Fortune Brands Innovations Inc (FBIN) 2011 Q3 法說會逐字稿

Good afternoon. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security third-quarter 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Brian Lantz, Vice President Investor Relations.

Good afternoon everyone, and welcome to the first Fortune Brands Home & Security quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress during the third quarter of 2011.

Hopefully, everyone has had a chance to review the news release we issued earlier. The news release and the audio replay of the webcast of this call can be found in the investors Section of our FBHS.com website.

I want to remind everyone that we may make forward-looking statements on the call today either in our prepared remarks or the associated question-and-answer session. These comments are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC such as the recent information statement filed as an exhibit to our Form 10. The Company does not undertake to update or revise any forward-looking statements which speak only as of the time at which they are made.

Also, any references to operating profit, earnings per share or cash flow on today's call will focus on the results on an adjusted pro forma basis as described in the news release issued earlier today.

With me on the call today are Chris Klein, our Chief Executive Officer, and Lee Wyatt, our Chief Financial Officer. Following our prepared remarks, we've allowed ample time to address any questions that you may have.

I will now to the call over to Chris.

Thanks Brian. Thanks, everyone, for joining us today and our first call as Fortune Brands Home & Security.

As you know, we successfully completed our journey to independence on October 3. The spin went off smoothly due to the effort and dedication of many of our employees and advisors over the past nine months. The stock began trading on October 4 and has held up well in the face of anticipated churn of shares, as is typical of a spin.

Lee and I spent much of September visiting with many of you, and we shared our business strategies and the opportunities we see for creating shareholder value as a standalone company. We highlighted the key elements of our strategy that are leading to our business momentum today in an otherwise stagnant home products market.

Let we spend a moment to recap some of those elements. We highlighted the strong operating platforms in each of our businesses which were the result of significant downsizing and re-engineering of our supply chains from 2007 through the middle of 2009. These were a series of deliberate actions taken in a time of uncertainty. Fortunately, these decisions paid off and we've been successfully operating in these new lower-cost, more flexible platforms for the last two years.

As the market has fluctuated up and down over the past 24 months, we've benefited by seeing how our operations leverage when volumes surge and we've learned how to adjust capacity again when demand softens or the mix shifts. All the while, through any environment, we take care of our customers by maintaining high service levels.

We also highlighted our continued focus on growth through product innovation and market expansion. Our innovation continues to focus on addressing consumer needs with a steady cadence of new fashion, new function, and new finishes across all of our product lines. As a leader in our markets, we're able to get this innovation into the hands of the consumers quickly to remain on trend. In today's market where price is so important, we believe total value is what converts a shopper into a buyer, and our affordable innovation puts us at the heart of that conversion.

We've also continued our investments in adjacent markets and geographic expansion and are seeing positive results of these efforts in markets like China, where we're building a strong business and a trusted Moen brand. We continue to execute on our strategies and focus on building a great company in the face of a fluctuating market.

We're also advantaged with a strong capital structure that provides substantial flexibility as we continue to innovate and invest in our businesses to navigate this challenging macro environment. We believe this positions us to capture long-term growth opportunities.

Our new company comes out with a very strong Board of Directors that's fully engaged and excited about our Company's progress today and our plans for the future.

We also recently announced a new Board member. John Morikis, COO of Sherwin-Williams, will join us in December to further round out a very deep pool of experience. And so we are on our way and excited to be an independent company focused solely on our Home & Security businesses.

Now, I'd like to move on to some perspectives on the overall home market. When we laid out our expectations for our second half back in early August, our assumption was that the market for our products would be relatively flat for the second half of 2011. Since then, the market has been running below most estimates, including our own. We estimate that our market was down 2% in the third quarter due to slower new construction, continued consumer caution for big-ticket purchases, and a Windows market that continues to decline at a low double-digit rate due to the energy tax credit in 2010. Even so, we outperformed our market in the third quarter, and we feel good about our performance and the execution of our strategies in this challenging environment.

Looking forward, we don't expect the market trends to improve in the fourth quarter versus the third quarter. As a result, the market for our products will likely be down 2% to 3% year-over-year in the second half, which is only slightly better than the market we saw in the first half.

Turning to our third-quarter results, third-quarter sales were up 4% from a year ago and ahead of the market for our home products. Our investments to grow the businesses resulted in strong performance at Moen, Master Lock and MasterBrand Cabinets, while sales for Doors and Windows were down slightly compared to the prior year with Windows declining more sharply versus 2010. We believe our continued ability to invest in innovation and expansion into new and adjacent categories is a key competitive advantage and is driving much of this growth.

All business segments were profitable this quarter.

Now, let me give you some topline highlights by segment. Sales for our Cabinets business were up 4% for the quarter. Share gains were driven by the continued rollout of new business initiatives like our in-stock cabinetry and vanity programs at Lowes and the Martha Stewart line of cabinets at Home Depot. We believe that we should continue to see the impact of these programs roll through in 2012 and beyond as we work closely with our customers to maximize the impact of these important new initiatives.

We also continue to attract new dealers to our portfolio of brands and expand our relationships with existing dealers by leveraging our strong product and service reputation. We are seen as a reliable and stable partner to the small business owners in the dealer channel.

We continue to navigate an aggressive promotional environment in the Cabinets segment, which had a negative impact on operating income for the quarter. As the market leader, we're working to couple promotional activity with our highly regarded customer service, product quality, and innovation to ensure we're not competing on price alone. Indeed, when we get closed on price, many designers would rather design and sell in our product lines. We believe our leadership in the dealer market, coupled with our strength in home centers with unique brands for both, puts us in a position to grow profitably across channels in the cabinet market for a long time.

From an operations perspective, we further refined our stock cabinet supply chain. As a result of increased efficiencies at our Indiana stock plant over the last 24 months, in October, we announced the closure of our Las Vegas stock plant which will be effective by the end of the year.

Faucet sales were up 10% in the third quarter. Moen saw solid gains in the US and in our international businesses. We grew in the US, both at retail and in wholesale. In retail, we continue to roll out new products, including spot-resistant finishes and our new Reflex hose system across our portfolio of pull-down faucets. While the wholesale side of the market continues to be challenged by softness in new construction, we've maintained our strong market share with the top builders and have continued to bring new products to the channel.

Internationally, sales in China were up double digits over the prior year as we continue to expand our branded footprint and move past the 500 store mark in the quarter.

Windows and Door sales were down slightly from the quarter. This market, specifically Windows, has been hit hard by the expiration of the energy tax credit at year-end 2010, which we believe pulled forward substantial demand into 2010. We look for this market to return to more normal levels longer-term, but for now the segment is challenged. We further reduced our cost structure by closing our McAlester, Oklahoma plant, which we announced in September. Despite this closure, we are still one of the few national vinyl window manufacturers and maintain the industry's shortest, most dependable leadtimes.

In Security & Storage, our sales were up 3% in the third quarter. The segment benefited from continued growth in the padlocks products with strong new product sales through the back-to-school season and share gains at key international accounts as well as strong global sales of Safety Products. The strong Security growth was partially offset by weakness in the Storage category in the quarter due to the timing of tool storage orders this year versus last year ahead of the holiday selling season.

So, to sum it up, the third-quarter Home market was weaker than our August estimates and that especially impacted our more discretionary cabinetry and Window and Door segments. But our Plumbing, Security and Storage segments continue to grow and generate strong stable operating margins.

As we look forward to the fourth quarter, we're executing our strategies and remain focused on outperforming the market. While the near-term market continues to be weak and the pace of the market recovery is uncertain, we are creating value today with our businesses by capturing market share, expanding into adjacent markets, and improving our operational platforms. In addition, we believe our strong brands, management teams, and capital structure should position us to create value at any pace of recovery.

Now, I'd like to turn the call over to Lee, who will review our financial performance. Lee?

Thank you Chris.

As Brian mentioned, my comments will focus on adjusted pro forma results to make all comparisons on a standalone basis. Let me start with our third-quarter results.

Sales were $848 million, up 4% from a year ago. Compared to the market for our products, that declined an estimated 2%.

Consolidated operating income for the quarter was $50 million, down $11 million or 18% from the same quarter last year. For comparison purposes, excluding an $8 million unusual gain from a litigation settlement in the third quarter of 2010, operating income was down only $3 million, or 6%.

Three items put pressure on third-quarter operating income. The first was $7 million of increased raw material and transportation cost, net of price increases. Please note that we've now taken price increases that should offset most of this inflation by year-end. The second was $5 million higher promotional expense in cabinets across all channels. The third was $4 million of negative product mix in Windows and Doors.

EPS were $0.19 for the third quarter, down $0.06 versus prior year. Excluding the litigation settlement from last year, EPS were down $0.03. The three items that I mentioned previously as putting pressure on operating income reduced EPS by approximately $0.07 in the quarter.

Now, let me provide a little more color on segment results. Our Cabinet sales were $311 million, up $11 million, or 4%, over prior year. Operating income for this segment was $8 million, down $2 million from the prior year, driven primarily by $5 million in increased promotional expense and $3 million higher net raw material and transportation costs.

Faucet sales for the third quarter were $249 million, up $22 million, or 10%, versus prior year. Operating income was $39 million, up $7 million over prior year. The increase primarily reflects the impact of sales gains and productivity improvements, less $3 million in higher net raw material and transportation costs.

Windows and Door sales were $148 million, down $1 million, or 1%, from the prior year, despite significant sales declines in Windows. Operating income for this segment was $2 million, down $5 million from last year, due to $4 million from a shift to lower-margin products and $1 million in higher net raw material and transportation costs.

Third-quarter Security & Storage sales were $140 million, up $4 million, or 3%, versus prior year. Operating income was $20 million, down $8 million in the quarter, due to the $8 million unusual gain from litigation settlement last year and some unfavorable mix in Storage category.

Before I turn to the balance sheet, let me touch briefly on restructuring activity. We continued to optimize our supply chains to match current demand patterns, improve our already lean manufacturing processes, and reduce fixed cost, while maintaining the flexibility to service growth up to $5 billion in sales. As a result of these ongoing efforts, we incurred $2.5 million of restructuring and other charges in the third quarter. These charges were primarily due to the closure of our McAlester, Oklahoma window plant.

We expect to incur approximately $20 million of charges through the first quarter of 2012 for previously announced restructuring related activities, including the closure of the McAlester facility and our Las Vegas cabinets plant. Approximately $14 million of these charges will be non-cash, primarily consisting of accelerated depreciation. These actions all had very strong returns, and the charges are excluded from pro forma results.

Now, turning to the balance sheet, our working capital efficiency remains strong at 15%. Although not reflected on the September 30 balance sheet, our post-spin capital structure was generally as we expected with cash of approximate $70 million, debt of $530 million, and debt-to-EBITDA leverage around 2 times.

With respect to guidance, our plan is to provide annual guidance for 2012 on the next earnings call. For the fourth quarter of 2011, our expectation is that the market for our products will be similar to the third quarter, down 2% to 3%. Based on this market assumption and our continued sales gains, our fourth-quarter sales would increase low single digits compared to the same period last year with all segments increasing except Windows and Doors, which faced strong 2010 Window comps. If current trends continue, fourth-quarter adjusted pro forma EPS could be down slightly to last year.

In summary, our business model continues to perform well in this very challenging environment. We're taking steps to manage the items that are putting pressure on profit. We believe we have the ability to leverage our foundation of leading brands, efficient supply chains, proven management team, and a strong capital structure, both now and as the market recovers.

I'll now turn the call back to Brian.

Thanks Lee. That concludes the recap of our performance for the third quarter. Now, we will begin taking your questions and we will continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I'll now turn the call back over to the operator. Steve?

(Operator Instructions). Dennis McGill, Zelman and Associates.

Hello guys. Thanks for the information. The first question would just be when you think about overall trends, and maybe it's best if we exclude Windows for this given a stimulus impact, but is there a way to think about the results in the quarter split between your new construction customers and your retail or home improvement-oriented customers?

Yes, I guess I'd say discretionary, including Cabinets, still is under pressure, that would be across all channels on R&R. But we did okay. Obviously, we've shown some growth. In general, I think the R&R market was [a bit] positive. But the headwinds we face were really Cabinets and Windows, as we said, kind of excluding that. So on the new construction side, I'd say kind of flattish. It appears as though we're kind of producing to demand, so there's not a lot of channel anticipation ahead of new construction activity. We're kind of replenishing channels as demand is drawn out.

I guess if you were to think about the 4% revenue growth in the quarter, are you saying basically that new construction would be flat year-over-year and the growth would be all home improvement or [how are you now]?

No, I think it's across. Last year, 2010, you'll recall new construction market dropped off quite a bit. I think the market was a bit surprised in 2010 by how quickly demand dropped out ahead of that new homebuyer tax credit in the first half of 2010. So the channel hat has kind of stopped bringing stuff in, especially at Moen. So this year, I think we're seeing more kind of across-the-board steady replenishment to really -- to the demand we're seeing, and that's kind of I think a healthy trend.

Okay. Second question, as we look out to '12 and think about the incremental cabinet wins that you guys have had and as those anniversary, anything that we should consider as far as mix one way or the other relative to the existing profile?

Yes, I think -- we've said this before -- but as they are loaded in and as we've kind of got a year under our belt, we're going to start working to really grow those positions. So there is the initial kind of pop you get from bringing the programs in, but as they start to mature, designers get more comfortable inside the programs. We start working with our customers as if we're kind of across the whole category to drive the category. And so we still think there is momentum coming out of that and actually look forward -- we'll be more specific on the January call as to kind of what we see in momentum coming through. But we still -- we think there's more to come on that side.

I'm sorry. I was -- I think I hear you on the revenue side, but just more a margin profile, is there a margin mix one way or the other as that ramps?

The in-stock programs are actually reasonably profitable. So I think as that becomes a big part on an annual basis, I don't think there's that much of a shift. You will start to see amortization coming off some of the load-in expenses that have been a part of this. Those have differing lives in terms of how that cost is amortizing, but as they start to mature, that's the biggest change in margin is that you'll have kind of a pure flow-through on the profit without the amortization of the load-in portfolio.

Got it. That's it for me now. Thanks.

Peter Lisnic, Robert W. Baird.

Good afternoon gentlemen. I guess first question, if we look at the cabinetry business, that $5 million of discrete promotional costs that you identified, just wondering has that trend worsened? Then more importantly, where do we go in the fourth quarter and into 2012 on that promotional environment?

The $5 million is incremental over the quarter last year. I'd say it's been a steady drumbeat probably for the last five quarters of increased promotional spending. We're really trying to kind of address the environment we see. We're not as aggressive as some of the others in the category. But you kind of need to be there close on price so we can let our innovation product quality service come through. So I think it should start to stabilize, and we would expect actually it would come back down going forward, but we're working through that now as we kind of plan out for 2012. Fourth quarter, yes, I expect trends from the third quarter to probably continue in the fourth quarter.

So another $5-ish million on a year-over-year basis in the fourth, is that the right way to think about it?

Yes, that's probably a ballpark for it. I don't know if it would be that high or not.

That's fine. Then I would assume it's the promotional environment in the other businesses because nothing was really identified, it's been a pretty stable state, is that fair?

Yes. I think we've seen over the last couple of years increased promotional cadence for nothing stands out. The other categories are competitive, but Cabinets I think what happened is we kind of came in and have had a pretty good run in terms of market share gains. Competitors responded with pricing. So we've had to match there, but I think in any other categories it's been kind of a more stable environment.

Then the last question if I could, you talked about Indiana and Las Vegas on the cabinetry, the plant side. Just wondering, with the market maybe being a bit weaker, are there any incremental actions that you're kind of looking at or thinking about into '12 on top of the $20 million that you've identified in response to a market that might look weaker?

There is a continuous process. We look at all of our manufacturing footprint. The reality is the actions we took up through the summer of '09 really positioned us to run at the level that we're at and be profitable and expand back up to about $5 billion in sales.

The things we're doing now is more on the margins. In the case of the cabinet, the stock business, over the last 24 months, we've had significant improvements in efficiency and have actually gained capacity at our Indiana plant beyond what we had planned on. So we actually have capacity above and beyond where we initially thought we would and we kind of looked at the footprint and said we can take costs out of Las Vegas and we haven't given up anything in terms of capacity. So it was less a reaction to a view on the market. It was more just, as we continue to get more and more efficient in our operations, we're going to create capacity and then we'll decide whether we need that or not.

On the Windows side, I think it is a case of that market softened up hard this year. I think the stimulus artificially inflated '09 and '10 from a market demand standpoint, and so we came back down in '10. We're not the only one. If you look around the industry, you'll see a number of guys in the industry taking capacity out. It's probably healthy for the industry. Then going forward, we'll assess whether there is a good match on the demand side and the capacity side.

Got it. One clarification -- Lee, the fourth-quarter EPS number last year, what number are you using?

$0.16.

$0.16. Perfect. Thank you very much for your time.

Matt McGinley, ISI.

Good evening. My first question is on the commodities. If you -- can you update us on what you expect for commodity headwinds on a full-year basis? I believe, last quarter, you said it would be around a $75 million headwind on a full-year basis.

That's correct. We said $75 million, and it's in that same range. It could be $2 million or $3 million higher or lower, but it's in that same range.

Given what you've taken on pricing so far, if commodity just stood still from where we're at now, how long would it take you to catch up and actually expand gross margins?

We think, by the fourth quarter, we'll be pretty close, within $3 million or $4 million of that inflation. So when we get next year, we should be relatively even, and it should prove to be a tailwind for us because it will cost us somewhere -- pricing is maybe $45 million this year. The commodities were $75 to a little bit more, so it's costing us $30 million to $35 million this year, so if commodities stay flat next year, that should be a tailwind for us.

Got it. On the working capital side, you said you measured your efficiency as 15%. What was it at year-end last year, and what do you target for year-end this year in terms of working capital efficiency?

It was around 15% last year as well, so we've been very consistent with that. That's a pretty good target for us. We've very tight on working capital over the last three years. I think we manage it well and we just want to continue that.

Yes, 15% is not bad as we're growing. So as we're coming down, we're improving on that. As we are starting to grow, we're just trying to say can you hold tight on that.

Thank you.

Eric Bosshard, Cleveland Research.

Thanks. Two questions, a near-term one and a longer-term one. In terms of the near-term versus 90 days ago when you last gave guidance, can you talk about what was different in the quarter on the sales line and on the profitability line?

I think the market was a little softer and so we would have thought, while we perform, we outperform relative to our market by about 6 points. We would've thought that would've been off of a flat market, and so we reported 4%. We would've reported more like 6%, and with that 6% rather being down a little bit for the quarter, we would've been up a little bit for the quarter. So that's kind of the metric. It's hard to read the beginning of August, given the heavy R&R market which is a big part of our business right now. It really runs from early September through mid-November. So the call we're making is based on where we were seeing things at that point.

That's helpful. From a market, is this across all four businesses? Is this more confined to Windows and Doors? Then from a profitability perspective, was the flow-through on the topline what you expected to be or were there -- was the promotion or the mix worse than you thought it was going to be?

From a profitability perspective, it was all market-driven. It was -- I think the flow-through was as we expected, so no surprises there really.

From a category, were there categories or were they all softer?

No, I think it was across -- it was across the board generally, I would say, from a category perspective.

Is it proper to assume from what you've talked about that the momentum eased through the quarter and has continued? It sounds like, based on the Q4 guidance in October in the books that you've got a sense November that things will softer and sort of remain at that level into 4Q? Is that the right way to thinking about it?

I think it's as September, October kind of coming into November feel the same. So I think, as we see the third quarter, we see the fourth quarter. Typically there's a drop off toward the end of November into December on the R&R side of the market. So I think that will occur -- we are projecting it occurs at a normal pace.

But one difference is going to be the window market really surged in the fourth quarter last year. There were a lot of folks trying to get window packages in before the end of the year, the expiration, so for us November, especially December, was pretty strong, so it will be a tough comp.

Then the medium or longer-term question, is there any way you can frame the cost savings from the actions you're taking now and the benefit we might see from that going forward? Then is there any way to look back and think about the cost savings, the cost structure improvement that you're realizing or operating with now relative to a year ago?

I think, in terms of cost savings, we always have continuous improvement processes and projects going on, and we are saving a reasonable amount of money doing that. We've chosen, in the last year, to invest much of that money in terms of our brands and in terms of our products through innovation to continue to grow market share. We're getting good returns on those. So we'll continue to have improvements. We'll continue to invest. As we get into our strategic planning for next year, on the next earnings call, we'll give you a sense of that is, how much we'll invest next year.

I guess sort of more targeted to the -- I think you talk about $20 million of restructuring expense that you're incurring from the actions that you've taken here more recently. What's -- what are the cost savings that you expect to get in terms of return on that?

Yes, that $20 million, again, $14 million of it is non-cash. The payback is between one and two years for those projects. So it's a very short-term payback. We'll build that into guidance for next year when we report on the next call.

Wonderful. Thank you.

David MacGregor, Longbow Research.

Good afternoon everyone. Congratulations on getting this up and -- on your own.

Thank you. It really feels pretty good.

Yes, I'm sure it does.

On the raw materials, you had been talking about this a moment ago, Lee, where you were saying that you're pretty much going to be in line with $75 million prior guidance. Pricing is going to give you about $45 million, so your net cost ends up being about $30 million to $35 million. It sounds like a lot of the catch-up is really predicated on your expectation to get pricing, but at the same time, we're seeing raw material markets rolling over pretty hard here. I'm just wondering to what extent that provides you with additional tailwinds of the numbers you've just laid out.

The numbers we laid out are based on pricing that's already been taken, first of all. In terms of that $30 million to $35 million this year, it assumes that commodity prices level off, so that's kind of what we're seeing right now. We're seeing them leveling off with maybe a few categories with a little trend down, but we need to wait and see how that -- if that stabilizes and at what level. But we're assuming fairly flat from this point, but, again, we'll update that.

There is a bit of a lag on the way down, so as commodity prices stabilize or decline a little bit, there's a lag in terms of how that passes through to us. In some cases, we buy raw commodities. In other cases, we're buying parts under contract with suppliers that are triggered by those commodity changes up or down. So there's a little bit lag effect up and down.

Can you help us understand sort of the nature of that lag? Is it 90 days, 180 days?

Yes, it's more like 180 days than it is 90 days.

Okay, so we'd begin to see in the second half of next year the relief of markets rolling over now?

You know (inaudible). Some of these markets stabilize sooner, so some of them will flow-through. We'll try and incorporate that on the earnings side next call to give you a view on commodities versus price.

The second question was just if you could talk about demand trends in your emerging markets. You had mentioned in your prepared remarks a little bit about the good news on Moen in China. But just overall thoughts on emerging markets business trends.

Yes, our biggest emerging market is China, and we've seen strong growth there. I think it's -- you know, we've been building that business over the last 15 years, so -- and we continue to open up storefronts. We're working with some of the bigger builders there, so we've just kind of seen the construction flow through our product demand. It's been pretty consistent this year, growing at double digits. So I know there's a lot of discussion about is China getting ahead of itself? For our demand in terms of what we're finishing into the built market on faucets, it's been a pretty consistent flow-through. It is a competitive market, but we're getting good returns on there.

Thanks very much.

(Operator Instructions). Dennis McGill, Zelman and Associates.

Just one quick follow-up. Either for the quarter or for '10, however you guys want to think about it, what's the split between windows and doors within that segment?

In terms of sales?

Yes.

About 50-50.

In '10, it was 50-50.

Yes.

Perfect. Thanks again.

Zahid Siddique, Gabelli & Co.

Good afternoon. I have a couple of questions. The first one is on the tax rate. I know that, in Q3, you had a relatively high tax rate. Going forward, how should we look at the effective tax rate for the businesses?

Again, we'll give you next rate year's tax rate when we give you guidance on the next call. But I'd say, right now, we're using 35%, and I'd stay with that for now. When a large portion of your business is domestic, it tends to drive the tax rate up. But that's an area we're going to focus in on the coming years, but I'd use 35%.

In Q3, though, you had $27 million in taxes off of an income of $47 million.

We have some -- because of the spin, we had some unusual tax expenses of say $10 million just because of the spin-off in the way of some of our repatriation was coming back. So those are unusual items. I would not focus on the third-quarter tax rate. I would just use 35% going forward.

35%, okay. My next question is on full-year CapEx, either for 2011 or 2012 expectations.

This year, we're $38 million to date. We think we'll, for the year, be in the $60 million to $70 million range, somewhere in there. I think, depending on the pace of the market recovery, we'll ultimately get back to about $100 million a year because that's the annual level of depreciation and amortization. But -- so $60 million to $70 million this year, moving towards $100 million over the next few years and we'll give you '12 next quarter.

What about corporate EBITDA -- or for corporate expenses?

Corporate expenses, from a spin perspective, they're about, incrementally about $20 million more than they have been historically.

Okay. And the last -- sorry.

(multiple speakers) but that's built into our adjusted pro forma that we have right now.

And use of cash going forward?

We have a lot of options. We'll generate pretty good cash flow. We've got a lot of flexibility. The first priority is always to invest in the business. We'll have a little bit of debt paid down but not very much, mandatory pay down, so then it will be basically using cash in a way that maximizes shareholder value. Whether that be acquisitions, returning cash to shareholders, we've got maximum flexibility, given our strong capital structure and our very low leverage.

Thank you.

David MacGregor, Longbow Research.

I wanted to follow up. You talked about the strength of back-to-school in the Security & Storage business. I'm wondering if you could help us understand the seasonal patterns in that business?

Yes. There's a couple things going on in Storage & Security. On the Security side, which is Master Lock, there is a bit of a surge in back-to-school; that would be their peak season. That really kind of starts building out late June through July, August, a little bit into September. Pretty strong this year, kind of mid single digit, which is strong in a category that's growing at about 1%. So a lot of innovation came through and sold through this year. A lot of our new product sold into the market.

On the Storage side of the market, that's the Waterloo business. That business is primarily Sears and Home Depot. A lot of that sells into the holidays. So a lot of folks -- those are gift items, tool storage chests in the garage, and so there's a load in that typically comes in third quarter into fourth quarter.

My comment earlier was relative to order patterns of September versus October. Last year, we saw earlier ordering in September, so some of that wound up in the third quarter. This year, we're seeing more of that kind of roll through the fourth quarter, so that's coming in a little bit later.

Got it. Thanks very much.

There's no further questions at this time. I'll turn it back over to Brian Lantz for closing comments.

Thank you Steve. We'd like to thank everyone for attending our quarterly calls today and look forward to speaking with all of you again very soon. Thank you.

Today's call was recorded. A replay of this call will be available this evening through midnight, November 11, by dialing 1-855-859-2056 and using the conference ID number 15918790. This concludes today's conference call. Thank you for your participation. You may now disconnect.