Maria C. Duey - VP, IR and Communications Keith J. Allman - President and CEO John G. Sznewajs - VP, Treasurer and CFO.

Eric Bosshard - Cleveland Research Company Robert C. Wetenhall - RBC Capital Market Nishu Sood - Deutsche Bank AG Dennis McGill - Zelman & Associates, LLC Stephen S. Kim - Barclays Capital George Staphos - BofA Merrill Lynch Adam Rudiger - Wells Fargo Keith B. Hughes - SunTrust Robinson Humphrey Garik S.

Shmois - Longbow Research Michael Dahl - Credit Suisse Stephen F. East - ISI Group, Inc..

Good morning, ladies and gentlemen. Welcome to Masco Corporation's First Quarter 2014 Conference Call. My name is Tiffany and I will be your operator for today's call. As a reminder today's conference call is being recorded for replay purposes. (Operator Instructions). I will now turn the call over to the Vice President of Investor Relations, Maria Duey.

Maria, you may begin..

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

Our first 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. As a reminder we would appreciate it if you were to limit yourself to one question with one follow-up.

If we are unable to take your question during the call please feel free to call me directly at 313 792-5500. I'd like to remind you that statements in today's presentation will include our views about Masco's future performance, which constitute forward-looking statements.

These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Qs that we filed with the Securities and Exchange Commission.

Today's presentation also includes non-GAAP financial measures.

Any references to operating profit, earnings per share or cash flow on today's call will be as adjusted, unless otherwise noted, with a reconciliation of these adjusted measurements to GAAP in our quarterly press release and presentation slides in the Investor Relations section of our website at www.masco.com.

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

Keith?.

Thank you, Maria, and thanks to all of you for joining us today for Masco's first quarter 2014 earnings call. Please flip to with slide number four. As we have for the last 10 quarters MASCO’s first quarter 2014 results showed year-over-year sales and profit growth and margin expansion compared to the prior year quarter.

Our new products and program wins drove sales in the quarter. We also continued to benefit from the positive trends in new home construction and improving repair and re-model activity. Plumbing installation and other specialty performed well this quarter and we are very happy with their results.

Our international sales and profits exceeded our expectations with an exceptionally solid performance by our international plumbing and window businesses. We continue to see strength in the European economy, particularly in Germany and the UK. Hansgrohe did extremely well reporting their best sales quarter in history.

The team's execution, coupled with new products drove sales throughout the quarter; hats off to [Frank Semling] the team at Hansgrohe. In North America we experienced our typical first quarter seasonal slowdown.

In addition the adverse weather conditions caused a short term closure of multiple facilities in our cabinetry and installation segment and a myriad of other inefficiencies, such as increased fuel cost, production and project delays and poor painting conditions.

Despite this, our focus on execution helped to mitigate the negative impact in regions not affected by weather such as our window business on the West coast and our international sales we saw strong comps.

We believe that while the weather certainly challenged our first quarter the demand for goods and services was not lost but rather deferred to latter periods. Turning to slide number five on our last call we outlined our priorities for 2014. Although still early in the year we have already made progress against these objectives.

We continue to grow share in our market leading brands. Delta continues to gain share as we move into adjacent categories in the bath and they continue to hold the number one share of shelf position in big box retailers. Our North American window business, Milguard due to its new product introductions continues to gain share.

Masco has a long history of customer focused innovation this year is no different. We started to rollout our new BEHR MARQUEE interior paint in the first quarter and we’ll continue to do so in the coming month as we move into the majority of the U.S. and all Canadian Home Depot stores.

Our installation and cabinetry business remained a major focus for us. We still have a lot of work to as we move these businesses towards sustainable profitable growth. In installation our commercial business had a great quarter with strong volume increases.

The residential portion of the business also performed well despite the weather with mid-single digit volume growth. We are excited to announce that we recently won the 2014 energy star award from the U.S. environmental protection agency.

This is the ninth time we’ve won the award and it recognizes our industry leading commitment to energy efficiency and building science expertise; job well done to Robert Buck and the team at Deltona. Related to cabinetry we continue to be pleased with our progress with the dealers and builders and are working to improve our performance in retail.

The weather was certainly a substantial headwind for us this quarter. Additionally we incurred costs associated with the stabilization of business such as the previously announced plant closures and the standardization of ERP systems.

We believe that our recent customer focused product launches and disciplined pricing will add value over the long term. The stabilization of this business will not happen overnight. We remain committed to the long-term success of this business. Internationally, we continue to expand and are extremely pleased with our results from the first quarter.

Our international plumbing business was up mid-single-digits in local currency and as I mentioned earlier, Hansgrohe had its best sales quarter ever and is benefiting from the increased demand for luxury goods. UK economy is improving and we're seeing strong sales from our businesses there.

Driving operational leverage across the organization is a key priority for us. We have consolidated Masco Behr in to Delta and are announcing savings in brand leverage from this move. We continue to manage cost aggressively and we are on target to achieve approximately $115 million of profit improvements gross for the year.

Our balance sheet remains a focus for us as well. Our working capital as a percentage of sales is now at 13.3%, down from 14.2% a year ago. These highlights demonstrate our continued focus on execution, which produced another good quarter.

Please move to slide number six, where John Sznewajs, our CFO will take you through our financial and operation review..

Thank you Keith and good morning everyone. If you please turn to slide seven, as Maria mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. We started 2014 with positive momentum from last year.

As Keith mentioned, the first quarter was our 10th consecutive quarter of year-over-year sales and profit growth. Sales increased 5% as we experienced sales growth in all of our segments. Sales in North America were up 3% for the quarter.

We continue to experience growing demand for our new home construction in our Behr modeling products, including big ticket repair remodel products despite the impact of adverse weather in the first quarter. As a reminder, repair remodel activity represents approximately 70% of our total sales.

International sales increased 7% in local currency in the quarter with much of the strength coming from our UK businesses as the housing market there strengthens and core market growth of our international plumbing businesses.

Gross margin expanded approximately 60 basis points, compared to the first quarter of last year to 28% largely due to improvement in plumbing segment.

We delivered strong bottom line performance as our operating income increased 12% in the quarter to $157 million with the operating margins expanding 50 basis points to 8%, the strongest first quarter margin we have posted in several years. EPS was $0.15, an improvement of $0.02 or 15% compared to the first quarter of last year.

Turning to slide eight, we see the components of our operating income improvement in the first quarter. The $21 million increase in net volume mix was principally driven by volume increases we experienced in each reporting segment, largely due to the increased repair remodel activity and favorable mix in our plumbing segment.

This strength was partially offset by negative mix in our Cabinets, Decorative and the Installation segment. Net price commodity improved approximately $12 million for the first quarter, largely driven by Cabinets, Pluming, Installation and other specialty segments.

This improvement was partially offset by an unfavorable price commodity relationship in the decorative architectural segment. This also reflects the year-over-year impact of our metals hedge which was $1 million favorable for the current quarter. We captured $31 million of profit improvements gross in the quarter.

These improvements were more than offset by general inflation and weather related costs, program support and growth initiatives spend in paint and inefficiencies in our Cabinet operations.

For 2014, we expect to generate approximately $150 million of profit improvements growth, similar to what we have observed on average for last five years, largely coming from continuous improvements in supply chain work.

Turning to slide nine, you can see that we delivered solid performance in our plumbing segment with sales increasing 5% in the quarter as our innovative new products drove consumer demand in addition to solid trade and project activity globally.

Strong sales momentum continued in North American, particularly in the trade channel which grew low double-digits percent excluding our recent exit of bathing. This reflects increased repair remodel activity resulting from our continuing investments in the showroom, commercial and multi-family segments of this channel.

We also saw single-digit growth, sales volume growth from our other North American business such as rough plumbing. Our USP and sales gains continued with sales increasing mid-single-digit percentages in local currency led by Hansgrohe with solid demand in our core Central European markets driven by Hansgrohe’s innovative new select product-line.

Operating profit increased 39% or $34million, driven by incremental volume, a favorable mix shift due to increased trade sales and strong productivity and cost control compared to the first quarter of last year.

Turning to slide 10, consumer demand for new product introductions, such as BEHR DECKOVER and strong performance in our Pro business drove a 2% sales increase in the segment. As a result we realized lower single-digit gallon growth in the quarter. Weather clearly affected this business in the quarter.

If we exclude Canada and the weather impacted reasons of the Northern U.S. we experienced high single-digit gallon growth in the rest of the U.S. Liberty Hardware experienced strong growth and contributed to the top and bottom lines of this segment with continued share gains and new programs at retail.

As we continue our legacy of driving superior innovation we are in the process of introducing BEHR MARQUEE interior paint our most advanced interior paint offering exceptional one coat coverage and superior stain resistance.

We started selling MARQUEE Interior in Home Depot stores in the first quarter and will be selling in all Canadian Home Depot stores by early second quarter and we will replace in most U.S. Home Depot stores by the end of September.

We pulled forward $5 million in advertising and merchandising to support this product launch and continue to invest in our international and professional growth initiatives which when coupled with an unfavorable price/commodity relationship and negative mix due to increase Pro sales more than offset Liberty Hardware's improved profit performance.

As a result of the BEHR MARQUEE interior product introduction and several new program wins at Liberty we expect to incur approximately $5 million of incremental program cost in the second quarter.

And as we have discussed for more than a year, given our high ROA growth initiatives to grow gallons with the Pro and internationally we continue to anticipate that annual operating margins for the segment will be in the high-teens compared to the historic margins.

Turning to slide 11, with the environment and market dynamics for Cabinetry are gradually improving in both the remodeling and new home construction segments. And we are pleased with the market's reaction to our new product introductions. We expect the completion of our major Merillat new product roll-out in the second quarter.

Management continues to drive the stabilization of this business. We generated price realization and improved sales to our dealer in building accounts in the quarter. However, we experience reduced sales to the retail channel. As a result North American Cabinet sales were flat in the quarter.

Our bottom line in the quarter benefited from our continued discipline around pricing and promotion activity. This benefit was more than offset by negative mix due to improved builder sales and weather related inefficiencies. In addition, we incurred IT cost as we finalize this standardization of our systems.

Inefficiencies as we transfer production from the announced plant closure last year and elevated costs associated with quality to ensure our new products meet customer expectations.

In the second quarter we will incur approximately $4 million to $5 million of costs to complete the implementation of the ERP system with our final manufacturing facility. We remain confident in our management and committed to long-term success of this business.

Turning to slide 12, segment sales growth of 7% was driven by strong results in our distribution, residential new construction, and commercial channels, delayed home building activity due to poor weather conditions in parts of the county dampened our growth in the quarter.

This said we experienced robust growth in those regions of the country not impacted by weather. Additionally the increase in multifamily starts as a percentage of total housing starts contributed to negative mix in the quarter. We anticipate this impact will moderate as the year progresses.

Operating profit was flat in the first quarter as a result of increased volume, profit improvements and a favorable price commodity relationship that was offset by wage inflation, growth investments, the increased multifamily mix in weather and efficiencies.

We added two new locations in the first quarter and anticipate adding additional approximately $13 million greenfield locations in the balance of this year. Turning to slide 13, our other specialty products segment increased 13% driven by mid-teen sales volume growth in our North American window business.

This growth was driven by favorable market conditions and share gains in the western U.S. which yielded strong sales increases in both repair and remodel and new home construction channels.

Our European window business positively contributed to the segments top-line and bottom-line due to the continued success of our small composite door acquisition in the first quarter of last year and improvement in the UK new home construction market.

The segment's operating profit growth in the quarter can be attributed to increased volumes in a favorable price commodity relationship, partially offset by ERP investment. Turning to slide 14, we continue to have strong performance in working capital.

Working capital as a percent of sales came in at 13.3% a 90 basis points improvement from the first quarter of last year. I want to thank the supply chain, operations and finance teams for driving this great outcome.

We ended the quarter with about $1.2 billion of balance sheet liquidity down from the year-end as we are in a traditional cash burn cycle in the first part of the year. So with that I'll turn the call back over to Keith..

Thank you, John. Please move to slide 16 for a few comments before we go to Q&A. Over the past two months since assuming my new role I've been out meeting with the investment community as well as many of our large retail dealer and home builder customers. I'll continue to do so.

As I've said before I was extremely involved in developing the strategy here at Masco in my role as Group President and I do not have any major strategic changes to announce at this time. I am committed to value creation and will focus on execution to drive productivity in our cost structure, our innovation pipeline and market share.

As we anticipate -- we anticipate that the positive trends in new home construction and home improvement in North America and Europe will continue. Having said that there are macroeconomic factors that could be a headwind for us going forward, including the pace of the global economic recovery.

Our size, scale and relationships with our customers allow us to rapidly respond to increased demand in new home construction and repair and remodel. We're excited about the future and we believe that Masco is well positioned for growth. With that the lines will be open for questions.

Operator?.

(Operator Instructions). Your first question comes from the line of Eric Bosshard with Cleveland Research. Your line is open..

Good morning. Two things.

Thanks for the color on trends for the quarter, just curious you talked about how ex-weather the results were and wondering if you can give us some sense of as we've gotten into April if that has further moderated and even if you could give us some further sense on what March might have looked like so we can start to dimensionalize what the impact of weather has been on the business and what it looks like.

.

Certainly Eric. It's John. So if you think about Q1 being up 5% for the quarter we were up pretty much mid-single digits for each month of the quarter. Here in early in April now it's a little bit early for us because we still have about a week in the month.

Things look like we're up low to mid-single digits that said I think there is a couple of things impacting it. Obviously Easter was in the tail end of March last year. We had Easter here in the middle of the month. Now also I'd say we are up against a pretty tough comp as we were up mid-teens percentages in April of last year.

So we are seeing some moderation or some improvement in our new construction related activities as we've seem to be gaining some momentum in those businesses. That said I think like lot of other folks we generally think that demand was deferred out of the first quarter and will be made up in subsequent quarters. .

Right, secondly cabinet and install profit improvement in 2013 was quite impressive in this first quarter looks like took a pause in that, just curious as we think about 2014 if we should continue to see meaningful recovery in those or if last year was the big progress and now the progress in 2014 is more moderate just trying to put that in context.

.

Yeah I will take a little bit on install and I'll turn it over to Keith to talk about cabin. So the weather was a pretty significant impact on the first quarter. To give you kind of a sense we had 750 branch days closed in the first quarter due to weather on Q1.

So if you think about that we have 190 branches that means each of our branches on average was closed for four days during the first quarter.

So that gives you a pretty dramatic sense, so as things begin to improve we do think that the incremental margins that we experienced, that we should experience in that 25% range may be little bit north of that should play out as the year rolls out here in 2014. I'll ask Keith to answer that little bit on cabinet..

Eric the team that was executing against the solid plan that's as a phased approach a big part of that plan is the stabilization phase we're working to optimize our supply chain, our manufacturing footprint and standardized IT infrastructure across the network and we encourage some cost in the quarter to do that as we discussed, the closure of our Jackson facility in Ohio, the implementation of our IT system in our Mount Jackson, Virginia plant.

And the weather as we said was a substantial headwind for us in the quarter. We have taken down significant number of production days.

We took down production shifts we had production shifts that were interrupted and had to be cancelled due to incremental weather and of course throughout the quarter we had many cases where it was difficult for people to make it to work. So obviously we don't anticipate that to continue through the year. We remain confident in this business.

Going forward we continue to work to drive it towards the 10% operating income business at 1.5 million starts with commensurate repair and remodeling left. The team is in place, is actively listening to the customer and closing the gap between what we need to serve them and where we're at and we feel good about it looking forward. .

Okay. Thank you. .

Your next question comes from the line of Robert C. Wetenhall with RBC Capital Markets. Your line is open..

Hey good morning. Was hoping I could get some clarification, you had mentioned $150 million of improvement and I was just trying to see if you could provide us with some granularity on where that's coming from and is that just strictly internal cost savings away from price commodity and mix. Thank you. .

Bob that is internal cost savings that we're driving to our total cost productivity initiatives. It ranges from our plus 21 program in Europe that is over in Hansgrohe to drive cost and supply chain and new product development processes.

Certainly material is a big component of that as we drive value engineering to better serve our customer at the appropriate price points. It includes commodity strategies and of course the Masco business system focused on labor productivity, lean manufacturing and optimizing our footprint.

So it really is a cost reduction initiatives that goes across the broad spectrum of the business..

And just in terms of that how should we think about that flowing through across the year?.

Yeah Bob it's John. The way I would think about it, as you think about the last couple of years I think we realized about $60 million of that benefit net in 2012 and about $90 million net in 2013.

So my guess is that we think we can do about the same that we did last year kind of a somewhere between $15 million and $20 million net improvement over the course of this year..

Got it, thanks very much. .

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

Thanks, good morning. First question I wanted to ask was in the discussion of some of the factors that affected 1Q, I know you mentioned of the slowdown that we have seen in housing starts generally. Just the trend slowdown we have seen since the second half of last year.

So I just wanted to dig into that a little bit and does that mean that you are not seeing it in your business yet because of construction delays? Was it hard to kind of parse that impact because of weather or I guess really the most important part of that question, is that something that's still coming or is it already been factored in?.

This is John. I do think we saw a little bit of that in the first quarter. Now that said, you could just parse the weather impact is Q1. But like the other thing that we are experiencing is extended build times in the new home construction, and site hours extended. Now I think that's partly due to weather.

So what we traditionally been in kind of 90 day lag from housing start announcements we are seeing closer to in certainly in this case is 120 to 150 day lag. So that's definitely impacted. So than we damped the impact of that effect over the course of the first quarter..

Got it. Thanks. And the second question I wanted to ask was on retail channel. In plumbing, you described wholesale and trade channel doing well. And Cabinet, builder and dealers channels doing well and in paint you described obviously some of the weather-related weakness. So all of that kind of points to the retail channels being weaker.

I know you don't provide key retailers sales, but I was wondering if you could just give us color on whether or not the retail side of things was particularly weak this quarter..

This is Keith.

Nishu it's again, it's difficult to parse out the effect of weather with extreme accuracy, but I would say that the weather effect was more pronounced to the retail channel in the net area than the trade channel, where in paint for example professional painters are going to paint independent of weather versus whether there could be more of an effect on the retail consumer.

So I would not characterize that we had significant issues at all in retail versus the trade channel. I think it was more of a weather related..

Okay. Thank you..

You next question comes from line of Dennis McGill with Zelman & Associates. Your line is open..

Hi. Good morning..

Good morning..

I guess the first question is just on the Cabinet segment and the ERP implementation. It's sounds like that, was may be a bigger hurdle than was expected and may be some of this is weather as well but just a loss on the segment accelerating.

Can you just put may be some context around what this means from operational standpoint and how it's affecting the business?.

Team is executing as I said against a turnaround plan that is phased, begun with the rapid turnaround to drive the business to profitability in 2013 and we achieved that. We have moved in and are well along the stabilization phase where we're focused on optimizing the supply chain, manufacturing footprint and the IT platform.

This is the last of our plans that we needed to standardize across the common IT platform. I am a stickler for that. I think we need that as a foundation as we move forward and pivot to the growth phase.

So there will be some carryover costs into the next quarter as we get through the ERP implementation and through the final aspects of the production shift from our Jackson, Ohio closure. So I would expect that a little bit leap over in to Q2 and then that would be it..

Aside from the cost side Keith, this is impacting your ability to ship or revenue in the quarter in anyway?.

We are experiencing some issues with regard to our fill rates but the team is down there and quickly counter measuring it. I would say having done numerous ERP implementations in my carrier that this is what we typically see when we are doing an ERP implementation..

Okay, and then just separately, I was wondering from your perspective the international operations, how much of deceleration or strength that you are seeing in Hansgrohe may be even the Windows business, it is the market starting to show some cyclical recovery versus internal actions in market share..

I think it's a combination of both. In Central Europe, the economy is coming back nicely for us. In the UK the economy is accelerating with some of the government actions that they are doing to support housing as well as the overall economy. So there certainly is a macroeconomic effect that we're seeing. However we're also gaining market share.

Hansgrohe has put significant -- has always and continues to put significant effort into their innovation pipeline. John briefly mentioned in his remarks our select product which is really industry leading and that's taking off tremendously.

We have outstanding sales teams throughout Europe and internationally that are driving market share gains for us. I think the ability to grow like we have in the face of some of the issues in Russia for example and the Ukraine that we're faced with shows that we're both gaining market share as well as enjoying macroeconomic recovery..

Okay, thank you guys. Have a nice weekend..

You too. .

Thanks Dennis. .

Your next question comes from the line of Stephen Kim with Barclays. Your line is open. .

Thanks very much guys. First question I had related to paint. I think you talked about the fact that in Canada you're gone be expensing about an extra, I think you said $5 million in extra cost again in 2Q for the rollout.

I was curious whether or not there would be some sort of loading effect during the next quarter or two which might to some degree offset that. .

So Stephen it's John. The $5 million that we are going into incur is not just in Canada but actually across all both businesses in the segment. So both there as well as the hardware will be incurring cost, there are a fair number of new programs in retail and of course of the last I guess since the beginning of the year.

In terms of the loading effect for the new BEHR MARQUEE there will be a slight loading impact but generally what we are anticipating as the sell-through will be pretty good as well. .

Okay, okay so not much loading effect then. Okay, second question relates to your cabinets business. You've talked about and -- you talked about targeting growth in the dealer channel and that's actually something that we've been hearing a little bit more from a number of players.

And so I guess I'm curious who do intend to -- who do you anticipate that you'll be gaining share form in the dealer channel. Are we primarily going to be talking about private players who are at somewhat higher price points or are you anticipating it would be somebody out that you could characterize in some way for us to be helpful.

And which brands do you anticipate leading that effort or initiative. .

What we're seeing in our dealer -- this is Keith, Stephen. And so what we're seeing in our dealer channel is that it hasn't been so much an issue of losing dealers as it has been share of wallet in those dealers.

And as we intensely listen to what we need to do to serve those dealers particularly in the area of new products introductions and programs and we've responded to that. We're starting to get traction. In terms of the specific brands that we believe we're taking share of that that's difficult for us to tell.

But we're definitely seeing an improvement in our share.

With regards to the brands we're seeing it across both our quality and our craft made by and in terms of dealer with the new home construction increase, with Merillat and the dealers that serve those, we're seeing a nice lift and a share gain as well as at our more our out focus craft made dealers. .

Yes, to add to Keith's comments. I will tell you that on our craft we come out with some products that are deliberately focused on the dealer channel. So that's something that we're definitely going to focus on over the course of 2014..

If you are out at the Kitchen and Bath Show, you saw some of our new products in terms of style that won several awards out there and you also saw the craft made advantage program that we're launching in the dealer channel to give our dealers a differentiated capability.

That was something that we heard from them in our dealer councils and the team at cabinetry responded quickly to get it to them and we're seeing and hearing very nice reports back..

Okay, great. Thanks very much guys. .

Your next question comes from line of George Staphos with Merrill Lynch. Your line is open. .

Thanks everyone, good morning. Congratulation on the progress. First question is on retail trend. If I heard you correctly I think you said or you implied anyway that you have lost maybe some sales momentum and market share in cabinets.

Was that a function of your ERP rollout or is that a function of something else? And within paint I think you said you had low single-digit gallon growth I seem to remember some of the other coating companies this quarter putting up a better percentage growth.

Is that a function again of the differentiation say between DIY and pro relative if to your competitors or do you in fact think you lost some market share there? And then I had a follow on..

Good morning George. On the remodeling side with cabinets, I’ll take that and then John can follow-up with the paint question.

I would say that it's difficult to nail down the market size component of the market share calculation at retail particularly when you are talking about a volatile environment with regards to the weather and as well as the choppy environment I’ll call it with regards to promotion.

We, as part of our turnaround plan in cabinets a fundamental aspect of the plan was to be a leader in correcting what we believed to be unsustainable levels of promotional activities. And we are doing that and it's paying off for us. However that discipline isn’t always followed.

In the quarter when some of our competitors had different approaches to promotions it can result in some temporary share loss and I think that was the key driver or so than any operational issue associated with ERP..

George as I like to on the paint side you know as Keith referenced a little bit earlier we saw very good strength in our pro-oriented business.

That said our DYI business was a little bit soft during the quarter and we do attribute that simply to the fact that it is much more difficult for DIY to paint in some of the adverse conditions that we experienced in the first quarter compared to the pro-painter.

So might there have been a little bit of different, just because of the nature of our customers base I think we are little bit differentiated from some of the other paints companies that have reported prior to us. .

Okay.

And then the second question in realizing it's a little bit like a world peace question, you know a lot of the other companies that we track, especially in wood products and your [wood] has seen really apparently nice pick up in April versus first quarter it sounds like your business in total has seen some sequential deceleration, recognizing that you have a very difficult comparison.

What do you attribute your recent percentage changes versus the year ago performance relative to rest of the market it appear that you’ve lost little bit of salesmen. Do you think it's just a comp or you think there is something else going on? Thank you guys good luck in the quarter..

Yes, thanks George. Yeah I think it is more of a comp at this point. And I think things are as weather improves we are seeing slow momentum build across our businesses and so I think it's more of a comp than anything else..

Your next question comes from the line of Adam Rudiger from Wells Fargo. Your line is open..

Good morning.

We noticed that you guys are getting back into the [marque] cabinet business so just wondering if you could discuss some of the thought processes behind that?.

Good morning Adam this is Keith. Our RTA product is a niche product that we’ve launched for the trade. It's a product that is sold through to our distributors. It could be assembled by the distributors or assembled by us. But it's, as I said a niche product that's meeting a specific need mainly from multi-family and our distribution channel.

It's not a retail product and we are just getting started..

Okay. So it's not like the [inaudible] it's a different. .

Yes it's a completely different product model and target customer. .

Okay. And then moving to paint for a second if you look at the gallon growth that you saw and you look at the mix from MARQUEE versus the other BEHR products. Is your sense that the MARQUEE is a kind of an additive product or is it something that somewhat cannibalizes the lower price point BEHR products.

And then when you think about the opportunity based upon your experience with the exterior what do you think the opportunity is on the interior side for additive growth?.

Yeah, I think this is good opportunity and this is actually a new price point for both us and the retail channel partner. Because the retail price points will be north of $40. So really don’t see significant cannibalization occurring rather appealing to a new set of consumer for ourselves and our channel partner.

So would you think it is finally additive you know we recognize it's not going to be a main line product just given the price points that it plays at but it should be a nice move up product for those that choose to do so. .

Okay. Thanks for taking my questions. .

Your next question comes from the line of Phil Ng with Jefferies. Your line is open. .

Okay. Well this is actually [Steve]. Europe has actually turned and bounced back of it.

How should we think about the operating leverage of that business?.

So the operating leverage in our European business is actually quite similar to all of our businesses because it's -- we've got cabinets and our plumbing businesses over there. So in general we see about 30% drop down in our European businesses as compared to our installation business here.

So as you think about that, that's actually very consistent both domestically here and as-well-as internationally. .

Got you. And in terms of the margin profile I understand last year in the back half it was little more heavier in terms of promotional and advertising spend and it seems like there was a bigger spend this first half as well.

So when we think about margin profile in the back half should we expect it to expand in the back half for decorative?.

Are you speaking specifically about decorative?.

That's right. Decorative. .

Okay. Yeah, so we did actually pull forward some advertising out of Q2 and into Q1 to support this MARQUEE launch. That said I also referenced today that we will have about $5 million of incremental expense in Q2 compared to last year's second quarter because of some new program and product wins.

That -- mind it was done in the second quarter though and due to the fact that we were winning new business and we will be happy to incur additional costs like that in future periods to the extent we're getting shelf space with new product wins and program wins.

As it relates to the back half of the year I think our advertising spend will be fairly consistent. We did indicate earlier that we will have about -- we probably have about $10 million incremental program costs in this year versus last year. .

Okay, when you say fairly consistent, as in fairly consistent to the first half of it or fairly consistent to last year?.

I am sorry. Fairly consistent to what we said earlier about the $10 million of incremental spend. .

Okay. All right. Thanks guys. .

Your next question comes from the line of Keith Hughes with SunTrust. Your line is open. .

Hi. My question is in the installations segment we've seen some inflation in installation last couple of quarters just were kind of impacted, back half in the numbers.

And as you out to next several quarters in installation we've all seen the slowdown in starts, how is that going to play out do you think in your numbers through the year?.

Hey, Keith it's John. Yeah we've seen some price inflation and installation prices have increased over the course of the last several quarters. But as said -- as I indicated in my prepared remarks we did have a favorable price commodity relationship in that segment in Q1.

So while we try to always improve our internal cost structure through productivity improvement and other means we were also in a position to pass it on price. To your second question about the slowdown in starts, as I mentioned earlier we're seeing an elongated bill cycle right now. So that will have a low burden impact on us in future periods.

So as I said what we're seeing right now is that our bid rates are building and those generally turn into activity several months out. So I think as the weather breaks here in North America then we should see some consistency -- some consistent growth. With that said we're up against some pretty difficult comps.

Now we've some pretty strong comps in that segment throughout 2013. So if housing starts aren't as -- don't increase as rapidly as they did last year it will have a little bit dampening impact on the growth rate in the segment. .

So if we start activity meaningfully pick up in next quarter, is the lag is still 30 days -- 90 days, 120 days something like before you would see activity or what do you think the lag is right now?.

Yeah. I'd say there is still a little bit of tightness on the front end of the build cycle, Keith so I would tell you that we're seeing kind of a 120 to 150 days right now. Also remember Keith with the high multifamily mix that we're experiencing.

38% of the total starts in the quarter which is up significantly on average it's been closer to 15% over the last 10 years. So that is definitely an impact on the build cycle..

Okay, thank you. .

Your next question comes from the line of Garik Shmois with Longbow Research. Your line is open. .

Good morning.

Just a follow-up question on the international growth you called out an improving UK market but how much of the international improvement in the quarter was weather, Europe was really dry, was there any portfolio effect at all?.

Clearly as harsh a winter as we had here in North America they had a light winter there and I think that was an effect. But I will go back to my earlier comments on the new product introduction, how the customers responding to those and the job that Hansgrohe is doing with regard to share gain. .

Yeah we don’t think there was much of a portfolio effect out of Q2 or any subsequent quarter into the first quarter. We continue to see good strength in our European operations. .

Okay. Thank you. And then just a follow up question and Keith, you talked about high single-digit growth in non-weather hit markets in the first quarter.

Do you guys think that's a more representative growth figure for R&R and gallon growth over the course of the year as weather improves in other parts of the country?.

Typically we see kind of mid-single-digit gallon growth over the course of the year. There are periods of -- it's little bit more robust particularly every second and third quarters tend to be the painting season. But we generally think of this business is as a GDP plus 1% or 2% type business. .

Okay. Thank you. .

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

Good morning it's actually Susan for David.

You guys have discussed the improving repair remodel trend that you are continuing to see and I just wanted to get a better sense of what you're seeing in terms of some of the consumer behavior there? Are you seeing any more willingness to perhaps move out in terms of price point or may be some higher tickets finishes things along that line. .

Susan this is Keith we are in fact seeing that. You can see that with in segment where there is a move up to a higher content and product, we're seeing good volume in our painted product in cabinetry for example. We're also seeing that across our other businesses, our window business is doing very well and that's considered a big ticket item.

Our spa business which is a luxury, certainly bigger ticket item is moving along nicely. So I would say yes we are seeing a movement up in terms of the consumer that's balanced of course by mix shifts that we see as new construction is growing at a rapid, more rapid pace than the base business and that tends to be a little bit more [de-contented].

So the whole issue of big ticket is a tale of two cities and move up in the confidence in the consumer for sure but also a mix shift as new construction and multi-family become a bigger part of the mix. .

Okay. And then your working capital was really impressive this quarter, especially given all the inefficiencies that you guys face that you've discussed do you expect that, that kind of progress will continue were there any sort of lag effects that we should look for there, how do you think about that trending through the year. .

This is -- as you probably have observed we've done a very good job on working capital for the last several years. And as [inaudible] got some very specific initiatives targeting our working capital. So we've done a great job on receivables and payables, and we continue to focus on inventory we think there is some progress to be made there.

So we finished 2013 at record low levels of working capital and we continue to make progress. I should also make you aware that everyone in the organization is incentivized though the variable comp on working capital as well, so that will also help keep the guys focused on making progress on that metric. .

Okay. Perfect, thank you. .

Your next question comes from the line of Michael Dahl with Credit Suisse. Your line is open..

Appreciate the difficulty parsing the weather impact here but I was hoping just from a margin perspective some of the things that you pointed out as far as higher fuel cost and some of the delays could you bucket those out and quantify how much of an impact we saw on margins for the quarter?.

Mike it's John. We took a really hard look at that. It is very, very difficult to give you anything with any amount of vigor behind it.

As Keith mentioned in his remarks we had significant number of closures of faculties, not only as I mentioned in the Installation segment but across our organization, inefficiencies on deliveries, inefficiencies on job site. So you know I mean it’s very difficult to quantify that.

I wish we could give you a pinpoint number, it’s just not practical to do so..

Got it, okay. And then as far as just seeing the performance in 1Q relative to your expectations, I guess does that change the way you would think about incremental margin targets for the full year here or should we still expect by year-end that you are back at the normal numbers that you talk about..

So, we are not -- this is this is Keith, Mike. We are not changing our look out or drop down margin on the incremental volume..

Okay, thank you..

Your next question comes from the line of Stephen East with ISI Group. Your line is open..

Keith, two questions on your units. One, your plumbing margin much better than we had talked in the past what you all thought was probably the run-rate. Do you think that’s sustainable as we go through this year and what’s happening with Europe in the recovery et cetera.

And then on the installation you all had talked about three factors really affecting profits.

Would you mind just -- John, maybe this is for you sort of bucketing those and rank ordering and you know how permanent and why you think multifamily dissipates in the second quarter?.

On the plumbing side Stephen we had a lot of goods guys going in our direction for the margin. Certainly the European growth that we saw, which is the higher end part of the segment principally Hansgrohe goes with it higher margins. We had a favorable margin mix shift to the trade, the trade tends to be a higher margin for us then other channels.

And then we also had a real solid performance in total cost productivity in that segment. As I alluded to you earlier, the plus 21 improvement process at Hansgrohe, the work that Rick Marshall and the team and doing at down Delta with total cost productivity so, we had a lot of thing going in our direction.

We are very happy with that and we like the performance.

Going forward when you look at where we are expanding with the accelerated international growth, which requires investments both in terms of pricing as well as infrastructure and you look at Delta Faucet planned expansion into adjacent categories and continuing to grow what we are doing in bathing and adjacent bath categories those are clearly lower margin products.

So I think when you think about the long term in this is segment as we said in the range of 11% to 12%, 12% to 13% rather with some potential upside, I think is good way to think about it..

Okay..

And Steve on the installation side. You know a couple of things there, obviously you know we talked about wage inflation, some growth investments and mix and weather inefficiencies.

You know clearly weather inefficiencies is a tough one to gauge, but with our 750 branch closures you know that’s clearly had a pretty significant impact on us in the quarter. Wage inflation wasn’t that much.

I would tell that of our four the smallest piece of it growth investments are probably the highest piece followed by increased multi-family mix being the second one. You know weather inefficiency is tough to gauge.

You know as it relates to your second question about why we think the multi-family will moderate as the year develops we got to look at the ways the starts are coming in and it looks like if you roll back the phases where multifamily starts work over the last couple of quarters and we see how it influenced the first quarter, we start to see more single family activity as a percent of total start, just hit the numbers and so, that’s why we think it will dissipate a little bit..

Okay, thanks. It’s very helpful. And then Keith, I thought the slide you had about 2014 priorities is extremely helpful there. And if you could touch on a couple of things in it; one, how you grow share and you talk about some about your strategy for international, I don’t know if you have any more to add on that.

And then your ERP that you have referenced a lot.

How much more do you have to go on that and what type of size should we expect coming through on that?.

In terms of the share growth it’s really about understanding our customer and closing the gap between what we provide and what they need as productively as we can. A big weapon in our arsenal for doing that is our strong brands, our innovation pipeline.

So principally our share comes through customer intimacy and then the leverage of brands and innovation.

With regards to international share, when you look across the landscape, particularly in the international faucets, you see significant wide space that we have for the Hansgrohe brand and the principal share driver on that is the good people that we have out in the markets in our sales infrastructure and the experience that we have, that comes from selling in over 135 countries.

But it also comes in developing a product assortment that is targeted for regional expansion. We also have international activity and growth that we're targeting with our BEHR brand and Delta Faucet as well. So that gives you a little bit of flavor on why we feel good about international. .

Okay. Thank you. .

That would have to be our last caller; we have to wrap up now. .

Okay thanks. I want thank everybody. I appreciate all the good questions and the interest and look forward to talking to many of you in May at the JPM conference. .

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