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

Garik Shmois - Longbow Research Stephen East - ISI Group Michael Dahl - Credit Suisse Keith Hughes - SunTrust Dennis McGill - Zelman & Associates Eric Bosshard - Cleveland Research Michael Rehaut - JPMorgan Bob Wetenhall - RBC Capital Markets George Staphos - Bank of America Phil Ng - Jefferies Tim Wojs - Robert W.

Baird Eli Hackel - Goldman Sachs Rob Hansen - Deutsche Bank Stephen Kim - Barclays Mike Wood - Macquarie Megan McGrath - MKM Partners.

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2014 Conference Call. My name is Steve 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 Director of Investor Relations, Irene Tasi.

Irene, you may begin..

Thank you, Steve, and good morning to everyone. Welcome to Masco Corporation's third 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 third 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 analysts' 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'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 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'll now turn the call over to our President and Chief Executive Officer, Keith Allman..

Thank you, Irene, and good morning, everyone. Please turn to Slide 4. Consistent with our performance throughout the year, Masco delivered another quarter of revenue and margin growth. I'm pleased with this performance, particularly when you consider the tough comparisons we faced.

Recall that in the third quarter of 2013, our topline increased by 12% and our operating profit margin expanded by 260 basis points. Despite this tough comparison, we increased our topline in this quarter by 4% and expanded our profit margin by 60 basis points. This represents the best third quarter we've had since 2007.

As a result of this performance, we achieved 15% growth in EPS to $0.31 per common share. I would note that unfortunate higher medical costs and other expenses cost us $0.01 per share in the quarter. Our performance was primarily driven by Plumbing Products, Other Specialty, and Installation and Services segments.

Similar to last quarter, our plumbing and windows businesses experienced strong sales and favorable mix primarily in the trade and showroom channel. In North America, the investments we've made in new products and programs continue to pay off. Delta achieved a record sales quarter in Q3.

We are very pleased with our Delta toilet program, which has sold over 0.5 million units in less than two years. This is just one example of how our consumer-focused innovations and strong brands continue to drive growth. Despite a softening Eurozone, our international businesses fared well.

Hansgrohe, for example, continued their strong execution and achieved yet another record sales quarter. In total, our international sales were up 5% in the quarter, 3% in local currency. I'm extremely proud of both teams and congratulate them on their exceptional execution.

Our Installation business delivered another quarter of solid growth by capitalizing on new home construction trends and executing on their strategy to diversify their business into the commercial and retrofit channels.

As we announced last month, our teams are working on the spin-off transaction of this business and it remains on track to be completed by mid-year 2015. As I previously communicated, our Cabinets segment's turnaround is the top priority. In the quarter, we took additional actions to improve the future performance of this business.

Our industry-leading lead times are a hallmark of our Merillat brand and we have made the necessary investments to meet that brand promise. We also announced the closure of two idle facilities in the business as we're confident that we can meet our growth plans without this capacity.

Despite our near-term challenges in cabinetry, our overall company performance reinforces that our strategies are working. We'll continue to execute and invest in innovation, customer-focused programs and brand to drive our business. Let me give you some examples of how we continue to lead the industry with innovation.

The Home Depot awarded Behr its Innovation of the Year Award for Marquee interior. And the EPA named Delta its 2014 WaterSense Partner of the Year for the third time in four years. Before I turn the call over to John, I'd like to leave you with three key takeaways.

Number one, we have taken important action at Cabinets to make the business more competitive in the long term. These actions have resulted in cost variances that were higher than expected, but necessary for the turnaround of the business. We have restored our lead times in Q3 and are positioning this business for growth in 2015.

Number two, I'm pleased with the overall performance in the third quarter. We posted our strongest third quarter for the company since 2007 and I feel very good about that. Number three, our focus on our strategic initiatives is paying off.

We are being recognized as industry leaders in innovation by our customers and we are executing successfully despite fluid macroeconomic environments in both Europe and North America. Now I'd like to turn the call over to John who will take you through our segments from a financial and operational perspective..

Thank you, Keith, and good morning, everyone. As Irene mentioned, my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. Looking at the third quarter, you can see our consistent execution resulted in our 12th consecutive quarter of year-over-year sales and profit growth.

Sales increased 4% as we recorded strong sales growth in three of our five segments and we're up against very good performance in the third quarter of the last year. Sales in North America were up 4% for the quarter. As the US economy improves, we are experiencing growing demand for our repair and remodeling and new home construction products.

As a reminder, repair/remodel activity represents approximately 70% of our total sales. International sales increased 3% in local currency in the quarter, driven by core market growth of our international plumbing business and our UK businesses.

Our focus on cost control continues to pay off as SG&A as a percent of sales decreased 50 basis points to 17.7% as compared to the third quarter of last year. And we delivered strong bottomline performance as operating income increased 9% in the quarter to $243 million with operating margins expanding 60 basis points to 10.9%.

We continue to be pleased with the growth in our operating margins. This is one of our best quarters in several years and it reflects the benefits of our brand strength, innovation pipeline, operating leverage and efforts to reduce costs.

Our strong operating leverage resulted in 26% incremental margins in the quarter and our EPS was $0.31, an improvement of $0.04 or 15% compared to the third quarter of last year. Turning to Slide 7, we see the components of our operating income improvement in the quarter.

The $7 million increase in net volume mix was principally driven by increased volume in our decorative architectural, plumbing and installation segments largely due to increased repair/remodel activity and continued recovery in new home construction.

This strength was partially offset by negative mix in our decorative architectural segment due to stronger Pro paint sales. Net price commodity improved approximately $11 million for the third quarter, largely driven by our Cabinets, Installation, Other Specialty and Plumbing segments.

This improvement was partially offset by an unfavorable relationship in the Decorative Architectural segment. We captured $42 million of profit improvements gross in the quarter. These improvements were partially offset by program support, growth initiative spend and inefficiencies in our cabinet operation.

For 2014, we expect to generate $150 million of 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 benefit from $10 million to approximately flat due to the growth investments and incremental cost we incurred in our cabinet business and other expenses.

Turn to Slide 8, you can see we delivered another quarter of solid performance in our Plumbing segment, with sales increasing 4%, driven by growth in our faucets and showers, rough plumbing and spas. We saw the greatest strength in our wholesale, showroom and dealer customers.

This reflects our continued investments in the showroom and commercial segments of this channel. And as a result, we are benefiting from a richer mix of products. For example, our Hansgrohe Select line, our showroom-focused Brizo faucets and our Highlife spas, all continued to outperform in the quarter.

Our European business experienced modest gains with sales increasing 2% in local currency despite soft economic conditions. And we delivered strong operating leverage with nearly 50% incremental margins in the quarter with a substantial portion of this coming from increased volume and productivity improvements.

Turning to Slide 9, you can see that we are flat in the Decorative Architectural segment in the third quarter. As a reminder, we were up against tough comparisons. Our Q3 2013 performance in the segment was extremely strong with revenue up over 9% over 2012 when we successfully launched Marquee exterior and DECKOVER.

In Q3 of this year, we successfully completed the rollout of Behr Marquee interior product, which was awarded Home Depot's innovation of the year. Segment sales were favorably impacted by $6 million of load in sales of this product. In addition, our focused approach on speeding our Pro business continues to gain momentum.

And Liberty Hardware had another strong quarter, achieving solid top and bottomline growth through continued share gains from successful new product introductions and program expansions in the retail channel.

Offsetting this growth was the timing of replenishment orders for Behr products at the end of Q3, which we believe reduced Q3 sales by $10 million to $15 million. Behr is now seeing strong replenishment orders here in October.

Operating margins contracted slightly in the quarter, primarily due to unfavorable price commodity relationship, driven by increased material cost and unfavorable mix driven by our Pro initiative.

We also incurred approximately $3 million of expense relating to the rollout of Behr's new color center displays at The Home Depot in select markets in North America.

As we continue this rollout in Q4 and in 2015, we expect additional color center expense of approximately $3 million in the fourth quarter, approximately $11 million in 2015, the majority of which will be realized in the first half of the year.

Also, the incremental advertising expense of $5 million was delayed from Q3 and we will now incur this expense in the fourth quarter of this year. Turning to our Cabinets segment on Slide 10, you can see our Cabinet segment sales grew 2% in the third quarter. Sales increased due to a favorable mix and strong international performance.

Within North America, we saw improved sales in the dealer channel as our recently introduced [ph] Kraft Advantage program gained traction. It is critical that we restart our lead times and to do so effectively and quickly. As Keith mentioned a few minutes ago, our lead times are back to industry-leading standards.

In doing so, we incurred additional costs that impacted our profitability in the quarter.

We estimate that total charges due to the plant closure, ERP implementation and the associated inefficiencies of these initiatives in this segment will aggregate approximately $35 million in 2014, $10 million each in Q1 and Q2, $8 million in Q3 and approximately $7 million in the fourth quarter.

Furthermore, we took action this quarter to sell our two builder-focused mothballed chemistry plants that make Merillat product. As we reviewed our capacity, we determined that we did not need these facilities. This resulted in a one-time rationalization charge of $28 million. We expect annual savings from this action of approximately $3 million.

Turning to Installation on Slide 11, the segment sales growth of 8% was driven by solid results in our residential new construction, commercial and distribution channels. Multi-family activity remains strong and we're seeing improved mix with increased activity from custom builders.

Our operating profit improved $1 million of 5% compared to the third quarter of last year as a result of increased volume and our favorable price commodity relationship that was offset by wage inflation and approximately $4 million and one-time increased medical and other insurance-related expenses.

Turning to Slide 12, our Other Specialty Products segment sales increased 8%, driven by North American window business as we experienced continued favorable mix shift towards our premium window into our product lines.

Our European window business also positively contributed to this segment's top and bottomline due to continued improvement in the UK remodeling market. The segment's operating profit rose 25% due to favorable mix and increased volume as a result of the stronger remodeling environment.

And turning to Slide 13, our balance sheet strengthened in the quarter as a result of the reversal of our deferred tax asset valuation allowance. We were able to reverse the valuation allowance because of our continued profitable growth and our improving outlook for our business.

Working capital as a percent of sales came in at 12.7%, a 20 basis sequential improvement from the second quarter of this year. I want to thank our supply chain, operations and finance teams for driving this great outcome. We ended the quarter with approximately $1.6 billion of balance sheet liquidity and our credit metrics continue to improve.

Now I'd like to turn the call back over to Keith..

Thank you, John. Moving to Slide 15, before going to Q&A, I'd like to highlight what we're doing to drive our business going forward. We are continuing to focus on strengthening our brands through customer-driven innovation. This is not only driving share gains for us, but it's also strengthening our strategic relationships with key customers.

Cost control continues to be a critical part of our strategy going forward. This enables us to expand margins as we convert increased volume with strong operating leverage. Fixing Cabinets is the top priority. We have taken the necessary actions to position the business for improved performance.

With regards to our capital allocation strategy, we will continue to execute going forward as we're confident in the long-term prospect of our business and our ability to drive shareholder value.

Our strong performance this quarter reflects our continued execution against our strategic priorities to drive the full potential of our businesses, to leverage opportunities across our businesses and to actively manage our portfolio. We are confident that this will lead to increased shareholder value and position Masco for even greater growth.

With that, I'd like to open up the call for questions.

Operator?.

(Operator Instructions) Your first question comes from the line of Garik Shmois from Longbow Research..

Just wondering, first off, if you could just talk high level with respect to the cadence of R&R over the course of the quarter? I think coming out of the second quarter, you're still seeing stronger growth in the lower ticket items, seeing better mix on the higher ticket items. Most of the growth has come from low ticket.

Is that still the case in the third quarter? If you could just talk about some of the variances, that'll be great..

We continue to see our R&R growth fairly steady from what we've seen in the last quarter. And going forward, we look at it approximately GDP plus 2, in that range. With regards to the demand as it relates to smaller ticket versus bigger ticket, again very similar to last quarter.

We're seeing good volume on the opening price points in our retail channel on the higher end. Bigger ticket items, we're seeing good wholesale and showroom volume. So I would characterize our R&R volume as being constant with what we saw last quarter..

Now that we have several weeks since you've announced the results of your strategic review, I just wonder if you can maybe provide a little bit more color around the $30 million to $40 million worth of cost savings that you previously announced and what the timing of the rollout of the cost savings program is going to look like in the P&L?.

As we implement that, we expect our run rate post-spend to be in terms of corporate SG&A in the range of $100 million..

Our general corporate expense has been running in the range of $30 million to $35 million a quarter. Maybe you saw here in the third quarter that on adjusted basis that came down to $22 million.

It's probably a little light just given the rationalization charges and the severance charges that we incurred in the third quarter, because all the action was taken on September 30th.

So as Keith mentioned just a minute ago, going forward, I think what you should expect to see from us is a general corporate expense number in the circa $100 million range on an annual basis with a little bit of ups and downs on an individual quarter basis. Now that said, we really won’t get to that run rate until this spin is executed.

So between now and then, we will continue to experience some additional severance cost each quarter as we have some people staying through to help us with the spin. And secondly, we will be incurring $10 million a quarter in spin related costs that will be running through general corporate expense as well.

So I think in the near term, it'll stay in that $30 million to $35 million. We'll see the benefits starting in the third quarter of next year..

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

Looking at your Plumbing, the sustainability of your out margin as you move forward, you've turned in some great results. And I know in the past, you've talked about expecting those to come down.

As you look out over the next year or two years, what would you expect the trajectory to be? How quickly do you think that's coming down, because it stayed up much better than what we thought?.

A big determinant of that is our mix and where the growth in the global market comes. As we've seen higher growth in emerging markets, that mix tends to be a little bit more dilutive. Also a significant contributor would be the growth rate of our adjacent products as we expand into other areas of the bath in North America.

That bath is also a lower margin play for us, but good return on our investments. So the key determiner on our sustainability, if you will, on those margins in that space is the growth rate around category expansion and the growth rate in emerging markets, both of which is our focus and both tend to be a little bit lower margin..

And then looking at Cabinets, I know coming into this quarter you thought you'd have about $5 million in incremental costs and then be done with it. You're now looking at between this quarter and next quarter about $15 million.

Could you just talk a bit more expansively about what you're doing now versus what you thought you would do a quarter ago? And watched your mixes with your dealer profitability we would have expected that to give you a bit of a bump and that didn't occur either. So maybe just give us some color on what's actually happening there..

We made a decision to more aggressively get back to our industry-leading lead times in the Merillat brand. Again, we're talking on the builder side of the business mainly. We put an extreme focus on that as we listened to our customer base and understood the value of that.

And in doing so, we put mainly labor inefficiencies in play as we made those improvements..

Will that just quickly evaporate then as you get past the fourth quarter or is that something that we've got to anniversary in the third quarter of next year?.

We think we'll see in the range of $5 million to $10 million of inefficiencies associated with this that bleed into next year and then after that will be clean..

We expect that to be wrapped up by the middle of the year..

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

I wanted to go back to one of the first questions on the new restructuring program and I guess in the context of you've got $150 million of gross profit improvement this year. Now you're saying with all these other investments, no net benefit.

Wondering if you could give some thoughts out as we look into 2015 between additional profit improvement programs and the restructuring? What do you actually expect to see as far as net profit benefit?.

As we have in the last several years, we've only generated about $150 million of profit improvements on a gross basis. And those profit improvements are driven by lean efficiencies, supply chain work, et cetera.

And those are offset by things generally like wage inflation, medical benefit inflation and other things that we incur on a regular basis with our business. And typically, for the last five years, we've been about neutral on our net benefit on price commodity. This year we're anticipating a slight benefit.

I think in the beginning of the year, we're hopeful if we could get $15 million to $20 million of a net benefit. That didn't materialize this year. We ran into some unanticipated inefficiencies at our Cabinet operation that we did not clearly expect at the beginning of the year.

And so that quickly ate into our expected net benefit to bring that down to zero here. So as we look forward into 2015, while we haven't finished our budgeting process yet, I would be hopeful if we could generate some net benefit. Probably we'll give you a little bit more color on that benefit at the Analyst Day in February.

And we can layer that number on top of that $30 million to $40 million benefit that we expect to get, and that's going to be a one-time benefit that we expect to get as a result of the headcount reductions that we announced on September 30th. Sorry, I can't give you a little bit more color at this point.

We're still working through our budgeting process here..

My second question is the share price performance has been a bit disappointing post the announcement of all the spin and other initiatives and capital allocation.

Have you given thought to some sort of accelerated repurchase, given clearly you've got enough cash on the balance sheet today?.

Mike, there's a number of ways to execute a share repurchase program and we're looking at a variety of options on how to do so..

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

Two questions on specifically your European business. It did very well in the quarter. You read the same headlines I read on Europe.

Are you getting any sort of read from your businesses in Europe what they believe the trajectory looks like for the next several quarters? And then question two, if you can give us any kind of commentary on how October trends across the entire business are ruuning?.

With respect to Europe, I think we're seeing a little bit of two different stories in Europe. Our continental European businesses are seeing the slower growth, as evidenced by the 2% up that I mentioned in local currency in Plumbing. So relatively soft growth, a good growth compared to overall GDP that the Eurozone is putting up.

That said, I'd tell you our UK businesses continue to benefit from the strength in housing in the UK. We saw very good strength in the UK both in our window, our plumbing business and our cabinet business from a topline perspective..

In October, we're seeing good steady growth. I'd characterize it as being consistent with what we've seen in this past quarter..

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

Keith, my first question just has to do with the inefficiencies on the cabinet side.

Are you to the point now where the efficiencies are just your burden as far as the plants that aren't well and you're having to incur additional cost to get the product out the door? I think you said lead times are back to normal, but quality or anything that would impact their business?.

I would say it's more of the former. It's our issue and we're working our way back to our more normalized level of efficiencies and productivities. We've put a bit of focus on getting our lead times back to our customer base. Our quality is good. We're by and large over the issues with the customer.

And these are internal issues that we're now focused on currently and then certainly into 2015 with a solid work stream of issues that we're driving to get that productivity back..

So there's still some issues for customers, but for the most part that's fine?.

We're not perfect with the customer base, but I'd tell you we're back to our industry-leading lead time and significantly improved..

With respect to the fourth quarter share repurchases, can you walk through what would you need to see to execute the share repurchase now if you're in place and in position to execute the share repurchase for the fourth quarter?.

We're committed to what we've disclosed, which is buying back 50 million shares over the next few years. In terms of our specific cadence, you'll see that as we report our Q..

Your next question comes from the line of Eric Bosshard from Cleveland Research..

First question on Cabinet profitability. You had outlined the plan for what you're going to accomplish in that business over the last three years and you've obviously had some execution issues that you're remedying.

I'm curious what you think about the path of recovering Cabinet profit as we look out over the next year once we get through what you dealt with in 2014?.

Fixing Cabinets is a priority for us, there's no question about it. We view that as the best path to shareholder value creation. As we talked earlier with Dennis' question, we're driving productivity and add work streams that we're focused on.

We have a solid innovation pipeline and new products where we're listening to our customers and delivering on that. And we'll talk about those as they happen. But we feel good about that. And with regards to the share gain, it will drive. Of course increasing the volume would be helpful for us..

The improvement in profits that was expected this year, is the recovery next year now off of the base that we'll experience in 2014, or can we have a more significant ramp-up, obviously excluding the charges, and how the profit recovered plays out in the Cabinet business?.

I think it'll be more significant and that we don't expect those costs and the inefficiencies associated with driving from five to two ERP systems and closing down the factories that we've had. So in the range of $20 million to $25 million, we don't expect that to re-occur..

In the paint business, understand the investments that are being made for Pro and for the color center and the new product.

But I'm curious how we should be thinking about the margin opportunity in that business in 2015? Is this another year where margins erode a little bit and you trade some margin for volume, or how should we be thinking about the medium-term future margins of the paint business?.

I think we look at that business consistently. And that is we still think that this business is generally high-teens margins. Absolutely we need to make investments in this business and we'll incur some expense in doing so, yes, but we still think the margin profile of this business is not significantly unchanged..

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

First question I had also is on Cabinet, and I just want to shift the focus a second to the topline. You actually had a very difficult comp in that quarter as well aside from the difficult comp in decorative. You're actually able to grow roughly 2%. You mentioned some of the drivers and restoring of lead times.

But I was wondering if you could get a little more granular in terms of what you're seeing in each of your difference channels? And to the extent that there is perhaps getting back on the horse type of effect in the dealer channel with the lead times, if that's something that you could expect to continue to positively benefit from over the next few quarters?.

As you know, we've had significant new product introductions and programs aimed at providing differentiation of better service and helping our dealers make more money, and that's paying off. So we're seeing some nice consistent growth and share gain in the dealer channel. On the builder side, we're keeping the business we want to keep.

There's some business that didn't make sense for us from a profitability standpoint. There's some business that we moved to more efficiently serve through our dealer network. And we are enjoying the macroeconomics of some 10% gain and starts this year versus last year.

On the retail side, we've got aggressive and made some moves with regards to our pricing and promotion strategies and we're working to find that sweet spot and the elasticity to be more effective..

And just want to circle back, John, to the question of corporate expense. It had come down. Last quarter it was down $8 million year-on-year, this quarter $9 million, and I think you referred to some timing charges. But just wanted to be certain.

I think you had said that you expect 4Q to get back to that $30 million to $35 million run rate, which is actually pretty steep increase.

So just wanted to make sure if that's the case or if there be any beginning benefits from those cost saving actions that were announced last month?.

As I mentioned, we expect to incur $8 million to $10 million of transaction or spin related costs as we move forward for the next several quarters. That $30 million to $35 million drops to kind of circa $25 million on an adjusted basis absent the one-time spin related cost..

And so that $8 million to $10 million per quarter?.

Per quarter. That's right, Mike..

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

Just wanted to understand if you took out the ERP cost and the impact of the polar vortex, would you guys be running breakeven in the Cabinets year-to-date? And on a longer-term basis, once you finish rationalization, what's the normal way to thinking about profitability in terms of EBIT margin for this business?.

I think it's fair to put back that $30 million to $35 million of incremental inefficiency cost that we have incurred. And then when you look at our growth rate, you could see our drop-down margin in the range of 40%. We're focused on attaining share and growing with the market. So I think that's a good way to look at it..

What kind of normalized EBIT margin do you think that implies just for modeling this out?.

I think we'll get into more detail on February as we lay out our margin going forward into, Bob..

You factor out the $35 million, but you look at our normal drop-down margin on this business. We should be in the 30%, 35% range on growth. So you see that going forward. As we make our way back from housing starts of circa 1 million this year to 1.5 million, you can kind of factor that drop-down incremental margin into your model..

On the paint business, I thought revenues would be a little bit higher. It looks like you're investing into business. Can you give us an idea of what you're seeing in terms of ebb and flow? It sounds like October was a stronger. You were weaker last quarter because of inventory replenishment.

What are you seeing in the channel and how are the competitive dynamics playing out? I'm aware you guys had a tough comp last year.

How do we think about growth going forward and reinvesting behind the business?.

We feel good about paint and we are continuing to reinvest behind it, no question about it. We had a tough comp in the range of 9% last quarter. We had some inventory timing issues in the channel. We're seeing good replenishment orders coming back. So we continue to be positive on the growth prospects of paint..

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

I guess the question I had related to Cabinets again.

The closing of the mothballed plant, I'm assuming that didn't have much, if any, ongoing expense until the closures, but if there was any expense, what could we perhaps build into our forecast longer term in terms of some margin benefit from that? And in turn, you were keeping these facilities mothballed presumably for some time on your expectations demand would come back and need that capacity.

What has changed other than your outlook or your supply chain where these facilities can now be closed?.

On the expense or the benefit side, we were not incurring significant cost to keep these facilities around. So we were simply continuing to secure them. So the benefit now by primarily closing those will be approximately $3 million per year..

There were a couple of factors in deciding to take these plants completely offline. One is our efficiencies that we're seeing in our component plants. As you recall, we closed two component plants and moved that volume into one and we wanted to be sure of our capacity capability in that plant. What we're seeing is encouraging.

So we have good capacity improvements versus our initial plan as we've ramped that factory.

Secondly, as John alluded to, there was a whole lot of cost to keeping these plants online, and we chose to keep that for a while as a buffer to see if we were to going to see a significant spike in new home construction mainly as this is focused on the Merillat and our builder business.

Good growth, we're seeing 10% uptick, but we wanted to make sure that we are prepared should we see something significantly greater. And we're not seeing that. So that's why we made the decision to take them completely offline..

A quick question on decorative work, to the extent that you can comment and perhaps you can, you mentioned orders are good, replenishment is good.

Do you have any sense on what retail growth is for your brands early into the fourth quarter?.

George, we don't have that number here in the early fourth quarter at this time. We haven't closed out the month of October just yet..

Do you have a view on what third quarter looked like from a retail standpoint? POS?.

No, I am not in a position to share that with you..

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

Your Cabinets business has lagged the market in 2014.

Now that your cycle is through some ERP issues, how do you expect your growth to shift or stack up against the market?.

Our objective is to take share. We're doing that with our products and our programs. We're going to do that with more consistent delivery on our lead times. It was a tough year for us in '14.

We made some fundamental improvements to the business, taken our ERP systems from five to two, shutting down two significant component plants, taken these mothballed plants offline. We've reinvigorated our product development process and we're focused on the customer needs, and it's paying off. But it was a tough year with regards to our performance.

We understand more about the elasticity in our pricing and program schemes in retail, which we'd like to continue to refine, which we think will drive share as well. So we plan on outperforming the market in '15..

Do you think most of the share gains going forward would be driven more on the retail side, as you price your products a little more competitive, are you a little more upbeat on the dealer side?.

I'm upbeat on both sides for different reasons that we've talked about. Certainly the dealer segment in this industry is significantly bigger than the retail, and we intend to gain share in both segments..

And just looking forward towards your cost take-out initiatives on corporate expense, can you give us some comfort around execution, because the ERP rollout has been a little bit tough for this year? So what's different and what have you learned that's going to help smooth out the process next year?.

I think they're completely different initiatives when you're talking about information system that manages the complicated supply chain versus a corporate office staff reduction. I would not characterize our corporate office staff reduction as risky. We've worked with our business units. We understand the business processes that we need to change.

We've made those changes and we're moving forward..

Your next question comes from the line of Tim Wojs from Baird..

Just turning back to Cabinets again, I think Home Center sales there, you mentioned, were down and it sounds like maybe there's some inefficiencies in pricing and marketing.

But I guess more broadly, are you seeing any change in how the Home Center think about the Cabinets business just in terms of floor space with competing alternative products like appliances?.

I don't see any big difference in our Home Center partners' view on the Cabinet business. It's a good business for them. Certainly there's tweaks that different customers make to their plan and to their layouts as they work to optimize their model.

But there's no question that Cabinets is an important part of the Home Center channel and that's going to continue to be that way from my perspective..

Just looking into 2015, John, any specifics we should think about just around raw materials and the price cost relationship there?.

Nothing in particular at this time, as you think about the commodity conflicts that impact our business. We have been experiencing from time to time installation inflation from the manufacturers and we'll see some more of that going forward into 2015. And then in terms of inputs, propylene has been running a little high.

And so that has continued to have some cost pressures on our inputs. And actually wood and finishing materials have been elevated over the course of the year. And so we expect that will probably continue into 2015 as well..

Your next question comes from the line of Eli Hackel from Goldman Sachs..

Just wanted to talk about how you're positioning yourself for growth in multi-family, which has been a lot stronger than single-family in the coming years.

Do you have any idea what percentage of that 30% that is new construction is multi-family versus single-family?.

Our share of multi-family and single-family is about equivalent as the overall market. Our Cabinet business, our installation business all participate in the multi-family segment of the builder channel. And our share there is consistent with our share in the single-family side..

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

This is Rob Hansen on for Nishu. Just wanted to ask about the other specialty segment. You mentioned that there's been some mix shift that's been helping there.

Is this just slower new construction growth, or are you repositioning yourselves more to R&R there? How does that look?.

As you may be aware, we're going to be repositioning this business through the downturn. Prior to the financial crisis, this business was heavily focused on residential new construction. And through the course of about six to seven years, we have delivered strides to reposition the business to be a much repair/remodel oriented business.

And we are seeing the benefits of that repositioning now over the last multiple quarters, as they deliver strong topline growth in each of the last six or seven quarters here largely from the remodeling efforts they put forth. So we feel really good about how that business is positioned in the marketplace..

And what do you look at as stabilized operating margins in this segment?.

We saw some very nice double-digit operating margins in the segment in the quarter. This has experienced good drop-downs historically in the 30% range. And so as we continue to grow this business, we expect to continue to experience the 30% drop-downs on this segment as well..

Just one last quick question on that is just how much of price increase has been a factor? Obviously seeing a lot of window manufacturers increasing prices recently.

So has that been just enough to cover rising input costs, or have you been able to capture a little bit more on prices as well?.

Pricing has done a good job of offsetting some of our input costs. The bigger benefit has been the mix shift. We have seen upgrading of our products to a higher price point products in both windows and doors. And so we're pleased with the consumers' reaction to our new products in the marketplace..

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

I was wondering if you could comment a little bit about the cadence of sales through the quarter, specifically in cabinets, but also interested in what you've seen in Plumbing as well..

When you say cadence of sales, Stephen, can you help me out?.

Basically month by month, did you see steady improvement? Was it sort of choppy? And also, I forgot to mention, anything on the pricing environment that we saw in the quarter?.

It is pretty steady. I'm thinking from a month-to-month basis here in my head. It was pretty steady. We had some replenishment orders in paint where that volume, as we talked about, and our channel tends to fluctuate and we're seeing that coming back in October. So there is a little bit of timing there.

But by and large from an overall demand perspective, it's been pretty smooth for the quarter..

What about pricing actions? Did you see anything there that you can speak to?.

It's been nothing that really stands out. It's been pretty calm, pretty stable throughout the quarter..

You had mentioned, Keith, I believe in your remarks earlier that in plumbing the gap down to your long-term margins guidance that is really attributable to emerging markets growth in adjacent products in North America.

And I guess I was curious as to how you see that growth playing out? Is this something that you expect to sort of be of a bit of a breakout year for either of those initiatives in 2015, or is that something that you think is going to be sort of a gradual spooling up of the velocity in those businesses?.

I think we're going to talk about that more in detail at the Investor Day. But I would characterize it more on the spooling upside..

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

Just some clarification on the net profit improvement, flat for the full year. If I add the numbers up, it looks like you were negative $15 million for the first three quarters.

Should we expect a positive $15 million year-over-year in the fourth quarter?.

We are expecting some benefit in the fourth quarter, Mike..

I mean that would benefit the segment margins, potentially 600 basis points.

Is there any offsets to that that we should be thinking about from initial modeling for the fourth quarter?.

Which segment are you talking about that should be benefiting 600 basis points?.

I'm just adding up the full-year numbers to the flat net profit improvement and you've tracked negative $15 million for the first three quarters.

So in order to reach that goal, you'd need to be up $15 million for the fourth quarter, which if I just add the total segments, that's a 600 basis point year-on-year operating margin tailwind in the fourth quarter..

Let me follow up with you offline on that one, Mike..

Just in terms of the ERP, can you talk to us about what the service benefits are and how you benchmark, not just the initial lead time, but the response time to any quality issues? And how you compare yourselves against your large competitors and other smaller manufacturers that you compete against?.

First of all, the lead time, we measure it just as at the time from when we receive the order until the time when that order is shipped. From a fill rate perspective, we hold ourselves high to a line item fill rate metrics. So it's extremely difficult versus looking at it from an order basis..

How you compare against your primary competitors at that independent dealer on those service metrics now?.

We have the industry lead time in the Merillat side of the business. We've had that for a long time, and that's extremely important to our dealer base. And when you look at where we are with KraftMaid with our four-week lead time, that's very competitive in the dealer base overall..

Your final question comes from the line of Megan McGrath from MKM Partners..

Just wanted to follow up a little on the paint segment. You talked about your tough compare for the Marquee Exterior and Deckover last year. But then you had the Behr Marquee Interior launch this quarter.

Could you talk about, maybe, if there's any timing differences there? What are your expectations for what those businesses could reach? Is Behr Marquee Interior have the potential to be as good as the exterior? And is it tracking as well as those launches did last year from a same timing perspective?.

We are about 400 or 500 stores at the end of the second quarter. We completed the rollout by 1,800 stores in the third quarter. So we're still seeing some of the sell-through and it just gained some traction now. It is a slightly higher price point. This is in a $40 to $45 gallon range. And we do anticipate very good response.

The initial reaction has been positive. We'll keep you updated as the quarters roll out, because we'll have more data here in 90 days, et cetera, et cetera..

And just final question on Cabinets.

I guess, just looking overall at the $35 million in costs this year and a little bit more, so maybe $40 million to $45 million in total costs, is all of that related to this ERP implementation, which seems, obviously, pretty high for an ERP implementation? Or was there other stuff that you uncovered at the same time that was costing you money, in excess of the ERP?.

That was not all related to the ERP. If you look back to the beginning of the year, we had two significant component plants that we've taken offline. And there's efficiencies associated with that as we move business from one plant to another.

As I said, one of the drivers of why we decided to take our mothballed plants offline was that we were seeing our performance in the remaining component plants. So it was a combination of plant closures as well as some significant ERP implementations..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..