Irene Tasi - Director of Investor Relations Keith Allman - President, Chief Executive Officer, Director John Sznewajs - Chief Financial Officer, Vice President, Treasurer.

Keith Hughes - SunTrust Stephen Kim - Barclays Garik Shmois - Longbow Research Eli Hackel - Goldman Sachs George Staphos - Bank of America Dennis McGill - Zelman & Associates Michael Rehaut - JPMorgan Adam Baumgarten - Macquarie Bob Wetenhall - RBC Capital Markets Nick Coppola - Thompson Research Group Mike Dahl - Credit Suisse David Goldberg - UBS Philip Ng - Jefferies.

Good morning, ladies and gentlemen. Welcome to the Masco Corporation's second quarter 2014 earnings conference call. My name is Sean and I will be your conference 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 Director of Investor Relations, Ms. Irene Tasi. Irene, you may begin your call..

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

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

If we are unable to take your question during the call, please feel free to contact me directly at 313 792-5500. I would 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 have described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and Form 10-Q that we filed with the Securities and Exchange Commission.

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

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

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

Thank you, Irene, and good morning, everyone, and thanks to all of you for joining us today for Masco's second quarter 2014 earnings call. Please flip to with slide number four. As I reflect upon the results of the past six months, I am pleased with our team's execution.

Despite tougher end-markets, our revenue has increased 5% and our profit margin has improved by 100 basis points, year-to-date. The 31% incremental margin we have experienced in the first half of the year is a testament to the effectiveness of our strategies, our team's execution and our portfolio's strong operating leverage.

In the second quarter of 2014, we continued to grow our business and enhance our profitability. We increased sales 5% and with solid execution expanded our operating margins by 140 basis points to 11%. This performance was primarily driven by our plumbing, decorative architectural and installation segments.

As a result of this performance, we have achieved 39% growth and EPS to $0.32 per common share for the quarter. Repair and remodel, which is 70% of our business, continues to be strong for us as our new products and program wins drove sales in the quarter. Our actions to drive improved mix and increased share are paying off.

We work diligently on new product development, improving relationships with key influencers in our markets and pricing. The result of this are particularly evident in plumbing and windows, where we experienced favorable mix, primarily in the trade and showroom channels, as we see consumers move up the price continuum in these categories.

We anticipate the demand for repair and remodel will grow at a steady rate. Despite the lower than expected growth in new home construction starts, our installation business delivered solid growth. This was driven by our continued focus on driving share and diversifying our business mix in the commercial and retrofit.

We expect this segment to grow with or slightly outpace like new home construction starts in 2014. While we were pleased with our overall sales growth and operating profit margin expansion, we are disappointed with the challenges we faced in the cabinet segment.

We experienced lead time delays and incurred additional expense as a result of problems related to an ERP implementation at one of our component plants. This impact was limited to the Merillat Classic product line, which represents approximately 20% of our overall sales in the segment.

I had personally reached out to our customers and I am aware of how this has impacted their business, as well as ours. This level of performance is not acceptable. We are focused on getting it fixed. We are improving and we will be back to normalized levels by the end of Q3. We had originally expected this business to turn a modest profit this year.

Given the timing of the improvement actions we are implementing, we now expect the cabinet segment will be at a modest loss for 2014. While this is not a major shift at our outlook, it certainly is not a preferred direction.

Nevertheless, we continue to believe that the underlying fundamentals of this business are strong, especially when considering its incremental margins of 35% and the line of sight we have to growth in 2015. Despite the near-term challenges in cabinetry, I am extremely proud of our organization's overall performance in the quarter.

Our plumbing segment, which represents approximately 40% of our company revenue and over 50% of our profit, continues to outperform. Let me give you a few examples. Delta's luxury brand Brizo is up over 35% this quarter and that's on top of a compounded annual growth rate of 25% over the past four years.

Delta continues to hold the number one share of shelf at big-box retailers and Hansgrohe had their best quarter in their 111 years history. Our spa business Watkins, which is the largest manufacturer of spas in North America had a tremendous quarter and has exceeded our expectations.

This momentum leads us to believe that, in the near term, the plumbing segment will continue to deliver mid-teens margins. On a longer-term basis, this segment will normalize to low-teen margins based on our growth plans to further expand internationally and growing adjacent product categories.

In decorative, Behr's commitment to innovation continues to pay off. Behr Marquee Interior has been extremely well received in the marketplace. Demand for Behr Deckover continues to grow and our relationship with our channel partner is strong and we are jointly focused on growing the business.

In other specialty, Milgard the leading window brand in the Western United States, continues to take share and are seeing strong growth with their Montecito and Tuscany product lines.

Our installation services team continues to impress me with their incremental margins of 37% this quarter, and their ability to target and successfully execute growth plans in the retrofit and commercial channels which now compromise approximately 20% of the segment sales. Before turn the call over to John, let me leave you with three takeaways.

Number one, we have executed many important initiatives at cabinets to make the business more competitive. Some of these resulted in cost and service variances that were not planned. This will be behind us in Q3 and the business will be well positioned for 2015.

Number two, we have good momentum, as evidenced by our overall company performance in the second quarter, and this trend is continuing in July, as we see sales for the month of low to mid-single digits and that's on top of a challenging comp from last year.

We are positioned for continued growth in the second half given our industry-leading brands, our robust innovation pipeline and operating leverage.

And finally number three, we remain committed to realizing the full potential of our core businesses, to leveraging opportunities across our portfolio and to actively managing the portfolio to drive long-term shareholder value. With that, please move to slide six, where John Sznewajs, our CFO will take you through our financial operating review..

Thank you, Keith and good morning, everyone. As Irene mentioned, most my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. So as Keith mentioned, consistent execution resulted in another quarter of sales and profit growth.

Sales increased 5% as we recorded sales growth in four our five segments. Sales in North America up 4% in the quarter. As the U.S. economy slowly improves, we continue to experience growing demand for our repair remodel and new home construction products. As a reminder, repair remodel activity represents approximately 70% of our sales.

International sales increased 2% in local currency in the quarter, driven by core market growth of our international plumbing business in our U.K. businesses. Our focus on cost control continues to pay off as SG&A dollars were flat compared to the second quarter of last year.

We delivered strong bottomline performance as operating income increased 21% in the quarter to $249 million with operating margins expanding 130 basis points to 11%.

This represent our best quarterly operating margin since the third quarter of 2007, when sales were $3 billion and reflects the benefits of our cost reductions over the last several years. Our strong operating leverage resulted in the 39% incremental margin in the quarter.

our EPS was $0.32 per share, an improvement of $0.09 or 39% compared to the second quarter of last year. As you turn to slide seven, we see the components of our operating income improvement in the second quarter.

The $18 million increase in volume and mix was principally driven by increased volume in our decorative architectural, plumbing, installation and other specialty segments, largely due to increased repair remodel activity and continued recovery in new home construction. This strength was partially offset by negative volume mix in our cabinet segment.

Net price commodity improved approximately $27 million, largely driven by our cabinets, plumbing, installation and other specialty segments. This improvement was partially offset by an unfavorable relationship in the decorative architectural segment. We captured $43 million of profit improvements gross in the quarter.

These improvements were more than offset by growth initiative spend, program support and inefficiencies in our cabinet operation. For 2014, we still expect to generate $150 million profit improvements gross, similar to what we have delivered on average for each of the last five years, largely coming from continuous improvement in supply chain work.

We are reducing our estimate of the annual net benefit from $15 million to $20 million to approximately $10 million due to the incremental cost we incurred in our cabinet business in the first half of this year. Turn to slide eight.

You can see we delivered another quarter of solid performance in our plumbing segment, as sales increased 6% driven by growth in our trade business, our new product introductions such as Hansgrohe's Select which offers pushbutton control of shower functions and Watkins' Highlife spas, which raises the bar on the luxury spa experience and international projects as Hansgrohe continues to win five-star projects around the globe.

Solid sales momentum continued in North America, particularly in the trade channel. This reflects increased activity resulting from our continued investment in the showroom, commercial and multifamily segments of this channel.

Our European businesses experienced modest gains with sales increasing low single-digit percent in local currency, primarily led by Hansgrohe as the core central European markets continue to recover provide a favorable sales mix.

Operating profit increased 26% or $29 million, driven by incremental volume, a richer mix of products due to increased trade sales, productivity improvements and, to a lesser extent, a favorable price commodity relationship, particularly in Europe. Turn to slide nine.

We see consumer demand for our new product introductions such as Behr Deckover and our newly launched Behr Marquee Interior Paint and a solid performance in our expanding Pro business drove a 5% sales increase in this segment. As a result, we realized mid-single-digit gain on growth in the quarter.

Liberty Hardware had another strong quarter achieving solid top and bottom line growth through continued share gains. Sales in the quarter were favorably impacted by $6 million of loading costs due to program wins in both Behr and Liberty. Marquee Interior, our most advanced interior paint was introduced Q1 in all 180 Canadian Home Depot stores.

It will be in most U.S. Home Depot stores by September. This premium paint product has contributed positive growth to the DIY channel since its introduction. We are confident in its continued success as it offers consumers a premium product that delivers consistent one coat coverage and superior stain resistance.

Operating margins expanded slightly, benefiting from additional volume and the retiming of the $5 million of anticipated advertising and program reset costs from Q2 to the second half of 2014. We are now estimating incremental advertising costs and program reset cost to be approximately $5 million in Q3 and $2 million in the fourth quarter.

These were partially offset by an unfavorable price commodity relationship. Turning to slide 10. Our North American cabinet business experienced a difficult second quarter as sales declined 5%. Sales were down for three reasons.

The first, lower than anticipated sales to builders, second lead time issues as a result of the ERP implementation and third, our disciplined pricing and promotional strategies which led to volume declines and share loss at retail. These were partially offset by improved sales in our dealer channel.

Our bottomline in the quarter was impacted by the lower absorption on the reduced volume, inefficiencies in cost related to the ERP implementation and a less favorable product mix. This was partially offset by pricing and promotion actions.

We estimated that total charges related to the plant closure, ERP implementation and the associated inefficiencies of these initiatives in this segment will aggregate approximately $25 million in 2014, $10 million each in Q1 and Q2 and $5 million in Q3.

As Keith mentioned earlier, this activity will be completed in the third quarter and we will be well positioned for growth going into 2015. Turning to installation. The segment sales growth of 8% was driven by strong results in our distribution into our residential and commercial new construction channels.

While multifamily activity remains strong, we are beginning to see more work from custom builders which positively impacts our revenue.

Operating profit improved $10 million or 125% compared to the second quarter of last year as a result of increased volume and a favorable price commodity relationship that was partially offset by wage inflation and other expenses. Turning to slide 12.

You can see our other specialty products segment sales increased 11%, driven by our North American window business as we experienced continued share expansion in the Western U.S. and a favorable mix shift toward our premium window and door product lines and selling price.

Our European business also positively contributed to segment's top 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 U.K. new home construction market.

The segment's operating profit rose 7% as profit from the increased sales in both North America and international was impacted by growth investments, including the ramp up of new employees to support our continued growth in the Western U.S. and ERP investment. And finally turning to the balance sheet on slide 13.

We continue to have strong performance in working capital. Working capital as a percent of sales came in at 12.9%, a 20 basis points improvement from the second quarter of last year. I want to thank the supply chain, operations and finance teams for driving this great outcome.

We entered the quarter with about $1.4 billion of cash of balance sheet liquidity and our credit metrics continue to improve. We also anticipate that our balance sheet will continue to strengthen in the second half of this year as we expect to reverse the valuation allowance on our deferred tax assets and in either Q3 or Q4 of this year.

So with that, I will turn the call back over to Keith.

Please move to slide 16 for a few comments before we go to Q&A like to talk a little bit of all, I am that approach six months and sell I remain convinced that Masco has tremendous opportunity given our strong brands, our market-leading positions are some operating leverage our capabilities, I developed a plan.

Thanks, John. Please move to slide 15 for a few comments before we go to Q&A. I would like to talk to you a little bit about what matters as we six months in the saddle. I remain convinced that Masco has tremendous opportunity given our strong brands, our market-leading positions, our solid operating leverage and our capable teams.

I developed a plan when I got the job and I have executed against that plan to spin up in to the role. I now have my leadership structure in place and we are continuing to work on our operating model and the strategy process.

This strategy process includes outlining a plan to realize the full potential of our existing businesses, reviewing the role of each of our businesses within the portfolio and refining our capital allocation strategy. Our focus is on building shareholder value in the mid to the long-term.

I anticipate this strategic review will be completed by the end of September and we will keep the investment community apprised of any major shifts.

In conclusion, as I mentioned a few moments ago, we anticipate continued growth in the second half as we continue to grow share of our market-leading brands, drive operational leverage and turn our cabinet business. With that, the lines will be open for questions.

Sean?.

(Operator Instructions). Your first question comes from the line of Keith Hughes from SunTrust. Your line is open..

Thank you. Just a general question on pace of business in the quarter.

You obviously have some nice share wins here in a couple of the divisions, but how would you characterize the repair remodel business and then going to the second half of the year, what are you hearing from your home builder customers in terms of their starts and activity they will be seeing as we end 2014?.

In terms of R&R, I would characterize, it is steady growth but we are seeing some choppiness. The R&A market as we are looking at it is really a little bit different when you look at smaller ticket versus big ticket.

On the small ticket side, we are seeing good activity in our plumbing business, good traffic in that aisle, we are seeing good activity in paint. In the bigger ticket items, we are seen a little bit of a drag when we look at our cabinet business.

We think that's driven by the fact that there is a little bit of an affluent versus less affluent play in there in the big-ticket. What I mean by that is if you look at our spa business which is more of an affluent purchase, more of an affluent buy, that's doing quite well. But when you look at cabinets, we are seeing a little bit of a drag.

I think that's in part because that's hooked in with typically other purchases that go with a kitchen remodel, for example, where there would be flooring, there would be appliances. That sort of thing. So I think it's a big-ticket, little smaller ticket story. On the big ticket side, a little bit of drag that we are seeing in our cabinets.

In terms of the second half on the newco side, the customers that I am talking to are a little bit tentative but we are seeing and believe that we will have new construction starts coming in a range of $1 million, slightly above $1 million, right in there with (inaudible)..

Just one quick follow-up within the paint business.

The margin, the cost structure you discussed in the second quarter, do you expect that to continue through the rest of the year, where you get price relief?.

Keith, we really didn't experience any cost pressures in the second quarter.

What we did say is that we retimed some advertising that we expected to spend in the second quarter to the back of the year and that will be, so we anticipated $5 million that did not materialize this year so that was a positive impact to the margins in the second quarter and will have a little bit of a drag in the second quarter, again about $5 million in the third quarter and about $2 million or so in the fourth quarter..

My mistake..

We see this business as a high-teens business..

Okay, thank you..

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

Thanks very much, guys. Great, well good results. Question I had about your longer-term plumbing commentary about mid-teens margins near-term to longer-term, more like lower teen margins.

I am curious as to how much of that will be driven, in your view, by Hansgrohe versus the other brands? If you have any visibility? Will that primarily be driven by Hansgrohe? And if you can give us some sense for how you think about what the incremental margin will be for these new initiatives, if you sort of just try to separate out what you are planning and how you are evaluating future adjacency opportunities from an incremental margin perspective, that will be great..

We are seeing the improved margins really spread across the segment. Certainly, Hansgrohe is a factor in there as we have seen core European business grow at a quicker rate than the remaining chunk of the business. So that gives us some mix favorability.

We also have a very robust cost out program called Plus 21 that we drive and have driven for years over at Hansgrohe. So they are contributing stateside here with Delta. Our trade volume is very solid for us.

We have had a concerted effort, our peer-to-peer is really where we have focused our new product introduction on that showroom and working with our relationship with the influencers and designers in those showrooms. And that's, we have got good momentum and productivity.

And we also have a very solid cost out program that I talked about last quarter down at Delta. On the spa side, we talked about the volume that we are experiencing our spa business which is also in the plumbing segment and of course with that comes some nice overhead leverage.

So really, the improvements, I would say is spread across the whole segment. It is going well. In terms of the incremental margins on expansion, as we drive globalization in our plumbing segment and we tweak our assortments to be more geographically centered, just because of the nature of that business, it tends to be a lower margin.

When you look here in North America, at the entire plumbing market and where we are growing with regards to adjacent products to expand into the bathroom, those tend to be lower margins as well. Typically, our highly decorative chromed products, if you will, tend to be higher margin.

So I think when you look at both the international expansion and the assortment requirements to drive that, and you look at our category expansion here in North America, both of those initiatives tend to be lower than the faucet and shower margins, which tend to be the highest in the category..

Great.

I guess what I am trying to figure out is, obviously you are not going to have a lower margin in plumbing longer-term if you are not going to have an attended [ph] increase in the topline and I am just trying to figure out if there is some sort of rule of thumb that we can be thinking about in terms of how much your topline might grow for any given decrement in the margins? I assume you look at the opportunities on a return on investment basis.

So I think you can give us some parameters around how we should be thinking about that kind of give-and-take between topline and margin? That's really what I was hoping for..

Yes, Stephen, I don't think we are prepared to discuss that just yet. These are relatively new initiatives. They are just getting out of the ground. So, clearly as Keith mentioned, particularly the adjacent products here in North America will have a lower margin. We will give you a better guidance on that as those things mature..

Okay, that's fine. The second question relates to your comment about July. Obviously, July had a pretty tough comp.

You were up low double digits, I believe, last year in July and you indicated, I think you are going to be up, correct me if I am wrong, did you say low single digits in July? I guess I was curious are you seeing any kind of acceleration in the business here in 3Q?.

We were up mid-teens last year, just to clarify that..

Okay..

In the month of July..

July, right. In terms of the overall demand, as I said, we are seeing steady growth in R&R. And I talked little bit detail about how that is choppy when you look at big ticket versus smaller ticket and that affluent buyer and some of the dynamics around that.

New construction, while certainly it's below what we anticipated, at the beginning of the year, it is still up and we are targeting somewhere slightly north of $1 million starts..

Okay, great. Thank you very much, guys..

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

Hi. Thank you. I just wondered if you could talk a little bit about the operating leverage in the install business in the quarter and maybe break out the benefits that you had called out? I think there were some net pricing benefits, some of that was some of the leverage associated with the commercial business.

And just wondering if we can get a better understanding of what drove the incrementals in install in the second quarter and how sustainable the mid-30s level is moving forward?.

Sure, Garik, it's John. A big part of that operating leverage in the second quarter was really driven by volume and the operational improvements that the team down at Daytona has implemented in the organization down there. So that was probably the biggest chunk of it. A much smaller piece of that would be the pricing that we mentioned.

As I also mentioned, we did have some offsets to that as we did experience some wage inflation. We are investing in labor. You probably have heard through your contacts that labor is our target. There is labor tightness around the United States. And we want to make certain that we have labor as we enter the busy third quarter for this business.

And so there will be a little bit of cost ahead of sales on the upfront which probably detract from the margin a little bit..

Okay. Thanks for that. And just switching to cabinets for a second. Just wondered if you could provide a little more context around your outlook for the full year of a modest loss, given that we have had about $70 million of loss in the first half of the year, you have another $5 million of the European headwinds in the third quarter.

It would, I guess, mean a pretty big snap back in the fourth quarter with respect to profitability to get to this modest loss.

Just wondering if you could provide a little bit more color on maybe what the guidance means and how confident you are in that business returning to profitability, maybe as early as the fourth quarter?.

I would peg the loss in the range of $5 million to $10 million. In terms of my confidence in this business, I remain confident for really three fundamental reasons. Number one, over the last 18 months, we have really driven significant improvements in the competitiveness of this business from the supply chain to our product development processes.

We have worked a lot on our business model and some of the sub-segments and countertops and builder direct. Our quality has improved and we have driven a substantial standardization across our IT platforms, which is important and it might be critical for our competitiveness going forward.

Unfortunately, those came with some unplanned costs and service variances. We are working very hard to get those fixed. We are improving. It will be behind us in Q3 and we will be positioned going into next year to deliver in this business..

Okay. Thank you..

Your next question comes from line of Eli Hackel from Goldman Sachs. Your like is open..

Thanks. Good morning. I just wanted to go back to just demand for a second right now. Just maybe a little bit more detail about, you talked to a people, how do you describe the U.S. consumer right now? You are always talking about big small ticket. Seeing a lot of mixed results across this space. Maybe your business seems a little bit better than average.

Do you think the consumer is getting better? And what would it take to drive more buyers on the bigger ticket side? Is the economy strengthening at a pace where that's going to come back in the near-term? Or is that really pushed a little further out?.

Again, I would look at it is as R&R and new construction and break that down in that way. On the R&R side, the affluent buyers is showing up. They are interested in spending, and as I mentioned before, we are seeing that with empirical data, particularly when look at a spot purchase, for example.

Certainly, our initiatives are driving share, but we are also seen the consumer show up there. And a little more, in the price conscious consumer, we are seeing a little bit more tentativeness. On the new construction side, we have unemployment at six, six-and-half year low. Consumer confidence at a six-year high.

I think it gets back to credit availability. That's a big driver in getting some real wage growth. I think as that happens, when you look at the position of housing stock in terms of available housing versus the population that needs it, I think that's in a good place.

It's really about credit, that first-time buyer starting to move out into new homes..

And then just maybe if you could, just quickly following up on that mid to lower end consumer? Just want to make sure, do you think that that lower end consumer is still struggling to some degree? Are you seeing any an improvement in that lower end buyer? Or is it really, so far, mostly being driven by the higher income buyers? On R&R side?.

In the low ticket, we are seeing good traffic. That's a good chunk of our business when you look at repair and remodeling on the plumbing side, particularly with faucets and showerheads, when you look at paint. So we are seeing the traffic.

And I think that's the space of the strength of our portfolio where we are mixed across everything from a high-value smaller ticket Behr paint all the way up to a luxury spa and a electric shower systems with Hansgrohe. So I would say that the bigger ticket part of the continuum, we are seen a little bit of drag on that less affluent buyer..

Got it, and then just second one. Just wanted to touch on Europe quickly. Clearly, your international result have been pretty strong, somewhat helped by currency. Can you just talk about your outlook for Europe in the back half of the year? Thank you..

Yes, Eli, I think Europe continues to look continuously pretty steady. We have seen very good progress each of the last four quarters or so in Europe. And we don't expect any acceleration in demand, but just consistent growth as we have experienced over the last couple of quarters..

We have a solid infrastructure in place with Hansgrohe across multiple geographies, north of 130 markets. There is certainly political risk. Obviously, we all see what's in the news. There's elections on in Brazil. These is a number of things that are going around the globe.

But when you really look at where Hansgrohe is positioned with the brand, the work we are doing on our international assortment, we feel good for steady growth outside the U.S..

Great. Thank you very much..

Your next question comes from the line of George Staphos from Bank of America. Your line is open..

Thanks, everyone. Good morning. Thanks for all the detail. I guess I had two questions.

First of all, within the cabinets business, Keith, what do you think will ultimately reverse the share trend that you are seeing within retail and also the builder channel? Will they, from what you are seeing, normally dissipate or is there other actions you are going to need to take to reverse what has been the declining share there? And then switching gears in decorative architectural and paints in particular, can you comment at all on the impact you are seeing from perhaps other coating companies now targeting the Pro initiatives as well? Thank you..

In terms of the actions to drive market share in cabs, we have been working a lot on our fundamentals, as I talked about, in terms of our product development process or standardizing our ERP systems. We had five or six ERP systems across cabinets. Now we are down to two. So we are focused on our KraftMaid line and our Merillat line.

So a lot of the work for share gains in terms of the core capabilities as well as the new products that we have introduced already in play and are paying off where we are seeing in our dealer channel in particular. We are working to have, as I announced, a lead time reduction on our KraftMaid line. We think that's critical to drive share.

We have implemented a new finishing system which, I believe, is going to raise the bar in the industry in terms of quality. That's implemented and we are running now, and that's a beautiful product. So that will help drive share.

On the retail side, we remain committed to our approach on promotions in terms of being strategic and utilizing them carefully to drive and get to that sweet spot for both revenue and value to the consumer. But we will continue to tweak that. I think the timing of some of our actions versus the competition has lead us to some share loss.

We are working with our designers and our influencers to understand their needs and develop better relationships with them. So I think there is a number of things that we are working on now.

And as we get more specific results, we will share with them but we are moving, and I think that's evidenced in what we have done in the dealer channel, which was our initial focus..

Keith, I know it's hard to predict, but from a timing standpoint, would you expect the share erosion to be done by the fourth quarter or first quarter?.

Yes, I think we are beginning to chip away at that. Now we are gaining share in our dealer channel in terms of retail. As we tweak our promotional strategies and continue to drive the improvements there, we will see that. This is a long purchase cycles. So it is going to take some time. But we are making momentum. We have momentum..

Okay..

George, you had a question on paint?.

Yes..

With regard to how we are our doing in the Pro? We are focused on the Pro and we are doing that in concert with the Home Depot. This is obviously an important segment. When we look at our intel and the studies that we do and then it's corroborated with outside studies, that Behr paint brand, that Behr brand is strong with the Pro.

Obviously strong in R&R, but it is also strong in the Pro. We also have good Pro traffic at the Home Depot. So it's an important growth initiative for us. We have not lost shelf space at the Home Depot and we are continuing to be successful in this Pro business.

It's outgrowing, clearly outgrowing, the base Pro business and we have a got a good value proposition. And we are working to make it better. Now it is not going to be -- the margins are not going to be as high as our base repair and remodeling book of business, but it is good return on assets for us. We have a good plan to work with.

And most importantly, we are in concert with our channel partner. It doesn't surprise me that our competition would see our success and work to countermeasure it..

Yes, George, we are investing heavily behind this business. As you may know, we have about now 150 Pro sales reps out in the field, calling on Pro customers to drive this business. So we feel very confident in the growth that we have been experiencing and the fact that have we got a good runway in front of us as well..

Okay. Thank you for the thoughts. Good luck on the quarter..

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

Good morning..

Good morning, Dennis..

Keith, I guess my first question just relates to, on the cabinet issue at Merillat.

Would that be in resolve by the end of this quarter? How will that impact the revenue side of the equation? Because I know you expect, you mentioned lead times are extended and backlogs are extended, so if that's fully resolved, does that mean customers are back to normal lead times? And if so, does that mean that you get almost a revenue catch up in the third quarter, as you satisfy these orders that are in backlog?.

I have reached out, Dennis, to many of our customers and I understand the impact that our performance has had on them. We have worked hard to develop the industry-leading lead time and fill rates coming out of our supply chain, and our channel partners come to rely on that.

And when we fail to deliver on that process, on that promise, it not good on their business and certainly it is not good on our business. It has affected demand and it is going to take some time as we get our lead times back to normal levels to reestablish our confidence and to get back. So I fully intend that we will get there in terms of the timing.

We are committed to get this stabilized in Q3 and then being working on all eight cylinders as we go into next year..

Okay. I realize that..

Related to your question regarding a third quarter catch up in sales as result of working through the backlog. We do expect a little bit of catch up here to hit the third quarter, but nothing really material..

Okay, and then second question, it looks as though corporate expense was at least lower than what we were modeling. It seems to be favorable relative to last year.

How do you think about that run rate going forward? And maybe if you could just give some examples of where some of savings might be coming from there?.

Dennis, I think the compares is challenging more so than we had some one-time events occur last year. And I think what you are seeing in the second quarter of 2014 is more indicative of a run rate. So you may recall, we had a retirement of a senior executive. A senior executive hit 65 and that caused some stock comp expense last year..

Okay. Thank you..

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open..

Thanks. Good morning, everyone. Nice quarter..

Thanks, Mike..

First question, just to go back to plumbing for a moment and appreciate the detail there.

Talking about mid-teens margins for the near term, if you could give us a sense of what you mean by near-term? If that's the second half of 2014 or would it likely go into 2015? And what's kind of biggest, you mentioned a number of positive influences on the margin, what would you attribute the biggest one or two drivers to the higher levels that you are seeing right now?.

Mike, I would say, the mid-teens through 2015 is something that would be good to model that range. In terms of the key drivers, boy, it's a combination of many things, but I think to break it down, I would say new products and listening to the customer and driving products, in a way that drive favorable mix.

Having said that, we have also put a fair amount of attention into more of the opening price point as well. So it's a combination. But I would say new product introduction mix and then our cost out program..

Great. Also the July number was pretty impressive, as discussed earlier, in terms of against a tougher comp.

With the comps easing in the next couple of months of the quarter, if you could just remind us what those were? And would you expect as a result, August and September to accelerate potentially? Or were there is some drivers in July, either, I think perhaps the continuation of some new product load in from in the paint segment or other things that we might continue to see overall kind of this mid-single-digit consolidated topline there for the quarter?.

Yes, Mike, it's John. In terms of the additional comps in the third quarter, just to remind everyone, the third quarter last year was our most difficult -- our best quarter in 2013, which was up 12%. So we were up mid-teens in July, low double digits in both August and September.

So the comps, while they get a little bit easier, it's still pretty challenging. In terms of what we are anticipating going forward, as Keith alluded to earlier, with housing starts in the neighborhood of $1 million or so for the year, we are thinking about where we were at through the first half of the year.

That would imply a pretty good clip going into the second half the year, as well as our lower ticket repair remodel products continued to perform well. We were confident that the growth rate that we have experiencing in the first half of the year feels like it should be similar to that going forward.

Could be some puts and takes a little bit here and there, but as you know, we really don't give topline guidance. So it's really hard to put a finite number on that..

No, I appreciate that. And just one last one for clarification. Keith, you were good enough to give us your sense of the loss for cabinets.

Just wanted to make sure, clarify the $5 million to $10 million, that's not a loss for the fourth quarter, but a loss for the overall year?.

Correct..

Okay. Thanks very much..

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

Hi, guys, it's Adam in for Mike. Just a couple quick one on paints. You say $6 million load in benefit in 2Q and the rollout should we finished for the Marquee Interior in some time in 3Q.

Can you talk about, the expect a load in benefit you expect in that quarter?.

It should be less than the cyclic because that would spread across both Behr as well as Liberty. Liberty won a number of new programs at retail. And so I would say, it is just going to be a couple million dollars in the third quarter because there is really only about two months worth of impact in the third quarter..

Okay, thanks, and then just if you could talk about the negative price cost in decorative? What was driving that?.

A number of things. We have seen a slight elevation in raw material costs compared with the second quarter of last year, both on TiO2 as well as in engineered resins that we purchase and put into our products..

Great. Thanks..

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets. Your line is open..

Hi. Good morning, and nice quarter. I just wanted to get a little bit specific.

You used the language in the press release, "realizing the full potential of your core businesses by actively managing the portfolio", and I was hoping you could share with us, how are you defining the core business? And what are your thoughts at this juncture? It sounds like the strategic review will be finished by September.

Are you leaning more towards an asset sale or a spend? Any color would be great..

Good morning, Bob. I apologize for the confusion in the press release. What I was trying to get across there is that, as a management team we are focused on a couple of time horizons. Number one is the mid to longer-term time horizon where we are looking at how we can drive shareholder value with our portfolio of strategy.

And we are running at aggressive ramp, an additional ramp of our portfolio strategy process to determine that. The other time horizon that we need to work on is in the here and now, the short term. And that is to drive our existing businesses that we have on our portfolio to be all it can be. And that's what I mean about full potential.

So it's not that we are, as a management team, strictly looking at the long-term of the portfolio issues, we are also looking at our core businesses that we have today and how we can improve them and drive, particularly in cabinet, turnaround. With regards to where I am leaning, really I am not leaning.

I am letting our process determine what the optimal portfolio is for mid-to long-term shareholder value. We are intently engaged in the process. We have brought on outside counsel to give us an external perspective of how we might unlock value.

We are looking at all options that are in front of us and of course we are doing it in concert with the board. So I am not going into this process with a preconceived notion. We are letting the process work. We are open to all options. And it is going well..

That's really good color. This might be a jump all to, and if John has any commentary as well, you have a lot of cash on the balance sheet. Net leverage is the lowest it's been in a long time at two times. I think you guys are on track to generate $500 million of free cash flow.

What do you want to do with the cash? And in concert with review of the portfolio from a strategic alternative standpoint, how relevant is M&A? And what are you thinking about returning cash? Thanks and good luck..

Yes, Bob, in terms of capital allocation, in the near term, we have been consistent in saying, that we want to pay down some debt in the near term. And so we do have some of the cash on the balance sheet earmarked for that debt repayment. That said, to your other point, we are looking at some other uses of our cash.

And we did raise the dividend in the second quarter. As you may recall, in May. We had about 20% dividend increase that we announced. At the same time, M&A is something that we would consider for our portfolio.

But right now, the add-on, bolt-on acquisitions to some of our existing portfolio businesses as opposed to going out and putting in a new line of business is something that we are not currently in. So don't think of it as a huge stretch of a huge acquisitions at this point. That's not something that we are contemplating at all..

Great. Thanks very much..

Your next question comes from line of Nick Coppola from Thompson Research Group. Your line is open..

Hi, good morning..

Good morning.

I am hoping to drill down a little bit more on what exactly happened in cabinets in the quarter and particularly some more color on the ERP implementation and where the additional expenses that may have been unexpected came from? And as a follow-up to that, do you have any view on how much revenue was missed in Q2 by the longer lead times?.

In terms of the cost variances driven by the ERP implementation, to deliver on our industry-leading lead times and fill rates information is key.

You need to have a timely information of demand and you need to have an understanding of where the product is as we execute in a build-to-order kitchen at a time environment with no finished goods and we are talking in the range of millions of SKUs when you look at the configuration possibilities across the entire assortment.

So information is key and when you implement an ERP system and we had some issues that we didn't catch in our early testing, and it took a while to uncover those issues and resolve them. And when you have inaccurate and non-timely information flowing into the system that's tight, you tend to have back orders.

And those backorders drive you into running off a hot list and it becomes difficult to maintain the fill rates in the standard cost that you drive for. So it was a combination of things. But fundamentally, it was issues relating to information in terms of demand and knowing where we are..

Okay.

That makes a lot of sense, and then, my last question for you would be about pricing at big-box and I guess my question, what these promotional activities looked like and whether or not there's been any discount in there?.

In terms of pricing at big-box, I think we have, as I mentioned in my remarks, I think we have lost some share when you look at the timing of some of our actions versus our competition.

But again, we are committed to our approach, which is to be strategic and creative in how we use our promotions to hit that sweet spot of bringing value to the consumer and being most productive for us. So will continue to tweak it, but we wish that we remain committed to our approach..

Okay. Thanks for taking my questions..

Your next question comes from line of Mike Dahl from Credit Suisse. Your line is open..

Hi, thanks, and nice job in a tough environment here. Just following up on the last comment there.

Should we interpret this as, the comments around promotional activity, that there's still elevated promotions by competitors in the channel? And is there any way, any color around what types of promotions you think are most effective today?.

In terms of these elevated promotion, we have seen it come down substantially from what it was quite frosty in the downturn. The price increase that we put in, we were leaders in that. I think that also contributed to some of the issues we have had in the topline. In terms of the most effective promotion, it really various.

There is certainly promotions that are effectively to administered to push to close. There is promotions that involve incentivizing our customer base to move up and to have a more contented product to go into glazed finishes, for example, to go into all plywood construction. Those sorts of things. So that's what think about.

We think about how can we bring value to the consumer, how can we move them up, so that's favorable for us in terms of margins, and of course we look at the competitive environment..

Got it. Thanks, and then second question. Just a quick one on FX. I think you talked about the sales impact there. I am wondering what was the impact on operating profit from FX? Thanks..

Hang on, Mike, as we pull that up real quick. It was a relatively small amount. FX overall for the company was just a favorable $2 million..

Thanks..

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

Thanks. Good quarter, and thank you for taking my questions. My first question was on the Behr Marquee roll-out and the success you have been having.

And I am wondering if you can talk a little bit about where the customers are coming from? Are these people who would have bought another Behr paint but they are trading up in terms of price point? Are you cannibalizing your own sales? Or are they coming from somewhere else? That's my first question..

The roll-out has gone very well for us. We started in Canada. And we got the Marquee rolled out in 180 stores up in Canada. And we are also starting to roll-out our new color selection merchandising up there and it's going quite well. We are seeing good growth with it.

Both ourselves and Home Depot are pleased with how its going and we are focused on executing that rollout here in the United States. In terms of where our customers are coming from, difficult to parse that out. Clearly, this is not all, there is incremental volume here for us.

This is a substantially different price point and a different product and we like where this is going as evidenced by our success where it has already been rolled out..

Great, and then just as a follow-up, you talked about gaining share in the dealer channel in the cabinet business.

And I am wondering if you can talk about how you guys benchmark execution and customer satisfaction in that business relative to some of the other competitors? And the reason I ask is, because I would assume as a huge driver of share gains and wins, is making sure the end user is happy and therefore the dealers are happy.

So maybe if you could talk about where you guys you think you are in terms of execution in that business? And how you benchmark where you are relative to the competition?.

I think we are doing very well and the results bear that out. We have put a concerted effort into the product assortment to make sure that we have the appropriate products for this market. We have executed initiatives focused on urban markets in big cities, which is very tightly linked to this higher-end showroom consumer.

We have looked at how we attack this segment from a sales representation standpoint. We have looked at our incentives associated with our sales reps in this line of business. So, as is usually the case, it's not one silver bullet, but it's been a number of initiatives.

In terms of how we gauge customer satisfaction, at the higher-end in the showroom model, this tends to be an assisted sale, and we value very much the opinion of those showroom folks that are in these dealerships that are helping the consumer. And we put a concerted effort with our programs.

Over the course of six weeks nonstop, we bring in showroom associates into our corporate headquarters down in Indianapolis. We talk to them about what new products they need, about how we can do better from customer service to pricing and promotions, all those sorts of things.

And we survey those influencers constantly and we ask for their ideas for improvements. So that's principally where we go to gauge customer satisfaction..

That's very helpful. Thank you for the color..

Your last question comes from the line of Philip Ng from Jefferies. Your line is open..

Hi, good morning, guys. New construction is still a little bit spotty, but you sound generally a little more upbeat on the back half. Will most of the pickup be driven on the cabinet side? I know it's been a nice growth driver this past year..

Phil, it is John. As you think about how the back half has been developing, again as I alluded to earlier, we do think if you are of the mindset that we are going to have a million housing start, a fair amount of growth will be driven by our installation business.

And then as we talked about earlier, with repair remodel, we are seeing a little bit of a choppiness effect there where the lower ticket items, we are seeing good experience with them, seeing some good strength there, but to a lesser degree, on the bigger ticket.

So I think cabinets actually would be less of a driver in the second half of the year than either the lower ticket or the new construction portion of our business..

Got you, very helpful.

And Keith, can you give us a little preview on how you are thinking about your longer-term initiatives? Are you looking more on the growth side, cost take-out or even possibly capital deployment?.

We are looking at shareholder value in the long-term and that's the fundamental lens there. We are evaluating all our options there..

Okay, all right. Thanks for the color. Good luck in the quarter..

Thank you..

There are no further questions at this time. I will turn the call back over to the presenters..

Well, thank you very much. Have a great day. And I appreciate all the questions. Thank you..

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