Masco Corporation
Q2 2012 Earnings Call Transcript

Published: 31 Jul 2012

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Masco Corporation Second Quarter 2012 Conference Call. My name is Sarah, and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to the Vice President of Investor Relations, Maria Duey. Maria, you may begin.

[Maria Duey:]

Thank you, Sarah, and good morning to everyone. Welcome to Masco Corporation's Second Quarter 2012 Earnings Conference Call. Joining me on our call today are Tim Wadhams, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer. Our second quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion on our website. Following our prepared remarks, the call will be open for analyst questions. [Operator Instructions] If we are unable to take your question during the call, please feel free to call me directly at [phone]. If you would refer to Slide 2, I'd like to remind you that today's presentation includes 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 in our Form 10-K that we filed with the Securities and Exchange Commission. Today's presentation also includes non-GAAP financial measures. We've provided a reconciliation of these measurements on our website at www.masco.com. With that, I'll now turn the call over to our President and Chief Executive Officer, Tim Wadhams. Tim?

[Timothy Wadhams:]

Thank you, Maria. And if you would please move to Slide #4. After a relatively strong start to the year in the first quarter, with sales up about 7% overall, second quarter sales leveled out and were flat compared to last year at $2 billion. We were hit by the negative currency translation. That cost us about $46 million in terms of top line. And excluding that, we'd have been up about 3% in terms of sales. From a positive perspective, our international operations were flat in local currencies in a relatively tough environment. We also benefited from price and improved new home construction-related activity. On the other side, Retail repair/remodel activity was slower, and our sales to key retail customers were flat in the quarter. Margins on an adjusted basis were up 40 basis points, and John will get into the detail there, but we did have some nice leverage in terms of our SG&A expenses, which offset the gross profit decline. We continue to benefit from profit improvement activities as -- and also had a positive price/commodity relationship in the quarter. Earnings per share on an adjusted basis, at $0.10, exceeded the $0.06 that we reported last year. And we did not pro forma those earnings for negative hedge and negative foreign currency translation, which each cost us about $0.01. We also in the quarter had a fairly significant event in terms of the settlement of our Columbus Drywall litigation. I should say that's accounted for in the second quarter. It actually took place in the latter part of July. We've agreed to pay $75 million to settle that claim. We continue to deny any wrongdoing or unlawful conduct but certainly feel that this decision makes sense under the circumstances, it eliminates a significant uncertainty and also limits the expense of that case, which was fairly significant. And it's very good to have that behind us. If you flip to Slide #5. Earlier this year, we communicated the strategic initiatives that we're focused on to drive improved performance and value going forward. Those include extending our market leadership positions, continuing to aggressively manage our cost structure through supply chain and Lean initiatives, improving our Cabinet and Installation-related businesses and strengthening our balance sheet. And if you flip to Slide #6, we'll talk a little bit about how we've done against those strategies. As it relates to extending our market leadership positions, we continue to introduce new products, as well as win new business for the future. I think a good example of one of the new product introductions that we have includes the extension of our Delta brand, with new products, new finishes and complementary accessories in the bath category. As it relates to our Installation segment, we continue to get very good traction in the first part of this year as it relates to the relatively new retrofit and light commercial channels. And our Window businesses, both in North America and in the United Kingdom, continued to gain share. Milgard continues to do a very good job in the Western part of the United States. Recent product introductions

[John G. Sznewajs:]

Thanks, Tim, and good morning, everyone. If you could just please turn to Slide 9. So as Tim mentioned, revenue in the second quarter was flat compared to last year's second quarter. Excluding the impact of foreign currency translation of about $46 million, sales grew at 3%. We saw increased sales in those businesses selling into the new home construction channel, including our Installation business, which was up 10% in the quarter. We saw increased sales of North American Plumbing Products, and we benefited from selling price increases. International sales were down 9% in the quarter though flat in local currency. The sales to key retailers were also flat in the quarter. Our adjusted gross margins were 26.1%, about 110 basis points lower than in Q2 of last year, due to material cost increases in our Decorative Architectural, Installation and European Plumbing businesses, partially offset by profit improvement initiatives. We did a much better job of leveraging our SG&A in the quarter as adjusted SG&A as a percent of sales dropped 150 basis points to 19.9%. As result of the favorable SG&A performance, we're also pleased with our bottom line performance, as adjusted operating income increased 7% in the quarter to $124 million, with an adjusted operating margin of 6.2%. And finally, our adjusted EPS was $0.10 in the quarter, an improvement of $0.04 per share in the quarter from the second quarter of 2011. If you'd turn to Slide 10, we can see the components of our operating income improvement in the second quarter. Our net price/commodity improved $14 million in the quarter, largely driven by our Plumbing, Cabinetry and other specialty segments, partially offset by a negative price/commodity relationship in our Decorative Architectural segment. This $14 million reflects the negative impact of our metals hedge, which was about $5 million negative in the second quarter. While we have experienced favorable price/commodity relationships in the first half of the year of about $35 million, based on current prices of our key commodities, we believe that in the second half of the year, the price/commodity relationship will likely be in the range of $10 million to $20 million positive. The $10 million reduction in net volume/mix was principally driven by negative mix of approximately $13 million in our Plumbing segment, which largely relates to Hansgrohe as they continue to penetrate new markets. The net profit improvements of $4 million were principally driven by our Cabinets, Installation and Decorative Architectural segments, partially offset by increased strategic growth spend in the Plumbing segment. For the first half of 2012, we are pleased with our profit improvements of $90 million gross and estimate that we can achieve $175 million for the full year, up from our original estimate of $150 million. If you turn to Slide 11, you can see that our Plumbing segment sales declined 3% in the quarter, again, principally due to foreign currency translation. Excluding the impact of the $37 million of foreign currency translation, sales increased 2% in the quarter. European sales in the segment were flat in local currency for the quarter despite a challenging economic environment. We experienced good growth in our North American businesses, as several of our most important faucet brands, including Delta, Peerless and Brizo, saw sales in the quarter increase high-single digits in both the retail and wholesale channels as they continue to gain share through new-product launches. Margins, however, in this segment were challenged by a number of items in the quarter

[Timothy Wadhams:]

Thank you, John. And if you would please flip to Slide #18. These are the priorities that we identified earlier this year in support of our strategic initiatives. And we feel like we've continued to make good progress in the first half of the year, including the second quarter, against all of these priorities. We've talked about most of them through the course of the last few minutes. I would add that, as John mentioned, we had some nice improvement in working capital management. And I'd like to join John in thanking our employees across the enterprise for their continued efforts and dedication. If you flip to Slide #19, a couple of comments before we go to Q&A. I feel like we've made a lot of progress in the first half of 2012. Weather certainly has been a factor. It helped us, we think, in the first quarter; probably hurt a little bit in the second quarter given the heat in certain areas of the country. So the line between quarters might be a little bit blurry. But having said that, sales for us in the first half were up 3% or $128 million. And if we exclude $65 million of negative currency impact, it would have been up about 5%. Margins in the first half are up 150 basis points versus last year. And our incremental margin in the first half is over 40%. That's helped by positive price/commodity relationships, as John mentioned, approximately $35 million. We've made some very good progress there, but we're still behind the curve when we look at the last couple of years. EPS as adjusted is up $0.14 a share, $0.16 versus $0.02 last year. And we've seen some nice improvement in our Cabinet and Installation businesses, and our cost structure, as John articulated. Second half 2012 looks to be a little bit more challenging from a macro perspective. European economies are still unsettled. And the U.S. economy appears to be slowing as consumers pull back. Retail sales have been down now, I think, for 3 straight months. And certainly, big-ticket remodel activity is not generating an awful lot of traction. I would point out that we're relatively pleased with our preliminary view of July. July, on an all-in basis, looks to be up low single digits. And if we exclude foreign currency, July looks to be up mid-single digits. And if we look at only North America, our preliminary view is that July will be up high single digits. So it looks like we're off to a reasonably good start for the second half. Also on the plus side, we continue to invest in our businesses. And we continue to win new opportunities, especially in Plumbing. These costs are hitting our P&L today. John talked a little bit about that as we went through some of the segment deal -- detail, but we'll certainly see the benefits from those opportunities in the future. We're also excited about the improving new home construction environment. As we mentioned, we expect housing starts are going to be probably somewhere around the 740,000 level. Inventories for new homes continue to be low, and in certain areas of the country are extremely low. Demand has picked up. Affordability has never been better. Prices are stabilizing, and in certain areas, moving up. And we've seen a lot of investors come in to acquire properties. Also encouraging is 2013 estimates for new home construction at 880,000 as per the Blue Chip consensus. Some other folks are a little bit higher than that. But if we can hit that level this year and next year, the 740,000 this year, the 880,000 next year, that certainly is going to be a positive for the overall economy, as well as for Masco. The economy needs both housing and automotive. The multiplier effect as you think about job creation is significant. And anything that's good for the economy is good for us. Having said that, we'll continue to focus on the things that we can control to drive our strategic initiatives, which include expanding our market leadership positions, continuing to focus on our cost structure, continuing to improve our balance sheet and continuing to drive our Cabinet and Installation businesses to profitability. And with that, Sarah, we'll open up the lines for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Eric Bosshard from Cleveland Research.

[Eric Bosshard:]

Two things. First of all, within Cabinets, I'm curious about what's changed -- and especially as you look into the second half, has you taken a little bit more cautious view on the profit progress you're expecting from that segment this year?

[Timothy Wadhams:]

Yes, what changed there, Eric, is a couple of things. One is that we're not getting the traction that we anticipated in the dealer channel. Again, that's a little slower than we anticipated. And I think from our perspective, we're just not getting the traction that we anticipated, which is a little bit disappointing. The other thing is with countertops, it's kind of a good news, bad news situation. We've had some basic difficulties scaling that business. Demand has been very, very strong. And we've run into some inefficiencies. We certainly think that we can drive profitability going forward. But we've had to pull back in terms of our expectations, and quite frankly, the profitability there is not what we anticipated. If we look at the cost side of the equation, I think at the beginning of the year, we estimated that we'd have a net of approximately $30 million of cost reductions. And we still feel like we're on target for that, so continuing to do a good job on the cost side, but basically on the revenue side, see the lack of traction in the dealer segment, along with the fact that repair/remodel for the bigger-ticket items is a little bit slower, as John mentioned, for higher-priced items like many of our offerings on the KraftMaid side. Sales look to be down about 5%. So those would be some of the factors that we're faced with. We also haven't seen a lot of pickup in Europe. I should point out that Europe continues to be challenging. No question about that. We anticipate a little bit of improvement there, but the top line there continues to be a bit of a challenge.

[Eric Bosshard:]

When you look at the market share position or the average selling price of -- especially on the KraftMaid side, is there anything to look at and would view this to be a little bit more of a medium-term challenge that may take longer to restore profitability because of how the market shares pie has moved and also how the mix has moved in this category?

[Timothy Wadhams:]

Well, yes, no, I -- we're optimistic going forward. I mean, there's no question about that. We continue to be profitable in the dealer channel. There's no question there. And KraftMaid continues to be overall profitable. But having said that, I think just in terms of top line, we're not getting the kind of traction that we anticipated. And I think that we should see some improvement there over the longer term. There's no question in my mind about that. I think we still got great brands. When you think about KraftMaid, Merillat and Quality. And so, yes, I see this more as a little bit of a speed bump. We have made some leadership changes, as I mentioned earlier, and so we're encouraged by that as well.

[Eric Bosshard:]

And one other. Could -- you've just squared you're more cautious on the second half. I mean as -- but it looks like July accelerated from the second quarter and maybe even the first half experience. How can you just put those 2 statements that seem to be conflicting in context for us?

[Timothy Wadhams:]

Well, I think anytime you're in a recovery, I think that there's going to be some lumpiness in it. And we certainly have experienced that. Obviously, the first part of the year started out very well. As we mentioned, second quarter was pretty consistent when we look at sales trends from April, May and June. We were generally, without foreign currency, up about 2%, 3% each month. And our sense is just a little bit of caution as we go into the second half of the year. I think when you look at some of the uncertainty out there, with disposable income being down, the lack of job growth, I think caution by consumers, I think it's just prudent for us to think a little bit more cautiously. But obviously, July is a little bit -- or maybe a little bit more than a little bit of a plus as we head into the second half. And I hope we're wrong as it relates to that. But we'll just have to see how things shake out.

[Operator:]

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

[Dennis McGill:]

I guess, Tim, just back on Cabinets, realizing that this restructuring is kind of 2 years in the making now, can you go into a little bit more specifics on what the challenges are in the dealer implementation? And then as you think about the management changes, getting involved there, what are you seeing new management doing differently than the prior management team?

[Timothy Wadhams:]

Sure. I think as we look at Cabinets, Dennis, as everyone's aware, we did do a major integration going back a couple of years, putting our Builder Cabinet and our Retail Cabinet Groups together. We think we've made very good progress there in terms of the cost side of that. My sense is that as I think back and I think we estimated that on the integration, we probably would save somewhere around $35 million. I think we've got that in the bag, and there's probably another $5 million to $10 million that we've been able to realize as part of the integration. Having said that, I think we probably have had a little bit more disruption, if you will, relative to top line activities. And that has put us a little bit behind the 8 ball just in terms of a couple of the segments. The dealer segment is an area that we think has a lot of promise. We're profitable in the dealer segment. We've got some very good relationships there, but we're not doing as well as we -- quite frankly, as we'd like too. So having said that, we did make a couple of leadership changes. From a corporate perspective, we've continued to streamline our corporate executive group, if you will, and we've gone from 3 to 2 Group Presidents in North America. And again, we were going to make that move irrespective of any issues around Cabs. But in doing that, Keith Allman, who is one of our Group Presidents in North America now, has responsibility for our kitchen and bath group. We put North American Cabinets and Plumbing together, and Keith is going to have group responsibility for that. Keith has Cabinet experience from Merillat and the Builder Cabinet Group. He was in Cabinets for 10 years. He was Exec VP, Vice President of Operations, so he's got a lot of background there. Keith went and left Cabinets about 6 years ago, went to Delta and did an excellent job leading Delta as the CEO. And has got a lot of experience in all the channels that are important to us from a Cabinet perspective. We also have changed the business unit leadership. Rick Roetken, who was the VP of Marketing at Delta when Keith was at Delta and more recently spent 2 years running our Liberty Hardware operation, has taken over as CEO of our North American Cabinet Group. And between Rick and Keith, they've got a great track record together in terms of the improvement that we've seen at Delta and a lot of very good experience in all of the channels that are important relative to the Cabinet-related business, particularly as it relates to Retail. So from our perspective, we got a lot done over the course of the last couple of years and certainly feel good about that, but also feel that there's some opportunity for us to kind of refocus on the growth side, if you will. And I think with Keith and Rick involved in that going forward, we're optimistic that we can generate some of the top line opportunities that we think are available to the leading brands that we have.

[Dennis McGill:]

And can you give us a little bit of color around, a, what key retail sales would have been, excluding Cabinets in the quarter; and then, b, what the top line assumptions roughly would look like in the second half of the year around that $55 million, $60 million loss in the segment?

[Timothy Wadhams:]

No, we didn't breakout Cabs from key retail sales. I think [indiscernible] yes, we don't have that at this point, and we might be able to take that out for later. And the rest of your question, Dennis, was top line assumptions in the second half relative to Cabinets?

[Dennis McGill:]

Yes, just give us a sense of what's embedded on the top line behind that loss that you guided to.

[Timothy Wadhams:]

Well, what we're looking for is probably a little bit of a decrease in the second half. I think in the first half, we're down about 3% or 4%, excluding foreign currency. And our sense is that that's probably somewhat consistent with where we'll probably end up in the second half as well.

[Dennis McGill:]

So -- and just lastly, so that implies deceleration on the remodel side in Europe since new construction is accelerating, as you said?

[Timothy Wadhams:]

Right, yes, exactly.

[Operator:]

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

[Nishu Sood:]

I wanted to turn to Plumbing. In Plumbing, the issue of mix affecting margins as Hansgrohe has expanded has come up periodically over time. So I just wanted to focus in on that a little bit. Clearly, if the business is pursuing the incremental sales, which is hurting mix, it must be a good return on capital investment. But from a margin perspective, I just wanted to understand how we should think about this going forward. Obviously, these expansions into the new markets are meant to drive sales over the long term. So does that mean that we should expect the margins for Hansgrohe and Plumbing to drift down over time as the mix continues to shift?

[John G. Sznewajs:]

What initially happened is over time in plumbing -- and Hansgrohe, they got a couple of 3 items that hit them from a mix perspective, one you alluded to, which was their expansion into international markets. A couple other things that hit them recently, one is the fact that, as you may recall, Hansgrohe principally started out as a shower business, and over time, they've really increased the number of offerings they have in the faucet side of their business. And while both of those businesses have great margins. It just turns out that showers are at a slightly higher margin than faucets. And so there's a negative kind of mix associated with the product mix that's developed over the course of the last couple of years. Then the last thing is that over the course of the last year or 2, we've seen some down trading. They've got a high-end brand called Axor, and we've seen some down trading on some of the larger international projects to more of the Hansgrohe mainline product. And so those couple 3 items hit it from a mix perspective. And to your point, you're right, from time to time, we had some -- experienced some negative mix at Hansgrohe. I would think that some of this is an investment, but in the near term, we'll experience some margin degradation as a result of the mix. But over the long term, what we tend -- generally tend to experience is that when they enter new markets, generally entering with their opening price point products, that over the course of time as those markets develop, they migrate people up the price continuum. And so I would generally tend to lead you to think that they've got a near-term issue that will probably start to correct itself over the medium term as these other markets start to mature.

[Nishu Sood:]

Got it. Great. That's very helpful. Second, I wanted to turn to the settlement -- the Insulation settlement. What I wanted to understand was, clearly, the issue there was around Masco being large and getting better pricing on Installation. Has this process, over time, with these relentless lawsuits and the class action, and the settlement affected the pricing that Masco gets on Insulation? And so would it have an effect on the pricing and margins in that business going forward? Or conversely, does the settlement actually remove any issues that there might have been with pricing while all these lawsuits were going on?

[Timothy Wadhams:]

Yes, I'm not sure I'd necessarily say there's a connection there, Nishu. I think as we think about our size and our buying power, we've talked a little bit about the relationship with Owens Corning on a strategic supplier relationship, we still are a large buyer of insulation. We still have leverage in terms of the opportunity in the marketplace. Obviously, it's very competitive at the level of new home starts that we're at today. But I would not see us disadvantaged in any way going forward relative to the fact that we settled this lawsuit or have had a couple of other litigation-related issues.

[Operator:]

Your next question comes from the line of Sam Darkatsh from Raymond James.

[Sam Darkatsh:]

Some questions on Slide 11. There were a lot of moving parts, obviously, with the Plumbing margins, John, with respect to the program costs and the hedge and then the explosion in the -- in one facility. How many of these costs continue and; to what degree over the next quarter or 2?

[John G. Sznewajs:]

Well, Sam, it's hard to predict currency and commodity movements, so I'm not going to really go there. But I would point to you that kind of the $10 million that I outlined, kind of the $5 million of program costs were -- was truly related to some retail activity that we had in the quarter, related to some share gains that we picked up at some of the major retailers. And then secondly, kind of what I call the operational one-timer is the plant explosion in the light that it kind of got lumpy into that. We're hopeful -- we're very hopeful that we don't have any further operational issues like that. So those, clearly, are one-time in nature. Could the rebates or could the reset costs occur -- to the extent that we continue to win new business here, that could be something that we experience in the future, I think we'd be happy to take that as we win new business. So -- but we'll continue to call those out as those things come up.

[Sam Darkatsh:]

Second question. There was also, I believe, a change in your expectations for general corporate expense. I think that if my notes hold correct, from $140 million to $125 million, what was that -- what was the source of that? And what do you expect for next year? Is this the ongoing run rate now?

[John G. Sznewajs:]

We haven't really gotten into next year. But the reason that things started to come down, as we guided on now, is you may recall initially, when we give out guidance, we budget everything at standard. And based on the experiences we've had through the first half of the year, with approximately $30 million in the quarter, we feel pretty comfortable at about $125 million we're guiding everyone to for the full year.

[Sam Darkatsh:]

And last question, it's a quick one. With the Installation business, I know you saw -- said that the Insulation was up 20, and the segment was up 10. I caught that there was 3 points of a headwind from the branch closures. But what accounts for the other 7% between the Insulation and the reported sales growth?

[John G. Sznewajs:]

Well, we've got a couple other components of that business that, perhaps, they grow as quickly as our Insulation sales, such as our distribution business. Our retrofit business slowed a little bit in the second quarter, partially we think a little bit due to the hot weather. So those couple of things. And then some of our other products didn't grow as rapidly -- like our fireplaces and gutters didn't grow as rapidly as the 20% that we experienced in Insulation.

[Timothy Wadhams:]

Yes, Sam, a lot of the pickup there tends to be with some of the bigger builders. And some of those homes tend to be a little bit smaller, with less features like fireplaces and that type of thing. And so there's probably less non-insulation-related product opportunity for us in certain situations. And you've also got the multifamily issue relative to mix as well, which would put you in a position where you're not going to probably have a fireplace, garage doors, gutters, that type of thing, to the same extent that you might with a single family.

[Operator:]

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

[Mike Wood:]

You'd mentioned the $5 million additional program costs for the share gains. With the remaining portion of that, the $10 million, can you frame that in terms of how that shifted versus prior quarters and how you think about what the payback is on that growth spend?

[John G. Sznewajs:]

Is it, Mike, in the Plumbing segment?

[Mike Wood:]

Yes.

[John G. Sznewajs:]

Yes, the $5 million in terms of what we spend, just one-time re-set cost, is to our price on the shelves of major retailers. So in terms of the return on that investment, we look for a pretty quick payback. Generally, these programs will go for 1 or 2 years, and so we look to recoup the return over the life of the program that we have in the aisle. That said, we're constantly managing our SKUs in the aisle and working with our retail partners to ensure that we've got product that moves quickly. So to the extent that something might not be moving as fast as either we or they would like, we'll continue to develop new products to make certain that we can add fast-moving SKUs in the aisles.

[Mike Wood:]

And can you talk about the point-of-sale trends also that you experienced in July, and also for the second quarter, so that we can understand if there's any destocking or restocking benefit there?

[Timothy Wadhams:]

Yes, I really don't anticipate and didn't feel like there was any impact in terms of inventory balancing at all as it related to the quarter. We saw a little bit of that, we thought, coming out of the first quarter into the second quarter. But really, our sales activity was, as I mentioned earlier, relatively flat each month. We're right around, excluding foreign currency translation, right around 2%, 3% in terms of increased sales. We ended up, obviously, without foreign currency, at about 3% for the full quarter. So really didn't see anything unusual relative to inventory balancing. And as we went in -- as we go into July, we talked a little bit about some pickup there, but don't necessarily believe that's attributed to anything relative to inventory one way or another.

[Operator:]

Your next question comes from the line of Will Randow from Citi.

[Will Randow:]

Could you share your price increases and how well those have been sticking, particularly on the Paint business? Is the number [indiscernible]

[Timothy Wadhams:]

No -- I'm sorry, go ahead, Will.

[Will Randow:]

As a competitor comp -- sorry, at a competitor comps, I remember you said the April price increase stuck, and I'm curious if there's been any success after that price increase?

[Timothy Wadhams:]

Talking about the commodity costs, are you taking about -- you're talking about Paint now?

[Will Randow:]

Yes, correct.

[Timothy Wadhams:]

Okay. And you're talking about cost increases in terms of the commodities?

[Will Randow:]

No, I'm talking about price increases rather.

[Timothy Wadhams:]

Okay, our pricing, yes. No, we -- as we mentioned earlier, Will -- sorry for the confusion there, but as we mentioned earlier, we started to implement price related to our Paint products in February. And that process was complete in late March, early April, in terms of implementation. And that was pretty much across all of our Paint-related products, all of our Paint-related customers. Since that point in time, we have experienced some continued increase in TiO2 and resin-related costs. But in the second quarter, late in the second quarter, that seemed to kind of level out a little bit. Obviously, we're still elevated versus last year. And as John mentioned, we had a negative price/commodity relationship in the Decorative Architectural segment. And our expectation is that we don't see in the second half given that worldwide volumes are down at this point in time as it relates to Paint, we're not anticipating necessarily any continued increases. But we're still a little bit behind in terms of where we'd like to be from a pricing perspective. And I can't really give you any further information on that at this point in time.

[Will Randow:]

Got it. I imagine the retailer you're working with, in particular, probably is going to push back if you try to -- push further price increases through the rest of the year.

[Timothy Wadhams:]

Well, that remains to be seen.

[Will Randow:]

Okay. And second question for Cabinets, I believe you said promotions were flat year-over-year, which sounds like still high to me. And you had share gains at retailers. Is that correct?

[John G. Sznewajs:]

No. I would say that our share at the major retailers is about flat for the year or for the quarter, I should say. And the promotional activity, is flat for the first half of the year for us based -- compared to the first half of last year. So it's still intense. They're still elevated but no more intense than what we saw in the first part of last year.

[Will Randow:]

So I guess, it sounds like it's relatively a price-taker business until you get capacity utilization back up. But are you guys thinking about some creative ways of creating value. Possibly doing, and we've talked about this, an asset swap with, let's say, a competitor, where you pitch windows for doors versus cabinets, or something where you create consolidation in an industry that lacks it?

[Timothy Wadhams:]

Well, we don't generally speculate on things that might be somewhat transformational, like what you suggested. I think our sense is that there continues to be a very good opportunity, fundamental opportunity, in the dealer channel, in the countertop market for us. As we've mentioned, we've got some new folks involved in that business. They're in the process of doing some assessment, as we speak, just in terms of kind of where we are in the different channels. And our sense is that there's a lot of opportunity for us to expand our penetration, improve our performance going forward and, certainly, are encouraged by the position we've got with our brands at this point in time. So I wouldn't necessarily want to speculate on anything of the nature that you suggested.

[Will Randow:]

Yes, I suppose NOL would take a ding too.

[Operator:]

Your next question comes from the line of David Goldberg from UBS.

[Susan Maklari:]

It's actually Susan. You guys did a few smaller acquisitions earlier this year. And as we've sort of gone through the year, and you've seen how the housing market and conditions overall come together, are you seeing any changes in terms of some of the opportunities that are available out there and your appetite for them?

[John G. Sznewajs:]

Yes, Susan, to be clear, we did a small acquisition, a spa manufacturer for our West Coast spa business late last year. And that actually is going very well for us. And the management team at Watkins has done a fantastic job of integrating that business and growing that business. So that's been a very positive acquisition for us. In terms of your question, are we seeing additional opportunities, new opportunities come on the marketplace, it's still pretty slow at this point in time. Even though end markets are starting to recover from the bottom, with still not a lot of sellers coming off the sidelines at this point, so I wouldn't want to speculate or say that we're looking at any more acquisitions at this point. But we're not seeing more activity of acquisition in the industry at this point in time.

[Susan Maklari:]

Okay. And then in terms of the balance sheet, the July repurchase -- or July debt maturity was sort of a point that we were waiting for. And we're -- we now that we're past that, can you give us any update in terms of how you're thinking about potential share repurchases or raising the dividend, anything in terms of shareholder value like that?

[Timothy Wadhams:]

Yes, I think, Susan, at this point, given where we are in the recovery and the fact that we're still $4 billion, $5 billion behind sort of our peak in terms of revenue, I wouldn't necessarily see any activity around shareholder-friendly-related initiatives like share repurchases or an increased dividend at this point in time. Obviously, as we get further into the recovery and start to see some additional top line opportunity given our operating leverage, the history we've got in terms of free cash flow, and I would remind folks that if you went back to the period 2003 through 2007, that 5-year period, we averaged about $1 billion of free cash flow a year. And that was after $1.5 billion of capital expenditures, $300 million of investment in displays, and we were able to, during that same time period, repurchase about 30% of our outstanding stock. I think that gives you a little bit of perspective of the cash flow capacity that we have. And -- but again, that was at a different time and a different place. And I think at this point, given where we are in the cycle, it would be premature for us to start down that path at this point in time.

[Operator:]

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

[Stephen F. East:]

If we look at your Paint business, again, you had a nice sequential improvement in op margin. How would you rank order what drove that from pricing volume? And did Pro build -- did your spend in Pro build accelerate versus the first quarter or not?

[John G. Sznewajs:]

Yes, Stephen, a couple of things there. On a sequential basis, I think some of the improvement did come from the Pro. That included -- drove as I mentioned, I think, in my remarks. Volumes were up just slightly in the second quarter if you factor out some SKUs that we lost at Walmart. So volume was such a huge driver. On the bottom line, profit improvements were a big driver in the quarter in the Decorative Arch segment. The performance of our Liberty Hardware business also aided their quarter pretty significantly. So in price [ph], a little bit if softness overall in the quarter just given the extreme heat, particularly in the last couple of weeks in the quarter due to putting up [ph] our exterior paint. So a couple of 3 things hit us there. But overall, improved pricing kind of helped us a little bit as well in the quarter.

[Stephen F. East:]

Okay, that's helpful. And then the other thing, you mentioned the key retail -- the Walmart stuff, on an apples-to-apples, one is the key retail -- what is going on with the key retailers? And then the other question I've got is, when you look at your European business, can you remind us what percentage of your sales is going over there and what the op margin is in Europe versus the U.S.? And then just sort of if you rank order, what the pressures you see being in that market?

[John G. Sznewajs:]

Okay. A couple of things there. One, our key retail sales, again, were flat for the quarter. And that's not only the -- our major retailers, Home Depot and Lowes, but the composite of a number of other probably 20-plus retailers that fall into that equation. In terms of Europe, our European sales are about 21%, 22% of our overall sales right now. And I think the last question was rank order, the -- some of the...

[Timothy Wadhams:]

No, I think what Stephen was looking at is the operating margin in Europe, and that would be down a little bit this year year-over-year, Stephen. I don't know that, that's in our analyst package. I don't -- is that in there?

[Stephen F. East:]

No, not really.

[Timothy Wadhams:]

I don't think we have the international margin. But that would've been down a little bit. I think last year, at this point, Stephen, we were running around 10%, 11%, as I recall. And with some of the mix challenges that we've got, some of the top line challenges, we'd be off there. And I don't have that number right in front of me, but my guess is it's probably mid- to high single digits versus low double digits last year.

[John G. Sznewajs:]

Yes. Stephen the way to kind of get it is if we had a $5 million operating income hit on currency and about a $50 million top line hit on currency. That translates through at the same margin, so that's probably high single digits, to Tim's point.

[Stephen F. East:]

Okay, got you. And is that the biggest headwind? Or are you seeing something else that causes you more concern?

[Timothy Wadhams:]

In Europe?

[Stephen F. East:]

Yes, in Europe, I'm sorry.

[Timothy Wadhams:]

Yes, I just think, for us, in Europe, obviously, the economies over there are pretty dicey. One of the things that helps us is the diversity of Hansgrohe's product offerings in emerging markets, project work in the Middle East. So we do have a bit of an offset. We don't have a lot of presence in Southern Europe

[Operator:]

And this concludes today's conference call. You may now disconnect.