Masco Corporation Presents at DbAccess Global Industrials and Basic Materials Conference: US Industrial Renaissance in Chicago, Jun-12-2013 08:40 AM

Jun.12.13 | About: Masco Corporation (MAS)

Masco Corporation (NYSE:MAS)

June 12, 2013 9:40 am ET


John G. Sznewajs - Chief Financial Officer, Vice President and Treasurer


Nishu Sood - Deutsche Bank AG, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

So why don't we get started. First session of the day here. I'm very excited to kick it off with Masco Corporation. I'm Nishu Sood. I'm the building and homebuilding analyst at Deutsche Bank. Just wanted to give a quick advertisement to our conference handbook. This has some profiles of all the companies that are presenting in the homebuilding and building product sector and -- as well as really tough questions that you can ask them in your one-on-one.

And -- so I'm delighted to introduce Masco. Very interesting fact. Last year, Masco, and I think your market cap last year would have been probably what, $6 billion, $7 billion or so?

John G. Sznewajs

Right. Probably [indiscernible]

Nishu Sood - Deutsche Bank AG, Research Division

So Masco market capital was $6 billion or $7 billion last year, was the most requested meeting last year for one-on-ones. So that gives you a sense that obviously, we are in residential recovery. Obviously Masco with a 70%, I'm sorry, 80% exposure to U.S. residential construction. Again, a ton of interest this year, so very excited to hear what they have to say.

This year, John Sznewajs is the CFO and he has worked in various other financial roles in the past as well at Masco Corporation. So delighted to have him speaking. Also up here is Maria Duey, who works in IR; and Renee Benedict is here as well. She's also part of the IR department.

So with that, I'll turn it over to John.

John G. Sznewajs

Thank you, Nishu, and good morning to all of you, and thanks for joining us here this morning. As Nishu said, I'm delighted to be here because we actually are in recovery now in the repair/remodel and new home construction industries in the U.S. And so before we get into our strength, our strategies and our growth that we've seen in front of us, I thought we'd spend just a couple of minutes covering some basics about the company for those of you that may not be as familiar with us.

So we finished our 2012 with about $7.5 billion in revenue. And just to give you a little bit of a sense, about 1/4 of that was related to the residential new home construction market here in the United States. The balance of about 75% was related to the repair/remodel industry that we serve here in the U.S. If you take the same set of businesses that we have today and roll the tape back to 2006, what you would find is that we have about $11.5 billion in revenue, and about 45% of our exposure was related to new home construction and about 55% was related to the repair/remodel industry. So you can see the dramatic impact of the downturn it had on the new home construction side of our business and a composition of our business over the last several years.

There are a couple of things that distinguish us from our competition and one of the biggest things is the fact that we've got some of the best ways [ph] in the industry with market-leading positions. So in the plumbing industry, we've got Delta here domestically, Delta Faucet Company, as well as Hansgrohe. That's our international faucet brand.

In our paint segment, we've got Behr, one of the leading DIY paint manufacturers, as well as Kilz, one of the leading primer brands here in the United States. We also have the #1 and #2 brands in the cabinet industry with KraftMaid and Merillat. And finally, we've got the leading vinyl window business in the Western U.S. under the Milgard brand.

At the same time, we've got some great strength within this business and a great scale. And we believe we are the largest manufacturer of faucets in the world; the largest commodity supplier, non-commodity supplier to the Home Depot; the largest supplier to Lowe's in their kitchen and bath segment; the largest supplier of architectural coatings or paint to the U.S. DIY market; and the largest and only national installer of fiberglass insulation for the new home construction industry. So that gives you a good glimpse of the company.

So with that, let's take a little bit of a look at our strategy. Really there are 4 strategies that we're pursuing to drive shareholder value. So we're looking to expand our market leadership positions, reduce our cost structures, improve our 2 underperforming businesses, that means our cabinet business and our installation business, and then strengthen our balance sheet.

So as we think about expanding our market leadership, and really, we take a look at the brands that we have in their market positions over the course of the last several years. And we clearly see the Delta, Peerless and Brizo, our faucet brands here in the United States have gained share in the last several years. Along with Hansgrohe, our international brands, as they have continued to penetrate more markets and gain shares by participating in international projects.

Our paint business has done a nice job of gaining share as they've introduced new products as well as certain to seek out new channels of distribution by going after the Pro paint contractor.

And then our Masco Contractor Services organization or services business has looked to expand their footprint by going after the residential retrofit and light commercial markets as well.

We also are focused on reducing our cost structure, and you can tell the downturn ahead has had a significant impact on our business. We estimate that it would take about $600 million of fixed costs gross out of our business over the course of the last 7 years. About $200 million of that $600 million is in our cabinet segment, another $200 million of fixed costs has come out of our Installation segment and the balance is really spread across the rest of our businesses. It's been some tough work we've had to do. We've closed more than 30 facilities -- 30 manufacturing facilities, as well as, has closed more than 150 of our Installation branches. At the same time, we've had to make some very difficult decisions by cutting our workforce in half over this period of time. So you can see we've taken a really good -- we've done a really good job of going after our cost structure.

We're looking to improve our underperforming businesses, and again this is our cabinet business and our Installation business. And because of the fixed costs we've taken out, we've seen some nice improvement in both of these businesses over the course of the last 18 months. So in 2012, for instance, we have improved the bottom line performance of both these businesses in aggregate by about $85 million. And then in the first quarter of 2013, we've improved the bottom line performance of both these businesses by about $24 million. So you can see that the fixed costs and the rationalization activity that we've undertaken over the course of the last several years has a good impact on the bottom line over the last couple of quarters. We achieved profitability in our Installation segment in Q4. And we are breakeven in our cabinet segment in the first quarter with our North American cabinet business making a little bit of money while our European business was a little bit negative from profit standpoint. And we've done a nice job of taking our breakeven cost down, so we are profitable at lower levels than we have been in the past.

And finally, we're looking to strengthen our balance sheet. We have an 87% debt-to-cap ratio at the end of 2012. That largely developed as a result of some impairment charges we took during the course of the housing downturn. We're addressing this in a couple of different fashions. One, we're looking to take down debt, so we paid down $400 million of debt in 2012. And we're planning to take out $200 million of additional debt this year because we have an August maturity that's coming due. At the same time, we're taking a look at the other side of the equation and we know that the denominator of this equation will improve dramatically as our financial performance improves and retain earnings piled back on to the balance sheet. Also the fact that we've got valuation allowance in our deferred tax assets that at the end of the year, aggregate about $600 million even though we'll put back on to the balance sheet at some point in the future.

So those are our strategies. Now let's take a quick look at some of our strengths, which we think are numerous. So as we consider our strength, the first strength that we consider is our brand strength, and I mentioned this a little bit earlier. We've got some of the best brands, again, in the industry whether it's KraftMaid, Merillat, Delta, Hansgrohe, Behr, Kilz or Milgard. But as you can see on this slide, we've also got numerous other brands and these are largely trade brands that participate in niche markets. I think the good news about the number of new brands is that given our financial strength, even though we went through a pretty significant downturn, we will continue to invest behind these brands over the course of the last several years. And one of the significant ways that we've invested in the brand, the fact that we've continued to focus on innovative products over the course of the last several years, and really this is our legacy. The company founded -- was founded in the 1920s, but really in 1950s, we introduced the single-handle faucet and we've built upon that legacy of innovation ever since. So you can see here that about 30% of our sales last year from our manufacturing businesses were derived from products that we introduced in the last 3 years. And returning to my earlier point, we're able to invest. So in 2008, we launched the Delta touch faucets. Then in 2009, we introduced our Paint & Primer in One product. We are first to market with their product. It's a huge commercial success. In 2010, Milgard introduced their Essence line of window, which is a new fiberglass and wood combination window. In 2011, we introduced a Pro-oriented paint brand under the Kilz brand. 2012, we partnered with Home Depot and launched the first-ever toilet program in Masco's history. And then this just this year and here in May, we launched BEHR MARQUEE, a new high-end exterior paint line, again, in conjunction with Home Depot. So you can see that we've got a great strength in product innovation.

The other thing we've done is we've aligned ourselves with the best customers in the industry. So whether it's the big-box retailers, and the fact that we support them with over 750 field sales service reps, the fact that we've got great relationships with those customers from top to bottom. And with the homebuilders, we not only partner with the public home builders that are doing extremely well in this developing market, but we served both the large publics as well as the small regional builders. So great alignment up and down the home builder channel.

And then our traditional customers, the smaller ones, the dealers and wholesalers that are important to our -- in our business going forward. Our financial strength -- we're able to support them in their unique needs by giving them display and technology support.

The next strength is the fact that we've got a nice internal continuous improvement culture that we've been implementing across all of our businesses. And this really starts with customer focus and that leads us to the innovative products that we've developed. We've really implemented lean over the course of the last several years as well getting that ingrained to it across all of our businesses. So this is a nice disciplined way to approach our businesses, run through our planning process and so we're very dedicated to this component of our business.

And then finally, our financial strength is unparalleled. We finished the first quarter with $1 billion of cash from the balance sheet, but down from $1.4 billion at the end of the year. So we do have a seasonal burn in the first part, in the first quarter of the year and that reflects that.

At the same time, we also entered into a new 5-year credit facility in March of this year. And it gives us great backup liquidity. The point I would make with our credit facility, the fact that we've not capped it in more than 20 years, but it's there to the extent that we may need it.

So that gives you a good overview of our strengths. Let's look a little bit of a look at how we intend to grow over the course of the next several years. I don't think anyone in the room would doubt the fact that the trends are finally turning positive in our industry. So whether it's household formations improving, housing affordability, existing home turnover, everything is going in the right direction for us. So we feel really good about how the macro is lining up to add some tailwind to our business over the course of the next several years.

And these are, by the way, internally that we think we are leveraged to grow with the recovery. So first, we've got very good operating leverage in the business. We generally dropped about 30% incremental margin, our -- we have 30% contribution margins on incremental volume. And so we've done very well in that over the course of the several years. In 2012, we dropped about 50% incremental margins. So a little bit higher than that. Some of that was aided by some pricing that we put in the market last year. In the first quarter of this year, we exceeded 30% incremental margins as well. So good performance here.

Over the long-term at 3 to 5 years out, housing returns to that long-term average of 1.5 million units and as a commensurate return in the repair/remodel industry, we do think this business can generate between $10 billion and $12 billion of revenue with margins somewhere between 10% and 14%.

At the same time, we've got a lot of initiatives and while we think we've got a great macro tailwind coming, these are the initiatives that we're counting on to drive our business greater than the market growth. And so we've talked about our product introductions whether it's the BEHR MARQUEE line that we launched or their new DECKOVER product, a new deck-resurfacing product that they launched in May of this year.

We've also taken the last several years to focus on strengthening our brand loyalty, and the classic example that we have is our Delta Faucet company. We've improved Delta's unaided brand awareness in the last several years by 15 points putting them at the top of the industry. At the same time, one of the things we've done is we've done a lot of research and interestingly enough, the average consumer thought that we make toilets. In our history, we never have -- and the fact over 70% of the folks say we're the #2 player in the toilet industry. So in 2012, we got into toilets. If the consumer thought we should be in the industry, we got into it. And so we partnered with Home Depot and launched that and it's been a great success. We've also moved the Delta brand to bathing units, something that they have not been in before, but a sister company had made it. So we're branding our bathing units to Delta.

At the same time, we've expanded our Installation business into the retrofit and light commercial areas to better balance their business, to take some of the volatility out of that business. They're also pushing our businesses to expand internationally. So whether it's Delta, we've taken them outside the U.S. or Hansgrohe, our global brand. They are now in more than 130 markets around the world. We've taken Behr out of the United States as well. They're now selling paint in China. And then even not going outside of the U.S., but expanding regionally, you take our Milgard brand out of the Western U.S. and into Western Canada and into Texas. So a lot of initiatives is to drive growth here over the next several years.

We also had to focus on our cost position. While it's great to drive growth, we have to maintain our focus and discipline around cost. So you can see here that we've taken out about $200 million of -- we enjoyed about $200 million of total cost productivity in 2012. This comes from a variety of actions that we've taken, whether it's some of the plant closure and headcount reductions that we had taken in prior periods that flowed through in 2012 or the fact that we're continuing to drive sourcing savings, lean savings through our organization to our continuous improvement efforts. At the same time this year, in the first quarter, we enjoyed about $42 million of total cost productivity in the gross basis and we think we can enjoy about $150 million maybe a little of upside to that number to the balance of 2013.

Then we take a look at our capital deployment. As we think about our capital, the good news is we're not a particularly capital-intense business. CapEx runs about 2% of sales and we've got enough capacity in the system now that the environment can return to that 1.5 million housing units and a commensurate return in repair/remodel activity without us having to add any significant bricks and mortar. So we're in a great position from an infrastructure standpoint.

At the same time, we've got great cash flow generation prospects. If you take the period 2003 to 2007, that's 5-year period, we averaged $1 billion of free cash flow each year and that's after we invest in $1.5 billion in CapEx and $300 million in display to support our business. And so we're in a very good shape from a cash flow generation perspective. I think we can return to some significantly better levels than we've done over the last several years.

At the same time, we are looking at small acquisitions. We've done a number over the course of the last 18 months. Most recently, we had a small composite door business to our U.K. window business to help them grow and penetrate some markets over in the U.K.

And finally, we're delivering on our 2013 priorities that we set for ourselves. You can see here that we made progress against all of them so far except for the debt reduction that we intend to take care of in August here in the third quarter. I would also tell you that in April, we've seen some success from these initiatives that we're delivering on. From a standpoint that our sales in April were up mid-teens percent and I can tell you that here in May, our sales were up low double-digit. So continuing strength here in the second quarter.

So to just kind of wrap it all up, as we consider it -- if you take the strength that we have in the business whether it's our brands that we've talked about, the innovation that we're driving, the strong financial position that we have, really on top of that our strategies of continuing to improve our fixed cost position and expanding our share, you marry that up with a very strong and improving end market macroeconomic position. We think strategy for growth going forward for the next several years.

So with that, I think we'll turn it over to questions.

Question-and-Answer Session

Nishu Sood - Deutsche Bank AG, Research Division

Great, thanks, John, for the great details. That was a great overview. I'm just going to kick off with a few high-level questions and then maybe turn over to the audience. So the exercise that most investors are doing with building products these days is saying what is normalized revenues, what is normalized EBITDA or operating profit and then assigning some kind of valuation to it off of that basis and then thinking about where the stock should trade now. Let's go over some of those numbers, and so I think those are the most important numbers in some of the investors' minds, the $10 billion to $12 billion in revenues, now the housing downturn went on for a while. So that $10 billion to $12 billion target is when you've been talking about for a while as well. However, since you started talking about it, you've divested some significant businesses, the latest of which was upsize the Danish cabinet space. There have been market share changes, channel changes, so that $10 billion to $12 billion, talk to us about what the assumptions are for that? Is that the inherent capacity of the portfolio businesses that you have now to assume market share gains, what are the assumptions for that $10 billion to $12 billion of revenues?

John G. Sznewajs

Certainly, Nishu, so the way we think about that is that, that's market recovery. So if you consider how 2012 ended, about 750,000, 770,000 housing starts. And we estimate that about 25% of our revenue is tied to new home construction, 25%. So roughly $2 billion in revenue. So if you consider the fact that housing doubled from here, so that $2 billion as an incremental $2 billion of revenue. And then, you have to make some estimates as to how repair/remodel activity will continue to grow. But if we think about the balance over this, about $5.5 billion growing from there, it's not unreasonable to assume that repair/remodel activity will grow and housing starts to grow and the economy recovers. So that one doesn't assume the portfolio of businesses that we have today. And that it also assumes the fact that we will continue to pick up some share. We have done some great share -- we had some great share gains over the course of the last several years. But that's going to be driven by the fact that we continue to focus on the customer whether it's our channel partners of the end consumer in driving new products. I mean, that's the lifeblood of the organization and the way to do so. So we think that getting back to that $10 billion to $12 billion range is definitely doable given the right market conditions.

Nishu Sood - Deutsche Bank AG, Research Division

So what repair/remodeling growth are you assuming for the U.S. business between now and normalization because I think on the European side, many investors would want to assume something much more conservative?

John G. Sznewajs

Relative to the fact, but if you consider again that our international exposure is about 20% of the business, in Hansgrohe, the brand I mentioned several times, is much more of a global footprint than a European footprint even though it's domiciled in Germany. There are -- as I mentioned, they've got great growth in a number of markets outside of Western Europe and so they penetrated the Far East very well, the Middle East, South Africa. So they're seeing growth that does not correlated directly with what's being experienced in Europe today. So that's one piece that you keep in mind. And then as you think about the repair/remodeling growth itself, Nishu, if you think the housing start, our housing exposure doubles from 2 billion to 4 billion. To get in the middle of that range, we require another 1.5 billion to 2 billion of repair/remodel growth on the 5.5 billion in revenue. So you can put a CAGR depending on when your assumptions is then we get back to 1.5 million housing units. That's the CAGR probably of GDP plus 3% or 4%, which probably is unreasonable because we think there's a fair amount of pent-up demand out there. Housing -- with housing demand being suppressed over the course of the last year, it translates that same effect, that's impacted the repair/remodel industry. And so we do think that there's a likelihood that we can see some outsized growth in repair/remodel in the next several years coming off the bottom here.

Nishu Sood - Deutsche Bank AG, Research Division

Got it. And now turning to margins, 10% to 14% operating margin range is obviously pretty wide and if people are valuing the stock today off of that sort of number, that obviously leaves a lot of room for flex. Now let me reference it the way that you did against 2006, 12% operating margins. Folks will be attending sessions from all kinds of other industrials companies and many of those sectors have seen their operating margins exceed prior peak margin. So auto parts, I know there are other sectors as well. The whole market profit margins that are all-time high. It's obviously a critical debate that the market is having right now. So for Masco, 10% to 12% could mean, you don't reach that 12% you had before or 14% means you could exceed it, how should we think about that and is there anyway you can narrow that range for us?

John G. Sznewajs

Well, certainly, what we tried to do in that slide is give you a kind of 2 impulse, right. The 10% range is where we think we can be at about 1 million housing starts. And if housing starts get back to 1.5 million units, we think we're in that low-teen range again. And recall that in an environment where housing starts used to be 2.2 million starts, now we're at 1.5 million since, so a 1/3 of what the market used to be or 2/3 of what the market used to be. So we do feel that between the cost together we talked about it, we've taken out and then our operating leverage, that we can get back to those margin levels again.

Nishu Sood - Deutsche Bank AG, Research Division

Great and maybe I'll just one more and then I'll turn it over to the audience. Now Masco story through the last housing boom from the late 1990s through to the mid-2000, significant acquisitions as a driver of growth and Masco becoming the largest building products company that it is today involved a lot of acquisitions in the '90s as well. Now since about -- I don't know since maybe 2006?

John G. Sznewajs

2003, '04.

Nishu Sood - Deutsche Bank AG, Research Division

You've been focused on paring the portfolio from over 60-plus divisions down to I think you're in the low 30s now. Looking ahead then, we looked at that growth chart, it's mostly market related, macro related. What Masco's specific activities do you see driving growth? Or you mentioned acquisitions in the U.K., tuck-in acquisitions, small acquisitions, so what Masco company-specific activities could there be major acquisitions that might contribute to growth as well?

John G. Sznewajs

As you look out and investing in our business, we don't see major acquisitions as a vehicle for growth for us over the course of the next several years. A number of our businesses is now or the size and scale where they can enjoy their own tuck-in acquisitions whether to give them a new product category, new product line, maybe a new price point that they're not currently participating in, maybe even a new geography. So I think those are the ways, that's the way that we're going to approach the market. I don't think you're going to see us add a sixth or seventh major vertical product category at this point. And I think we're comfortable with the businesses that we have. We've got the market leaders today. So really no reason for us to invest significantly in businesses outside of our core at the moment, but just rather continue to bolster the great companies that we already have.

Nishu Sood - Deutsche Bank AG, Research Division

Any questions from...

Unknown Analyst

Just curious, we've seen the housing starts begin to improve from what I'm hearing the repair/remodel has been lagging and really hasn't picked up at all. Any signs there, any thoughts about the repair/remodel, which is a bigger part actually of your business?

John G. Sznewajs

Yes, that's right. In particular, where we've seen a little bit of a lag is in the big-ticket repair/remodel area. And for us, it's our window and door business on the repair side. And so I think what's happening there is that business should start to take off as home price appreciation begins to ingrain itself in the economy and in consumers' minds. We really saw a [indiscernible] kind of start to see that inflection point up to third quarter of last year, we saw house price appreciations' are to take up. So I think it's a function of time before the U.S. consumer is willing to make that shift from, my house is devaluing, to my house is appreciating, before they're willing to put some investment back in their home. But you'll certainly see the first signs of it but it's only been a couple of quarters so I don't have any definitive trends at this point but we're confident that in our lower ticket repair/remodel items, things like faucet, things like paint, we have seen good growth in those businesses over the course of the last several quarters.

Nishu Sood - Deutsche Bank AG, Research Division

Let me jump in with the toughest question I probably get on Masco from investors. Is Masco too big and are there too many divisions? And does it end up masking some of the strengths of -- some of the stars like Hansgrohe and Behr paint? So you mentioned some of the strengths. Obviously, you are the largest non-commodity supplier to Home Depot. So maybe discuss both sides, maybe you can address obviously some of the strengths of being large and maybe you can address that question head on, does it end up masking some of the stronger businesses?

John G. Sznewajs

No, it's a fair question. So we've got -- as we talked about, we've some great businesses, some very large businesses, and so those -- though that size, that scale affords us some unique opportunities, as an example, over the course of the last several quarters, given the fact that we've got this national footprint and the only national installer of fiberglass installation as a new home construction industry. We've been able to enter into national contracts with some of the biggest builders out there. So whether it's Pulte or D.R. Horton, Lennar, KB or Toll, we've entered into national agreements to service them in their needs as they start to grow off demand. One of the things that distinguishes us is we've got the financial wherewithal to grow with those customers as they grow. Some of our competitors, as you might imagine in that industry, a little bit smaller and may have a little bit tougher time funding the working capital needs to grow that business. And so we'll keep them both growing. So that serves us well. Again, I'll give you another example, Delta, with their size, their strength, they've won a number of major programs in retail over the course of the last year. And then that's across both the major retailers, Home Depot or Lowe's or even Walmart we've won some business. So that strength, that ability to continue to innovate is meaningful to our customers. Now the same thing happens with our smaller businesses, but they tend to be more niche oriented, right. So we've got some great businesses like our -- we've got the leading spa business in North America. Now you might think that, that's a highly discretionary product to buy and it is. But they've done a great job of taking sure. They're highly focused on their customers, have been able to grow that business over the course of the last several years. So while we get a lot of questions about whether we should pare back in our portfolio. In addition, to our large core businesses we've got some very strong, very good smaller businesses that focused on these smaller markets that serves us well. So not to say that we won't pare the portfolio or add to the portfolio over the course of time because we will, but at this point, there's -- we don't see any significant changes to the portfolio.

Nishu Sood - Deutsche Bank AG, Research Division

In your answer, another very interesting topic, the channels and you laid them out very well in one of your slides, the builders, the big-box retailers and obviously, the wholesalers. You hear different things about the different channels from different companies so Stanley Works is always sort of the time we want, less big-box retailers, they beat us over the head and with line reviews every couple of months, it makes life difficult. And even with the big builders, you heard Ply Gem, recently they went public saying, margin profiles were selling into the big builders are lower than they are for selling through the dealer network, to the wholesalers and so, as you look ahead to those 3 channels, does Masco have a -- I mean as we think about your revenue growth, which of those channels is going to be more important? Do you have particular strategies? I know you've, obviously, realigned some of your cabinets business around the distribution channel. So just maybe talk us through the importance of those channels on a relative basis as we go through housing recovery.

John G. Sznewajs

Sure, well, first and foremost, Nishu, let me tell you, we love all of our customers. I don't care what channel that they serve. But as you think about the recovery, well, it's going to take place. As obviously, the builder channel would be significant for us because that's really the portion of our business that's coming off the bottom. And so as I mentioned, with the international contracts on the Installation business. Those relationships will serve us well and will continue to grow with that, with those customers. But as repair/remodel continues to grow, it's going to be a little bit different. Obviously, our business in the big-box continues to perform well as those customers continue to perform very well. And then we have had our own challenges. They're actually the more internally -- internal challenges, they're an external challenges with some of our smaller and particularly in the cabinet side with the dealer channel. We've done a great job of penetrating the builders with our cabinet business and a great job of penetrating the big-box retailers with our cabinets. But we have always been challenged on the dealer side and the thing that we're doing is trying to drive business there by innovating. And so we wanted to offer prices distinguishable from other channels of distribution. So in the first quarter this year under the KraftMaid brand, we launched some new products that's unique to the dealer channel. Later this year, we'll be launching some additional new products under the Merillat brand that are unique to the dealer channel. So we try to balance our businesses across all 3 channels. Nothing is more important. We just know in the way the cycle is going to roll out, some will be more impacted in the near term than others.

Nishu Sood - Deutsche Bank AG, Research Division

Maybe turning to the comments you're making about recent trends, April up I think you said high single digits?

John G. Sznewajs


Nishu Sood - Deutsche Bank AG, Research Division

I'm sorry, mid-teens. With that, I thought that was May?

John G. Sznewajs

May was up low double-digits.

Nishu Sood - Deutsche Bank AG, Research Division

May was up low double-digits, okay. So obviously, very strong trends. In the past, the early indicators that you have given sometimes there's been some variability between how those early trends in the quarter looked and what the quarter ends up being. So maybe you could talk through that. Obviously, those are very strong numbers. Maybe you could put them in some context into how that might end up looking in terms of revenue growth when we hear about the segment quarter.

John G. Sznewajs

Certainly and I think what we have keep in context is that 1 month does not make a quarter. And you always have to take into account what happened and occurred in the prior year. So as we look at April for instance, great growth in April, mid-teens, up mid-teens percent. Got to say, if you reflect back on the first end of the first quarter of last year and then the beginning of the second quarter of 2012, what we saw was the fact that we had great weather in the month of March last year, and so we believe that pulled forward some sales out of April and then to March. And similarly, as the balance of the second quarter of last year rolled out, where we saw was that April was relatively flat as the month in 2012. May was relatively flat in the month of 2012. And then June last year was actually down a little bit. So we actually have flat quarter for 2 -- the second quarter of 2012. So I guess what I'm saying is that we had a little bit of an easy comp here in the beginning of the first part of the second quarter, we'll see how the balance of the quarter plays out.

Nishu Sood - Deutsche Bank AG, Research Division

Got it. And on capacity, you mentioned that you have enough capacity to get back to 1.5 million starts, can you drill down on that a little bit based on which division you're talking about? I imagine in Installation services, the capacity is probably much easier. I'm sorry, if you probably would need to add some more, it would be easier anyway, but also would that much excess capacity could operating leverage end up being higher than this 30% that you're describing because that's quite a bit of slack that we're talking about although it's $100 million.

John G. Sznewajs

And so I'll only focus my comments on the cabinet segment and the Installation segment because I think those are the 2 most relevant because our plumbing business is down to just slightly from its peak and actually our paint business is up from 2006. So if you think about our cabinet business, we've got 2 plans that are mothballed currently. So that's part of that excess capacity that we could bring back online if required. So depending on the strength of the recovery and the location of the recovery, we've got plans down in Florida, plans down in the Southwestern United States. And so we can bring those back online so obviously, we're operating in less than capacity -- full capacity now but then we can bring those 2 back on to get us back to that 1.5 million housing start level and increase in the repair/remodeling activity. The other thing that we're looking at is our Installation business. I mentioned the fact that we pared down significantly the number of branches that we had across the country. What we're doing now is fully building those back up depending on where volume is and we're doing it some very thoughtfully. We're not just putting a new branch to add fixed cost to the structure, to our cost structure but rather, are using only manned warehouses as an initial vehicle in order to expand our service coverage area. And so as volumes pick up, then we'll consider adding additional branches as appropriate. So we're being very thoughtful about how we add fixed cost back into the system at this point.

Nishu Sood - Deutsche Bank AG, Research Division

Great. So we're out of time, but thank you to Masco and hope everyone's conference goes well.

John G. Sznewajs

Thanks, Nishu.

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