Masco Corporation (MAS) Q2 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Masco Corporation Second Quarter 2012 Conference Call. My name is Sarah, and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to the Vice President of Investor Relations, Maria Duey. Maria, you may begin.

Thank you, Sarah, and good morning to everyone. Welcome to Masco Corporation's Second Quarter 2012 Earnings Conference Call. Joining me on our call today are Tim Wadhams, 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 on our website. Following our prepared remarks, the call will be open for analyst questions. [Operator Instructions] If we are unable to take your question during the call, please feel free to call me directly at (313) 792-5500. If you would refer to Slide 2, I'd like to remind you that today's presentation includes our views about Masco's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors in our Form 10-K that we filed with the Securities and Exchange Commission. Today's presentation also includes non-GAAP financial measures. We've provided a reconciliation of these measurements on our website at www.masco.com. With that, I'll now turn the call over to our President and Chief Executive Officer, Tim Wadhams. Tim?

Thank you, Maria. And if you would please move to Slide #4. After a relatively strong start to the year in the first quarter, with sales up about 7% overall, second quarter sales leveled out and were flat compared to last year at $2 billion. We were hit by the negative currency translation. That cost us about $46 million in terms of top line. And excluding that, we'd have been up about 3% in terms of sales. From a positive perspective, our international operations were flat in local currencies in a relatively tough environment. We also benefited from price and improved new home construction-related activity. On the other side, Retail repair/remodel activity was slower, and our sales to key retail customers were flat in the quarter. Margins on an adjusted basis were up 40 basis points, and John will get into the detail there, but we did have some nice leverage in terms of our SG&A expenses, which offset the gross profit decline. We continue to benefit from profit improvement activities as -- and also had a positive price/commodity relationship in the quarter. Earnings per share on an adjusted basis, at $0.10, exceeded the $0.06 that we reported last year. And we did not pro forma those earnings for negative hedge and negative foreign currency translation, which each cost us about $0.01. We also in the quarter had a fairly significant event in terms of the settlement of our Columbus Drywall litigation. I should say that's accounted for in the second quarter. It actually took place in the latter part of July. We've agreed to pay $75 million to settle that claim. We continue to deny any wrongdoing or unlawful conduct but certainly feel that this decision makes sense under the circumstances, it eliminates a significant uncertainty and also limits the expense of that case, which was fairly significant. And it's very good to have that behind us. If you flip to Slide #5. Earlier this year, we communicated the strategic initiatives that we're focused on to drive improved performance and value going forward. Those include extending our market leadership positions, continuing to aggressively manage our cost structure through supply chain and Lean initiatives, improving our Cabinet and Installation-related businesses and strengthening our balance sheet. And if you flip to Slide #6, we'll talk a little bit about how we've done against those strategies. As it relates to extending our market leadership positions, we continue to introduce new products, as well as win new business for the future. I think a good example of one of the new product introductions that we have includes the extension of our Delta brand, with new products, new finishes and complementary accessories in the bath category. As it relates to our Installation segment, we continue to get very good traction in the first part of this year as it relates to the relatively new retrofit and light commercial channels. And our Window businesses, both in North America and in the United Kingdom, continued to gain share. Milgard continues to do a very good job in the Western part of the United States. Recent product introductions: Essence -- Essence is our wood fiberglass window -- the vinyl color window program and our vinyl swing doors are all getting very good traction. As it relates to cost reduction, we had another very strong quarter in terms of profit improvements. John will get into the details, but we came in around just a little bit below $50 million for the quarter. And we have updated, and John will talk about that in a minute or 2, our guidance for the full year as it relates to profit improvements. Our balance sheet continues to be strengthened. As we indicated, we had a debt maturity payment in early July, that was about $750 million. And as a result of that, our debt, if you go back to the beginning of the year, will be down about 10%. We ended the quarter with $1.9 billion of cash. And if you take into account the debt repayment, we ended up at about $1.2 billion. And if you flip to Slide #7, we'll talk about our Cabinet and Installation-related businesses. Back in February, during our fourth quarter earnings call, we discussed our expectations for improvement in these 2 segments, which have had relatively significant operating losses over the course of the last several quarters. At that point, we estimated that we could improve our operating performance in Cabinets by approximately $50 million for the full year and our Installation business by approximately $30 million for the full year. And again, that was based, at that time, on the assumption of flat housing starts. Obviously, housing starts have been up during the year, and we'll talk about that in a second. As it relates to Cabinets, during the first half of the year, we have seen about $19 million of operating profit improvement, principally driven by cost reductions in North America. At this point in time, it looks like we're going to fall a little bit short of the $50 million that we anticipated earlier. We expect the second half that we'll see about $10 million to $15 million of improvement, which would put us in a full year number of approximately $30 million to $35 million, so a little bit short of the $50 million that we anticipated. We obviously are seeing some benefits from a lift in new home construction-related activity. Unfortunately, that's offset by continued difficult market conditions in Europe, as well as slower repair/remodel retail activity in North America. And we've also had some challenges implementing our North American dealer and countertop-related strategies. We have recently made some leadership changes as it relates to our North American Cabinet business. In terms of Installation, our first half operating performance has been improved by approximately $29 million compared to last year. We've had a nice lift in terms of top line activity, as well as a good job on the cost side. And at this point in time, as we look out through the rest of the year and anticipate housing starts, which the Blue Chip consensus suggests will come in around 740,000 for the full year, that's up about 20% compared to last year, our sense is that number will probably be pretty close to where we end up. On a lag basis for us that represents about 725,000 starts. And our sense is that our Installation business has a very good opportunity to get close to breakeven at that kind of level. Now what that means is that the $23 million of adjusted operating losses that we've incurred in the first half would be offset in the second half. So we feel pretty comfortable about that and certainly pleased with the increase in performance as it relates to Installation. If you flip to Slide #8, I'd like to turn the call over to our CFO, John Sznewajs, who's going to walk us through some of the detailed operating information and talk about our segments as well.

Thanks, Tim, and good morning, everyone. If you could just please turn to Slide 9. So as Tim mentioned, revenue in the second quarter was flat compared to last year's second quarter. Excluding the impact of foreign currency translation of about $46 million, sales grew at 3%. We saw increased sales in those businesses selling into the new home construction channel, including our Installation business, which was up 10% in the quarter. We saw increased sales of North American Plumbing Products, and we benefited from selling price increases. International sales were down 9% in the quarter though flat in local currency. The sales to key retailers were also flat in the quarter. Our adjusted gross margins were 26.1%, about 110 basis points lower than in Q2 of last year, due to material cost increases in our Decorative Architectural, Installation and European Plumbing businesses, partially offset by profit improvement initiatives. We did a much better job of leveraging our SG&A in the quarter as adjusted SG&A as a percent of sales dropped 150 basis points to 19.9%. As result of the favorable SG&A performance, we're also pleased with our bottom line performance, as adjusted operating income increased 7% in the quarter to $124 million, with an adjusted operating margin of 6.2%. And finally, our adjusted EPS was $0.10 in the quarter, an improvement of $0.04 per share in the quarter from the second quarter of 2011. If you'd turn to Slide 10, we can see the components of our operating income improvement in the second quarter. Our net price/commodity improved $14 million in the quarter, largely driven by our Plumbing, Cabinetry and other specialty segments, partially offset by a negative price/commodity relationship in our Decorative Architectural segment. This $14 million reflects the negative impact of our metals hedge, which was about $5 million negative in the second quarter. While we have experienced favorable price/commodity relationships in the first half of the year of about $35 million, based on current prices of our key commodities, we believe that in the second half of the year, the price/commodity relationship will likely be in the range of $10 million to $20 million positive. The $10 million reduction in net volume/mix was principally driven by negative mix of approximately $13 million in our Plumbing segment, which largely relates to Hansgrohe as they continue to penetrate new markets. The net profit improvements of $4 million were principally driven by our Cabinets, Installation and Decorative Architectural segments, partially offset by increased strategic growth spend in the Plumbing segment. For the first half of 2012, we are pleased with our profit improvements of $90 million gross and estimate that we can achieve $175 million for the full year, up from our original estimate of $150 million. If you turn to Slide 11, you can see that our Plumbing segment sales declined 3% in the quarter, again, principally due to foreign currency translation. Excluding the impact of the $37 million of foreign currency translation, sales increased 2% in the quarter. European sales in the segment were flat in local currency for the quarter despite a challenging economic environment. We experienced good growth in our North American businesses, as several of our most important faucet brands, including Delta, Peerless and Brizo, saw sales in the quarter increase high-single digits in both the retail and wholesale channels as they continue to gain share through new-product launches. Margins, however, in this segment were challenged by a number of items in the quarter: negative mix of the quarter of approximately $13 million, principally from Hansgrohe, as I described earlier; also, we incurred incremental costs for new programs and growth initiatives of about $15 million; we experienced negative currency of about $5 million. All this was offset by a favorable price/commodity relationship, net of our hedge, of about $12 million. Taking a look at the performance of this segment, we had 4 what I would call kind of unusual items that hit the segment in the quarter, each of which were about $5 million in magnitude. Now currency, as I mentioned earlier, was about $5 million; hedge is, as Tim referenced earlier, was about $5 million; we had program costs for some new programs that we gained at Retail in several major retailers, things like reset costs and the like, were about $5 million; and then we had some operational one-timers of about $5 million in the quarter. Things like we had a tank explosion at one of our facilities that took down production for several days. And fortunately, no one was hurt, just some damage, but it took production down for a couple of days, and we incurred some expense related to that. So all those 4 items in aggregate account for about $20 million. If you turn to Slide 12, you can see that revenue in our Decorative Architectural segment grew $25 million or 5% in the quarter, driven by Behr's continued growth with the Pro painting contractor, share gains in our builders' hardware business and price increases, the implementation of which was completed earlier this year. The new formulation that Behr introduced earlier this year are performing well. And sales of our top-rated and reformulated Premium Plus Ultra products were up mid-single digits in the quarter. Overall, gallons were down slightly in the second quarter, though excluding the SKU reductions at Walmart, gallons were up slightly, and we believe we gained share at Retail in the second quarter. As previously mentioned, we believe that sales in the second quarter were likely impacted by the pull-ahead of sales due to the favorable weather that we experienced in the first quarter of this year. We also saw nice revenue gains from our builders' hardware business in the quarter, as their results have improved following a tough 2011. Operating margin improvement was the result of the benefit of profit improvement initiatives. It was also aided by improved performance in our builders' hardware business. This was partially offset by increased growth initiatives spend for our international expansion in our Pro growth with our Behr business. And finally, the price/commodity relationship was negative $5 million in the second quarter, which was offset by the timing of some promotional spend. If you turn to Slide 13, you can see that the environment for Cabinetry remains challenging as our segment sales were down 5%. Excluding the $8 million negative impact from foreign currency translation, Cabinet segment sales were down 3% in the quarter. And as I mentioned earlier, our European sales were flat in local currencies. We experienced solid sales growth with our countertop initiatives. And our direct-to-builder sales were up low teens percent. So we are well positioned to benefit from our relationships with many of the big builders as they grow and take share in the housing recovery. This growth, however, was offset by a decline in the dealer channel and big box retail sales. We believe that the repair/remodel market for Cabinets is down mid-single-digits percent in the quarter, especially at the higher price points where we participate. And the intense promotional environment at Retail has continued the second quarter. And our spend on such promotions remains at levels consistent with what we experienced last year. We improved our operating loss in the quarter by $10 million or 290 basis points and $19 million year-to-date. This improvement was driven by benefits realized from prior year restructuring activities and current year profit improvement initiatives, partially offset by start-up costs associated with our countertop programs. Turning to Slide 14. You can see our Installation sales, and we are very pleased with the improved both the top and bottom line performance of this segment in the second quarter. Segment sales grew 10% and were fueled by higher volumes and sales across all lines of businesses, including our residential new construction, retrofit, commercial and distribution. Sales were negatively impacted from the previously announced closure of branch locations and the mix shift to multifamily starts, which on a combined basis, reduced segment sales in the quarter by more than 3%. We continue to focus on increasing our Installation sales with the largest homebuilders. And we are well positioned to grow this business with the big builders, particularly D.R. Horton, Lennar, Pulte and KB. Our Installation sales in the quarter increased by more than 20%. In addition to solid top line performance, management's strong execution delivered significantly improved bottom line results, with operating profit improving $10 million in the quarter and operating margin expanding by 400 basis points. This segment had a very good operating leverage in the quarter, delivering 38% incremental margins resulting from increased volume, successful price/commodity management and profit improvement initiatives. And as Tim mentioned earlier, assuming lagged housing starts of about 725,000 this year, we believe this segment will approach breakeven for the full year in 2012. As you turn to Slide 15, you can see that our Other Specialty Products segment declined 3% in the quarter. Excluding the exit of select U.S. Window markets late last year, segment sales would have been up 1% in the quarter. Our U.K. Window and Milgard businesses benefited from share gains and reduced promotional rebate programs in Q2. Window and door sales in the Western U.S. increased high single-digits percent in the second quarter due to the improvement in the new home construction market, product introductions and geographic expansion. Our adjusted operating margins improved by $6 million or 430 basis points, benefiting from rationalization activities undertaken in the second half of last year, improved price/commodity relationships, including the rebate activity I just mentioned, partially offset by inflation. And if you turn to Slide 16. As Tim mentioned earlier, this month we retired our July 2012 $745 million debt maturity with cash from the balance sheet. As a reminder, we issued $400 million of 10-year notes in the first quarter this year with an interest rate of about 5.95% to partially prefund this July maturity. Since the beginning of the year clear, we have retired about $400 million of debt. The negative interest carry is approximately $7 million or about $0.01 per share for the second quarter and approximately $0.02 per share for the full year of 2012. We continue to improve our working capital as a percent of sales, defined as accounts receivable plus inventory less payables, from 15.6% down to 14.6%. This is great work from everyone across the enterprise on that metric. And finally, we finished the quarter with $1.9 billion of cash on the balance sheet. And following the retirement of our July maturity, our cash balance is approximately $1.2 billion. So with that, I'll turn the call back over to Tim for his look on our outlook.

Thank you, John. And if you would please flip to Slide #18. These are the priorities that we identified earlier this year in support of our strategic initiatives. And we feel like we've continued to make good progress in the first half of the year, including the second quarter, against all of these priorities. We've talked about most of them through the course of the last few minutes. I would add that, as John mentioned, we had some nice improvement in working capital management. And I'd like to join John in thanking our employees across the enterprise for their continued efforts and dedication. If you flip to Slide #19, a couple of comments before we go to Q&A. I feel like we've made a lot of progress in the first half of 2012. Weather certainly has been a factor. It helped us, we think, in the first quarter; probably hurt a little bit in the second quarter given the heat in certain areas of the country. So the line between quarters might be a little bit blurry. But having said that, sales for us in the first half were up 3% or $128 million. And if we exclude $65 million of negative currency impact, it would have been up about 5%. Margins in the first half are up 150 basis points versus last year. And our incremental margin in the first half is over 40%. That's helped by positive price/commodity relationships, as John mentioned, approximately $35 million. We've made some very good progress there, but we're still behind the curve when we look at the last couple of years. EPS as adjusted is up $0.14 a share, $0.16 versus $0.02 last year. And we've seen some nice improvement in our Cabinet and Installation businesses, and our cost structure, as John articulated. Second half 2012 looks to be a little bit more challenging from a macro perspective. European economies are still unsettled. And the U.S. economy appears to be slowing as consumers pull back. Retail sales have been down now, I think, for 3 straight months. And certainly, big-ticket remodel activity is not generating an awful lot of traction. I would point out that we're relatively pleased with our preliminary view of July. July, on an all-in basis, looks to be up low single digits. And if we exclude foreign currency, July looks to be up mid-single digits. And if we look at only North America, our preliminary view is that July will be up high single digits. So it looks like we're off to a reasonably good start for the second half. Also on the plus side, we continue to invest in our businesses. And we continue to win new opportunities, especially in Plumbing. These costs are hitting our P&L today. John talked a little bit about that as we went through some of the segment deal -- detail, but we'll certainly see the benefits from those opportunities in the future. We're also excited about the improving new home construction environment. As we mentioned, we expect housing starts are going to be probably somewhere around the 740,000 level. Inventories for new homes continue to be low, and in certain areas of the country are extremely low. Demand has picked up. Affordability has never been better. Prices are stabilizing, and in certain areas, moving up. And we've seen a lot of investors come in to acquire properties. Also encouraging is 2013 estimates for new home construction at 880,000 as per the Blue Chip consensus. Some other folks are a little bit higher than that. But if we can hit that level this year and next year, the 740,000 this year, the 880,000 next year, that certainly is going to be a positive for the overall economy, as well as for Masco. The economy needs both housing and automotive. The multiplier effect as you think about job creation is significant. And anything that's good for the economy is good for us. Having said that, we'll continue to focus on the things that we can control to drive our strategic initiatives, which include expanding our market leadership positions, continuing to focus on our cost structure, continuing to improve our balance sheet and continuing to drive our Cabinet and Installation businesses to profitability. And with that, Sarah, we'll open up the lines for Q&A.

[Operator Instructions] Your first question comes from the line of Eric Bosshard from Cleveland Research.

Two things. First of all, within Cabinets, I'm curious about what's changed -- and especially as you look into the second half, has you taken a little bit more cautious view on the profit progress you're expecting from that segment this year?

Yes, what changed there, Eric, is a couple of things. One is that we're not getting the traction that we anticipated in the dealer channel. Again, that's a little slower than we anticipated. And I think from our perspective, we're just not getting the traction that we anticipated, which is a little bit disappointing. The other thing is with countertops, it's kind of a good news, bad news situation. We've had some basic difficulties scaling that business. Demand has been very, very strong. And we've run into some inefficiencies. We certainly think that we can drive profitability going forward. But we've had to pull back in terms of our expectations, and quite frankly, the profitability there is not what we anticipated. If we look at the cost side of the equation, I think at the beginning of the year, we estimated that we'd have a net of approximately $30 million of cost reductions. And we still feel like we're on target for that, so continuing to do a good job on the cost side, but basically on the revenue side, see the lack of traction in the dealer segment, along with the fact that repair/remodel for the bigger-ticket items is a little bit slower, as John mentioned, for higher-priced items like many of our offerings on the KraftMaid side. Sales look to be down about 5%. So those would be some of the factors that we're faced with. We also haven't seen a lot of pickup in Europe. I should point out that Europe continues to be challenging. No question about that. We anticipate a little bit of improvement there, but the top line there continues to be a bit of a challenge.

When you look at the market share position or the average selling price of -- especially on the KraftMaid side, is there anything to look at and would view this to be a little bit more of a medium-term challenge that may take longer to restore profitability because of how the market shares pie has moved and also how the mix has moved in this category?

Well, yes, no, I -- we're optimistic going forward. I mean, there's no question about that. We continue to be profitable in the dealer channel. There's no question there. And KraftMaid continues to be overall profitable. But having said that, I think just in terms of top line, we're not getting the kind of traction that we anticipated. And I think that we should see some improvement there over the longer term. There's no question in my mind about that. I think we still got great brands. When you think about KraftMaid, Merillat and Quality. And so, yes, I see this more as a little bit of a speed bump. We have made some leadership changes, as I mentioned earlier, and so we're encouraged by that as well.

And one other. Could -- you've just squared you're more cautious on the second half. I mean as -- but it looks like July accelerated from the second quarter and maybe even the first half experience. How can you just put those 2 statements that seem to be conflicting in context for us?

Well, I think anytime you're in a recovery, I think that there's going to be some lumpiness in it. And we certainly have experienced that. Obviously, the first part of the year started out very well. As we mentioned, second quarter was pretty consistent when we look at sales trends from April, May and June. We were generally, without foreign currency, up about 2%, 3% each month. And our sense is just a little bit of caution as we go into the second half of the year. I think when you look at some of the uncertainty out there, with disposable income being down, the lack of job growth, I think caution by consumers, I think it's just prudent for us to think a little bit more cautiously. But obviously, July is a little bit -- or maybe a little bit more than a little bit of a plus as we head into the second half. And I hope we're wrong as it relates to that. But we'll just have to see how things shake out.

Your next question comes from the line of Dennis McGill from Zelman & Associates. Dennis McGill - Zelman & Associates, Research Division: I guess, Tim, just back on Cabinets, realizing that this restructuring is kind of 2 years in the making now, can you go into a little bit more specifics on what the challenges are in the dealer implementation? And then as you think about the management changes, getting involved there, what are you seeing new management doing differently than the prior management team?

Sure. I think as we look at Cabinets, Dennis, as everyone's aware, we did do a major integration going back a couple of years, putting our Builder Cabinet and our Retail Cabinet Groups together. We think we've made very good progress there in terms of the cost side of that. My sense is that as I think back and I think we estimated that on the integration, we probably would save somewhere around $35 million. I think we've got that in the bag, and there's probably another $5 million to $10 million that we've been able to realize as part of the integration. Having said that, I think we probably have had a little bit more disruption, if you will, relative to top line activities. And that has put us a little bit behind the 8 ball just in terms of a couple of the segments. The dealer segment is an area that we think has a lot of promise. We're profitable in the dealer segment. We've got some very good relationships there, but we're not doing as well as we -- quite frankly, as we'd like too. So having said that, we did make a couple of leadership changes. From a corporate perspective, we've continued to streamline our corporate executive group, if you will, and we've gone from 3 to 2 Group Presidents in North America. And again, we were going to make that move irrespective of any issues around Cabs. But in doing that, Keith Allman, who is one of our Group Presidents in North America now, has responsibility for our kitchen and bath group. We put North American Cabinets and Plumbing together, and Keith is going to have group responsibility for that. Keith has Cabinet experience from Merillat and the Builder Cabinet Group. He was in Cabinets for 10 years. He was Exec VP, Vice President of Operations, so he's got a lot of background there. Keith went and left Cabinets about 6 years ago, went to Delta and did an excellent job leading Delta as the CEO. And has got a lot of experience in all the channels that are important to us from a Cabinet perspective. We also have changed the business unit leadership. Rick Roetken, who was the VP of Marketing at Delta when Keith was at Delta and more recently spent 2 years running our Liberty Hardware operation, has taken over as CEO of our North American Cabinet Group. And between Rick and Keith, they've got a great track record together in terms of the improvement that we've seen at Delta and a lot of very good experience in all of the channels that are important relative to the Cabinet-related business, particularly as it relates to Retail. So from our perspective, we got a lot done over the course of the last couple of years and certainly feel good about that, but also feel that there's some opportunity for us to kind of refocus on the growth side, if you will. And I think with Keith and Rick involved in that going forward, we're optimistic that we can generate some of the top line opportunities that we think are available to the leading brands that we have. Dennis McGill - Zelman & Associates, Research Division: And can you give us a little bit of color around, a, what key retail sales would have been, excluding Cabinets in the quarter; and then, b, what the top line assumptions roughly would look like in the second half of the year around that $55 million, $60 million loss in the segment?

No, we didn't breakout Cabs from key retail sales. I think [indiscernible] yes, we don't have that at this point, and we might be able to take that out for later. And the rest of your question, Dennis, was top line assumptions in the second half relative to Cabinets? Dennis McGill - Zelman & Associates, Research Division: Yes, just give us a sense of what's embedded on the top line behind that loss that you guided to.

Well, what we're looking for is probably a little bit of a decrease in the second half. I think in the first half, we're down about 3% or 4%, excluding foreign currency. And our sense is that that's probably somewhat consistent with where we'll probably end up in the second half as well. Dennis McGill - Zelman & Associates, Research Division: So -- and just lastly, so that implies deceleration on the remodel side in Europe since new construction is accelerating, as you said?

Right, yes, exactly.

Your next question comes from the line of Nishu Sood from Deutsche Bank.

I wanted to turn to Plumbing. In Plumbing, the issue of mix affecting margins as Hansgrohe has expanded has come up periodically over time. So I just wanted to focus in on that a little bit. Clearly, if the business is pursuing the incremental sales, which is hurting mix, it must be a good return on capital investment. But from a margin perspective, I just wanted to understand how we should think about this going forward. Obviously, these expansions into the new markets are meant to drive sales over the long term. So does that mean that we should expect the margins for Hansgrohe and Plumbing to drift down over time as the mix continues to shift?

What initially happened is over time in plumbing -- and Hansgrohe, they got a couple of 3 items that hit them from a mix perspective, one you alluded to, which was their expansion into international markets. A couple other things that hit them recently, one is the fact that, as you may recall, Hansgrohe principally started out as a shower business, and over time, they've really increased the number of offerings they have in the faucet side of their business. And while both of those businesses have great margins. It just turns out that showers are at a slightly higher margin than faucets. And so there's a negative kind of mix associated with the product mix that's developed over the course of the last couple of years. Then the last thing is that over the course of the last year or 2, we've seen some down trading. They've got a high-end brand called Axor, and we've seen some down trading on some of the larger international projects to more of the Hansgrohe mainline product. And so those couple 3 items hit it from a mix perspective. And to your point, you're right, from time to time, we had some -- experienced some negative mix at Hansgrohe. I would think that some of this is an investment, but in the near term, we'll experience some margin degradation as a result of the mix. But over the long term, what we tend -- generally tend to experience is that when they enter new markets, generally entering with their opening price point products, that over the course of time as those markets develop, they migrate people up the price continuum. And so I would generally tend to lead you to think that they've got a near-term issue that will probably start to correct itself over the medium term as these other markets start to mature.

Got it. Great. That's very helpful. Second, I wanted to turn to the settlement -- the Insulation settlement. What I wanted to understand was, clearly, the issue there was around Masco being large and getting better pricing on Installation. Has this process, over time, with these relentless lawsuits and the class action, and the settlement affected the pricing that Masco gets on Insulation? And so would it have an effect on the pricing and margins in that business going forward? Or conversely, does the settlement actually remove any issues that there might have been with pricing while all these lawsuits were going on?

Yes, I'm not sure I'd necessarily say there's a connection there, Nishu. I think as we think about our size and our buying power, we've talked a little bit about the relationship with Owens Corning on a strategic supplier relationship, we still are a large buyer of insulation. We still have leverage in terms of the opportunity in the marketplace. Obviously, it's very competitive at the level of new home starts that we're at today. But I would not see us disadvantaged in any way going forward relative to the fact that we settled this lawsuit or have had a couple of other litigation-related issues.

Your next question comes from the line of Sam Darkatsh from Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Some questions on Slide 11. There were a lot of moving parts, obviously, with the Plumbing margins, John, with respect to the program costs and the hedge and then the explosion in the -- in one facility. How many of these costs continue and; to what degree over the next quarter or 2?

Well, Sam, it's hard to predict currency and commodity movements, so I'm not going to really go there. But I would point to you that kind of the $10 million that I outlined, kind of the $5 million of program costs were -- was truly related to some retail activity that we had in the quarter, related to some share gains that we picked up at some of the major retailers. And then secondly, kind of what I call the operational one-timer is the plant explosion in the light that it kind of got lumpy into that. We're hopeful -- we're very hopeful that we don't have any further operational issues like that. So those, clearly, are one-time in nature. Could the rebates or could the reset costs occur -- to the extent that we continue to win new business here, that could be something that we experience in the future, I think we'd be happy to take that as we win new business. So -- but we'll continue to call those out as those things come up. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Second question. There was also, I believe, a change in your expectations for general corporate expense. I think that if my notes hold correct, from $140 million to $125 million, what was that -- what was the source of that? And what do you expect for next year? Is this the ongoing run rate now?

We haven't really gotten into next year. But the reason that things started to come down, as we guided on now, is you may recall initially, when we give out guidance, we budget everything at standard. And based on the experiences we've had through the first half of the year, with approximately $30 million in the quarter, we feel pretty comfortable at about $125 million we're guiding everyone to for the full year. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And last question, it's a quick one. With the Installation business, I know you saw -- said that the Insulation was up 20, and the segment was up 10. I caught that there was 3 points of a headwind from the branch closures. But what accounts for the other 7% between the Insulation and the reported sales growth?

Well, we've got a couple other components of that business that, perhaps, they grow as quickly as our Insulation sales, such as our distribution business. Our retrofit business slowed a little bit in the second quarter, partially we think a little bit due to the hot weather. So those couple of things. And then some of our other products didn't grow as rapidly -- like our fireplaces and gutters didn't grow as rapidly as the 20% that we experienced in Insulation.

Yes, Sam, a lot of the pickup there tends to be with some of the bigger builders. And some of those homes tend to be a little bit smaller, with less features like fireplaces and that type of thing. And so there's probably less non-insulation-related product opportunity for us in certain situations. And you've also got the multifamily issue relative to mix as well, which would put you in a position where you're not going to probably have a fireplace, garage doors, gutters, that type of thing, to the same extent that you might with a single family.

Your next question comes from the line of Mike Wood from Macquarie.

You'd mentioned the $5 million additional program costs for the share gains. With the remaining portion of that, the $10 million, can you frame that in terms of how that shifted versus prior quarters and how you think about what the payback is on that growth spend?

Is it, Mike, in the Plumbing segment?

Yes.

Yes, the $5 million in terms of what we spend, just one-time re-set cost, is to our price on the shelves of major retailers. So in terms of the return on that investment, we look for a pretty quick payback. Generally, these programs will go for 1 or 2 years, and so we look to recoup the return over the life of the program that we have in the aisle. That said, we're constantly managing our SKUs in the aisle and working with our retail partners to ensure that we've got product that moves quickly. So to the extent that something might not be moving as fast as either we or they would like, we'll continue to develop new products to make certain that we can add fast-moving SKUs in the aisles.

And can you talk about the point-of-sale trends also that you experienced in July, and also for the second quarter, so that we can understand if there's any destocking or restocking benefit there?

Yes, I really don't anticipate and didn't feel like there was any impact in terms of inventory balancing at all as it related to the quarter. We saw a little bit of that, we thought, coming out of the first quarter into the second quarter. But really, our sales activity was, as I mentioned earlier, relatively flat each month. We're right around, excluding foreign currency translation, right around 2%, 3% in terms of increased sales. We ended up, obviously, without foreign currency, at about 3% for the full quarter. So really didn't see anything unusual relative to inventory balancing. And as we went in -- as we go into July, we talked a little bit about some pickup there, but don't necessarily believe that's attributed to anything relative to inventory one way or another.

Your next question comes from the line of Will Randow from Citi.

Could you share your price increases and how well those have been sticking, particularly on the Paint business? Is the number [indiscernible]

No -- I'm sorry, go ahead, Will.

As a competitor comp -- sorry, at a competitor comps, I remember you said the April price increase stuck, and I'm curious if there's been any success after that price increase?

Talking about the commodity costs, are you taking about -- you're talking about Paint now?

Yes, correct.

Okay. And you're talking about cost increases in terms of the commodities?

No, I'm talking about price increases rather.

Okay, our pricing, yes. No, we -- as we mentioned earlier, Will -- sorry for the confusion there, but as we mentioned earlier, we started to implement price related to our Paint products in February. And that process was complete in late March, early April, in terms of implementation. And that was pretty much across all of our Paint-related products, all of our Paint-related customers. Since that point in time, we have experienced some continued increase in TiO2 and resin-related costs. But in the second quarter, late in the second quarter, that seemed to kind of level out a little bit. Obviously, we're still elevated versus last year. And as John mentioned, we had a negative price/commodity relationship in the Decorative Architectural segment. And our expectation is that we don't see in the second half given that worldwide volumes are down at this point in time as it relates to Paint, we're not anticipating necessarily any continued increases. But we're still a little bit behind in terms of where we'd like to be from a pricing perspective. And I can't really give you any further information on that at this point in time.

Got it. I imagine the retailer you're working with, in particular, probably is going to push back if you try to -- push further price increases through the rest of the year.

Well, that remains to be seen.

Okay. And second question for Cabinets, I believe you said promotions were flat year-over-year, which sounds like still high to me. And you had share gains at retailers. Is that correct?

No. I would say that our share at the major retailers is about flat for the year or for the quarter, I should say. And the promotional activity, is flat for the first half of the year for us based -- compared to the first half of last year. So it's still intense. They're still elevated but no more intense than what we saw in the first part of last year.

So I guess, it sounds like it's relatively a price-taker business until you get capacity utilization back up. But are you guys thinking about some creative ways of creating value. Possibly doing, and we've talked about this, an asset swap with, let's say, a competitor, where you pitch windows for doors versus cabinets, or something where you create consolidation in an industry that lacks it?

Well, we don't generally speculate on things that might be somewhat transformational, like what you suggested. I think our sense is that there continues to be a very good opportunity, fundamental opportunity, in the dealer channel, in the countertop market for us. As we've mentioned, we've got some new folks involved in that business. They're in the process of doing some assessment, as we speak, just in terms of kind of where we are in the different channels. And our sense is that there's a lot of opportunity for us to expand our penetration, improve our performance going forward and, certainly, are encouraged by the position we've got with our brands at this point in time. So I wouldn't necessarily want to speculate on anything of the nature that you suggested.

Yes, I suppose NOL would take a ding too.

Your next question comes from the line of David Goldberg from UBS.

It's actually Susan. You guys did a few smaller acquisitions earlier this year. And as we've sort of gone through the year, and you've seen how the housing market and conditions overall come together, are you seeing any changes in terms of some of the opportunities that are available out there and your appetite for them?

Yes, Susan, to be clear, we did a small acquisition, a spa manufacturer for our West Coast spa business late last year. And that actually is going very well for us. And the management team at Watkins has done a fantastic job of integrating that business and growing that business. So that's been a very positive acquisition for us. In terms of your question, are we seeing additional opportunities, new opportunities come on the marketplace, it's still pretty slow at this point in time. Even though end markets are starting to recover from the bottom, with still not a lot of sellers coming off the sidelines at this point, so I wouldn't want to speculate or say that we're looking at any more acquisitions at this point. But we're not seeing more activity of acquisition in the industry at this point in time.

Okay. And then in terms of the balance sheet, the July repurchase -- or July debt maturity was sort of a point that we were waiting for. And we're -- we now that we're past that, can you give us any update in terms of how you're thinking about potential share repurchases or raising the dividend, anything in terms of shareholder value like that?

Yes, I think, Susan, at this point, given where we are in the recovery and the fact that we're still $4 billion, $5 billion behind sort of our peak in terms of revenue, I wouldn't necessarily see any activity around shareholder-friendly-related initiatives like share repurchases or an increased dividend at this point in time. Obviously, as we get further into the recovery and start to see some additional top line opportunity given our operating leverage, the history we've got in terms of free cash flow, and I would remind folks that if you went back to the period 2003 through 2007, that 5-year period, we averaged about $1 billion of free cash flow a year. And that was after $1.5 billion of capital expenditures, $300 million of investment in displays, and we were able to, during that same time period, repurchase about 30% of our outstanding stock. I think that gives you a little bit of perspective of the cash flow capacity that we have. And -- but again, that was at a different time and a different place. And I think at this point, given where we are in the cycle, it would be premature for us to start down that path at this point in time.

Your last question comes from the line of Stephen East from ISI Group.

If we look at your Paint business, again, you had a nice sequential improvement in op margin. How would you rank order what drove that from pricing volume? And did Pro build -- did your spend in Pro build accelerate versus the first quarter or not?

Yes, Stephen, a couple of things there. On a sequential basis, I think some of the improvement did come from the Pro. That included -- drove as I mentioned, I think, in my remarks. Volumes were up just slightly in the second quarter if you factor out some SKUs that we lost at Walmart. So volume was such a huge driver. On the bottom line, profit improvements were a big driver in the quarter in the Decorative Arch segment. The performance of our Liberty Hardware business also aided their quarter pretty significantly. So in price [ph], a little bit if softness overall in the quarter just given the extreme heat, particularly in the last couple of weeks in the quarter due to putting up [ph] our exterior paint. So a couple of 3 things hit us there. But overall, improved pricing kind of helped us a little bit as well in the quarter.

Okay, that's helpful. And then the other thing, you mentioned the key retail -- the Walmart stuff, on an apples-to-apples, one is the key retail -- what is going on with the key retailers? And then the other question I've got is, when you look at your European business, can you remind us what percentage of your sales is going over there and what the op margin is in Europe versus the U.S.? And then just sort of if you rank order, what the pressures you see being in that market?

Okay. A couple of things there. One, our key retail sales, again, were flat for the quarter. And that's not only the -- our major retailers, Home Depot and Lowes, but the composite of a number of other probably 20-plus retailers that fall into that equation. In terms of Europe, our European sales are about 21%, 22% of our overall sales right now. And I think the last question was rank order, the -- some of the...

No, I think what Stephen was looking at is the operating margin in Europe, and that would be down a little bit this year year-over-year, Stephen. I don't know that, that's in our analyst package. I don't -- is that in there?

No, not really.

I don't think we have the international margin. But that would've been down a little bit. I think last year, at this point, Stephen, we were running around 10%, 11%, as I recall. And with some of the mix challenges that we've got, some of the top line challenges, we'd be off there. And I don't have that number right in front of me, but my guess is it's probably mid- to high single digits versus low double digits last year.

Yes. Stephen the way to kind of get it is if we had a $5 million operating income hit on currency and about a $50 million top line hit on currency. That translates through at the same margin, so that's probably high single digits, to Tim's point.

Okay, got you. And is that the biggest headwind? Or are you seeing something else that causes you more concern?

In Europe?

Yes, in Europe, I'm sorry.

Yes, I just think, for us, in Europe, obviously, the economies over there are pretty dicey. One of the things that helps us is the diversity of Hansgrohe's product offerings in emerging markets, project work in the Middle East. So we do have a bit of an offset. We don't have a lot of presence in Southern Europe: Spain, Portugal, Italy and Greece, that those are not major markets for us. So from that standpoint, we're in reasonably good shape there. So I think we're maybe a little bit more balanced than maybe some other folks who basically are pretty concentrated on the continent. But having said that, it's still pretty tough. Okay. Sarah, thank you, and we'd like to thank everybody for joining us on the call today. And as Maria indicated, if we didn't get to you or you have additional questions, give us a yell. Thank you.

And this concludes today's conference call. You may now disconnect.