Irene Tasi - Director, Investor Relations Keith Allman - President and CEO John Sznewajs - Vice President, Treasurer and CFO.

Mike Dahl - Credit Suisse Susan Maklari - UBS Nishu Sood - Deutsche Bank Keith Hughes - SunTrust Will Randow - Citigroup Robert Wetenhall - RBC Capital Markets Stephen Kim - Barclays George Staphos - BAML Michael Rehaut - JPMorgan Dennis McGill - Zelman & Associates Stephen East - Evercore ISI Eric Bosshard - Cleveland Research Company.

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Second Quarter 2015 Results Conference Call. My name is Carol, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.

[Operator Instructions] I will now turn the call over to the Director of Investor Relations, Irene Tasi. Irene, you may begin..

Thank you, Carol, and good morning to everyone. Welcome to Masco Corporation's 2015 second quarter 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 of 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 call me directly at (313) 792-5500. Statements in today's presentation will include our views about Masco's future performance, which constitute forward-looking statements.

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

I’d like to remind you that the results we will review today exclude our Installation Services segment, reflecting our spin-off of TopBuild Corp. the business comprising that segment on June 30th. 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, www.masco.com.

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

Keith?.

Thank you, Irene, and good morning, everyone, and thank you for joining us today. Turning to slide four. I am very pleased to review both our second quarter results, as well as our recent accomplishments, which demonstrate the strength of our business’ execution and the strategies we have in place to drive shareholder value.

Once again, all of our segments contributed to topline growth, resulting in North American sales increasing 7% and international sales increasing 5% in local currency. We delivered this growth, while expanding our operating margin to 14.5%, our strongest operating margin in over a decade.

Our exceptional operating leverage in the quarter was the result of our disciplined cost management. Additionally, our margin was aided by Cabinetry’s accelerated turnaround, favorable price commodity and the timing of promotional expenses. Our results were supplemented by the achievement of some key milestones we set out for ourselves in 2015.

Notably, our Cabinetry business accelerated the pace of its turnaround plan and surpassed its 2015 annual operating profit target in the second quarter. The demand for higher ticket repair remodel items continues to improve and we've aligned our Cabinets business to capitalize on this trend. Our KraftMaid brand continued to gain share at retail.

While our dealer exclusive KraftMaid Vantage product line drove sales in the dealer channel, clearly resonating with designers and dealer principles. We have also restored Merillat leading -- industry-leading lead-times to position the brand for anticipated higher growth from new construction in the back half of this year.

We are extremely proud of the result the team had delivered and we now expect that our Cabinets segment will achieve operating profit of approximately $25 million for 2015.

In our Plumbing segment, Delta faucet and our Watkins spa business both broke sales records in the quarter, demonstrating the strength of their brands and the effectiveness of their growth strategies.

Delta’s focus on key influences in the wholesale channel, as well as the successes of their innovation pipeline continues to enable this above market growth. Hansgrohe, despite currency headwind continues to leverage their global leadership as they further expand into emerging markets and drive sales and profit growth.

In Decorative Architectural segment Behr Paint grew core sales with their innovative new product BEHR MARQUEE, their ongoing expansion into the Pro segment and their award-winning customer satisfaction level. This growth is a testament to Behr’s brand and innovation leadership in the DIY industry.

In our Other Specialty Products segment, Milgard Windows the leading window brand in the Western United States had a tremendous quarter.

They continued to capitalize on improving market dynamics, including new home construction growth, repair and remodel growth and increased demand for their higher-end offerings, including their recently introduced Athens stores.

From a capital allocation perspective, during the quarter, we continue to execute on our commitment to shareholders by repurchasing approximately 3.8 million shares of stock. Year-to-date, we have repurchased approximately 7.8 million shares, returning over $270 million to shareholders through share repurchases and dividends.

Reflecting confidence in our future outlook, we were pleased to announce this morning our intent to increase our annual dividend by $0.02 per share to $0.38 per share, beginning with the fourth quarter of this year. And finally, we completed the tax-free spin-off of TopBuild Corporation, a pivotal point in Masco’s history.

We look forward to TopBuild’s continued success as a standalone publicly-traded company. Now, I'll turn the call over to John, who will go over our operational and financial performance in detail.

John?.

Thanks, Keith, and good morning, everyone. Please turn to slide six. As Irene mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time charges. We continued our positive momentum coming out of the first quarter.

I'm pleased to report the second quarter was our 15th consecutive quarter of year-over-year sales and profit growth. Excluding the impact of foreign currency, sales increased 7% and we experienced sales growth in all four segments.

On a reported basis sales grew 3%, foreign currency translation negatively impacted our sales in the second quarter by $77 million, principally due to a weaker euro, compared to the U.S. dollar. Sales in North America were up 7% for the quarter.

Continue to experience growing demand for our new home construction in repair and remodeling products, including our big-ticket kitchen and window products. With the spin-off of TopBuild is complete, repair and remodeling now represents approximately 82% of our total sales.

International sales increased 5% in local currency in the quarter, driven by the continued strength of our international plumbing and window business. International sales now represent approximately 23% of our total sales.

And we delivered strong bottomline performance as operating income increased to 22% in the quarter to $280 million, with operating margin expanding 230 basis points to 14.5%.

In the quarter foreign currency translation negatively impacted operating profit by $19 million and we incurred approximately $5 million of interest carry costs from our March 2015 debt issuance. Our EPS was $0.38 the improvement of $0.10 or 36% compared to Q2 of last year.

Turning to slide seven, you see that our Plumbing segment sales were flat for the second quarter. The strength in the U.S. dollar once again mapped the continued strong performance in our Plumbing segment.

Excluding the $63 million impact of foreign currency translation, sales increased 7% driven by growth in faucets, spas and new program wins with key trade and retail partners. As Keith mentioned earlier, both Delta and Watkins enjoyed record sales quarters in Q2 and contributed to our North American sales growth of 8%.

We experienced strong growth in the trade channel in the quarter as both our Delta and Brizo brand drive consumer demand for our innovative new products and we continue to take share in this category.

The growth at Watkins, our leading spa business was due to the strength of our Caldera and Hot Springs brand as well as our acquisition of Endless Pools. Watkins achieved this record quarter excluding the impact of this acquisition. Our European businesses outperformed delivering 4% sales growth of local currency.

Hansgrohe continues to drive trade channel growth to the strength of its brand, design and innovation. As we said in our Q1 earnings call, operating margins in the second quarter improved to the recent historical levels. Foreign currency translation negatively impacted plumbing segment’s operating profit by $12 million in the second quarter.

Please turn to slide eight. In our decorative architectural segment, second quarter sales increased 4%, driven by the performance of our new Behr Marquee interior product and growth in our Behr Pro business. Excluding the impact of foreign currency translation due to a stronger U.S. dollar versus the Canadian dollar, segment sales increased 6%.

Foreign currency translation negatively impacted this segment’s operating profit by $7 million in the second quarter. Operating profit increased 18% in the second quarter due to increased volume, a favorable price commodity mix, our relationship and effective cost management.

This segment also benefited from lower promotional expense of $6 million in the quarter related to the 4th of July sales event at the Home Depot, which began in July this year as opposed to June last year.

As a result of this and other investment, we will incur an incremental $25 million in promotion, program cost, such as our successful Behr Pro initiative. Program reset, including new program wins at Liberty Hardware and advertising expense in this segment’s third quarter as compared to the third quarter of last year.

This investment demonstrates our strong commitment to grow this business.

Turning to slide nine, you can see our cabinets segment sales increase 6% in the quarter due to improved performance in the KrafMaid brand in the home center and dealer channels, partially offset by lower sales to the direct-to-builder channel because we continue to exit lower margin business.

The segment returned to profitability in the second quarter. The bottomline improved $23 million over the prior year.

This was primarily driven by improved mix as our higher price point KraftMaid brand continues to experience strong growth, improved pricing dynamics in the direct-to-builder channel, the reduction of the prior year’s incremental spend on ERP inefficiencies, and the benefits associated with other cost savings initiatives.

The cabin team is focused on driving profitability in 2015 as we continue to introduce new products in retail and dealers and improve the execution in our Merillat business. We now believe we will deliver operating profit of approximately $25 million in 2015.

Turning to slide 10, our other specialty product segment sales increased 8% and excluding the impact of foreign currency translation, sales grew 10%. We are particularly pleased with this result given the difficult comparison to last year’s second quarter when the segment’s growth was 11%.

Our North American window business delivered low double-digit sales growth in Q2. This growth was driven by volume increases and the continued benefit of our favorable mixed shift toward our premium window and door product line. Excluding the impact of a stronger U.S. dollar, our European window sales increased 7%.

In the quarter, we also completed the acquisition of Evolution Manufacturing, our higher price point vinyl window manufacturer in the U.K. This acquisition will enable us to penetrate the greater London market. The segment’s operating profit growth in the quarter can be attributed to increased volumes, favorable mix and effective cost management.

Turning to slide 11, we ended the quarter with about $1.5 billion of balance sheet liquidity. This amount reflects the $200 million dividend we received from TopBuild Corp. on June 30th.

Our focus on working capital management delivered strong performance in the quarter as working capital as a percent of sales remained relatively flat versus prior year at 14%. We continue to take action to attract shareholder value. During the second quarter, we repurchased 3.8 million shares of approximately 1% of our common stock.

Reflecting our Board’s confidence in our future outlook, we announced the intent to raise our annual dividend by $0.02 from $0.36 to $0.38 per common share, starting with our quarterly dividend paid in the fourth quarter of 2015. We remain -- and we remain well positioned to retire $300 million to $500 million of debt in 2016.

Now, I will turn the call back over to Keith.

Keith?.

Thank you, John. We’ve delivered a solid first half of the year and met key objectives we set for ourselves. We’ve demonstrated our ability to capitalize on improving market dynamics and our ability to leverage our industry-leading positions.

With the spin-off of TopBuild complete, we move into the second half of 2015, well positioned to continue to drive value. We expect that repair and remodel growth will continue to improve at a steady pace. All new home construction will accelerate in the back half of the year.

We’re confident in our ability to win in this macroeconomic environment with our focus portfolio, our commitment to operational excellence and our discipline around capital allocation. I’d like to thank our teams for an outstanding quarter. Your efforts drove great results. With that, John and I will open the call up for questions..

[Operator Instructions] Your first question comes from the line of Mike Dahl from Credit Suisse. Your line is open..

Thanks for taking my questions and congrats on the progress this quarter. I wanted to start out on the paint segment. And John, I think you mentioned there is $25 million of incremental spend in 3Q. So just rough math seems to suggest that that's talking about dropping down to something like 14% operating margin.

And so is it that the right way to think about it and then how should we think about the fourth quarter? Is any of that actually a pull forward from the fourth quarter?.

So Mike -- no, to answer your question directly, we continue to believe that this is going to be a high teens margins business. Really what happened and what’s driving a lot of the spend is as I mentioned in my prepared remarks, we had the 4th of July event that took place.

Typically, it’s a 10-day event, it was a 5-day event this year with Home Depot on the 4th of July holiday. And we just had the benefit in the quarter of all the sales related to that promotion but not on the expense.

And so we don't think the total expense that we incurred last year is going to be any different than the expense that we incurred this year. We still incurred and it’s going to be the shorter window of time. And so that’s what’s driving the amount of that expense.

So I still think even for Q3, even with this $25 million of incremental expense that we talk about, I think you’ll still see high teens margins from this segment..

Got it. Okay. And then shifting gears to the cabinets, obviously strong performance there. I think you credited mix but I wanted to also dig in because obviously at the Investor Day, we heard a lot about some of the initiatives and with the new leadership there.

And so how much of that, would you say is being driven by some of those tasks that Joe Gross came in and from day one, it seemed like he thought there were -- there was a large bucket that was still low-hanging fruit.

And so how much are you already benefiting from that in the quarter and what should we expect going forward?.

We’re clearly seeing a benefit of Joe’s leadership and that entire team. Extremely pleased with the progress they're making and they are laying the ground work for this business to be even better.

When we think about the outlook for the remaining of the -- remainder of the years, as John and I both mentioned, we believe this segment will contribute $25 million dollars of operating income in this year. And then we’re going to continue to drive the business beyond that..

Okay. Thank you..

Your next question comes from the line of Susan Maklari from UBS. Your line is open..

Good morning..

Good morning, Susan..

First, just coming back to the cabinet for a minute, the $25 million profit for the year is not that far from sort of where we had been going prior to this quarter. So it seems like even with the POP, you are really not changing your back half expectations a lot.

Can you just help us understand how we should be thinking about that and maybe how sustainable are some of these things that you’ve seen?.

When we look at -- I will hit the demand pattern first, talk about that a little bit. We are seeing the new construction accelerating in the back half of the year, which is favorable for us. We have the leading new construction brand in Merillat on the cabinet side, so that’s positive in terms of the overall volume.

It does come at a little bit of a leaner mix for us. So, we see some of that mix headwinds if you will in the back half, but we feel good about the underlying demand in this segment. Our KraftMaid brand continues to take share at retail. We feel very good about that.

So when we rolled that up and we look at the overall year, we believe we will come in at $25 million of operating income..

And Susan, maybe to supplementing Keith’s comments a little bit, basically we are looking at this segment and really spoke about the segment in our Investor Day and we thought we delivered about $10 million of operating profit for the full year.

And so we think that this is -- given the strength of the second quarter that we experienced and given what Keith just talked about the strength of the second half that we see, we think that the $25 million new target that we are focused on is a material move upward from where we were before..

Okay. And then in terms of the share repurchase, you noted that you increased the dividend.

Is there any thought about perhaps accelerating the share repurchase activity or increasing that authorization at all?.

We can’t, Susan. The authorization was just put forward in September of last year. At that time, we’ve been very consistent in saying that we repurchased between $400 million and $500 million worth of shares each year. And so we at this point are not changing that guidance at all.

We expect to in 2015% repurchase somewhere in that $400 million to $500 million range..

Okay. Thank you..

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

Thanks. I also wanted to dig into cabinets, terrific performance there. And I wanted to understand, this improvement has happened a lot more quickly than you laid out at your Investor Day and certainly, I think than a lot of people were expecting.

So, first of all, starting on the revenues, you mentioned even with some trimming down of low margin business in the builder channel, there was enough pricing improvement and dealer KraftMaid sales to drive a pretty decent sales performance.

So if we were to break those down, how did those weigh on the sales number, what was the main driver in driving the good sales performance there, how much pricing, how much volume and how much of an offset might there have been from shedding some of the lower margin side -- sorry the lower margin business?.

It was a mixture, Nishu. When you think about the KraftMaid brand, we've had really nice success in the retail channel and with that, KraftMaid sales has favorable mix for us with good margins in KraftMaid and we enjoy that volume without a doubt.

We also launched recently the KraftMaid Vantage program, which is a dealer exclusive product line that has exceeded our expectations. It really is hitting the mark in terms of the expectations and the service that it gives the designers, as well as the owners and the dealer principal.

So that KraftMaid benefit in terms of the overall unit volume, as well as the benefits of the mix and the price point that we get out has been very fundamental to us for sure in the turnaround.

On the pricing and the builder direct side and the Merillat brand, that's really, I would say a 50-50 mixture where we are getting good results from the price increases that we are taking out to the market and we are driving the business to be more selective in the builder direct business that we go for.

And also significant cost outs where we've -- we are not only not incurring the cost penalties and inefficiencies that we had in ‘14 associated with the ERP system, but we are also driving new improvements in terms of raw material yield rates, machine efficiencies and labor efficiencies.

So it’s been multiple areas that have given us this improvement both on the demand side, as well as the cost management side. And I couldn’t be happier with Joe and the team..

Got it. Got it. Great. And actually, I also wanted to ask about the cost side. That was very helpful color. At the Investor Day, Joe had talked about seeing a bucket of $50 million roughly of cost that could come out of this business and obviously, you talked about the margin, the margin potential of the business.

Any updated thoughts on that, seems like that has gone better than expected? Any updated thoughts on the, kind of cost takeout potential out of this business longer-term?.

Our focus is still on this year. We are going to continue to drive this business, make it all that it can be our target. We’ve moved up from $10 million to $25 million in the year and certainly we see the potential for this business to be better beyond that.

But for now, Nishu, we are really focused and Joe is focused on driving this business this year..

Great. Thanks..

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

Thank you.

Just looking forward, particularly in commodity, raw materials, do you see anything coming -- it's going to be a change from what we’ve seen from the first half of this year?.

Keith, it is John. In terms of what we are seeing in terms of inputs to plumbing, cooper has been a little bit volatile over the course of the last couple of quarters mostly on a downward trend. But with some of the new legislation that’s out there related to brass and the like, so it’s changing some of our mix of product.

There is some new legislation out there in term of flow rates in California, given the drop. We are coming up with some new products and so we need to introduce and are require to be introduced. So, we feel good about that. I also -- as the comps grow, as we look at our international sales, they end up buying their brass and their copper in U.S.

dollars, so that will have a slightly negative impact on -- as we look forward, I don’t think it’s going to be that material at all. So, I feel really good about where we stand in terms of our position.

We are really pleased though, I should say about the progress we are making in the trade channel, both of our Delta and our Brizo brands as we mentioned earlier, we are seeing really good sales through that channel right now..

And slightly same question for the same business moving forward..

We’ve seen some favorable commodity read through in that segment. As we talked, we are committed to investing in that segment because it’s a great return for us. And the investments in that channel not only drive topline but they further reinforce our brand positioning and customer royalty. So there is a virtual cycle there. So, we are happy to do that.

Our intention is to -- as we talked about, Q3 versus prior year Q3 to invest across a wide area in that segment from new program wins in Liberty hardware to advertising and promotion. We are finishing up the expense associated with the color centers. So, all in about a $25 million incremental spent, when you compare Q3 of this year to Q3 of last year.

So long-term and in year, we expect this segment to be right there in the high teens around 18% margin..

Okay. Thank you..

Your next question comes from the line of Will Randow from Citigroup. Your line is open..

Hey. Good morning and congratulations on the quarter..

Thanks Will..

Thanks Will..

Just a question on regional trends. We heard about just like most folks, demand being impacted in main places like Texas, partly because of falling rain.

Are there any regional trends, which you could call out in your business or dampening of sales, driven by some of the weather activity we saw in the second quarter?.

We did see a little bit of a headwind as you might expect in our exterior paint business in Oklahoma and Texas with all the range that they had.

But when you look broadly across the country on a take repair, remodeling modeling first, we see pretty steady demand across all of our markets, really from a new home construction perspective, good growth around that southern smile in the United States if you would, particularly in Florida and Carolinas.

So a little bit of regionality, but really it’s a demand patterns when you look across repair, remodeling and new construction has been pretty steady.

When you look across our channels at retail trade direct to builder, we are really seeing some nice steady growth and in particular our trade and dealer business is strong both in a cabinet business as well as in plumbing. So we like the way the portfolio is mixed across both the demand drivers regionally and geographically.

We are seeing some good growth in Central Europe. Southern Europe is starting to raise its head up a little bit and pick up real solid growth in the U.K. And in China, Hansgrohe continues to win with their brand and innovation and their strong dealer network over there. So a pretty steady story both channel-wise and regionally..

Thanks for that. And just one follow-up on the cabinets business.

Do you feel like you picked up any share in the second quarter? Or is the demand pace that you saw in the second quarter probably going to get good proxy for what we might see in the second half?.

We picked up share in retail. We feel confident saying that. The KraftMaid brand continues to resonate with the designers and the influencers, and it’s a great product and it’s working well for us.

On the dealer side, as we’ve talked about in the past, it’s really as touch quarter-over-quarter basis to peg the market size there, but we feel we are holding our own and gaining slightly on the dealer channel..

Thanks again. And congrats once again..

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

Hey, good morning. You guys smoked the quarters. It’s got to be a great feeling. I wanted to ask you on paint. You had a pretty tough comp coming in and you actually put up a really good topline there. Is this like due to end market growth or is this due to product innovation? And you’re putting $25 million into 3Q.

And my guess is that will turbo charge demand.

How should we be thinking about the demand cycle given the trends? Is this end market growth, product innovation, or just a byproduct of you guys pounding with the category?.

Yeah. I will start-off and repeat the part of your question and turn part of it over to Keith as well. You are right, we did come into the quarter with the relatively tough comp. I think we have 5% in the second quarter of last year. So you are right, so good performance by the Behr team, we’re really proud of what they done.

I would say part of your question is definitely innovation is helping drive the growth at Behr. The Behr Marquee is resonating well with the consumers. But then I will say our Pro initiative is continuing to gain traction over time.

And obviously, it’s been building over the last year or two from a relatively small number, but we are seeing just very consistent growth as we penetrate the pro channel.

Keith?.

Our core is doing very well as well, Bob. The new color centers, while the installation has just completed in June for those color centers that have been in for a full quarter, we are seeing nice lift.

The product is resonated and we are really looking for it, as we move into third quarter to leveraging and overlaying at nice ad spend onto that new merchandising and the new products altogether. So we think it’s a nice 123 punch to drive us into the quarter and finish the year.

In terms of how much of our success here is share versus end market growth, that’s as you know difficult again to peg the size of these markets and it’s tough to parse that out, but we feel very good about both the underlying economics around the repair, remodeling and particularly this size ticket with paint.

And we also feel very good about how we’re delivering from a merchandizing product and customer satisfaction customer experience standpoint..

Let me ask that different way.

Do you think gallon growth will track low-single digit or more mid-single digit?.

I think more low..

Got it. And on your cabinets business, I would say this is a pretty V-shaped turnover real fast. Hats off to you guys because I am sure that took some intense work. You’re putting up a 5% margin, 5.6% massive year-over-year improvement. I am not looking for a spike in exact here. You went from $10 million to $25 million of operating income.

But maybe just leveraging off some of your prior commentary, at mid cycle what kind of margin do you think you can deliver in this business and what are the steps you need to get there? Thanks very much. And good luck..

I would say high single, low double, Bob, took that digit margins..

Any view on timeframe to realize that kind of profitability?.

Well, it’s tough to nail it down to a timeframe. I hate to do that here. I would tell you that I think this business, we’re going to continue to drive it through the year to that $25 million and then there is upside for that..

Yes, Bob, I think the second half of this year will tell us more about the trajectory of this business..

Got it. Good luck. And great quarter. Thanks..

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

Stephen, are you there?.

I am sorry about that.

Can you hear me now?.

Yes. Okay. Sorry. That’s my fault. Just quickly in cabinets, obviously the improvement we saw this quarter was impressive.

Can you talk about how the improvement shaped up over the course of the quarter for example? Was your sort of exit rate in the quarter in terms of the way the efficiencies were coming together running at a higher rate than maybe even what we saw in this quarter? Or would you characterize sort of the improvements that were achieved in the quarters being maybe a little bit lumpy somewhere tied to specific initiatives or specific improvements that sort of occurred helter-skelter throughout the quarter.

If you could just give us a sense for what that look like so we can be thinking about how things shape up from here..

Stephen, it’s John here. I would say that the improvement over the quarter was pretty consistent. I know it’s upward trended and things had developed. Obviously, the sales were kind of picked up seasonally in this segment. And so I think the improvement is going to follow that seasonal sales level..

Well, that’s very encouraging. Great. Okay. And then, in the decorative art, just a question there, your raw material benefit I think you -- we’re just trying to get a handle on. I think we talked about $25 million of incremental spend and you sort of talked about maintaining the margins.

I am wondering if we could take those remarks to sort of triangulate in onto an assumption that maybe about that $25 million was about what your raw material benefit was..

Stephen, I would try to interpret it that way. The material benefit was far less than that in the quarter. Again, remember we had a lot -- a fair amount of promotion that we didn’t spend in the quarter. So I wouldn’t try to interpret it that way..

Okay. Great. Well, thanks very much, guys. Great job..

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

Hi, everyone. Good morning. Thanks for all the details. A lot of my questions had already been answered. I want to take things from a little tack in terms of cost and margin. You had again very solid SG&A leverage. In the quarter, you’re down I think 30 basis points from the year ago as a percentage of sales.

How much more favorable might that ratio be able to be over the next several years, how much of that might have been if at all related to currency moves, and how much it was structural? And is there any point where either because of the revenue growth or the type of markets you were in for a macro standpoint where you start to see some breakpoints in SG&A, the sales have to start naturally trending higher?.

Yes, George, good question. One of the things that we’ve been focused on for the last several years is our SG&A expense in total. And to your point, we have seen some of that benefit flow through over the course of last several quarters and it really manifested itself well here in the second quarter of this year.

Not much of the benefit I would tell you comes from currency, just the way that our operations were. So I would say most of it is fundamentally structural. Lot of it we think had to do with some of the cost out initiatives that we initiated over the last several years.

I would tell you under Keith’s leadership, under the new initiative team we are highly focused on managing our cost structure. And so I think cost control, cost containment is one of the things that we speak about regularly and on an internal basis. And so, is there further upside from here? Yes, we think so.

But is there going to be a fundamental leg up from here? No, I don’t think that you will see that. I think you’ll just see regular consistent performance continuing to drive our SG&A lower. Some of that will come. Obviously, volume will help improve that metric as well.

So as we grow over time, I think we can leverage kind of our fixed cost SG&A base pretty well. So we look forward to improving that metric over the course of the next several years and we’ll keep you informed as we make progress..

So differently you have enough capacity at that line level of staffing, serves etcetera to grow the business without seeing it go up naturally is what you’re saying as well..

That’s right. Obviously selling will flex a little bit as sales grow. But the G&A component of SG&A, we think we’ve got pretty tight level that we won’t need to invest incrementally to grow the business..

Okay. And just on paints, my follow-up. I think an answer to one of the other questions you’d mentioned that you expect low-single digit growth in gallon on a going forward basis.

And not trying to get too nitpicky or pedantic, I mean if you were investing in the business as agree, which you will in the third quarter end and rightly so given the margin, how do I reconcile low -single digits if I heard you correctly with the reinvestment? And how important is the Pro piece of that in maintaining the growth going forward? Thanks.

And good luck on the quarter..

George, I think you reconciled our investment in the upcoming quarter and out quarters by taking a long view in the segment. We believe that fundamentally R&R is going to grow in the 4% to 6% range, so that’s good growth for us. We have a leading position and a great partner.

And we’re integrating merchandising with product and advertising, and that’s a good story. So when we think about the investments in this, we don’t think so much quarter by quarter, while we do want to be transparent and allow you to do the modeling as accurately as you can, we really take a longer-term view of this.

And we like the segment and we like our growth potential in it..

All right. Thanks, Keith. I’ll turn it over..

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

Thanks. Good morning, everyone. And congrats on all the progress. The first question I had was on just going back to cabinets for a moment. And certainly, you kind of highlighted a few drivers of the improvement in the quarter over the last -- over the year ago quarter.

Just trying to get a sense perhaps, if you aren’t able to let say, just say, okay, this amount of dollars came from cost outs versus mix.

I was hoping to get a sense of maybe just prioritizing the drivers, what was the biggest bucket, the second biggest bucket if you were to think of perhaps, some of the cost outs versus mix versus pure volume leverage.

How to think about what’s really driving the bus in an order of magnitude sort of way?.

Mike I’ll start with cost. I think that’s the biggest bar in [Parado] [ph] and in that, there is lack of spend on the efficiencies that we had versus prior year with the ERP and then real robust if you will new cost outs around productivity scrap yield, those sorts of things. So that’s the first bar. Volume would be the next one.

Volume was a nice contributor for us in the quarter and we expect that to continue in that the third and the [Parado] [ph] bar would be mix..

Okay. Perfect. And secondly, just looking at some of the -- let’s say, non-segment line items. You continue to exact a lot of discipline on the overall corporate expense line at around a $100 million this year.

How should we think about 2016, while not getting too specific in terms of guidance obviously? But just is that something that you grow more modestly in line with inflation? And any thoughts around just the ongoing tax rate for this year? I believe around 40% on a blended, but I believe in our model at least, we have a back half of 36%.

And I believe that's kind of what the ongoing number is to think about going forward, if you can just clarify those items..

Sure, Mike. In terms of the general corporate expense, I do think the $100 million number is kind of our new run rate down from where we’ve been historically, $5 million or $20 million to $30 million. So we feel really good about what we’re accomplishing on, the cost control on the general corporate side of things.

And to your point about the go-forward, we don’t see it materially changing from here. Could there be some inflation, yes, what we try to offset that inflation, whether its wage or healthcare or whatever through productivity absolutely we are going to try to do that. So we like to think $100 million is a good number.

So in terms of the tax rate, yeah, we did one unusual item flow through the tax rate this quarter. They had to do with an unusual item related to the spin where we had doing -- it actually had to do with TopBuild but we have to incur through continuing ops on our side, so it’s kind of an one-time event.

But to your point, I know it’s about an $18 million item that flowed into our tax rate. To your point long-term, I will think about this is a 36% tax rate, that should be our long-term tax rate for back half of this year really going forward into 2016..

Great. Thanks, guy..

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

Hi. Good morning, guys. First question is just, as you think about that second half guidance for Cabinets. Keith, you mentioned the acceleration you’re seeing in the business backlog and new construction coming through.

So it seem volume would be a bigger contributors as you move forward? I know after doing $15 million of property, you’re kind of guiding to $10 million for the second half combined? Is there anything that we should be thinking about that would cause that the deceleration or is it just conservatism given the choppiness of the cost outs?.

I think its more on the demand side, particularly as we see the new construction accelerating the back half that mix tends to be less profitable for us, let say, more repair and remodeling driven mix.

So as new construction grows there is a faster clip in the back half, which we expect R&R, that would be a mix, there is also the seasonality that’s inherent in the business..

Okay.

So mix was positive in the second quarter, you’d expected to be a drag if new construction plays out as you expect?.

When -- yes. When comparing back half over second quarter, yeah..

Okay. And then just bigger picture on the business, I think, three months ago at the Analyst Day, it seemed relatively open to sort of gauging the business at the end of the year and then rollout of sale that was in the best interest of shareholders.

What do you say, it feel any better about the sustainability of the business within the Masco portfolio today than you did then, or as this trajectory about what you had expected?.

I feel better about the performance than I expected. We’ve guided the $10 million of profitability in ‘15 and now we’re more than doubling that. So I pleasantly surprised by the, not surprised but feel good about the work that Joe and his team have done.

We haven’t looked at all and we're not really thinking about any kind of potential portfolio moves, what we are really doing is driving this business for this year, that’s Joe’s charge and as you can see, he is taking that out fulfill..

Okay. Good. Thank you, guys..

Thank you..

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

Thank you. Good morning, guys. Keith, could -- I know you all don’t give out any more, what exactly is going on through the quarter.

But could you talk a little bit more broadly about how the quarter evolved with trends thinking both, separating out North America and Europe? And then just one last question on the paint, you had a competitor that did a big rollout at lows.

You all were also bringing out your color center impact at the same time? So can you sort of parse out what you think that -- maybe that first onslaught from competitor did for you -- did to you and then what the color center did for you and how you all are measuring that?.

In terms of the in-quarter trend, when you pill back some of the inventory fluctuations that are natural, whether you're talking about system load for a promotion or just some natural fluctuations that can happened in the channel, you pull out FX. It really was remarkably steady eddy through the quarter in terms of a month by month look.

So, I would characterize to your first question in terms of the in-quarter trend is being remarkably steady..

Nothingly different between North America and Europe either..

Okay..

Yeah. Same story over in Europe, pretty level and we like that. This type of demand increase and this type of macroeconomics bode well for us. We have the capacity in place from a brick-and-mortar standpoint with our significant capital investment to support this kind of growth.

And then with this kind of steady nature of it, our people systems respond very well to that, in terms of retaining and training our staff. So that we can maintain our customer satisfaction levels and quality levels and do it in a way that it is a reasonable amount of overtime and avoiding fixed spikes in premium freight and logistics hit so.

We like this types of steady good momentum on the growth side. Don’t really want to comment about what’s happening, what competitor’s moves we’re focused in terms of those impact. We’re focused on being the best channel partner we can be for The Home Depot and being the best paint supplier we can be for the consumer and it’s working.

The color centers were just really finalized and put it in June. So it’s too early to tell, but for those centers that have been in a while particularly the ones that have been in for sometimes up in Canada, we are seeing all of our research that we’ve conducted with The Home Depot. We’re seeing it pay off.

It’s a better mousetrap, a better merchandising solution that takes into account how the buyer has changed overtime and we’re excited about it..

Okay. Thanks. That helps me there.

And then John maybe this was directed at you, can you talk about where you think your cash flows will be in 2015 and the buckets -- prioritized the buckets et cetera? And then, I know it’s early for 2016, but does 2015 have a normalize feel about it or is there something different that we ought to be able to see as we move through 2016 on it from a cash flow and usage perspective?.

No, no. Stephen, in terms of cash flow, the only thing that’s going to be unique this year is obviously why the $200 million dividend from TopBuild that we got in the second quarter from them. But beyond that, it should be relatively normalized cash flows in terms of, I think you brought the questions on capital allocations.

Our priorities really haven’t changed much from what we discussed at our Investor Day. Obviously, we continue to invest in the business is our first priority and as Keith referenced we have a relatively low investment requirements for that.

Beyond that, we talk about paying down a little bit of debt next year, also balancing that with acquisitions and shareholder friendly requirements. Obviously, we just announced the dividend increase, about 6% dividend increase effective about the fourth quarter.

So that will be a slight use of cash but it shouldn’t be significant just given our share repurchase activities. The overall cash outflow impact isn’t changing significantly or so. We feel really good about our cash flows. In terms of ‘16, again I don’t think we’re going to change all that much for 2016.

And I think we’ll continue to focus on investing the business share repurchases acquisitions to continue to grow the business. So I think a very consistent message you’ll hear from us over the course of the next two to three years..

All right. Thank you. I appreciate it..

Our final question today comes from the line of Eric Bosshard from Cleveland Research Company. Your line is open..

Good morning..

Good morning, Eric..

One more question on the cabinet business. Curious if you look at two factors, one for the market and secondly, your share, in terms of the market, do you feel that the repair remodel market is same or accelerated? And then secondly, you comment on the KraftMaid is continuing to gain share.

We just love to understand, how this year performance now is different than before? What's driving that and is there any change in promotional efforts or traction in that business?.

On the market side, Eric, we feel good about R&R. There is a basket of indicators that are all positive, when you look at employment levels, consumer confidence, household formations and importantly, it’s improving values of existing homes, which is a key driver for this segment.

So, you couple those indicators with what we believe to be pent-up demand where people have put off these types of purchases, and they can now connect with that in terms of return on investment in their homes. We think there is good steady R&R growth that we’re looking at. In terms of our share, clearly, we’re doing well in the home centers.

We’ve been steady in our promotional strategies as you recall a couple quarters ago, we talked about fine tuning that. And we've gotten to a very nice place where it’s productive for us in terms of driving demand but it's also very is profitable and is sustainable.

So, I wouldn’t characterize our promotion activity as really much different from prior quarters. I mean, it is continuing to work. You supplement that with some of our targeted new product introductions both into dealer as well as in the retail channels, it’s all contributed..

I appreciate the repair remodel market dynamics have been favorable in terms of home values and those factors. But it’s probably cabinets has kind of lagged other categories and participating.

Are you suggesting or seeing that the cabinet market is now performing along with other categories or perhaps you see that all along, can you just give a little bit more color on that?.

I think we're seeing it improving. I know we’re seeing it improving. The pent-up demand is starting to release, we believe together with all those other macros. So whether or not this large ticket is the way up to the rest of the market, tough for me to say but we certainly are seeing it improving.

And we are seeing it across the board, which gives me confidence. We’re seeing it in our window business where we are having nice success with our higher end of the range there. We are certainly seeing it in plumbing as we drive our assortment and we pay better attention to the showroom channel. So, we are seeing good uplift there in terms of ticket.

And you look at Watkins, I mean, you don't get much more discretionary than expenses far and we are really doing well, record quarter in that business.

So when you look at it, when I look at it from a number of different angles to try to get a feel for in particular big-ticket on the cabinet side is starting to unleash a little bit, I said yeah, it is and we like it..

Great. Thank you..

Thank you for attending Masco Corporation second quarter 2015 results conference call. This concludes today’s call and you may now disconnect..