Fortune Brands Innovations Inc (FBIN) 2011 Q4 法說會逐字稿

Good afternoon, my name is Jessica, and l will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security 2011 fourth quarter and full year 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. Welcome to the Fortune Brands Home & Security quarterly investor conference call and webcast. We are pleased to be here today to provide a n update on our progress during the fourth quarter of 2011, and our 2012 guidance. Hopefully when everyone has had a chance to review the news release we issued earlier today. 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 in the associated question and answer session. That are based on current expectations 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 our information statement as an exhibit to our Form 10. The Company does not undertake to update or revise any forward-looking statements, which speak only to 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 our results on an adjusted proforma basis as described in today's news release, unless otherwise specified.

With me on the call today are Chris Klein, our Chief Executive Officer, and Lee Wyatt, our Chief Financial Officer. We have allowed ample time to address any questions you may have. I will now turn the call over to Chris.

Thank you Brian, and thanks to everybody for joining us today. I would like to start off with our fourth quarter performance. First a few observations on the market. While the overall home products market was up in the fourth quarter, we estimate the market for our products was relatively flat for the quarter. Repair and remodel spending was muted by continued consumer caution for big ticket purchases like cabinets, and the windows market continuing to decline due to the impact of the Energy Tax Credit, which expired at the end of 2010.

We again outperformed our market in the fourth quarter, and we feel good about our performance and execution of our strategies in this challenging environment. Fourth quarter sales were up 4% from a year ago, and ahead of the market for our home products, which we think was flat for the quarter. The investments behind our businesses resulted in strong performance at Moen, Master Lock, and Master Brand cabinets. Our Windows & Door segment sales were lower versus last year, driven by windows which faced higher year ago comps, due to the 2010 Energy Tax Credit, while doors were up versus the prior year and the quarter. We believe our continued ability to innovate and expand into new and adjacent categories is driving much of our continued growth.

Now let me give you some top line highlights by segment. Sales for our Cabinets business were up 5% for the quarter. We continued to gain share in Cabinets as we benefited from the roll out of new business initiatives, like our in stock cabinetry program at home centers. We also continued to gain share in the dealer channel by leveraging our portfolio of brands, and our strong product and service reputation. We win in this channel by seeking to align with the best dealers in every market, set them up with a broad portfolio of your products, and then help them with the tools and service they need to win in their local markets.

Plumbing and sales were up 8% in the quarter, Moen saw solid gains across the board, with increases in the US and in our international businesses, particularly China. We grew both at retail and in wholesale across the US. At retail, we continue to see strength from practical innovations, such as [soft] resistant finishes, and our new Reflex hose systems for pull-down kitchen faucets. In wholesale we continue to drive hard to build our leading market positions with the top builders,expanding our efforts in multifamily and upgrading many of our showroom displays.

Internationally, sales in China where we now have more than 530 stores were again up double digits over the prior year. The team in China continues to expand our brand, footprint, big builder relationships, and product range to extend our market position. Windows & Door sales were down 11% for the quarter. Doors saw sales gains of 5% driven by a growth in Canada, and a recently launched exclusive relationship with a major Windows & Door brand, where we are making all of the entry door panels. However, windows were down over 20% in the quarter as they comped against an exceptional prior year quarter, that was fueled by the expiring energy tax credit and a richer than normal product mix.

In Security & Storage, sales were up 13% in the quarter. Security saw gains across the board driven by innovative new products like speed dial, and precision dial padlocks in retail, broad gains in commercial security products, as well as strong international sales of padlocks and safety products in the Europe, South Africa, and Asian markets. The brand is strong and our innovation seems to be really hitting the mark. Overall with the exception of the windows business, our segments performed well. We continue to execute our strategies and we continue to innovate and invest in our businesses, and we believe this positions us capture near term and long term growth opportunities.

Now let we turn to our top line outlook for 2012, starting with our assumptions for our market. Lee will then take you through specific full year guidance for 2012 in a few moments. From a macro perspective, it almost goes without saying there are continued challenges in the housing market, including tight credit, foreclosures and falling home prices. However, we are seeing some signs of improvement as new construction appears to have picked up somewhat in the fourth quarter, especially on the multifamily front, and existing home inventories are down to roughly a 6-month supply. Recent modest improvement in the US economy and the unemployment rate , coupled with some pent-up demand in home improvements, seems to be supporting modest growth in remodel activity. However, concerns about the general health of the economy in the face of the recovery are still weighing on consumers confidence, and their willingness to embrace large ticket purchases. Therefore we remain cautious.

While we see slight improvement in both the new construction and repair remodel segments, we are planning for the market for our home products to increase at a slow pace in the coming year. Our 2012 plans are built on an assumption that the total home market, including both repair/remodel and new construction grows at a combined rate of 3%, and as the market for our products grows a bit less at around 1% to 2%,due primarily to the more discretionary nature of cabinets and products. We are also assuming that this market growth is modest early in the year, and becomes a bit stronger as we move later into the year.

Based on that market assumption, we expect our 2012 full year sales to increase at a mid-single digit pace over 2011, again outperforming the market for our products. Within the business, cabinets should see continues share gains in both the home center and dealer channels, driven by continued innovation and investments in new programs. We expect the promotional activity to continue through 2012, but remain at about the same levels we saw in 2011. We will remain disciplined, as we stay competitive on pricing, but distinguish ourselves with innovative products, on trend styles and our market leading service styles. For faucets ,we will continue to invest in the Moen brand, and launch innovative new products that consumers want. We will also continue to drive hard for market share gains with builders, which should continue to position us well for any pick up in new construction, and we plan to further invest to expand our distribution footprint in China into more Tier 3 and Tier 4 markets. We expect to have some 650 store fronts throughout these countries by the end of the year.

In the Windows & Door segment, doors should see continued growth from our exclusive new relationship with a major window and door brand, where we are making all of their entry door panels. Windows demand should stabilize as the market moves past the effects of the 2010 energy tax credit. Security and storage should benefit from continued investment in new product innovations, including digital electronic padlocks, other electronic products and services, and further expansion into commercial safety. On the storage side, we will focus on adjacencies to try to mitigate the ongoing secular decline in tool storage. So for 2012, we believe our continued ability to invest in innovation, and expand into adjacent categories is a key competitive advantage that will again help us take share and outperform the market.

So to sum up, while slightly better, a soft fourth quarter home market continued to impact our more discretionary cabinet and Windows & Door segments the most. But our plumbing and security and storage segments continued to grow and generate strong stable operating margins. As we look forward to 2012, we continued to execute our strategies and remain focused on outperforming the market. While our plans assume the near term market will be only modestly positive, and the pace of the market recovery remains uncertain, we strive to create value by capturing market share, expanding into adjacent markets, and improving our operating platforms. We continue to believe our strong brands, management teams, and capital structure should position us to create value at any pace of recovery.

Now I would like to turn the call over to Lee, who will review our financial performance and 2012 guidance.

Thank you, Chris. As Brian mentioned, the majority of my comments will focus on adjusted proforma results for 2011. To make all comparisons on a standalone company basis. Let me start with our fourth quarter results. Sales were $876 million, up 4% from a year ago. Again outperforming the market for our home products which was essentially flat. Consolidated operating income for the quarter was $40 million, up 2% compared to the same quarter last year. A few items put pressure on fourth quarter operating income. The first was $6 million lower profit due to volume and mix in our Windows & Door segment, as customers opted for lower price point products than in last year's fourth quarter, which was influenced heavily by the energy tax credit. The second was $5 million in higher promotional expenses in Cabinets versus the prior year quarter,with the majority in the retail channel. And lastly 2011 commodity and fuel inflation was fully offset by price increases in the quarter. EPS were $0.16 for the fourth quarter, equal to last year, the items that I mentioned previously is putting pressure on operating income, reduced EPS by approximately $0.05 in the quarter.

Now let me provide a little more color on segment results. Our Cabinet sales were $302 million, up $15 million, or 5% over the prior year quarter. The operating loss for this segment was $3 million, down $3 million from the prior year, driven by the increased promotional expense of $5 million, but for the full year, operating income was $18 million. Plumbing sales for the fourth quarter were $258 million, up $18 million, or 8% versus the prior year quarter. Operating income was $39 million, up $4 million, or 12%. The increase primarily reflects the impact of sales, gains and productivity improvement, less $2 million in higher advertising and brand investment.

Windows & Door sales were $154 million, down $19 million or 11% from the prior year quarter. Operating income for this segment was $3 million, down $8 million. Both the sales and operating income declines were the result of windows comparisons to the fourth quarter last year when the energy tax credit pulled significant volume forward, and generated a richer product mix. Fourth quarter security and storage sales were $163 million, up $18 million or 13% versus the prior year quarter. Operating income was $17 million up $7 million, due primarily to higher volume and efficiency improvements.

Before I turn to the balance sheet, let me touch briefly on the charges impacting GAAP earnings. The spin-off of our business in October has given us the opportunity to evaluate existing policies, methods and processes. These fourth quarter charges reflect policies and judgements that we are implementing as a new Company. First as a result of the continued downturn in the Windows & Door market, we are recognizing a noncash impairment charge of $0.35 per share for the Windows & Door segment. This charge primarily reflects weak performance in 2011, coupled with the continued uncertainty in the pace of recovery in that market. We have confidence in our business model and the Simonton brand, but meanwhile the industry remains challenged by extra capacity and pressured margins. So we arewatching how this unfolds in 2012.

Second, we adopted a new pension accounting methodology, that better matches actuarial gains and losses with the periods in which they were incurred. Since our plans have accumulated losses, caused by declining discount rates and portfolio performance over the last few years, our new method requires that we restate 2011 and prior periods, to recognize the losses in the year incurred, rather than amortize into future periods. As a result, we incurred a $0.16 per share noncash charge primarily for actual losses in the fourth quarter, and $0.25 per share for the full year. Prior periods have also been restated to reflect the impact of this change. We expect annual pension expense in 2012 to be around $9 million, plus any actuarial losses if they occur. We are approximately 75% funded, and expect to make contributions of approximately $20 million in 2012. Most of our defined benefit pension plans were closed to new participated by 2009, and will be frozen by 2016.

And lastly, as we discussed last quarter, we continue to optimize our supply chains, to maximize current demand patterns, improve our already Lean manufacturing processes, and reduce fixed cost,while still maintaining the flexibility to service growth, up to $5 million in sales. As a result of these ongoing efforts, we incurred $17 million for primarily noncash restructuring and other charges in the fourth quarter,due to the previously announced closures of our McAllister Oklahoma window plant, and our Las Vegas cabinet plant.

Turning to the balance sheet. Our December 31 balance sheet ended with cash of approximately $120 million, debt of $410 million, and net debt to EBITDA leverage around 1.2 times. We believe our strong balance sheet combined with growing free cash flow provides flexibility to maximize shareholder value in a variety of ways. Let me now provide further detail on our planning and guidance for 2012.

Our approach to planning and providing guidance has three elements. First, our market assumption is that the conservative end of the general consensus. This allows us to plan expenses conservatively, which provides down side protection. However, if the market is more robust, we are positioned to capture our share, and should leverage well as we did when the volume surged in 2010. Secondly, our plan includes continued share growth in addition to overall market growth. And third, we are continuing to make investments across the business that should provide returns in 2012 and beyond. While we are cautious about 2012, we do see significant growth in the out years, and want to invest ahead of this opportunity.

So turning to guidance details. As Chris mentioned, for the full year, our planning assumption is that the market for our product will be up 1% to 2%. With modest growth early in the year, and stronger growth later in the year. Based on this market assumption, and our continued share gains, our 2012 sales should increase mid single digits compared to 2011,with all segments increasing.

We expect our 2012 EPS before charges and gains, to be in the range of $0.66 to $0.74. This range represents an increase of 10% to 23% over 2011 of $0.60 restated EPS before charges and gains. If the market for our products grow faster than the 1% to 2%, EPS should grow even more, as we leverage both our market share gains and supply chains. 2012 free cash flow should be in the range of $145 million to $180 million, after CapEx of approximately $80 million and pension contributions of $20 million.

In summary, our business model continues to perform well in this challenging environment. And as we now enter our first full year as an independent company, we believe that we are positioned well to leverage our foundation of leading brands, efficient supply chain, proven management team, and strong capital structure both now and as the market recovers. I will now turn the call back to Brian.

Thanks, Lee. That concludes our prepared remarks for the fourth quarter and for 2012 full year guidance. We will now begin taking your questions and will continue as time allows. Since there may be a number of you that would like to ask a question, I would ask that you limit your initial questions to two, and then reenter the queue. So I will now turn the call back over to the operator be begin the question and answer session.

(Operator Instructions). Your first question comes from the line of Ivy Zellman with Zellman and Associates, your line is open.

Thank you. Good afternoon, good quarter guys.

Thanks, Ivy.

You have been very helpful, really appreciate the detailed guidance. One of the questions we have is to understand, if you could, break out the expectations you are using for new construction for growth on business and repair and remodel, and can you talk about the variability in the range you are providing in the EPSguidance? Is it contingent on a sales variability, or is it more a reflection of margin variability, that would be very helpful, and then I do have a follow up?

Sure. Yes, I would start by saying these are our planning assumptions and over the last four years as we have watched the market, as you have watched the market, obviously a lot of volatility. We have followed the same approach year in and year out. We look at all of the estimates and do some of our own work, and then we take the bottom end as we planned, so going into this year we did the same thing. Kind of looked at the bottom end, and there is a wide range of projections that we look at.

But we came in really looking for the new construction market to be up only about 6% for the year, and then R&R about 2% for the year. We are about 70/30 R&R versus new construction, so you can quickly get to the mix. And then we discount that a little bit by our cabinet business, because the cabinet industry in general has been underperforming relative to overall R&R by a little bit. So we discounted that down. That is really where we get to a market of 1% to 2%, off of a macro market at 3%.

As Lee said, as the market flexes up, if it performed better, and it looks a little bit better coming out of the fourth quarter, we should track and be able to absorb that upside as we did back in 2010, we did the same thing back then, where we looked at a pretty conservative set of assumptions coming in the market, and then we had a bit of a surge through the year. The variability around the range is really driven at the sales level. As we get to the higher end, we are going to lever better. We have a couple of businesses that are just above their breakeven, some are solidly profitable, so as we get to the higher end of that, we lever better.

Yes, I think that is right. We are making some investments during the year, but if that market performs better than our market assumption, we will leverage, we traditionally leverage 30% our so on sales. We think we will leverage nicely if the market moves up. That is the point of variability in our EPS guidance.

Thanks a lot. Very well articulated. Just secondly, as you think about the promotional activity in cabinets, and a leader in the industry, is there an inflection point where you would be a leader in reducing the promotional activity? What level of sales, certainly 5% is pretty healthy growth that you were able to achieve in the fourth quarter. But yet with promotional activity, obviously pressuring the Company's bottom line, so where is that inflection point?

We are pushing it, and we are looking for it too. So I would say we are the laggard out there today, and we are really trying to invest in innovation and push that through as well as some of our new programs. And really our new programs in that innovation led the gain we saw in the fourth quarter. So I would say we are holding our own on promotion, but of the Big 3, we are bringing up the rear, and I would think at some point, you are going to see some more discipline. We are assuming no more than kind of what we had last year, and we are working hard to bring more discipline back into that market. I don't want to talk too much about our competitors or that sort of thing, but we are on the same page here.

Got it, well thanks very much, congratulations.

Thank you.

Your next question comes from the line of Peter Lisnic with Robert W Baird, your line is open.

Hi, good afternoon, this is Josh Chan filling in for Pete. I was wondering for your 2012 guidance, how much of price cost, when if any, are you incorporating, and also how much higher investment year-over-year?

Yes, in terms of inflation, we think we will have a slight tailwind coming in from our price increases. We are seeing about a $15 million net inflation drag in 2012 on new 2012 inflation, but we get a carry-in from our price increases, so we think net it should be a benefit of $10 million to $15 million, net of all that. And in terms of investment, we are investing in the range of $15 million to $20 million across all of the businesses in a way that should really drive performance over the next few years.

Okay, great. And then on the cabinet side, if you sort of exclude what the market will give you, is there a way you can quantify the amount of new business that you expect to realize in 2012, given some of the programs that you have retail and the dealer channels?

I can't really break it out by numbers, but I can give you a sense of it. We have rolled in most of the new programs that we have taken in, we are always fighting for new business, but of the big programs that we kind of rolled out over the last 18 to 24 months, a lot of that has come in initially. But those programs grow over time, so we won't quantify it for competitive reasons, but those will continue to perform, the initial load-in isn't what you get, it is above and beyond that, as we grow and those are some pretty big programs, so we will continue to roll that, and that will result in us outperforming where the cabinet market is. We have been outperforming at a pretty healthy clip in that marketplace. While it won't be as extraordinary as it has been, we are still counting on some good performance this year above the market.

Great, thank you for your time.

Your next question comes from the line of Robert Wetenhall with RBC.

Hi, good afternoon. Nice quarter. Could you just detail by segment what you are seeing in terms of, or your expectations for pricing you can take, and your expectations particularly in plumbing what your expectations are for raw material headwinds? I am just trying to get a little bit more granular on that?

When you look across the entire business, we see for inflation in 2012 probably a total of $30 million to $35 million of additional inflation. We have got some pricing built into our plan, which nets that down to about, new pricing, nets that down to about $10 million to $15 million negative impact. But then we have got price increases that we implemented in 2011, that are carrying over that gives us kind of a net benefit for the year. We have been able in 2011 to take price increases across all segments, and we have done that, in 2012 we will take them in those segments where the inflation is high enough that it gives you a reason to go back. There are a couple of segments where you will get a little inflation that is just not enough to take a price increase yet, if it continues. Then later in the year we will readdress the price increase.

With most of our businesses there is a lag, so it does have to accumulate over time, and we showed last year that we were able to capture that increase. There is a lag that has to be sustained, and then we can go back and get that increase.

If you look over the last three to five years our pricing increases have offset inflation, so we have been able to do that over an extended period of time.

Got it, that is real helpful. The advance material Windows & Door systems, obviously it was a difficult quarter the ever this group, and you are facing the tough comp. Can you give us a little bit more insight into what you are expecting as you work through the year with this business? And also talk about how you got this new exclusive relationship as primary supplier on the low end door segment?

Yes, I will start with that, on the door side. It is actually, I can't name who it is, but it is one of the major window and door guys, and we are going to be all of their doors, so we will be producing all the doors that they used to make for themselves, so that as a nice piece of business. It will roll in throughout the year. On the window side, yes, the issue is the tax credit, it kind of felt good while we had it, so we had it for two years, 2009, and 2010, we really had a monster quarter in the last quarter of last year, as we were really pulling business out of 2011 into that final quarter. Everybody performed well, we did extremely well. And so that is what we were comping again. So you saw a more than 20% decrease in that business for that quarter.

I think the other thing is that the industry only now is starting to rationalize really second half of 2011 is when you saw some capacity coming out of the market. We took some capacity out, a number of our competitors did, and it really is kind of almost a delayed reaction to the overall downturn, and the stimulus kind of kept us all in the business with more volume, maybe then what was underlying. And as we came can into 2011, and the stimulus went away, you kind of rebased it down. So what we are looking at is 2011 was the adjustment year, I think 2012 we will be running at about where 2011 was industry-wise. We always try to outperform, so we will try to do better than the industry. But I think that rebasing was an 2011 phenomena. Painful, I think frankly more capacity needs to come out. We will be watching the industry carefully, and evaluating as it rolls through. But as we have seen with all of the stimulus programs in our industry, it kind of moves demand around into different periods, but it hasn't really created too much fundamental new demand.

That is helpful, and if I can just sneak in one quick one.

Sure.

I think Lee touched on your balance sheet have very, very low leverage, is your intention through the balance of the year just to keep leverage at that net debt of 1 times in that range?

Yes, when you look at our free cash flow, we used cash in the first quarter and then in the fourth quarter we generate the majority of our free cash flow. So what you will see is we will pay down our revolver, throughout the years as we have cash, and then we will probably accumulate anything above that, because we really wouldn't want to pay down our term loan, because you can't refill that bucket. So you will see us use cash early, you will see us accumulate some cash once we get to a revolver that is at zero.

Understood, good luck this year guys, thanks.

Your next question comes from the line of Joshua Pollard with Goldman Sachs, your line is open.

Hey, thanks for taking my question. Can you talk about the health of the business through the first month of the year? I know it just finished up. But specifically I am wondering about the aggression in cabinets? Has that continued, and are you still seeing a similar clip of growth in your security business?

Yes, I think that the health of the business is good coming into the start of the quarter. We finished up a little bit better than we thought in December. And we are coming in kind of at or even a little bit better in the first part of the month. I point out though, that January is not even one third of the quarter, it is typically our slowest month of the year. So it is probably an early warning signal, let's call it 1/6th of the quarter, but it is coming in fine.

I think in cabinets we are seeing about the same. Take a little bit of time for my earlier comments around some of the restraint to come back in, we are seeing the same level of promotional activity as we did coming out of the fourth quarter coming into the first quarter. Again we are trying to compete based on new products that we are bringing in, our service levels or quality levels, and on promotions we are really trying to stay in the game more than anything else.

Okay. And then two very quick ones on the low end door business that you are picking up, are you expecting lower incremental margins, or should the operating leverages from your plans more than offset any difference in gross margins?

Yes, I may have not been clear in the way I described that business, but it is not low end door business, it is entry door business. So we are producing all of the entry doors for one of the major window and door manufacturers out there. They are looking to us to make all their doors, they aren't making them any more themselves. That is actually pretty nice margin business. We are in start-up phase there, so there will be some costs in some of the investments. We talked about earlier maybe $15 million to 20 million in aggregate. For all of our businesses there is some of the new door business investment in there, but that is going to be a nice piece of business, that will compliment what Therma-Tru does today. So it will be similar to the Therma-Tru margins that you see today.

Last one, will you be treating the quarterly actuarial losses and gains as core, or will you be excluding them from your adjusted earnings?

Well, what we will do is we will mark the market once a year, and generally that will come in the fourth quarter at year end when you really have to set your actuarial discount rates and return rates, so you will see that in the fourth quarter.

Okay, great, thanks guys. Really appreciate it.

Your next question comes from the line of Matt McGinley with ISI Group, your line is open.

Good evening. Into 2012, are you seeing any channel anticipation ahead of new construction activity or better remodelling, and when you overlaid those macro that you laid out before, is that bottoms up in that you are hearing that from your customers, that they are anticipating a better back half or stronger demand in the first half? Or is that top down macro assumption that you are getting from economists?

Top down macro. So because the feedback we are getting from the channels has been really near in, and I don't blame them. They are kind of giving us a read what is going on in the last month and what is going to happen in the next month is not even quarter to quarter. So I don't blame them, as the volatility that they have seen in the last four years has kind of moved through the system. In terms of I think your basic question are we seeing them bringing any inventory into channel, if I understand that right?

Right.

I think they are not anticipating, it was interesting because back in 2010, just as we started into the year, you did see some channel coming in as if they didn't want to miss the business. There is a lot more discipline out there right now, because I don't think they want to get stuck with inventory, if it is a little bit slower than they are going. So they are ordering basically at a need, where they may had been running a little bit light, to bring it up to maybe where normal level would be. But nobody is getting out ahead of where the demand might be, because I don't think anybody is certain enough, to say gee, I want to bring it in, maybe the other side of it is, we have all gotten pretty good on service, and so lead times are shorter and we can respond when they order in. So we aren't seeing any big inventory build ahead of a surge in demand.

Got it. And then an overall question for 2011, as you look at the, I guess pretty impressive sales numbers you had in security, plumbing, and cabinets throughout the year, how much of that was driven by price versus units?

I think we you look at say the fourth quarter, price is a point to maybe 1.5 points, in that range for 2011.

Alright. Thanks a lot.

Thank you.

Your next question comes from the line of Ken Zener with KeyBanc, your line is open.

Good afternoon.

Hi, Ken.

The entry door business that you have picked up, would that kind of be, if you guys have your market share, is that going to be equivalent on a run rate maybe to 5% or 6%additional growth for you guys? I mean is that 20% of your business that you are pulling in? How should we think about that? You mentioned margins I assume, is it diluted to your core Therma-Tru business?

No, it shouldn't be dilutive, initially it would be. We have got some start-up costs coming into the year at run rate, so probably next year it will be good margin business. I can't really size it because we are constrained in confidentiality in the partner we are working with, and so I didn't bring up their name, and I don't really want to size it. But it is material enough that we brought it up, and I think that you will see it start to flow through the business overall. It will be a good addition, and it is additive to the business, it isn't cannibalizing anything else that we have got. So it is good. It is a good win for the team.

Good, and then within millwork, which is both Windows & Doors, can you talk about, because windows does seem to be the most unstable from the competitive landscape of their balance sheets, et cetera, which is acting probably over capacity, margin pressure. How might this doors, you taking over this doors business, obviously you are taking off someone's capacity there, differ from windows in terms of the sustained margin pressure you would face? I don't know if you have commented on the margin differential between windows and doors? Thank you.

No, kind of think about the two industries a little bit differently. The door industry is pretty well consolidated, so it is a more stable industry. Obviously a couple of the big guys went through some financial restructuring that was leverage related, but it is overall more consolidated. A little bit healthier market.

The windows market is still so highly fragmented. And while there are some large guys like ourselves, there are a lot of small guys out there as well. I think that is the challenge, is when you delay the kind of consolidation that is required in that market, which is really what the tax credits did, now you are seeing it flow through, and you have to kind of have to see that, and that will be capacity and margin. I think that is what we are watching closely, is can you get the health of that industry back to where it should be, by better balancing capacity and demand, and at that point then you stabilize the margins there. So I would characterize the door market is really because of its consolidation in probably a more stable place, the window market is a little more in flux.

I guess the last one, the M&A activity that you could do with your balance sheet, what are your thoughts around Europe. If opportunities come up over there? Thank you.

Europe. Our thoughts are that ironically right now, I guess the US market is looking a little bit more predictable. That is kind of hard to say. But I think that I guess we would watch to see kind of where that shakes out. Obviously Europe is not one country, so there are more stable economies, Germany is a bit more stable. Kind of as you look across the continent, there are some that are in tough shape.

I think you can't just call it as Europe, and anything we looked at we would have to look hard to understand where the proportion of the business is that is more at-risk economies, and we would look at it in a very sober way. Because I think there are going to be some longer lasting consequences of what they are going through right now just to settle out their debt. Those economies are going to take a little while to get back going, and all kidding aside, I am more optimistic that the US economy on the home side, we have got better days ahead. We called it as a slow build this year, but we feel like we are at the bottom here, and we are performing well at the bottom, so I look around and this is a better market to be able to predict than over there right now.

Thank you.

(Operator Instructions). Your next question comes from the line of Eric Bosshard with Cleveland Research Company. Your line is open.

Good afternoon guys. This is Omar Aleem stepping in for Eric.

Hi, Omar.

One question for you on mix. In terms of 2011 in the cabinet and faucet businesses, can you describe what you saw in the year in total, and secondly, did you see anything different in 4Q versus the prior trends through the year?

Overall mix? So I guess I would start with cabinets, our mix shifted a little bit just because we brought in a big chunk of new business which was in-stock business at Lowes. That margin structure look a little bit different than semi-custom. Outside of that within the categories of semi-custom, near custom, and stock, there has been pressure on mix. You look all the way back to 2006, to where we are in 2011. But it is really kind of stabilized within 2011 at where it has been over the last year or two, so not a huge pressure. Obviously in cabinets the promo environment is what we have been focused on. Mix has held up okay, and really it is more within our portfolio that you would see some changes there.

On the faucet side, again it is by category, so in proportion, the wholesale market is still driven by new construction. Resale has been very strong for us over the last three years, so in proportion to the portfolio retail is a little bit bigger proportion than wholesale had been, going forward as the market recovers and more new construction. That will actually turn and wholesale will be stronger coming out. And then our China business which has been performing very well, has been a bigger part of that mix. So I don't know if that is helpful?

Yes. And more specifically, in 4Q if you look at the mix, the average selling price, faucets, cabinets 4Q versus the rest of the year, did you see a change? Excluding new business,just apples-to-apples core business, did you see anything different in 4Q versus the rest of the year mix-wise?

No I would say that it is about the same. I think 2011 was kind of a just the same year as we went through it, with the exception of windows which we called out, and this is again because it was a bit of a lag. The ETC was holding back what was called the equilibrium state, so there is where way saw a bigger shift in mix, because there was probably some subsidy of a higher mix because of that tax credit. But cabinets and faucets, we have been through this so it is pretty well adjusted, and it is kind of trending at where it has been, which says consumers are shopping at those same levels of price versus value. Again with the exception of cabinets, a heavy promotional environment.

Okay, and then just lastly, same thing in 2012, do you expect, do you expect are you thinking when you have thought about your guidance for the year, are you thinking of some improvement? Are you banking on some improvement in mix,2012 versus 2011?

Not significant mix shifts anticipated in our guidance. China gets a little bit bigger, but not a significant mix change.

Okay. Thank you, guys.

Your next question comes from the line of Michael Rybak with Ivory Capital, your line is open.

Good afternoon.

Hi, Mike.

My question has to do with the statement you made in your prepared remarks, with respect to your growing for free cash flow and your ability, or your flexibility to maximize shareholder value, what are some of the alternatives you are currently evaluating by what you can do with that?

A good question. As we are not that highly leveraged, and we will service debt, but debt isn't a huge call on cash. Our first call is investment in our business, so as we said we are going to invest a little bit this year in our business, because we get great returns out of those investments. Beyond that we will look at acquisition opportunities, and evaluate those as they come, but we aren't going to press ourselves have to do ask sixes. We will do strategic accusations as they are available. So as we accumulate cash, we will evaluate share buy backs versus dividend, so what we know is that we have based the business to a point where we don't need a lot of excess cash as a cushion. We don't have a lot of debt. So we will be very efficient in the use of cosh, and we will evaluate and unless we have an acquisition that we can utilize it with, we will evaluate dividends versus share buy backs and return cash to shareholders.

Okay. Okay. And with respect to when you are going to kind of finalize that strategy, whether you are going to go the acquisition route, or the capital return route, when is that going to happen? When are we going to get more details on that?

Well, we are thinking about it all of the time. If you look at our business, we tend to generate a lot of our cash towards the end of the year, we utilize cash as we go through the year, big selling seasons if you will. And so fourth quarter ends up being the big cash realization point. Realizing when we come into the fourth quarter is when it will become more of an issue of accumulating all of that cash and saying well now, I want to do something. So we will certainly be ready ahead of that. We think within the universe of acquisitions the things we can do inside of our businesses will be more creative to us than the those things beyond. As you might imagine, we may have some targets and things that we look at, and those will become available or become appropriate as time goes on. We don't comment on specific situations. Until really the timing becomes more of when we will be accumulating excess cash. At that point we will be ready to take some action.

If I can squeeze in one more question. In your road show you provide a table of the operational targets you are going to hit under various housing scenarios, so 1 million houses, 1.5 million houses. First, have those changed? And then two, is there anything that makes you more or less confident about those targets?

I think we are still in the same place. Those are very much not time based but based on where the market is evolving to. So at the mid point, we were at 1 million housing starts and 2.5% to 3% R&R market, and then at the steady state, we called 1.5 million housing starts and 5% R&R, and our businesses as they look today should lever and hit those points the same as what we talked about three or four months ago. Nothing has really changed in that period of time. We are still confident in the restructuring that we have done, and the positioning of our businesses, and we are having good success out in the marketplace. So there is nothing to change that outlook.

Your next question comes from the line of Zahid Siddique, Gabelli & Co. Your line is open.

Good afternoon. I have a few questions. The first one is on the Windows & Door business. Would you be able to quantify the profitability of the windows business? Was that profitable first, and what was the number?

We don't break those out separately. We keep them inside the segment.

Any thoughts on divesting the windows business?

No, as I said earlier, unfortunately the tax credit delayed the natural evolution of that market , to where supply and demand was better matched so we are looking now at how that market is going to shake out. We have a great business with Simonton, we just took out some capacity in the late third quarter. So we did realign our capacity a little bit. But we continue to win awards on quality, J.D. Power Awards, service levels really lead the industry, so it is a great platform. It really becomes an industry question. We are going to be watching it closely. I think it will depend on the actions within the industry, and what happens in the next 12 months.

Okay, and moving on to security and storage. You had a sizability bump in revenues in Q4, Q3 was not that great relative to Q4, what caused Q4 to be so much better than Q3?You pointed out a few things, but I wanted to see if you could quantify a little bit more?

I would just say, I am not going to break it down, but I would say across the board we performed well in the fourth quarter, and maybe it was the stars aligning across the board. But retail performed well, it was on the heels of a very strong Back-to-School season. Commercial performed well. Europe saw some very nice gains. Our safety business around the world, this is the business where we secure lock out tag out mining sites. South Africa, Australia, really everything kind of clicked. We are bringing in some new electronic products. So I mean everything kind of lined up. I am not sure that the first quarter a good one to extrapolate through the whole business, as it was really all of the stars lining up together. But I would say it was pretty deep and across the board. The brand is as strong as ever. The level of innovation in that business has been consistent. We have invested a lot in that business. And it is doing well. So it is really kind of firing on all cylinders.

And last question is on cabinets, how big is the large cabinet business within that segment? And when do you think that might improve?

The large cabinet business it is really just one cabinet business. I'm not sure I understood the question.

Meaning I guess large ticket items have been challenged, what proportion of the business would be large ticket items if you will?

We don't break that out, but that is probably more challenged than the bottom end of the marketplace. And I think that improved as consumer confidence improves and as bigger ticket purchases improve. I still have a lot of confidence in that business, any consumer work that we do reflects the heart of the home is the kitchen and bath, and that is where people really aspire to put a lot of new investment dollars to work, and it really is a question of when they get to the confidence level. I think there is probably some pent-up demand out there to bring back in. So we remain optimistic on that part of the market, but it is probably lagging the rest of the market.

Thank you.

We have no further questions at this time, I will turn the call back over to Mr. Brian Lantz.

Thank you, Jessica. We would like to thank everyone for attending our call today, and surely look to be word to seeing many of you very soon, thanks a lot.

Today's call was recorded, a replay of this call will be available this evening through Midnight February 15th by dialing 1-855-859-2056, and using the conference ID number 40881017. This concludes today's conference call, thank you for your participation, you may now disconnect.