet on the street to really go out and further penetrate that channel. So strategies really across all three channels. But if I was going to say the one that holds the most opportunity, certainly, it would be the dealer channel but we see huge opportunities really in all three channels.

And then just finally on the Paint category. It seems like you're anniversary-ing the premium plus Ultra now. You've got cost inflation in resins and titanium dioxide, which you talked about over the last couple of quarters. Your competitor on the other side of the aisle started to cut its prices at this point. I don't know if you responded with a price cut or not. My best understanding is you have not as of yet. But I guess I'm just trying to gauge the outlook for margins in that category, given that it looks like the cost inflation is likely to continue and price competition is starting to build. How should we think about that?

Well, as we mentioned earlier, that we expected a little bit of pressure in the second half, and we did experience that in the third quarter. We'll experience a little bit of that in the fourth quarter. But we'll continue to work with our suppliers, work on productivity and certainly work on pricing related to our products going forward. I would say that again, as you look at our margins historically in this category, they've been pretty consistent over time. Usually they'll move one direction or another on a temporary basis, maybe at quarterly basis. But we're very comfortable that we'll continue to have very good performance in this segment not going forward, and be able to work our way through some of the issues with supply and cost at this point in time.

We'll go next to Eric Bosshard with Cleveland Research Company.

You made a comment about managing the business more aggressively for the near term related to your comments about the outlook for housing being a little bit more protracted than perhaps you previously thought or hoped. Can you just explain a little bit better what you mean by managing more aggressively for the near term?

Well, I think we're going to keep doing the things that we've been doing, Eric, in both the Install and Cabinet business. I think one thing that's really important is we have very strong management teams in both of those businesses. Management teams that we have a very high level of confidence in. Obviously, things are difficult now, but Donnie did a very good job I think at talking about what we're doing from a Cabinet strategy standpoint. We think there's some huge opportunities and again, we've got to get things in place to take advantage of what we think will be a much more robust environment somewhere down the road. So when we think about those two businesses, we think about great leadership, we think about great products in terms of Cabinets, the innovation that we're doing. On the Install side, we've got a good team there as well that is getting after it every day. And again, we have managed aggressively. I think when you look at the costs that we've taken out of both of those businesses over the last couple three years, I think it's very significant. I think there's still opportunity to do that going forward, and we'll continue to do a lot of the same things we have done. We'll look at our footprint in terms of the Installation business. We'll look at the way we manage that business, look at different alternative ways to approach the markets. But again, there's a lot of focus there. We've had very good teams, and we feel very confident that we're going to create value going forward in both those segments.

So I guess just to clarify, when I heard you say manage it more aggressively, I interpreted that to be managing costs out in light of a softer housing environment. What it looks like you're doing is you're putting more feet on the street in both Install and Cabinets. Is that to improve market share? Is the near-term focus to improve the market share performance? Is the near-term focus to manage down the cost structure?

I think it's both, Eric. I think as Donnie mentioned, I think we've recognized that we cut very deep on the Install side. We may have taken some folks off the street that could help the top line. You can't cost cut yourselves to success over the long term, and I think there are some opportunities for us to take share. And market share in this environment for companies that have a strong financial position I think is a great opportunity and a little bit more investment. We think we'll have a nice payback, both near term and longer term.

And I would add, Eric, we're adding feet on the street where we see a significant opportunity to grow share. On the Installation side, we think we cut too far from the secondary market and we've seen opportunities to bring some of those folks back. In the Cabinet side, the dealer market is just -- even though we're number two in sales, and it's really been a market where we've been underrepresented. So we see an opportunity to grow sales within that segment and it makes sense for us to invest to do so. Now on the supply chain side, we've really been focused on managing aggressively our cost structure but also building in flexibility so that on the way back up, we can serve whatever the recovery looks like. We do believe today that that's more protracted than we would have seen in that recovery at the beginning of this year, and we're planning to add back our cost given our outlook.

On key retail sales or sales to key retailers that softened in 3Q, it look like kind of four points versus 2Q. Can you give any further perspective on to that, and to sell in relative to sell-through, perhaps trends in the quarter and kind of how things had started out in 4Q there?

Well, I think the issue there, Eric, is there's nothing remarkable in any of our product groups. I think we saw a slowness pretty across the board. Whether it's a smaller ticket item like paint or plumbing or big-ticket like cabinet. So there isn't any issue or concern relative to share. No concerns just outside of the macro environment. I think our feeling is the consumers have just sort of closed down to a certain extent. And we talked a little bit about that coming out of the second quarter. So I don't think there's any unique trends or anything else going on, Donnie, that I'm aware of.

No, and no issues with changes in inventory that would have impacted those numbers.

And then the last question just on Cabinets. Year-to-date, do you think your market share is up, down, flat?

As we spoke to it, on the builder side, we clearly are gaining market share and our sales to our top 10 builders are up. So we're clearly gaining share on the builder direct sales. On the dealers, we're maintaining share but we really had a spot. We are shares through the customers that we've been able to add with new brands. And on the home improvement retailers, we believe we are maintaining share maybe have lost a point or two, primarily due to the product that we exited.

But still number one at both of the big box in terms of sales.

Yes, and one thing that impacts that segment especially in the third quarter on a big way is what's going on in Europe. We have a Cabinet business in the United Kingdom that's primarily new construction, and that market has been impacted every bit as dramatically, if not more, than what's going on here in the United States so we've had some significant underperformance in that business unit. And then our ready-to-assemble Furniture business in Denmark to go in Stenberg, really had a loss of some low margin business to one of their large customers that impacted the quarter pretty dramatically.

We'll go next to Budd Bugatch with Raymond James. Sam Darkatsh - Raymond James & Associates: It's Sam Darkatsh. I'm just taking you back on Eric's last question there, just wanted to be clear. I think you earlier said in the flip chart that your organic U.S. sales in Cabinets sell 8%, and then I guess organic be defined as excluding the RTA walkaway business.

Yes, that's correct. Sam Darkatsh - Raymond James & Associates: Was that better or worse than the cabinet industry in the U.S. in the third quarter, specifically? Was the cabinet industry down worse than 8%?

Sam, I don't have a sense of that. I don't know.

Yes, that's hard to estimate, Sam. We certainly believe that Cabinets in the second half tend to be trending in the down in the low to mid-single digits. So when we think about some of the business we exited that could result in a one- to two-point share loss at home improvement retailers, I think that's pretty consistent.

Yes, I think Donnie's comments, Sam, just in terms of whether it's 8% or whatever that number might be, I think our sense is just in terms of share, Donnie talked about direct to builder where we are up on a year-to-date basis this year. We, on the dealer side, we're down about that same number. But our sense is that we've added a bunch of opportunities going forward. So it's kind of tough to gauge. But what we feel in terms of trends going forward are positive, both on a direct to builder as well as from the dealer perspective. And you can see the traction we're getting with the strategy in terms of the dealers we've added, the number of dealers that have picked up the Masco brand. And on the home center side, as Donnie mentioned, we could be down maybe a point there. But we're holding our own from a share standpoint across the board. Sam Darkatsh - Raymond James & Associates: Two more quick questions, if I might. One also in Cabinets. The $23 million worth of RTA walkaway, what are you taking for that impact over the next couple of quarters? And then the last question would be you mentioned the pricing net-net, price mix unfavorable at $30 million. Copper and zinc have reinflated recently. What are your thoughts there going forward near term?

Well, what we mentioned at the end of the last call, Sam, was that we anticipated we had headwinds of about $40 million in the second half of the year related to price commodity relationships. If anything, that's probably increased to say, $50 million, maybe $55 million from a full year perspective. And that would suggest that we've got about $20 million of headwind in the fourth quarter. Most of that is related to resins, inputs for Paint, Windows and Plumbing. Sam Darkatsh - Raymond James & Associates: And the RTA impact the next couple of quarters?

I would guess, I don't -- John, do you have a sense of that.

Well, the $200 million program that we're walking away from and if we ramp it up, Sam, by the end of, let's say, it's the end of Q2 by the time we wind down the program with our customers, there would be a $50 million or so impact per quarter just if you annualize the $200 million over the course of the year. Sam Darkatsh - Raymond James & Associates: So that goes to a more normalized $50 million run rate over the next few quarters because this one was about half that amount?

Yes.

We'll go next to Michael Rehaut with JPMorgan. Michael Rehaut - JP Morgan Chase & Co: First question, I was hoping just to go back to the Cabinets for a moment and I think it was one of the first questions you were asked about. Incremental cost being taken out of the business in 2011 versus 2010 and I think at first blush, you started talking about cost until '06. And then the two plants, which are coming out in the middle of 2011 I believe. So I'm just trying to get a sense of the actions taken in 2010 and perhaps earlier on in 2011. How are we to think about the costs take out in '11 versus '10?

Yes, I think in big buckets, Mike, we've got plants related to the RTA business that will be closed in early second quarter of next year or second quarter of next year and I think that's about $20 million, isn't it, John? Roughly in terms of fixed cost. In addition to that, the integration that we announced earlier this year, as we've mentioned, as the savings run rate that we've identified at this point in time of roughly $30 million to $35 million will be at about a $5 million run rate by the end of this year. And we estimate that we'll get the entire $30 million to $35 million by the end of 2012. So I would suggest to you that my guess would be and again, I don't know if we have this documented or detailed, but we'll probably have another $15 million to $20 million out by the end of next year. So that would give you about $40 million of incremental fixed cost reduction in Cabinets by the end of next year, with another $10 million to $15 million to come in 2012 based on the integration. Now having said all that, as Donnie and I have both indicated in the past, as we continue to work on the integration, our sense is we'll continue to find some additional opportunities to take costs out. But that would frame what we think the numbers will look like. Michael Rehaut - JP Morgan Chase & Co: So $40 million, but that's annualized by the end of '11. So portions of the $20 million will hit in '11 and then '12 and et cetera, if I understand you correctly.

Yes, that's right. Michael Rehaut - JP Morgan Chase & Co: Also just on Cabinets, I believe you had said a $34 million of potential annualized sales from some of the new customers and dealer strategy that you're getting. I was just trying to understand is that based on just the fact that with the new brand or with the new customer looking at an average sales per customer, because obviously, getting the brand on their shelves and walking in on an initial basis, I would assume there's a ramp to that $34 million. So the potential is more just if the customers coming in on a full spend, more mature basis, am I thinking about that right? Or is that something where you could think about getting that $34 million potentially ramping up over a two-, three-year period or if you could just comment on that.

Yes. Michael, the estimates come our Masco Cabinetry group and what they do is they look at their sales plan for these customers. And so depending upon the size of the customer of the market they're in and the showrooms, based on who we've added so far, that's what they would see as a potential for annual sales.

And I think, Donnie, if I'm not mistaken, I think that's pretty much grounded in the current environment that we're in today. Not assuming any significant lift in terms of economics relative to starts might end or increase in repair/remodel activity from kind of where we are relative to current levels.

And I would add, Mike, we've just begun. I mean this is an effort that we're trying to give you an early feel for. But we're really just getting out of the gate here with our Dealer Advantage Program. We're still adding people and feet on the street to go after and drive some share in this category. We just see it as a huge opportunity for us though. Michael Rehaut - JP Morgan Chase & Co: Just on installation, I believe in the last couple of quarters, you mentioned $4 million of start up cost per WellHome in the first and $5 million in the second. I was wondering if that run rate is continuing? And now with the maybe adding some sales people back in the near term, going to see some incremental fixed cost or a higher cost base and the future of WellHome in terms of those start-up costs and how are we to think about the next couple of quarters with initiatives such as WellHome and perhaps, some additional feet on the street?

Well, adding feet, certainly, Mike, will increase some cost. But our sense is that that's going to pay for itself and should have a good return on that investment. The WellHome incremental loss was $3 million in the quarter, and as you know, we ramped that up late last year. We did indicate that we expect to have two branches, the two initial branches. One I think that's in New Hampshire and one that's in the Detroit area here, to a break even or better by the end of this year and we still believe that we're tracking that. But I would anticipate that next year, we'll continue to have some launch-related or operating losses generated by that particular segment. But again, don't have that quantified at this point in time.

I would add that the cost in the quarter, didn't gave the incremental cost but cost in the quarter have not ramped up. So we don't anticipate, Mike, that the train or the overhead associated with that initiative will be any higher than what we're currently in.

We'll go next to Joshua Pollard with Goldman Sachs.

My question is you made a comment that things have gotten incrementally just a bit worse on your outlook on the new side. You didn't make specific comments with respect to the retail side. I'd love to hear those. And also, if you look over the last three months, can you talk a bit about and I'd love if you could quantify your ability to pass on price? We continue to hear through that channel that pushing prices to the home center has gotten incrementally more difficult, and I was wondering if you could comment on that.

Well, I think the repair/remodel-related activity. Yes, I think if anything, you can kind of see that in our sales to RT retail customers. We were positive in the first quarter this year. We were flat in the second quarter. We're down a little bit in the third quarter. So if anything, our experience is that even lower-ticket items we're seeing a little bit of slowness. Now again, is that temporary? It's kind of funny. We stared out very slow, March and April were pretty strong. And since that point in time, things have tended to slow up a bit. Still not seeing a lot of traction for larger ticket repair/remodel activity. I think there's maybe been a little bit more traffic, a little bit more in terms of people looking or considering, but not necessarily willing to pull the trigger. In terms of price commodity over the last three months or your specific question is about price, I don't know that I would say that things are any more difficult than they normally are. That's always a tough conversation. And I think will continue to have a tough conversation, but I don't know that it's any more difficult. We continue to manage price commodity very aggressively and I don't know, Donnie, if you've got anything you want to add to that?

The price starts has always been hard and certainly, innovation is key at being able to maintain your margins and you have to have strong leadership brands. And we've got a lot of work to really position our brands in a leadership position to really drive foot traffic. Delta has just done a tremendous job with innovation and driving foot traffic. And the brand is here on Plumbing you'll have Delta. And we feel the same way in the Paint aisle with what they've been able to accomplish and all the innovative things that there has changed. And really that industry from color match to paint primary on, to nano guard. And then if you look at the cabinet industry, we think we're into the same thing. We think that's been a market that, cabinets for the most part, there's been some new styles and designs and maybe colors and finishes. But it's right for innovation, and we think we have some disruptive innovation in our pipeline that we're real excited to bring to market and we think we're the only one really with the scale to be able to do it in a way that needs to be done. So we look at brands in the cabinet industry, we have the number one brand in KraftMaid for retail, we have the number one brand for builder with Merillat. So where you have strong brands and you continue to innovate and bringing value to both the consumer and your customer, price will always be challenging but it's a little bit easier.

You made on your comments on paint that you felt like the worst of the commodity pressure was over. I wasn't sure if that was with respect to TiO2 or with resins. I was wondering if you could give some anecdotal evidence of that because we continue to hear that things are equally as tight, if not more tight today than they were just a quarter ago so I'd love a comment there. And then last question on your Cabinet business. With the new launches, I was wondering if there were any special cost in your Cabinet business that were not rationalization charges, especially that we should be thinking about negative 26 from a profit loss as a new run rate, awful wish to improve off of or is there something sort of more specialized in there that we should be thinking about back and now as we look forward.

Well, the drop in the profit was pretty much in line with the drop in sales in that particular segment. I would say sequentially, we did have some additional costs from the second quarter to the third quarter. To your point, I think about $5 million, $6 million of promotional related expenses. And again, that is pretty consistent with the fact that we had the new launch for KraftMaid. In terms of your question related to resins and TiO2, our folks have been able to navigate through that issue. It is still tight, but our feeling is that the worse is behind us. But that could be in part as I mentioned on the second quarter call, that when you're growing your business as we have been over time and you've got very good relationships with suppliers, that tends to be beneficial. And I'm sure we're not the only company in that position, but we've had a very good relationship, a very good track record. And our feeling is that in terms of supply based on what we know today, it's still going to be tight but still should be very manageable on our part. And that concludes the call for today. I'd like to thank all of you for joining us. And that we look forward to talking with you at the end of the fourth quarter. Thank you.

This does conclude today's conference call. Thank you for your participation.