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Masco (NYSE:MAS)

Q2 2011 Earnings Call

July 26, 2011 8:00 am ET

Executives

Timothy Wadhams - Chief Executive Officer, President and Director

Donald Demarie - Chief Operating Officer and Executive Vice President

John Sznewajs - Chief Financial Officer, Vice President and Treasurer

Analysts

Daniel Oppenheim - Crédit Suisse AG

Nishu Sood - Deutsche Bank AG

Christopher Wiggins - Oppenheimer & Co. Inc.

Josh Levin - Citigroup Inc

Robert Wetenhall - RBC Capital Markets, LLC

David S. MacGregor

Joshua Chan - Robert W. Baird & Co. Incorporated

Operator

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2011 Second Quarter Conference Call. As a reminder, today's conference is being recorded and simultaneously webcast. If you have not received the press release and supplemental information, they are available on Masco’s website along with today’s slide presentation under the Investor Relations section at www.masco.com.

Before we begin management’s presentation, the company wants to direct your attention to the current slide and the note at the end of the earnings release, which are cautionary reminders about statements that reflect the company’s views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be open for analyst questions. If we are unable to get to your question during this time, please call the Masco Corporation Investor Relations office at (313) 792-5500.

I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Timothy Wadhams

Thank you, Connie, and thank all of you for joining us today for Masco's Second Quarter 2011 Earnings Call. I'm joined by Donnie Demarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO.

And if you would please flip to Slide #3. Sales in the quarter were down 1%. Excluding rationalization charges, gains and impairments from financial investments and adjusting for a normalized tax rate of 36%, income as reconciled would have been $0.05 a share compared to $0.16 in the second quarter of 2010. On an as reported basis, we earned $0.02 in the second quarter compared to $0.01 in the prior year. Working capital improved in the quarter to 15.6%. We'll talk about that a little later on, and we ended the quarter with $1.6 billion of cash.

If you flip to Slide #4, please. Gross profit and operating profit as reconciled for the rationalization charges and for a litigation charge in the second quarter, gross profit would have been down about 150 basis points to 26.9%, and our operating margin would have been 5.5%, a 280 basis point decline. A little bit of color in terms of our overall financial performance. I mentioned that sales were down 1%. That equates to about $26 million. That includes an unfavorable change in terms of product exits. As we've announced previously, we have exited the ready-to-assemble product group that ended in the second quarter, and that was a reduction of about $49 million in terms of sales. Offsetting that was positive impact from foreign currency of $54 million.

Our International operations were up 5% in the quarter in local currencies, and had another very strong quarter in terms of operating performance with margins at 9.8%. That compares to 9.5% last year. Sales to key Retail customers were down mid-single digits in the quarter. All of that is represented by the exit of the ready-to-assemble product group. Without that impact, we would have been flat in the quarter in terms of key Retail sales, and that includes some declines of Wal-Mart that we'll talk about in a little bit.

Just to give you a perspective, in the first quarter, if you eliminate the exited products, we would have been down low single digit as we communicated a while back. Sales off $26 million. Our operating profit on a reconciled basis was down $59 million. We think volume accounted for about $25 million of that. And obviously, we did benefit from foreign currency translation, so that masks some of the volume decline. Price/commodity relationships in aggregate cost us about $10 million in the quarter, and almost all of that is in Cabinets and Plumbing. Mix was about negative $10 million in the quarter, and almost all of that is in Plumbing. We did have a little bit of combined mix and price/commodity impacting Other Specialty Products. In addition, we incurred some expenditures for some of the growth initiatives that include our international expansion in Paint and Plumbing, some new Retail programs, innovation and the dealer initiative in Cabinets and the Pro initiative in our Paint group. And we'll talk about those as we go through the segments.

If you would please flip to Slide #5, where we reconcile earnings per share. As you can see here, this takes into account the reconciliation for the rationalization charges, as well as the litigation charge, and a pretty significant impact in both quarters related to financial investments. In the second quarter of 2010, we had an impairment charge of $33 million. In the second quarter of 2011, we had gains from the disposition of financial investments of $33 million. Those are coincident numbers. As I mentioned, adjusting or reconciling, if you will, we made $0.05 in the second quarter compared to $0.16 last year. And on as reported basis, just as a reminder, earnings per share were $0.02 compared to $0.01 in the prior year.

Please flip to Slide #6. We'll talk about the Cabinet segment. Our sales in Cabinets were down in the quarter 18% and again, that includes the impact of the products that we exited. Without that impact, we would have been off about 6% in the quarter. Decremental margin in the quarter was inflated above our contribution margin. The decline in margin reflects volume, the under absorption of fixed costs. We had about $6 million related to the $49 million of product exit. In this segment, as I mentioned earlier, we had about $5 million of unfavorable price/commodity relationship, and we did incur some increased costs relative to promotion related to the dealer initiative, brand building and some promotions at Retail.

If you flip to Slide #7. In terms of Cabinets, just a quick update. We have a lot of things accomplished in the second quarter. We completed the common architecture program that affected the Merillat and Quality brands. And we also, as I mentioned earlier, finished the exit of the ready-to-assemble related products. And again, we're very happy to have those behind us. We continue to benefit from the Cabinet integration. We're tracking the savings that we've communicated previously. We believe we'll be on track to show about $35 million to $40 million of savings by the end of 2012. And we continue to add dealers or have dealers that have added a Masco Cabinet brand. Over 400 dealers we estimate have done so, and my memory tells me that about 180 or so of those are new dealers to Masco, so we're pleased with that. We did idle another manufacturing facility in the quarter, and KraftMaid was awarded the highest ranking in terms of customer satisfaction related to Cabinets in a J.D. Power's study and obviously, that relates to the U.S. and obviously, we're very proud of that.

If you flip to Slide #8, our Plumbing-related business. We had another solid quarter in Plumbing. Plumbing was up 12%. We did benefit from foreign currency in this particular segment, about $42 million of the $54 million positive currency translation relates to Plumbing. Without that, we would have been up about 5%. We did see a modest decline in terms of margin, down about 40 basis points, and profitability is impacted by unfavorable price/commodity relationship. We talked about that a little bit earlier, unfavorable mix, as I mentioned, and some investments, incremental investments in the quarter in terms of international brand and some other marketing-related programs.

If you flip to Slide #9. We continue to invest in the Plumbing segment and brand-building innovation and design, and pursuing international growth. And we had very strong performance in the quarter in our faucet brands in the U.S., Delta, Peerless and Brizo. And Hansgrohe just had a fabulous quarter; in fact, a record quarter in terms of their operations as they continue to expand in global markets. We continue to innovate. Our Touch Technology has now been applied to bathroom faucets. Those were introduced, and we're really excited about the opportunities there. We continue to gain share in tubs and spas, hot tubs and spas with our HotSprings and Caldera brands. And we mentioned last time that Delta was nominated for an Effie Award, and they were recognized with a Silver Effie in the quarter. Again, that's a prestigious honor related to advertising and communication, and certainly very proud of that.

If you flip to Slide #10, Installation and Other Services. We were down about 5% in sales in the quarter, and that compares to a 7% decline in 90-day lag starts. In addition, we were off about $3 million in terms of profitability. That 20% decremental margin pretty much explains or pretty much approximates our contribution margin in that particular segment.

If you flip to Slide #11. We did -- I believe we had some sequential share gains from first quarter 2011. As we mentioned in the first quarter, we have we believe sequential gains from the fourth quarter of last year, and obviously that's an important topic. I think last year at this time with some of the compression in the build cycle, some of the decontenting that was going on in terms of housing, we had a lot of discussion around share in this business and we're really pleased with some of the progress we've been able to make in terms of Installation. We continue to benefit from increased retrofit sales, and we've got some really good opportunities that are developing with some of the larger builders going forward. Unfortunately, not a lot of that showing up on the top line at this point in time because of the decline or depressed activity. But we certainly are encouraged going forward relative to some of the opportunities that have developed.

We also completed the implementation of the ERP system in this segment, and we believe that initiative and some of the things we're doing from a lean standpoint should continue to drive efficiencies and cost savings going forward, so making a lot of progress in terms of Installation.

If you flip to Slide #12. Decorative Architectural Products were off 3% in the quarter. We had a pretty significant drop relative to sales in terms of profitability. We continue to see commodity cost pressure, but in this segment in this quarter, price/commodity was basically neutral. Decremental margin includes the timing of advertising spend, which was up compared to the second quarter of last year of $5 million, $6 million. And we also incurred $6 million or so for program costs related to new opportunities in builders' hardware, the investment in the Pro and international expansion and some work we're doing to reformulate some of our Paint-related products.

So if you flip to Slide #13. We continue to be very excited about some of the top line opportunities in this segment. Our Direct to Pro program with Home Depot continues to gain traction. We have all the Home Depot stores are set now with the Kilz Pro-X product. We got that accomplished in the second quarter, so feel really good about that. And Liberty is in the process of launching some new programs at Retail in both bath and Cabinet-related hardware, and we'll talk more about that later this year as those programs develop, but a lot going on in terms of top line opportunity in this segment.

If you flip to Slide #14, Other Specialty Products. Sales were off 5% in this segment, about $7 million. And we had a pretty significant decline in terms of operating profit in relation to the sales. First and foremost, I would point out that last year, we had an exceptional second quarter. We had about a 7% margin in terms of last year in the quarter as you can see here, so very good second quarter last year. And those of you who have followed us know that we've seen declining performance in this segment since that point in time. We continue to believe that we're being impacted negatively by declines in new home construction in the Western U.S., lower repair/remodel activity. And we believe that that's in part driven by the exploration of the homebuyer tax credit last year, as well as the expiration of some of the energy tax credits that were available. Our lower operating profit reflects volume, about a $4 million spend on geographic expansion, product loss, promotions and trade shows, some loss of leverage, additional freight costs in the quarter. And we did -- when you look at price/commodity and mix combined, we were down probably in this quarter or in this particular segment $1 million to $2 million. So again, not a real solid performance in this segment, but a lot of work going on in terms of product launch.

And if you flip to Slide #15, a couple of comments relative to this segment. We continue to believe that in windows in both the western United States as well as the United Kingdom that we're gaining share. That's been a fact for us, we think, over the course of the last 6 quarters or so. Unfortunately, the pie is much smaller. Milgard continues to expand in geographies in Texas and Western Canada. The expansion into Texas has cost us a little bit, including some additional freight. And Arrow Fastener has come out with a couple of product lines. We've talked about the R.E.D. line. They've also come out with a new Elite tool line, so we're excited about that opportunity. And as it develops, we'll be able to share some information with you about the outcomes there.

If you flip to Slide #16. I mentioned working capital earlier. We improved from 16.1% to 15.6% in terms of receivables plus inventories less payables as the relationship to the last 12 months sales. And you can see that in terms of the components here, we're up a little bit here in terms of inventory days. Don't feel like there's anything there that is of concern and continue to do a very, very good job in terms of accounts payable management. And really, we want to take this time to kind of thank the team, the Masco Team for the effort here as well as the effort across the other aspects of our business. Obviously, the environment continues to be very challenging, but we're very pleased with some of the opportunities that we're developing, and really encouraged by the effort our folks are putting forward.

If you flip to Slide #17. Before we go to Q&A, I'd like to make just a couple of comments. Market conditions certainly continue to be challenging. The only economic signals continue to be somewhat mixed. But basically, most economists have reduced their expectations for 2011. And we currently see a much less robust year than we anticipated at the beginning of the year. You might remember our housing start assumption early on was around 690. At the end of the first quarter, we adjusted that to about 640. And more recently, at least at this point in time, our view is that housing starts appear to be relatively flat with last year. Having said that, for us, lag starts are every important. And on a 90-day lag basis, our sense is that starts will be flat on that same basis.

We're not seeing a lot of pickup in terms of repair/remodel activity for bigger-ticket items. So that continues to be slow. And having said that, as we've said in the past, we'll continue to focus on the things that we can control and influence. That includes driving the Masco Business System across the enterprise, continuing to invest in innovation, our leadership brands, global expansion and continuing to manage our cost structure.

We've got a lot going on operationally. Obviously, 2 of our major priorities are the Cabinets and Installation businesses, and I continue to be pleased with the progress we've made there. As I mentioned earlier, we've completed several key initiatives. The ERP Installation at Installation services, the product exits, the common architecture program, obviously all of those have required significant time and attention. And we're certainly glad they're behind us. In addition, as I mentioned, we did idle another manufacturing plant in Cabinets. And although the economy is not as robust as we had anticipated earlier this year, we still anticipate significant improvement in terms of the operating performance of both of these businesses. We currently anticipate that on a full year basis that we can reduce the operating loss by $20 million to $40 million in terms of Installation and Cabinets combined, and we will continue to push very hard to reduce our breakeven point, and we expect to make more progress in 2012, irrespective of the economic environment.

We also continue to believe that we will successfully offset commodity costs and other inflation on a full year basis. As I mentioned last time we were together, that's certainly a fluid situation. And since we last talked, we do face some additional challenges as it relates to lumber, particleboard, TiO2, resins for paints and windows, as well as metals and other commodities. But we continue to be confident that as we work with suppliers focusing on supply chain, working on cost reductions and implement pricing, that on a full year basis that we'll have these costs covered and neutralized. Year-to-date, we're negative about $20 million in terms of price/commodity relationship. There's a lot more work to do, but we feel confident that we'll be in good shape as the year continues to unfold.

We continue to be confident in the long-term fundamentals for our market, and we continue to invest. We're increasing our penetration in North America from a -- in terms of dealers for Cabinets in that particular channel, and with a professional painter. We continue to develop international opportunities for Paint and Plumbing, and we're launching several new programs this year in Plumbing, Cabinets and builders' hardware. While it's too early to talk about specifics, we think these opportunities are very exciting, and we'll be able to share some of the details with you as these develop over the next couple of quarters.

We're incurring some incremental costs, as I mentioned earlier and covered when we talked about the segments, as we execute on these opportunities. But we anticipate that they will add significantly to our top line as they mature over time. Longer term, we continue to feel very positive about our ability to create value for our shareholders. We believe that when we can get volumes back to on a top line basis, the $10 billion to $12 billion area that we enjoyed previously, there's no question in our minds that we can deliver double-digit margins at that kind of level, and certainly produce the kinds of returns that shareholders are looking for as they think about Masco as an investment.

And with that, Connie, we'll open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Josh Levin from Citigroup.

Josh Levin - Citigroup Inc

So you talked in the press release about new programs in Plumbing and Cabinets, and you just made a passing reference to it. And I suppose understandably for competitive reasons, you don't want to give too many details. But can you -- with regards to those new programs, can you help us think about when and how does new programs might start to impact earnings?

Timothy Wadhams

Yes, Josh. We're looking at top side opportunities that we think are very significant. We think the Pro initiative with The Home Depot is an opportunity that could result in hundreds of millions of dollars on the top line as it develops over time. We also think that some of the opportunities that we're pursuing in Cabinets, builders' hardware and Plumbing have top line opportunities of hundreds of millions of dollars. Having said that, many of those programs will be launched later this year and it's important for us, obviously, to coordinate communication, promotional strategies with our customers, and so we don't want to get ahead of ourselves. But I'm very certain that you'll be pleased as we are able to communicate more about those programs going forward, and we will do so at the appropriate time. But we've been very hard at work obviously strengthening our brands, investing in innovation. And we've shared that with investors over time, and that's been a big part of our strategy. But we feel very confident, very comfortable that these opportunities, as they develop, will provide significant earnings and significant top line growth.

Josh Levin - Citigroup Inc

Okay. And my second question, so single-family starts appear to be sort of just flatlining, but multi-family starts are picking up. Can you give us an idea of how your earnings sensitivity differs from multi-family starts to single-family starts?

Timothy Wadhams

Well, generally speaking, a single-family start would have more of the types of products that we manufacture; for example, Installation, more fixtures in terms of faucets, those types of things. So generally speaking, single-family starts are more important to us. Having said that, we're certainly very much aware that multi-family starts are growing more rapidly than single family. And so from that standpoint, we've got products that we certainly think will resonate well in those applications. I mean, basically they tend to be the same products, but just fewer of them.

John Sznewajs

Yes, and Josh, I would add that we saw this trend coming really about 2 years ago, and have worked hard in both our Cabinets segment and Install to position ourselves to win. On the Installation services, although the take per unit is lower, we believe our market share is at least the same as it is on the single-family side. So we think we're positioned to win there, where surely a better balance sheet, strong capital base is really important to do those bigger projects. And on the Cabinet side, we've really been focused on doing more in smaller spaces that applies both to multi-family, but also to what we're seeing in the single-family market today. We're dealing with smaller kitchens, and so how do we do more in smaller spaces and really bring out more value to consumers. So we see this trend as one that we think we're positioned to win, and we're going after it aggressively.

Operator

And we'll take our next question from Josh Chan from Robert W. Baird.

Joshua Chan - Robert W. Baird & Co. Incorporated

I was just wondering, a lot of building products companies have talked about a tough April and May, but June was a little bit better. Could you comment on that for your company, and if you also care to comment about July?

Timothy Wadhams

Yes. Well, what we mentioned the last time we were together was that April, when we had our call I think on the 26th of April, that April looked like it was going to be down high single digits and in fact, it was. We did see a pretty nice lift in May. We were up mid-to-high single digits in May, and June was relatively flat for us. July, at this point in time, our sense is will be down low single digit or flat if you exclude the product exit, the way it looks at this point. Again, to your point, Josh, weather has been commented on by several folks in the industry, and I don't think there's any question that weather has been a factor in terms of certainly impacting consumers' involvement in projects over the late -- early part of the first quarter or late part of the first quarter, excuse me, early part of the second quarter. No question.

Joshua Chan - Robert W. Baird & Co. Incorporated

All right. That's definitely understandable. And then going over to the second half outlook, you talked about some program launch and then you also have easier comparisons. I mean, I understand what's going on with the macro, but I guess your comment about second half growth being challenged seems somewhat conservative. I mean, could you explain a little bit about the outlook?

Timothy Wadhams

Well, the outlook that -- what we tried to talk about there was more from a macro perspective, and we certainly continue to believe that the macro side of things is weak. You've got the near-term reality of higher energy costs, higher food costs, which impact disposable income for consumers. And you've also got the near-term uncertainty that seems to emanate from the discussions that come out of Washington in terms of a variety of economic topics that I think people think are important. So when you think about that, the consumer does not appear to be very actively engaged at this point in time. So our feeling is the macro side of things is going to be pretty tough. Having said that, from our perspective as I mentioned earlier, we've got a lot of new product opportunities that we'll be launching in the second half. And we certainly expect to have some positive impact from that. So our concern about the environment is more on the macro side, the things that we can influence, the things that we have the ability to control, which include some of the new products that we're bringing to market certainly, we believe, put us in a great position. We've done a lot to strengthen our brands over the course of the last couple of 3 years. We're in a very good position there. We continue to be in an extremely good position from a share standpoint. One of our strategies has been through innovation, through a lot of the work that we've been doing with the consumer to increase our very strong market position. And as we sit here today, I don't think there's any area given the fact that we've seen some good improvement in terms of Installation and Cabinets over the course of the last couple of quarters, at least on a sequential basis, that puts us in a position where from a share standpoint, we continue to grow. So we think the environment is going to be challenging, but we certainly think that the opportunities that we'll be rolling out will be a plus. And your comment about easier comps in the second half is certainly accurate, and we'll see how things unfold. But we feel very, very comfortable with the opportunities that we're developing inside.

Operator

And we'll take our next question from Dennis McGill from Zelman & Associates.

Dennis McGill

Just wanted to follow up on the multi-family discussions just to make sure I understood your comments correctly. So you're saying a share in multi-family similar to single family, then is it fair to assume that in the Install business, roughly 25% to 30% of revenue is multi-family?

John Sznewajs

Yes, Dennis, I'd have to look at it to see. I don't think we've broken that out, have we broken it out or given that out?

Timothy Wadhams

Well, I don't know if we have the breakdown. I'm not sure that we...

John Sznewajs

Mostly it's influenced by the take per unit, Dennis, because the take per unit in that segment is lower than it would be on a single family. But that's something that we can look at and decide whether or not we've disclosed that previously.

Dennis McGill

Okay. It might be something helpful to disclose in the future, if you will dig it up. The other question just had to do on the Cabinet side, the facility closure in New Mexico. I was just wondering if you could elaborate on that a little bit on that how that fits into the cost savings that you previously talked about, and then how we should think about that moving forward. And then also the decision to close now versus a year ago with the restructuring efforts, what factored into that to lead you to close it today?

Timothy Wadhams

Well, I think in terms of the decision, Dennis, obviously, we've completed a lot of work in that segment. The exit of the product group that we talked about, the common architecture program. I mean, those were certainly initiatives that were very important. The integration has been going well, and I think as we have looked at expectations for volumes out there, having an operation on the West Coast was important for us from a freight standpoint at one point in time. But as we reviewed our footprint, reviewed the economics, we felt like we could eliminate some of the capacity there. And we'll have a little bit of a penalty in terms of freight, but we think that's certainly manageable. I think the cost, it was about $1 million, John, in terms of charge. And I think the savings, Dennis, this plant will be idle, by the way, so we'll continue to depreciate it, but I think we're looking at, what, about $3 million, $3.5 million?

John Sznewajs

On a full year basis, $1.5 million to $2 million this year.

Dennis McGill

Okay. And that'll be incremental to cost you discussed previously?

Timothy Wadhams

Yes, that's correct.

Operator

And we'll take our next question from Nishu Sood from Deutsche Bank.

Nishu Sood - Deutsche Bank AG

Actually I wanted to ask about commodity costs. The negative $20 million headwind you talked about sounds small relative to just some of the headline price figures you see, especially in areas like Decorative Architectural. So are there hedging activities going on, or what are you folks doing to manage that so well?

Timothy Wadhams

Hedging, Nishu, for us has been fairly minimal and pretty much limited to metals, particularly copper and zinc. But what we've -- you might -- roll the tape back a little bit, you might remember late last year, second half, I think we incurred a negative price/commodity of about $60 million, $65 million on a full year basis and I think almost all of that was in the third and fourth quarter. But we have been very active in the areas that we talked about. I think you can assume that we have seen hundreds of millions of dollars of commodity cost increases this year. But obviously, we've been able to offset that with supply chain initiatives, with pricing. So we've been very, very active. And I think we've had some very good success. The strength of our brands, the innovation that we've worked on certainly aids us in that opportunity. But we feel pretty good about where we're at. And again, it's been a lot of hard work by folks across the enterprise, but we've been pretty successful.

Nishu Sood - Deutsche Bank AG

Got it. Okay. So I guess looking at that as a net figure, but the second question I just wanted to make sure I got it in there was about the Plumbing Products division. You mentioned unfavorable products mix shift in that division. Now when I think about that division, the first thing I think about is that -- one of the first things I think about is the success of Hansgrohe. Obviously at the higher end now with the decline in big-ticket remodeling that obviously would have shifted your mix there to probably more replacement and Retail-type stuff. But I would have thought that the Hansgrohe effect would have been stronger than the countervailing effect. So how should we look at that negative mix effect that you were talking about?

Timothy Wadhams

Well, actually, Nishu, a lot of the mix impact is related to Hansgrohe. And a fair amount of that relates to their movement from principally a showerhead manufacturer to a faucet manufacturer. That transitioned well. Actually, I shouldn't say moving away from showerheads but basically, getting more balance with faucets, and faucets versus showerheads in terms of the products that they manufacture tend to have a little bit lower margin. The other issue that affects them is the expansion that they've had into geographic areas. Typically, as they go into geographic areas, and I think they're in, what, about 30?

John Sznewajs

70.

Timothy Wadhams

70 different geographic areas with what, 30 different subsidiaries at this point in time. Typically, when they enter a new market, there tends to be a little bit of a shift there, if you will, or a little bit of pressure in terms of margin. So that would be primarily where the mix shift is taking place. Now we've also seen a little bit of shift in terms of hot tubs, for example, to opening price points. But basically, Hansgrohe would be the one area where mix has probably been more of the issue. But having said that, they continue to perform at just a fabulous rate, if you will. As I mentioned, they had a record quarter in both sales and profitability. And so even though there's a little bit of a mix shift, we're still seeing some very good top line growth there.

Operator

And we'll take our next question from Chris Wiggins from Oppenheimer.

Christopher Wiggins - Oppenheimer & Co. Inc.

Just curious, you called out $6 million year-over-year change in ad costs at Decorative, and just wondering if you could provide any color on how you think those ad costs trend sequentially into the third quarter. And then related to that, I think some suppliers have increased the TiO2 pricing by another 25%. So I guess I'm wondering your ability to offset that, does it come from just kind of lower ad spending as an offset to higher pricing, or how should I think about that dynamic?

Timothy Wadhams

Well, it is true that there have been some additional cost increases related to TiO2 in resins. I think that others in the industry have talked about those in terms of mid-to-high teen type increases. Because of the fact that we deal with a lot of large suppliers and have one large customer, we don't typically get specific about price/commodity detail in this particular segment. But I think you can certainly assume that we continue to face cost pressures. And as we've talked in the past, there are availability issues, if you will, relative to supply. And we've been able to manage through that and have done a very good job. So that would be part of the answer to your question. The rest of the question related to promotional activity, and we did have incremental in the second quarter about $5 million, $6 million of incremental promotional spend. And typically, the second quarter, Chris, is when we have the majority, if you will, of some of the promotional activity related to Paint. You've got Memorial Day, typically the 4th of July starts sometime in late June. We also do some things around other dates like Labor Day and Presidents' Day. But the second quarter tends to be the quarter when most of the advertising budget is spent. And if you look at the sequential change in profitability versus the change in sales from the first quarter, you can see that impact. And we talked about that last year on the call as well. But second quarter is a very, very heavy period of time in terms of advertising spend.

Christopher Wiggins - Oppenheimer & Co. Inc.

Okay, great. That's helpful. And then if I could ask kind of just a bigger-picture strategic question, I mean, as you kind of look out at some of the economic forecasts, particularly as you look to housing starts for 2012, a lot of forecasts imply kind of a big step up. And I guess from a planning perspective, I'm just wondering how you view the environment. I mean, do you plan with that type of step up in mind, or do you look at it as more of a very much more conservative approach as you kind of look at your strategic planning for next year?

Timothy Wadhams

We have tended to try to be on the conservative side, Chris, in terms of our planning. Our sense is that -- and to be honest with you, even though we think we've been conservative in terms of our planning, we've been surprised as starts have declined, just like most of the rest of the folks that use that. So it has been pretty difficult from a planning perspective. But we do feel very confident that if we miss and there's more upside, that we'll be able to respond. We feel that the footprint in terms of our Installation business, we've made a lot of changes there obviously. We've taken a lot of branches out. We've consolidated, but we think we're in a very good position relative to where we think housing activity could be strongest. We're also -- we're working very closely with the larger builders as I mentioned earlier. So we feel like we can adjust there. And I think most of the rest of our businesses, we've got the flexibility. We're more nimble. We've completed the common architecture project that we talked about in terms of the Merillat and Quality brands. So our sense is that we can react on the upside. So attempting to plan maybe a little more conservatively we think makes sense.

Christopher Wiggins - Oppenheimer & Co. Inc.

Great. And if I could just sneak in one more question. I view it was interesting you put out a press release during the quarter, I think that you were increasing some production lines for some hot tub manufacturing with some strong demand there. I found it interesting. I'm just wondering if I could -- if you could give any color as to -- when I view hot tubs, I view it as a very discretionary item and certainly a bigger-ticket type discretionary item. So I'm curious as to why you might be seeing strength in that market, but not so much in some of the other big-ticket items?

Timothy Wadhams

Well, that has been kind of an interesting phenomenon. That started probably about a year ago, and I think it has a lot to do with the strength of the brands. Our hot tub business, HotSprings and the Caldera brand are both leading brands in that segment. We also have taken a lot of share. A lot of folks have gone out of business in that segment. There's been a lot of folks, unfortunately, that haven't been able to make it or from our perspective, I guess, fortunately. And so we've been able to pick up share, and that is one of the bright spots for us. But you are right, it is a very discretionary purchase. It tends to be a bigger-ticket purchase. As we mentioned, we have seen a little bit of migration to opening price point, and we came out with a new product called HotShot, I think. And yes, and John points out that we did develop a -- the ACE System, which automatically regulates the chemicals in the spa. We brought that out about just a little less than a year ago. So it's been a fair amount of innovation and a lot of good work in terms of brand positioning in that segment.

John Sznewajs

I would just add that I think innovation played a big role. The ACE System has really changed the need to buy another spa. So we're seeing people who own spas trade them in on new spas, and wanting to get this innovation. So it's been such a strong innovation that's really created new demand for.

Operator

And we'll take our next question from David MacGregor from Longbow Research.

David S. MacGregor

Tim, your international revenue is about 22% of the total, but there's a lot Western European revenue and U.K. revenue in there. So I guess with respect to emerging markets, how much is emerging markets? You talked about developing your Paint and Plumbing business internationally. How much of that is really emerging market plans with respect to the segments rather than, say, Western European growth plans?

Timothy Wadhams

Again, David, there is a pie chart in the back of the information that we provided. I think it's Slide #28, that gives a breakdown of our international revenue kind of splits that into regions. And so that would give you a pretty good flavor in terms of where we're having the most success. I don't know, John, if you've got -- probably you want to maybe provide a little color on that.

John Sznewajs

Yes. I mean, to your question about emerging markets and sales outside of Western Europe, I mean, basically, it would be -- call it sort of 2%, 3% what we would define as emerging markets, that being sort of Asia and Latin America. To balance it, we've got a fair amount in the other European market either Northern Europe or Eastern Europe as well. So suffice it to say that overall, it's relatively small. 2% to 3% of that, of course, would be a percent of our total sales, not as a percent of our international sales.

David S. MacGregor

Yes, great. I guess the question really is, what do we do about that, and how do we grow that? It seems like with growth opportunities in North America somewhat stunted for the time being that there might be a bigger opportunity in some of these other markets just where within the list of priorities does that stand?

Donald Demarie

David, it's Donnie. It's right up there. We really see growing in emerging markets, and really in markets where the projected growth rates are higher than they here in North America, is probably our #1 priority. We're doing a lot with Hansgrohe. They've been very, very successful in growing their business. If you go back 10, 12 years ago, they were 90-plus percent in Europe. And now, we're doing as much in -- outside of Europe as we are in Europe. And yes, they have a great model, and we've had the Delta folks and the Hansgrohe folks working on some joint initiatives. John Sznewajs and I were in China earlier this year to announce the launch of the Delta brand in China. And we're bringing our technology there with our Touch2O, and we think that's going to resonate really well, especially in the Asian market. We're also doing -- we're looking at opportunities in Paint. We sell paint today in Canada, Mexico, South America. We have a large R&D facility in India, and we put together a team to really explore what's our best opportunities and where should we go next. So we really see those 2 platforms as global platforms. Outside of that, we've got opportunities in hand tools. We've been doing things with Arrow Fasteners to get outside of North America, and have had some good success. And some of the success we've talked about a little bit earlier with hot tubs is really is our ability to ship and sell products internationally. So we're doing quite a bit in hot tubs now, too. So a lot of our businesses where we have a reason to believe we've put some very hard to get after it organically. So we're making a lot of progress.

David S. MacGregor

Okay, good. Just a follow-up, I guess, in 2012, you've got $800 million of debt coming due. Do you plan to refinance that, or would you use the cash on hand? And I guess just association with that, you've got cash on hand in Hansgrohe. How much access do you have to that cash, and do you have the ability to declare a dividend?

John Sznewajs

David, a couple of questions there. With respect to the $800 million coming due next July, we've said in the past that if you think about the March 2010 issue that we did, we issued $500 million of debt to replace the $300 million maturity at that time. We'll take about -- because the $200 million is overfunding on that maturity, we'll take about roughly $400 million off the balance sheet to pay down that maturity and then we'd refinance the balance of it. So we feel pretty confident we can do that. With respect to the cash over in Europe, there is some cash over in Hansgrohe. We do have an operating agreement between ourselves and the other shareholders of Hansgrohe to get at that cash if we need to. We do have a dividend policy in place in a manner with fairly efficient cash structure to get to try to minimize as much of the tax cost in bringing that cash back. So we've got some plans in place to -- in the future to bring that cash back tax efficiently.

Timothy Wadhams

Yes, just to amplify on John's initial comment, David, if you take the $300 million that was due in March of 2010 and the $850 million of debt that's due next -- about a year from now, that's obviously, $1,150,000,000,000. And I think when we get all done, our intent would be to pay down probably $200 million to $300 million of that with internal funds. Now John mentioned that refi -- we did a refi when we paid down the $300 million of $500 million. That would suggest another financing at some point of $300 million to $400 million, just to add a little bit of color to John's comment, with a net debt decline of $200 million to $300 million. And that has been consistent in terms of our communication to investors for the last couple of years.

Operator

And we'll take our next question from Bob Wetenhall from RBC.

Robert Wetenhall - RBC Capital Markets, LLC

Just wanted to try to reconcile a little bit more of your top line commentary that you have some relatively easy comps going into the back half of the year, but you also noted the challenges in the broader outlook for the economy. And are you just trying to direct us to think that sales in 2011 are going to be a little bit lower than in 2010?

Timothy Wadhams

No, we haven't given guidance for sales. We've talked a little bit about the economic environment. But we haven't given any guidance, Bob, in terms of sales, and certainly wouldn't necessarily direct you to that conclusion.

Robert Wetenhall - RBC Capital Markets, LLC

Got it. Okay. And just in terms of the commodity cost pressures if -- I kind of got confused when you were running through it. It seems like there was a bunch of different places. Could you just run through it by segment real fast where you feel maybe the top 2 or 3 places where you can offset the raw material inflation most effectively?

Timothy Wadhams

Yes. We -- well, I guess what I would say to you is that I believe in all the segments that we will have success. I wouldn't want to tell you that each segment will be neutral at the end of this year relative to price/commodity because timing of actions certainly have some implication. But our sense would be that if we do have some negative impact in terms of price/commodity that, that is something that will correct itself in a subsequent quarter. So we've got pressure in all the segments; Cabinets, particleboard in Europe, as well as lumber here in the U.S., is certainly a challenge. Metals impact us in Plumbing in terms of zinc and copper, which go into brass. We've talked about inputs for Paint. And in the Window business, resins, glass costs certainly are items that we need to manage through. But having said that, I feel very good about our ability across all of the product groups to make that happen. Again, innovation, strong brands certainly facilitate that.

Robert Wetenhall - RBC Capital Markets, LLC

So you're going to get some pricing to offset the raw material?

Timothy Wadhams

Well, we certainly anticipate that we will have pricing in certain areas. We'll be working with suppliers in certain areas. And so yes, definitely, there'll be price.

Operator

All right. We'll take our final question from Dan Oppenheim from Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG

I was wondering if you can talk about the -- you've mentioned the Cabinets and Installation business narrowing the losses there, but at running behind that level -- and we talked about in terms of running up behind that -- the business so far this year. Can you give more clarity in terms of narrowing the losses, what's left to do in terms of the cost and how you can make it up there?

Timothy Wadhams

Well, I think, Dan, one of the comments that we heard a little earlier was more -- less challenging comps in the second half of the year. And I think that if you think back late last year, we saw a real slowdown in terms of housing starts. Obviously, the first part of this year was pretty slow. So to the extent that we're going to end up about flat with last year, that would suggest that the latter part of the year should be a little bit stronger in terms of that activity. We've also got some of the other major initiatives out of the way that certainly took time and attention. We've got some top line opportunities that we're developing in Cabinets, particularly with the countertop solution that we've talked about in the past. And we've got some excitement there that we'll be able to share with you over the course for the next few months. So we've got some top line opportunities. We've also got some top line opportunities in the Installation side of the business. We expanded the footprint for our distribution business a couple of years ago with a couple of greenfields. So we've got opportunity there. We've also got some opportunity with the larger builders, and we've talked about that. So I think both the combination of top line, additional cost reductions in the second half, we've got the ERP system fully implemented in Installation. So we feel like we've got a very good opportunity to make that happen and you are correct as you look at the first couple of quarters. Most of that improvement is slated for the second half.

John Sznewajs

And I would add, Tim, that we've got the realization of benefits from actions we've already taken.

Daniel Oppenheim - Crédit Suisse AG

Okay. And then, I guess, just a quick follow-up. You've talked about sort of lowering expectations in terms of just the housing starts this year, and the conservatism towards next year. How much of that impacts your view in terms of the ability to get price to offset commodity costs just in terms of a tougher environment there, or do you think that that's something you can get even with lower volumes there?

Timothy Wadhams

Well, I think we've demonstrated, Dan, over the course of the last 2, 3 years in a very, very challenging environment. I mean, we've been able to successfully offset commodity costs. I think if we were to go back and roll the tape back 3 or 4 years, I'm guessing that we're probably neutral over that long period of time. And we've seen a $5 billion decline in sales from $12.5 billion in '06 to about $7.5 billion last year. And so I don't think it gets a whole lot tougher than that, but I think when you've got the focus we've had on innovation, the focus we've had on the work we've done around customer intimacy, the strength of our brands, it certainly puts us in a good position. We've got a supply chain initiative in place that is getting a lot of good traction. So yes, we feel comfortable that even in a tough environment, we should be able to make that happen.

Thank you. And I'd like to thank all of you for participating today, we appreciate that. And as Connie mentioned earlier, if we didn't get to your question, please give us a call, and we'll try to get back to you as quickly as we can. Thank you.

Operator

And this concludes today's conference. We thank you for your participation.

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