Jul 30, 2013
Executives
Maria Duey - Vice President - Investor Relations Timothy Wadhams - Chief Executive Officer, President and Director John G. Sznewajs - Chief Financial Officer, Vice President and Treasurer
Analysts
Michael Dahl - Crédit Suisse AG, Research Division Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division Dennis McGill - Zelman & Associates, LLC Keith B.
Hughes - SunTrust Robinson Humphrey, Inc., Research Division Nishu Sood - Deutsche Bank AG, Research Division George L. Staphos - BofA Merrill Lynch, Research Division Mike Wood - Macquarie Research Kenneth R.
Zener - KeyBanc Capital Markets Inc., Research Division Sam Darkatsh - Raymond James & Associates, Inc., Research Division Nicholas A. Coppola - Thompson Research Group, LLC Adam Rudiger - Wells Fargo Securities, LLC, Research Division Michael Jason Rehaut - JP Morgan Chase & Co, Research Division Stephen F.
East - ISI Group Inc., Research Division Susan Maklari - UBS Investment Bank, Research Division David S. MacGregor - Longbow Research LLC
Operator
Good morning, ladies and gentlemen. Welcome to Masco Corporation's Second Quarter 2013 Conference Call.
My name is Regina, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes.
[Operator Instructions] I will now turn the call over to the Vice President of Investor Relations, Maria Duey. Maria, you may begin.
Maria Duey
Thank you, Regina, and good morning to everyone. Welcome to Masco Corporation's Second Quarter 2013 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 (313) 792-5500.
I'd like to remind you that statements in today's presentation will include our views about Masco's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.
We have described these risks and uncertainties in our Risk Factors and Other Disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Today's presentation also includes non-GAAP financial measures.
We have provided a reconciliation of these adjusted measurements to GAAP 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 thank all of you for joining us today for Masco's second quarter 2013 earnings call. If you please move to Slide #4.
We're very pleased with our second quarter 2013 results, certainly one of our strongest quarters since the downturn and a continuation of the momentum, which started for us in the fourth quarter of 2012. We continued our trend of delivering growth in the second quarter, with all 5 of our operating segments increasing top line sales and expanding operating margins.
Our leadership position in the building products industry and our focused execution against rising new home construction activity particularly benefited our Cabinet, Installation and window-related businesses. Notably, our Installation and Cabinetry segments were both profitable in the quarter, reflecting our strong leverage to a housing recovery and our continued commitment to cost containment.
As we previously indicated, returning these segments to profitability has been one of our prime -- our top priorities. Demonstrating the strength of our brands was a strong sales contribution from new product introductions, particularly in our paint and Plumbing businesses.
And despite challenging macroeconomic environments in the Eurozone, our international sales increased in the quarter, reflecting strong performance by our international Plumbing and window businesses. And if you would please turn to Slide #5.
As we've communicated in the past, our strategy is focused on 4 key elements to drive performance. We expanded our market leadership by continuing our legacy of introducing new products and programs, which matter to both our customers and the end consumer.
Our Decorative Architectural businesses introduced new products at retail, which have exceeded expectation. And we continue to reap the benefits from previously-introduced products and programs with our North American faucet and toilet businesses, which delivered mid-teens growth in the quarter.
Our emphasis on cost control is evident in our continued SG&A improvement. As I mentioned, we continue to see improvement in our Installation and Cabinet segments.
Our Installation segment is capitalizing on improved market dynamics and drove increased sales in all channels of their business. By remaining focused on profitability, they continued their trend of improving operating profit.
The new management team that's been in place in our North American Cabinet business for the past year has had a positive impact on that business. The segment reached profitability in the quarter and continues to execute on their plan of stabilizing the business and positioning it for future profitable growth.
Combining these 2 segments, our Cabinet and Installation business improved by $26 million of operating profit versus the second quarter of 2012, and we're obviously very pleased with that performance. In addition, we remain committed to strengthening our balance sheet and continue to improve our working capital during the quarter.
These execution highlights produced a very strong second quarter, and we're very pleased with the trajectory of our performance. If you please move to Slide #6.
At this time, I'd like to turn the presentation over to John Sznewajs, our Chief Financial Officer. And John will walk us through our segment operating performance.
John G. Sznewajs
Thank you, Tim, and good morning, everyone. If you could please flip to Slide 7.
As Tim just mentioned, our momentum accelerated coming out of the first quarter, and we delivered a strong second quarter. Sales increased 10%, with North American sales up 11% and international sales up 6% in local currency for the quarter.
Currency, I should say, had a minimal impact in the quarter. Volume increases were strongest in our direct-to-builder channel.
We did a great job of leveraging our fixed costs in the quarter, as our adjusted gross margins expanded 200 basis points to 28.9%. We're also pleased with the strength of our bottom line performance, as our commitment to cost control helped to leverage our SG&A and increased our adjusted operating income 57% to $206 million, with adjusted operating margins expanding nearly 300 basis points to 9.6%.
We realized strong operating leverage, as we delivered 37% incremental margins in the quarter. And our adjusted EPS more than doubled in the quarter, to $0.23 per share from $0.11 per share 1 year ago.
Turning to Slide 8, we see the components of our operating income improvement in the second quarter. The $43 million increase in net volume/mix was driven by solid volume increases in our Installation, Plumbing and Decorative Architectural businesses and to a lesser degree, in our Cabinets and Other Specialty segments.
This growth was partially offset by negative mix in our Cabinet business, as we experienced solid growth -- sales growth to production builders in our Plumbing segment with our successful new programs and expansion into international markets. Net price/commodity improved by approximately $22 million, largely driven by our Cabinets, European Plumbing and U.S.
window businesses. This also reflects the year-over-year impact of our metal hedge, which was $1 million favorable in this current quarter.
We captured $45 million of profit improvements gross in the quarter, and we believe we are on track to realize our full year profit improvement initiatives gross of approximately $150 million. Turning to Slide 9, you can see that our Plumbing segment sales increased 9% in the quarter.
The strong sales momentum we've been experiencing in our North American faucet and toilet businesses, which include our leading brands, Delta, Peerless and Brizo, continued in the second quarter. Our sales of these products grew mid-teens percent, aided by last year's program wins in the retails channel and strong balanced performance in the trade channel, reflecting our continued investment in the showroom, commercial and multifamily segments of this channel.
As a reminder, our revenue in the second half of 2012 benefited from about $25 million of load-ins related to our retail program wins in the third and fourth quarters of last year, so we'll have some difficult comps in the next 2 quarters. We also experienced mid- to high-single-digit growth from several of our North American businesses, such as rough plumbing and spas.
Our European sales rebounded nicely, with sales increasing 6% in local currencies, following a Q1 that was hampered by difficult weather conditions. This increase was led by Hansgrohe, as our other European Plumbing businesses were relatively flat in the quarter.
Offsetting this growth were weaker sales from our bathing unit business. As we previously mentioned, we launched a retail shower surround and tub line review and exited a product line.
These negatively impacted sales by approximately $13 million in the quarter, and we estimate it will total approximately $50 million for the full year 2013. Year-over-year operating profit increased $37 million, driven by increased volume, a favorable price/commodity relationship, particularly in Europe, and favorable productivity and cost control.
This was partially offset by negative mix. Turning to Slide 10, you see that revenue in our Decorative Architectural segment increased 9% in the quarter, driven by strong core DIY paint sales and new product introductions.
The 2 products we've launched in Q2 at The Home Depot, BEHR MARQUEE and BEHR DECKOVER, are off to a terrific start. We also experienced growth in both our Pro and Mexico paint initiatives.
And as a result, we had mid-single-digit gallon growth in the quarter. Finally, Liberty Hardware contributed to the segment's top line growth, as they rolled out several new programs and promotions at retail in the quarter.
Operating margins expanded slightly, as the benefits from additional volume were partially offset by increased advertising and other costs for the new products and programs and an unfavorable price/commodity relationship. These costs aggregated approximately $10 million in the quarter.
Turning to Slide 11. You can see our continued focus on profitable growth in the Cabinet segment resulted in the improved bottom line performance, as we posted a profit in the quarter.
We also saw improved top line performance, with segment sales increasing 5%. North American Cabinet sales, excluding countertops, increased high single-digit percent in the quarter, reflecting strong direct-to-builder growth.
We are profitable in our North American business and improved our operating results in the quarter by $9 million as a result of cost control, productivity improvements, which include the benefits from prior year restructuring activities, and the favorable price/commodity relationship that reflects lower promotional spending. This favorability was partially offset by negative mix due to increased sales to production builders.
The turnaround plan in North America is on track, and we are profitable in this segment sooner than we anticipated as a result of our focus on cost containment, improving demand and restructuring actions taken in late 2012. As we turn to Slide 12, you see our sales growth of 21% was primarily fueled by higher sales volume in our residential new construction, commercial, retrofit and distribution businesses.
Residential new construction Installation sales increased more than 30% in the quarter, and have continued to focus on increasing our Installation sales across all lines of business. We are growing with all builders but particularly, the big builders, including Toll Brothers, D.R.
Horton, Lennar, Pulte and KB. And in the second quarter, we signed a national contract with Beazer.
In addition to solid top line performance, management's strong execution delivered significantly improved bottom line results, with adjusted operating profit improving by $17 million and adjusted operating margins expanding 520 basis points. This segment exhibited strong operating leverage in the quarter, delivering 28% incremental margins despite the impact of rising material and labor costs.
This business is focused on cost control, coupled with the benefits they are realizing from prior profit improvement actions, have positioned them to grow profitably with the housing recovery. Turning to Slide 13.
Our Other Specialty Products segment increased a strong 13% in the quarter, driven by North American window sales increasing more than 20%. This growth was due to higher sales in both our new home construction and replacement window markets, as well as new product introductions.
We are particularly pleased that our replacement window sales increased high-teens percent, reflecting growth driven by new products. And despite difficult economic conditions, our U.K.
window business grew low-teens percent due to higher volumes, and was aided by a small composite door acquisition that we made in the first quarter. Segment adjusted operating profit improved by $8 million, and adjusted operating margins expanded 450 basis points, resulting from incremental volume and improved price/commodity relationship and lean in-sourcing savings.
Finally, looking at our balance sheet on Slide 14. You can see that we continue to have strong working capital execution, as we improved working cap as a percent of sales to 13.1% from 14.6% 1 year ago.
Also here in the third quarter, we'll be retiring our $200 million debt maturity on August 15, its maturity date. And finally, we finished the quarter with just over $1.2 billion of cash on the balance sheet.
Now if you flip to Slide 15, with that I'll turn the call back over to Tim for his comments on our outlook.
Timothy Wadhams
Thank you, John. And if you would please move to Slide #16.
Our success in the second quarter reflects our commitment to executing on the priorities we identified at the beginning of the year. Our Installation and Cabinet businesses are steadily delivering results against improving market dynamics.
We expect that the previous actions they have taken to improve their business will continue to deliver benefits going forward. Our commitment to innovation, new programs and strategic growth initiatives is producing results, as evidenced by our second quarter performance.
And as John mentioned, debt reduction is slated for a couple of weeks from now with cash that we have on hand. We're encouraged by our second quarter performance and the continued progress against our priorities.
And we certainly want to thank our employees worldwide for their ongoing efforts to drive Masco's performance. And if you would please move to Slide #17 and a couple of comments before we go to the Q&A session.
While we're pleased with our first half performance, we recognize that we still face macroeconomic challenges that we'll have to manage. The recovery in the U.S.
is less than robust, and the Eurozone continues in recession. While new home construction in North America continues to increase, the composition of starts, at least at this point, continues with more multifamily homes, which has an impact on our mix.
And commodities have, for the most part, temporarily eased. However, the potential for unforeseen volatility continues to exist.
Despite these macroeconomic factors, we're committed to delivering strong performance, and we've demonstrated our ability to capitalize on the improving market dynamics we are all experiencing. Our market-leading positions, supported by our strong liquidity, enable us to respond to increased demand in new home construction with greater agility.
Our brands and our commitment to innovation represent strengths we can leverage in the repair/remodel channels to gain share and increase our strategic relationships with our key customers. And fundamental to delivering that strong performance as we realize additional growth opportunities, we are confident that our operating leverage, driven by our scale and our emphasis on cost containment, will deliver meaningful incremental profits.
We're encouraged by our first half 2013 results, and particularly pleased with the strength of our second quarter. We have solid momentum going in the second half of 2013, and we're off to a good start in the third quarter, with July sales up low-double digits.
And with that, I'd like to open up the call for questions.
Operator
[Operator Instructions] Our first question will come from the line of Dan Oppenheim with Crédit Suisse.
Michael Dahl - Crédit Suisse AG, Research Division
It's actually Mike Dahl on for Dan. First question, actually, on the paint side, I wanted to see if you could drill down into that $10 million that you mentioned as far as the unfavorable headwinds on the margin side.
How much of that was commodity? How much of it was the initiatives at Depot?
And how should we think about that for the balance of 2013?
John G. Sznewajs
Yes, Mike, it's John. I'd tell you that the majority of that $10 million was program-related costs and that the price/commodity relationship was just a minor piece of that $10 million.
To the second piece of your question about how do we think about that going forward, hopefully, we'll have some additional program costs going forward, because that reflects the fact that we're getting additional business with our home center customers, our other customers. So but if it -- as you know, those things are tough to predict, so it's tough to say how those will play out in the segment going forward.
But we'll continue to keep the investment community apprised as we win new programs in -- at retail.
Michael Dahl - Crédit Suisse AG, Research Division
And shifting gears to the install side, the national contract win with Beazer, could you talk about the scope of that? Is it just Installation?
Or how many products are you getting in the door there?
John G. Sznewajs
Yes, again, that's an Installation national contract as well. I don't believe we have 100% of their business, but I think it's a vast majority of their business, because they may have some developments or communities where we don't have resources.
So -- but yes, again, the team down at MCS has done a fantastic job of dealing with the big builders and winning these national contracts.
Operator
Your next question comes from the line of Bob Wetenhall with RBC Capital Markets.
Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division
Guys, fantastic quarter and a great job on cost control. Had a quick question about Cabinets.
New res construction is -- housing starts were up 20% year-over-year, and I think you got pricing in the quarter. So I was wondering -- I thought Cabinets would be a little bit more robust top line, and I was curious if that was due to Europe or some volume growth was offset by somewhere else.
Timothy Wadhams
Yes, Europe hit us a little bit on the negative side on that, Bob. And thanks for your comment in terms of the quarter.
But yes, Europe hit us a little bit on the top line, and we had a little bit of a mix issue, as John mentioned, relative to top line. We were up 8% in North America in terms of Cabinets overall, and had a little bit of mix impact.
But felt like we had a pretty decent quarter, did a good job on the dealer channel, good job with big builders, obviously.
Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division
Got it. And one follow-up, too.
Paint was really good top line, growing 9%. And I was hoping I could get a little bit more color on incremental margins given the good volume, and kind of the trade-off between higher advertising costs versus potentially weaker mix and how you anticipate that playing out.
You got great incrementals across the rest of the portfolio. Was wondering if paint starts to deliver equally attractive incrementals in the second part of the year.
Timothy Wadhams
Yes, thanks. Yes.
The issue there, Bob, is traditionally, we have -- almost all of our advertising spend takes place in the second quarter, and so when you compare second quarter to first quarter, you've got that delta. And in this particular quarter, as John mentioned, we had some additional costs related to new programs, as well as some incremental advertising costs above last year.
As we mentioned before, our primary objective when -- in the paint category is to drive gallons. And as John mentioned, we had a nice lift in terms of a mid-single-digit increase in terms of gallon growth versus last year.
Operator
Your next question comes from the line of Dennis McGill with Zelman & Associates.
Dennis McGill - Zelman & Associates, LLC
First question just had to do with the remodeling side of the business, you noted in the press release, seeing some pickup there. I was wondering if you'd just elaborate on the products that you guys look at internally, whether that's components of Cabinets or components of windows, faucets, et cetera, where you're seeing starting to see some momentum there and just thoughts around the category.
Timothy Wadhams
Yes. Lower price points, Dennis, obviously, with paint and faucets have done well for us over the course of the last couple of years.
But what we've seen, and we talked a little bit about that in the first quarter, is a little bit of pickup in terms of windows for replacement or remodel, as well as Cabinets. As we mentioned, dealer sales in Cabinets were relatively strong in the quarter related to last year, so we've seen a little bit more activity there.
I think it's still a little bit early to declare victory on the bigger ticket side, but trends seem to be indicating more foot traffic, more interest and certainly a little bit of pickup in terms of execution.
Dennis McGill - Zelman & Associates, LLC
Okay. And then separately, we've seen a lot of press releases related to Installation branches starting to come back online.
Can you just maybe quantify where that number stands today and then just how you guys are thinking about growth in that business through branch as supposed to organic for existing branches over the next couple of years?
John G. Sznewajs
Yes, sure, Dennis. I think our goal for the year is at about 15 branches at MCS by the end of the year.
I think to date, we're at about 9 so far, and not all of those are full branches. I should remind you and the rest of the folks on the line that we're taking a very thoughtful look about how we expand the business as it relates to our branches.
So in a number of areas, we're adding unmanned strategic stocking centers, where we are -- where we just drop inventory, and our crews can go there and pick up inventory to expand the geographic presence that we can cover. So -- and those, we believe, will ultimately turn into full branches once they've got enough volume in that area where it warrants a full branch.
So we're trying to keep our costs in control as we slowly grow that business.
Dennis McGill - Zelman & Associates, LLC
But does that change the incremental cost of the business at all?
John G. Sznewajs
I think it improves it slightly, but I don't think we're going to materially deviate from that sort of 25% incremental margin that we've been guiding you to over the course of the last year or 2.
Operator
Your next question comes from the line of Keith Hughes with SunTrust.
Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Question is on Europe. The international sales were, I think, surprisingly good considering the trends there.
I know you talked about some individual wins. But what's your view for Europe for the second half of the year?
I mean, are we seeing a bottoming there? Or just what's the kind of trend you see going into July?
Timothy Wadhams
Well, I think that what I've seen more recently is it looks like things have stabilized to a certain extent in Europe, at least that's what some of the economists seem to be indicating. We are, as we've said before, Keith, we're positioned in the United Kingdom, which is 1 of the 2 economies that I think are expected to have positive GDP this year, along with Germany.
And so our position there has been pretty stable over the course of the last several quarters. We did have a nice lift in that quarter with our window business -- in the second quarter with our window business, which is in the U.K.
And then, of course, Hansgrohe, with their international reach, if you will, continues to do a nice job with some of the project works, some of the new markets that they've entered. So that tends to give us a little bit more balance.
So I would expect that we'll continue to do well with Hansgrohe going forward. There's no question about that.
I don't particularly anticipate a big lift at -- from an economic standpoint, but I think our businesses will continue to perform pretty well. You might remember that we've been up in local currencies in Europe over the last 2 years, as I recall, fairly modest but still up.
And I think that as things get better, we would expect to do a little bit better than we've done in terms of the last couple of years.
Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
And a final question on the paint business. You talked about some extra adds in product rollout costs in the second quarter.
Does that abate as we go into the third?
John G. Sznewajs
Yes, Keith, that would abate. That was kind of a onetime cost to get those products into the store shelves and in front of the consumers.
Operator
Your next question comes from the line of Nishu Sood with Deutsche Bank.
Nishu Sood - Deutsche Bank AG, Research Division
Wanted to ask the first question. John, you mentioned the nice performance on Installation Services, and that was in spite of labor issues.
So I wanted to get a little bit more color on that. And also, in any of your other businesses that are more labor intensive, as you're ramping up in terms of adding staff back for the housing recovery, how those -- whether any issues have cropped up and how that's been managed, how that's been looking?
John G. Sznewajs
Yes. Nishu, we have experienced some labor tightness around -- in various markets throughout the United States, but it's not a uniform tightness.
So certain markets like Texas, Northern California, the Denver area, we've experienced some tightness in our labor. But we've hired more than 500 people across the organization since the beginning of the year to support the growth, and that's not just in our Installation business, but that's company-wide.
And we've not had a significant issue in terms of finding people. We offer benefits, where many of the competitors that we're up against are smaller competitors and may not have a benefit package they can offer to their employees.
So getting people in the door has not been an issue for us at this point.
Nishu Sood - Deutsche Bank AG, Research Division
And what about across the other divisions? Has that been an issue, let's say, in the -- in windows or Cabinets or any of your other operations?
John G. Sznewajs
No, at this point, Nishu, it's not been an issue across any of the manufacturing operations. We do actively recruit all the time to ensure that we've got an adequate pipeline of labor, and we feel pretty confident about where we stand today.
Operator
Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.
George L. Staphos - BofA Merrill Lynch, Research Division
My 2 questions were really around Behr. On the one hand, I was hoping to discuss with a little bit more detail what kind of pickup or benefit you're seeing from the Pro initiatives.
And then switching gears to the retail side, if you will, what benefit are you seeing from MARQUEE thus far in the market, and what benefit is it having on your other brands through Home Depot?
Timothy Wadhams
Yes. On the Pro side, George, we continue to show nice increases year-over-year.
We haven't quantified that, but we continue to get some nice penetration there. We've done some things to repackage our KILZ brand, done some formulation work there.
And that activity seems to be paying off fairly well, and so we're encouraged by that. As it relates to MARQUEE, MARQUEE is doing well.
We launched both MARQUEE and a new product that we call DECKOVER, and both of those are doing well in the marketplace. DECKOVER, given the time of year and the nature of that product, has really been a grand slam for us.
It's just performed exceedingly well. In fact, we've had a little bit of problem, quite frankly, from a supply perspective in a couple of situations, so we're ramping that up.
But both of those products are performing well for us at retail.
George L. Staphos - BofA Merrill Lynch, Research Division
Just on the Pro initiatives, you say you're doing well. I know you're not quantifying it, but would it be fair to say you're doing better than your own-roll gallonage growth, even though I realize that's kind of an apple-and-oranges comparison?
Timothy Wadhams
A little tough for us to respond to that. We didn't really break it down between Pro and DIY.
As we indicated, we were up mid-single digits in terms of gallons. But that would really apply to both retail and Pro.
I can't tell you it's 6 and 6, but it certainly would represent increased gallons in both those areas.
Operator
Your next question comes from the line of Mike Wood with Macquarie Capital.
Mike Wood - Macquarie Research
You had impressive Cabinets margins, but as I do look at the roughly $25 million annualized that you saved from the 2 plant closures and I attribute 1/4 of that to the quarter, it looks like it leaves about 25% incremental margins in the remaining sales growth. I'm curious if that's what you'd expect going forward if there was a drag on that from the product rollouts, like Merillat next quarter, that you're planning?
Timothy Wadhams
Yes, it's a more mix issue, Mike, in terms of the large increase that we've had on the new builders side -- or new home side, excuse me, particularly with some of the larger builders. So that's more of a mix-related issue in terms of the analysis that you just did.
Mike Wood - Macquarie Research
Great. And also in the press release, you've mentioned you were encouraged by R&R trends.
Could you give us an update in terms of what that growth rate looked like? And in the past, you've given an update in terms of post quarter trends, so if you have any comments on July?
Timothy Wadhams
Well, July was pretty much, across the board, came in strong. As we mentioned, low-double digits, and there really isn't anything unusual going segment by segment.
I mean, all segments had some strong results there. We talked a little bit earlier about the R&R side of things, and as we indicated in the press release, seen some improving trends there.
As I mentioned previously, lower ticket items like faucets and paint have continued to do well. But we are seeing a little bit more activity around windows for replacement or remodel, as well as a little bit more activity from a Cabinet standpoint.
I wouldn't necessarily want to predict what the second half would look like there. I mean, our sense is that, that ought to continue.
I think some of the fundamentals, when you think about housing turnover, you think about the fact that home price appreciation has continued, which is certainly a plus in that regard, consumer confidence is ticking up a little bit, job growth is there. So it would feel to me like, assuming that, that continues in the second half, we ought to continue to see positive trends in those 2 bigger ticket items for our business.
Operator
Your next question comes from the line of Ken Zener with KeyBanc Capital Markets.
Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division
I'd like to follow up on the windows, where your success continues. Not only I think is the category turning, but you're obviously gaining share.
And could you kind of discuss how that plays out given you're more Western focus? You talked about home prices.
I mean, is there something really distinct that you are seeing, since your growth rates are so strong and so given your regional exposure, a? And b, is it getting more rational on the extrusion side?
Is that actual industry finally getting its capacity in line?
Timothy Wadhams
Yes, I would think from a capacity standpoint, Ken, that things are fairly balanced. You might remember that about 1.5 years ago or so, we took a couple, 3 plants out in the West and certainly, feel like our capacity's in a very good spot at this point in time.
And yes, what I would say is that we are a regional business, and when we talk about increases, we're talking about, in terms of share, talking about the regional market that we play in. And Milgard's continued to just do a very good job.
It's a great brand. We've had some new product introductions that have helped, a lot of focus on dealer relations and the pipeline in the dealer channel.
And obviously, in the West, we've seen some improved repair/remodel activity. So I think it's more a market dynamic and the fact that we're executing at a very high level and we've got some new product in the channel.
John G. Sznewajs
And Ken, just to add to Tim's comment just to refresh your memory, we do our own extrusions within Milgard. So we don't really take a look at the extrusion industry and what's happening out there.
We feel pretty comfortable about our internal capacity.
Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division
Okay, great. And then if you could -- in Installation, where you did obviously go to positive, can you kind of maybe give us a little more granularity around what's enabling you to go into these markets?
Is it that the -- there's a certain volume that you're targeting? And could you perhaps comment on the volume leverage that you're getting as opposed to price in the business, enabling you to lift margins as well?
John G. Sznewajs
Yes. Ken, as we have historically said, maybe to address your last question first.
We've typically experienced about 25% incremental margins in this segment on volume, and that's about where we're at right now. We've been very consistent on that over the course of the last several quarters, so the volume has been pretty good.
In terms of how we grow this business, we are being very thoughtful about where we see demand increasing, and then placing our R&D strategic stocking centers, that we talked about a little bit about earlier, in those locations where -- that are seeing that growth in demand and going after it with our large builder and then also our more traditional local and regional builders as well. So we cut across all the customers in that segment or that business.
So we feel very good about the execution that the team is delivering there.
Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division
Right. And I guess to the extent you're running below, if you say 25% on volume and if you're below that, are you insinuating that price was not positive?
John G. Sznewajs
No, if you're asking about the fact that there was some Installation pricing that was put out in the marketplace in the second quarter, I'd tell you that we worked hard to offset that -- those increases by working with our suppliers, focusing on our own internal productivity, but then also, in certain instances, passing through price as required.
Timothy Wadhams
Yes. And Ken, that's been a dynamic for the last couple of years.
So we have not had significant price/commodity impact in that segment over the course of the last couple of years. So I think to John's point, we've been successful managing price increases that have been placed in the market.
Operator
Your next question comes from the line of Sam Darkatsh with Raymond James.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
Most of my questions have been answered. Specifically, I guess, Cabinets, regarding to the home center level, you mentioned the dealer and the builder demand being real strong.
What are you seeing there? And what do you expect over the next 6 to 12 months at that specific vertical?
John G. Sznewajs
Yes, Sam, it's John. We -- I think it's fair to say that we had modest share increases year-over-year in Cabinets at home centers.
I'd also tell you that sequentially, as we talked about in our first quarter call, that we had stronger share gains from Q1 into Q2, as some of our competitors rolled off some of the aggressive promotional activity that they were undertaking, and we've been very consistent with our promotional activity. So as we -- as I referenced on the first quarter call, you're going to rebalance after the end of those promotional periods.
So feel pretty good about where we're at, as always, continue to focus on that aspect of our business to try to grow it.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
And key retailer sales, Tim, did you mentioned that? I didn't hear it if you did.
Timothy Wadhams
No, I did not mention it, Sam. And we have made a decision not to provide that going forward.
Basically, that doesn't say a heck of a lot about our business. It does give some readthrough, if you will, to a couple of our customers, and from their perspective, they would appreciate it if we didn't disclose that particular metric.
So we've decided not to do it. Obviously, as you look at our segments and think about paint, think about Plumbing, think about the commentary that we do by channel, you can get a pretty good perspective of how we're doing in that particular area of the business.
But from our standpoint, that doesn't really lend a whole lot to understanding Masco's performance.
Operator
Your next question comes from the line of Nick Coppola with Thompson Research.
Nicholas A. Coppola - Thompson Research Group, LLC
So looking at Cabinets, particularly at retail and dealers, are you starting to see customers trading up to some of the higher price points that would be accretive to margins?
John G. Sznewajs
Yes, Nick. We're are starting to see some evidence of that, as people shift up from some of our lower basic rate products to things like all-plywood construction, some of the premium door styles and finishes.
We are seeing some of those trends in the marketplace.
Timothy Wadhams
Yes. The other thing, Nick, that I think is kind of important there is that folks who are interested in a higher-end cabinet, our semi-custom, for example, if they're not going to buy it now, they tend to wait.
And so we're not seeing people necessarily trade down in that channel. So -- and I think that's another nugget, if you will, in terms of just the way people are starting to think about things.
At least, that's what we're feeling in the marketplace.
Nicholas A. Coppola - Thompson Research Group, LLC
Okay, that's helpful. And then across segments, if I heard correctly, sales to big builders has improved even incrementally relative to prior quarters.
Thinking about that, what is that a function of? Is it really a function of new contracts, like we talked about with Beazer?
Or is it really getting additional penetration with existing customers?
Timothy Wadhams
I think it's a combination of really getting new opportunities with builders, and again, as John had indicated, we've always been strong across the -- with the local or regional guy. But I think what's really happening there is that the bigger builders are taking share, that when you think about the new home activity, a lot of that is being picked up by the larger builders.
Operator
Your next question comes from the line of Adam Rudiger with Wells Fargo Securities.
Adam Rudiger - Wells Fargo Securities, LLC, Research Division
Can you talk about what happened -- what the sales did in June? If I recall, you -- intra-quarter, you had talked about some double-digit and mid-teens growth in April and May, which suggests June might have slowed a little bit.
So can you just talk about the puts and takes and maybe last year's comparisons in June?
Timothy Wadhams
Yes, June was up mid-single digit in terms of sales. You're correct.
April was up mid-teens. May was up low-double digits.
So there was a little bit of a drop, vis-à-vis those 2 months. But as I mentioned, July came in or it looks like it's going to come in.
We don't have the final numbers yet, obviously, but it looks like it's going to come in at least at the low double-digit kind of range. So I'm not sure I'd read too much into that, Adam.
I think that given the strength of April, May coming off of a relatively slower first quarter, we talked about that from a weather perspective. So I think there was a little bit of a lift there, weather related.
June came in about what we anticipated, quite frankly, in terms of our planning. So there wasn't necessarily anything unusual relative to June.
And as I indicated, July has picked up again to at least what appears to be a low double-digit area.
Adam Rudiger - Wells Fargo Securities, LLC, Research Division
Okay. And then on that note, was there -- do you think there -- was there a -- from May with the new programs of the deck paint and the MARQUEE, did that, do you think, add?
Or as you quantify the incremental sales at Depot, that might have been kind of onetime in nature as you get those products in the stores?
John G. Sznewajs
No, we did not quantify, Adam. Partly, if you recall Tim's comments a couple of minutes ago about the strength of some of the activity surrounding those new products, we don't think that there was much of a load-in impact in the second quarter just given the strength of the sell-through that we saw on those products.
Operator
Your next question comes from the line of Michael Rehaut with JPMorgan.
Michael Jason Rehaut - JP Morgan Chase & Co, Research Division
First on Installation if you could. In the past, in the last cycle, when you were growing both sides of the business, the Installation side and the non-Installation side, as you were ramping up the non-Installation products, there was a negative mix there.
Since then, in the downturn, you've shutdown a lot of those non-Installation products. So I was hoping if you could give us a sense of where you are in terms of the dollar mix of the business between Installation, non-Installation and retrofit and the relative profitability of those 3 segments and how you think about that coming out into this upcoming cycle.
John G. Sznewajs
Yes, Mike, you got a couple of questions embedded in there, so let me try to -- make certain that I get to all of them. So I think your first question was around the mix of business Installation versus non-Installation.
And right now if you look at our contracting business, it looks like about a 2/3, 1/3 kind of mix, 2/3 being Installation, 1/3 being the diversified products that we call them, things like fireplaces, gutters, garage doors and after paint. Also, I think you asked about the profitability of Installation versus the diversified products.
And I'd tell you, you might expect that -- we've always been a large buyer of installation, so I think those products do have slightly better margins than our diversified products. But I would tell you that our diversified products, the ones that we're still in, are much better than the diversified products that we had several years ago, just given the breadth that we had.
And was there a third question embedded in there, Mike, that I may have...
Michael Jason Rehaut - JP Morgan Chase & Co, Research Division
John, just about how you think about growing each of the 2 businesses going forward. If, coming up into this upcoming cycle, are you going to maybe lean more on the Installation side, or would you kind of try and grow that non -- or that diversified products business back to where it was?
John G. Sznewajs
Clearly, Mike, because we've narrowed the scope of the number of diversified products, it won't nearly get to be the size that it was in the last cycle. That said, I think what we're trying to do is better balance the business for the long run, and that includes looking at focusing on the retrofit business, where we do have dedicated salespeople going after that business, and then continue to focus on both Installation and diversified products with all of our customers.
So I think there's -- the foot's on the gas across all 3 kind of -- all 3 product categories.
Michael Jason Rehaut - JP Morgan Chase & Co, Research Division
Okay. And just one additional question if I could.
On the new products, I believe you mentioned right at the beginning of the call that some of them were exceeding your expectations, which is great to hear. I was hoping maybe, is there -- are there any kind of metrics you could share about how you track those new products, perhaps as in terms of a vitality index across all of your sales or contribution to growth and how we should think about that going forward.
Timothy Wadhams
Yes, we don't necessarily break out the contribution or haven't tried to aggregate that, Mike. But basically, you might remember from some of our presentations that our vitality index currently is running above 30%.
And in our vitality index, our new products -- manufacturing products, that excludes our Installation business, but basically, those are products that we've introduced within the last 3 years as a percent of our total sales, and that's been above 30%. My guess would be, given the strength of what's taken place this year, we should certainly be, in 2013, above that 30% level going forward.
And that really reflects the emphasis we've put on innovation, some of the new programs we've come out with, the toilet programs, some of the faucet programs. And we certainly see that as a very fundamental part of our strategy going forward, and a continued area that we'll certainly be emphasizing.
Michael Jason Rehaut - JP Morgan Chase & Co, Research Division
Okay. Can I squeeze one last one in?
Timothy Wadhams
No, we need to move to the next person. But we'll catch up with you on the phone.
Operator
Our next question comes from Stephen East with ISI Group.
Stephen F. East - ISI Group Inc., Research Division
Tim, when you look at your incremental op margins, they've improved awfully nicely in the first half the year, and I actually look for some acceleration in the second half of the year. What -- where do you think your normalized incremental op margin should be?
And how long do you think it takes you to get back as you sort of climb down during the re-acceleration period of the cycle?
Timothy Wadhams
I think the way to answer that, Steve, is really talk about our contribution margin. Obviously, the incremental profits have been a little bit higher than 30%, which is basically the contribution margin across the enterprise.
We've talked a little bit about that by segment. But I think from a modeling perspective, if you were to use the 30%, that'll get you into the right ballpark.
We've had a little bit of benefit, as John mentioned, from price/commodity relationships that tend to help that. But I think if you use the 30% contribution margin, I think that is a very good proxy for what ought to drop to the bottom line on incremental volume.
As we've said a couple of times, when we have a new program, that's a little bit different. Those incremental margins can be a little bit less than that, because you've got additional advertising or merchandising-related costs, which would be true with, for example, with our new toilet program.
Stephen F. East - ISI Group Inc., Research Division
Okay. And would the remodeling incremental margin be any different than what you would see in your normal course of business?
Timothy Wadhams
I wouldn't necessarily say so, Stephen. Again, when we think about incremental or contribution margin on volume, that's pretty constant.
Typically, on the repair/remodel side, you might have a little bit of additional advertising-related cost or merchandising-related cost. But again, that blended 30% is a pretty good way to look at it.
Stephen F. East - ISI Group Inc., Research Division
Okay. And then just one last question, someone asked you about June.
The last few quarters you've seemed to -- your trend seems to be strongest in the first month of the quarter and ease back a bit. Should we -- is that how we should think about your business?
Or have there just been some unusual things that have transpired as you go through the quarters recently?
Timothy Wadhams
I don't know that I would necessarily read too much into the fact that the first month of the quarter, for the last couple, 3 quarters, has been strong. We're not complaining about that at all.
I mean, we certainly have enjoyed some pretty good starts to the quarter. If you go back to January, as well as April and July, there's no question.
And again, I think that anytime you're in a recovery, it's going to be a little lumpy at times, and you're going to see order patterns change a little bit, buying patterns by consumers change a little bit. I mean they can move around, and I think that's more indicative of the fact that we're still coming off of a bottom here that's been pretty protracted.
The recovery in housing has been pretty strong and pretty solid over the course of the last 1.5 years or so. But when you look at GDP and the overall general economic environment, it's still relatively weak.
So I think we're going to probably see some movements like that. But I think that from a trend standpoint, we're not experiencing anything that is concerning to us about the order patterns per month or the monthly results.
I mean, we have been able to -- we forecast things, obviously, like everybody else. And generally speaking, our forecasts have been pretty good from a monthly perspective.
So I don't know that there's anything necessarily unusual there.
Operator
Your next question comes from the line of Susan Maklari with UBS.
Susan Maklari - UBS Investment Bank, Research Division
Quick question for you. You mentioned that you're still making progress in terms of the $150 million goal for profit improvement.
And given what we've seen this year and the sort of general expectation for trends going forward, is there any thought of maybe updating that goal? And can you give us maybe any sense of what you would need to see change out there in order to get some kind of a change in -- or an update in that?
John G. Sznewajs
Susan, as we took a look at it and what we've come in with year to date, I think we're comfortable with the goal. As you might recall, we undertook a pretty significant activity in the back half of last year, which impacts, obviously, the first half of the year.
So maybe that's some of the progress we've made year to date, the strength of it won't be as great in the back half of this year, and so that's way we're sticking with the $150 million at this point. But we'll update you again at the end of the third quarter.
Timothy Wadhams
Yes, that certainly doesn't suggest, Susan, that we're not always looking for incremental opportunities, whether it's process improvement or other efficiencies. I mean, we continue to drive for that, and certainly, we'll continue to push hard.
But to John's point, we'll update you with that as we go along.
Susan Maklari - UBS Investment Bank, Research Division
Okay. And then just in terms of the M&A environment, can you give us a quick update there?
Are you seeing anything changing or anything that's sort of come up of interest or...
John G. Sznewajs
Well, clearly, compared to the last 4 or 5 years, when there was virtually no M&A activity in our industry, the increase in the number of businesses that seem to be coming to market has increased nicely. And you would expect, being one of the leaders in the building materials industry, we do take a look at a lot of the folks that do come to market, and we are being very selective about how we think about M&A.
Just to give you a sense, I mean, you should not anticipate that we would add a sixth or seventh product line at this point. Though we might consider a small tuck-in, like we did for our U.K.
window business earlier this year. So those are the types of things that we're looking at, at this point, Susan.
Operator
Our final question will come from the line of David MacGregor with Longbow Research.
David S. MacGregor - Longbow Research LLC
I just wanted to ask you about the Cabinet business. A few years ago, you combined your retail and your builder Cabinet businesses, and part of that was the pursuit of cost reductions, but also trying to develop a good, better, best product lineup that would allow you better penetrate the retail and the dealer channel and win market share.
And you, obviously, accomplished a lot in terms of getting your fixed cost down and getting your break-even point down in that segment. But if you could just talk a little bit and update us on the extent to which you feel you've made progress in terms of developing a good or a strong good, better, best product lineup and your strength at opening price points and your ability to win share as a consequence?
Timothy Wadhams
Sure. Yes, I think your focus is right, David.
We did put a lot of emphasis on the cost side and have made very good progress there. We also think we've made some improvements in terms of the 3 brands.
You might remember that, in February, we launched a new product for the KraftMaid brand. As I think John indicated in the last call, we've got a major, in fact, the largest in the history of Merillat's existence, a new product launch coming up this fall.
So we think we've made some good progress there. We are working to do a good job to clarify what all of those brands represent.
And to the extent that we think about good, better, best in terms of our quality brand, our Merillat brand and our KraftMaid brand, we think we've got good distinction there and certainly feel like we're starting to see a little bit of a lift in terms of the marketplace and a good response to some of the things that we've done to position those brands. So I think we're in a good spot.
Obviously, we think we've got some good upside in that segment, and we've got to continue to demonstrate that going forward.
David S. MacGregor - Longbow Research LLC
Well, just a second question on working capital. You've made a lot of progress there.
I think you got your working capital or percentage of revenues down about 150 basis points year-over-year. Is this about as good as it gets, given you've got new product rollouts, you've got new listings, you've got cyclical recovery in front of us?
Does working capital consume cash going forward?
John G. Sznewajs
David, we have been pleasantly surprised at how the entire team across the enterprise has driven our working capital improvement over the course of time. And so every time I think we've hit a new low, we, next quarter, do another new low.
So I feel pretty good about it. Incrementally, I don't think it's going to get significantly better.
Do we still have opportunities there? I'd say we do.
I think our receivables and payables are probably in about as good a shape as we're going to get them. I think there's still some opportunity to take a look at inventory across the spectrum.
So I'm hopeful that there's some opportunity for further working capital improvement, and we're going to go after it without a doubt. But it's been a great team effort so far in getting where we're at.
Timothy Wadhams
Yes, I think, David, we'll continue to push there, but John and the finance team, Dave Brown and our supply chain guys and our business unit folks have done a very, very good job over the course of the last couple of years. I mean, there's no question about it.
But we'll keep pushing. We can always do a little bit better.
And our folks are committed to make that happen. And with that, I want to thank everybody for participating today, and we'll turn it back to you, Regina.
Operator
Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining, and you may now disconnect.