Fortune Brands Innovations Inc (FBIN) 2012 Q1 法說會逐字稿

Good afternoon. My name is Jessica, and I will be your Conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security First Quarter 2012 Earnings Conference Call. (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 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 first quarter of 2012.

Hopefully, 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 comments on the call today, either in our prepared remarks or the associated question-and-answer session. And they're based on current expectations and 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 Annual Report on 10-K as filed with the SEC.

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 results on an before-charges and gains 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. Following our prepared remarks, we've allowed ample time to address any questions that you may have.

I'd now like to turn the call over to Chris.

Thank you, Brian. And thanks to everyone for joining us today. We had a very good quarter, with strong growth exceeding our plans in both sales and EPS, as we continue to gain share and benefit from a better-than-expected market.

Let me spend some time on the first quarter, and then I'm going to discuss our thoughts on the full year. First, with regard to the market, both the overall home products market and the market for our products were higher in the quarter and ahead of our planning assumptions.

The pace of repair and remodel spending picked up, albeit with continued consumer caution for big-ticket purchases like cabinets. New construction was also stronger than expected in both single-family and multifamily starts. While warmer weather likely played a role in the market performance, we saw broad strength that included many areas of the country where weather wasn't a factor. Importantly, we outperformed the market for our products in the quarter, and we feel good about our performance and the execution of our strategies, as we're off to a solid start in 2012.

Turning to our performance for the quarter -- sales were up 12% from a year ago and ahead of the market for our home products, which we estimate was up about 4% for the quarter. We exceeded our expectations at Moen, Security & Storage, and Window & Doors, which grew sales 20%, 18% and 11% respectively and significantly surpassed our profit plans.

Cabinets saw sales grow up above their market and met our sales and profit expectations, as the market for these products lagged the overall market in first quarter. We believe our continued ability to innovate and expand into new and adjacent categories is driving much of our growth ins share gains.

Now, let me give you some top-line highlights by segment. Plumbing sales were up 20% in the first quarter. Moen saw gains across the board, with increases in the US and in our international businesses, particularly China. Gains were strongest in our wholesale business in the US, where we saw volume gains as the pace of new construction picked up and wholesalers began to rebuild inventory. Our efforts over the past years to build on our leading market share with the top builders and wholesalers, expand in multifamily and upgrade many of our showroom displays yielded strong results in the quarter.

Moen also continued to see strength from our steady pace of consumer-driven practical innovations such as spot-resistant finishes, Reflex pull-down kitchen faucets and twist showerhead wands. In fact, just this week, we unveiled our newest innovation at the Kitchen and Bath Show here in Chicago. The motion-sense faucet is a unique, hands-free, touchless kitchen faucet. It senses when you need water and responds without the need to even touch the faucet. It also conserves water, as it is only on when you need it.

Internationally, sales in China, where there are now nearly 600 Moen branded stores, were again up strong double digits over the prior year, driven by new construction growth and our continued expansion into Tier 3 and Tier 4 markets. The team in China continues to expand our brand with a wider range of price points and products, which include an expanded line of bath vanities and sinks.

In Security & Storage, our sales were up 18% in the first quarter. Security again saw gains across the board, driven by innovative new products and expanded share in retail, broad gains in commercial security products, especially safety; as well as strong international sales of padlocks and safety products. The brand is strong, and our innovation continues to hit the mark.

Our line of storage products saw large gains from tool storage, as our largest customer in tool storage aggressively promoted the category and our new products. And we continued the momentum of garage organization products.

Windows & Doors sales were up 11% for the quarter. Door products, which are heavily driven by new construction, saw sales gains of 16%. We saw growth with distributors from a stronger market, some inventory rebuild in the channel and incremental sales from the recently launched relationship with a major window and door company. Window products were up 6%, driven primarily by share gains, with some help from the weather in the Northern markets.

Sales for our Cabinet business were up 4% for the quarter and met our expectations. We continue to outperform the cabinet market with sales gains in all channels, despite our estimate that the cabinet industry sales were only up about 2% in the quarter. As the pace of new construction picked up, we saw strength with dealers, where we're the market leader, and with builders. In the dealer channel, we continue to grow by leveraging our portfolio of brands and our strong product and service reputation.

We also saw growth in home centers, where the results were more mixed, with some gains and some losses because of our disciplined approach to promotions, which we held flat to last year. However, despite our spending restraint, the promotional environment for cabinets remains elevated. We remain disciplined, picking our spots and staying close enough on promotions to leverage our strong designer relationships.

Importantly, as we begin to see a market recovery, we're now focused on growing profits in the channels, brands and price points that best reward us for our leadership positions, innovation, and the quality of products and service we've maintained throughout the market downturn.

To sum up the first quarter -- the market was stronger than expected, and we again outperformed, with Moen, Security & Storage, and Doors & Windows exceeding expectations, and Cabinets on plan. We continue to execute on our strategies as we continue to innovate and invest to capture near-term and long-term opportunities.

Now, let me turn to our top-line outlook for 2012, starting with our assumptions for the market. We will then take you through our specific full-year outlook for 2012 in a few moments.

From a market perspective, we're seeing more strength than we planned for coming into 2012. We're seeing continued signs of improvement, as both repair and remodel and new construction picked up in the first quarter. Recent modest improvement in the US economy, coupled with some pent-up demand in home improvements, and the increased pace of sales of foreclosures, seem to be supporting demand growth in remodel activity. And for new construction, our broad range of sources have increased estimates for total housing starts this year, the largest increases in single-family starts.

However, concerns about the general health of the economy in the face of recovery are still weighing on consumers' confidence and their willingness to embrace larger-ticket purchases. There are still continued challenges in the housing market, including tight-credit foreclosures and soft home prices. So while our view is more positive for the full year, we remain keenly aware that the market could change.

Considering both the broader strength of the overall market and first quarter results, we're increasing our 2012 planning assumption for the market for our US home products. Our full-year plans are now built on an assumption that the total market for our home products grows at a mid-single digit rate. Within that assumption, we expect repair and remodel to grow at a rate of around 4% and new construction to grow in a range of mid- to high teens. Our plans assume that the market for our products grows a bit slower than the overall market, but still within the mid-single digit range. Our market assumption reflects the lag in cabinet products, with stronger growth in the second half of the year.

So based on that market assumption and our quarter one performance, we expect our 2012 full-year sales to increase now at a high-single digit pace over 2012. We believe our ability to invest in innovation and expand into adjacent categories is a key competitive advantage that'll continue to help us outperform the strengthening market for our products.

To sum up -- with our strong first quarter results, we're off to a solid start in 2012. We continue to execute our strategies and remain focused on outperforming the market. While the pace of the market recovery remains uncertain, we are seeing increasing strength in the home products market and have increased our outlook accordingly. 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 market recovery.

Now, I'd like to turn the call over to Lee, who will review our financial performance and provide more details on our revised 2012 outlook. Lee?

Thanks, Chris.

As Brian mentioned, the majority of my comments will focus on income before charges and gains, which best reflects ongoing business performance.

Let me start with our first quarter results. Sales were $799 million, up 12% from a year ago; again outperforming the market for our home products, which was up an estimated 4%. Consolidated operating income for the quarter was $21 million, up $18 million compared to the same quarter last year.

There are three items to note that impacted first quarter operating income. First, the market for our products was stronger than expected, at an estimated 4% growth; versus a previous expectation for a relatively flat market in the first quarter. Second, some of our businesses saw channel partners rebuild inventory levels. Most notable was the wholesale channel for Moen, where we believe an estimated $12 million to $15 million in sales increases may have come from inventory rebuilds. And third, our tool storage business enjoyed an estimated $8 million to $10 million sales increase from retailer-driven promotional activity.

EPS were $0.08 for the first quarter, up $0.08 versus the same quarter last year.

Now, let me provide a little more color on segment results. Plumbing sales for the first quarter were $244 million, up $41 million or 20% versus the prior-year quarter. Operating income was $36 million, up $11 million or 41%. The increase exceeded our plans, with sales gains across the business, with the largest growth of approximately $24 million coming in wholesale. And China was up $6 million. These sales gains were the primary driver of the higher operating income.

First quarter Security & Storage sales were $129 million, up $20 million or 18% versus the prior-year quarter. Operating income was $12 million, up $6 million and well ahead of plan, due primarily to higher sales across the business, with the largest growth in retail padlocks, global safety and tool storage.

Windows & Doors sales were $113 million, up $11 million or 11% from the prior-year quarter. The operating loss for this segment was $10 million, a $3 million improvement to the prior year and above plan, driven primarily by higher sales and efficiency improvements, which were offset somewhat by product mix. While we continue to cautiously watch total capacity in the broader windows market, we expect our Windows & Doors business to be profitable for the full year and meaningfully ahead of 2011.

Our Cabinet sales were $312 million, up $12 million or 4% over the prior-year quarter. The operating loss for the segment was $4 million, versus a $2 million loss in the prior year, due in part to higher fuel cost. But both the sales and operating loss were on plan.

The first quarter is seasonally our lowest-volume quarter across our businesses, with less leverage against fixed cost. We expect our Cabinet business to be profitable for the full year and significantly ahead of the $18 million earned in 2011. We still expect a lag in purchases of larger-ticket items to continue that impact in the near term but expect significant growth in the second half of 2012.

Turning to the balance sheet -- our March 31 balance sheet ended with cash of $121 million, debt of $431 million, and net debt-to-EBITDA leverage around 1.1 times. Free cash flow was only slightly negative in the first quarter and significantly better than the prior year. The first quarter is seasonally our period of highest cash use. We believe our strong balance sheet, combined with the growing free cash flow, provides flexibility to maximize shareholder value in a variety of ways.

Let me now provide further details on our updated outlook for 2012. As we said last quarter, our approach to planning and providing our outlook has three elements, which are -- a market assumption, continued share gains, and business investments.

First, with the strength we saw through the first quarter, our market assumption is now closer to published market consensus due to the broad nature of the current market strength. However, we continue to project the market for our products to lag in this early stage of a potential recovery due to our mix of larger-ticket items, such as cabinets. Second, our plan still includes continued share gains in addition to the overall market growth. And third, we will make investments across the business that should provide returns in 2012 and beyond.

While we're cautiously optimistic about 2012, we expect significant growth in the out years and want to invest ahead of this opportunity. Therefore, in the second and third quarters, we'll make a significant portion of the $20 million of incremental investments that we mentioned on our last call.

Turning to the outlook details -- as Chris mentioned, for the full year, our revised planning assumption is that the market for our products will be up mid-single digits. This assumption is based on the market continuing the strength experienced in the first quarter. Based on this market assumption and continued share gains, we expect our 2012 sales to increase high single digits compared to 2011, with all segments increasing.

While first quarter sales increased 12%, excluding the increases from inventory rebuild by channel partners and the retailer promotion of tool storage, our run rate for sales growth was closer to 8% to 9%. This run rate supports our outlook for high-single digit growth for 2012.

We expect our 2012 EPS before charges and gains to be in the range of $0.77 to $0.87 based on our revised market assumption. The midpoint of this range represents an increase of 37% over 2011 revised EPS of $0.60. Due to the pace of investments in the business expected in the first half of 2012 and the lag in consumer spending on large-ticket items like cabinets, we expect the main impact of our increase in EPS guidance to come in the second half of the year.

We expect 2012 free cash flow to be in the range of $200 million to $225 million after CapEx of approximately $80 million, pension contributions of $20 million, and around $50 million in proceeds from option exercises.

In summary -- our business model continues to perform well. And we are pleased with our first quarter results. While we've raised our outlook for the full year based on the expectation that the current market growth will continue throughout 2012, the pace and steadiness of the market growth is not certain. But regardless, we believe that we are positioned well to leverage our foundation of leading brands, efficient supply chains, proven management team and strong capital structure at any pace of recovery.

I'll now turn the call back to Brian.

Thanks, Lee.

That concludes our prepared remarks for the first quarter. We'll now begin taking your questions, and we'll continue as time allows. Since there may be a number of you who'd 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 will now turn the call back over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) Dennis McGill, Zelman.

Just a first question that has to do with the good problem of cash that you're generating and no real, clear use for it. So if you end the year on par with your guidance, you're going to have about $325 million in cash against that $430 million of debt. And I think initially, when you've talked about share repos, it's just been with the idea that you need to have some confidence that the market's turning. So if everything evolves as you've laid out, it seems like that would be in place. Can you just talk about sort of share repurchases versus debt pay-down -- how you would think about using that cash this year?

Sure, Dennis. As you say, a high-class problem.

Yes, I think we on the Board will talk that through. We are contemplating either share repurchase or dividend or acquisition as kind of the three uses of cash. And what we've said is, over the next five years, we expect that we'll do some of all of the above. I think, in terms of share repurchase, [let's] see where we're valued relative to intrinsic value, and consider that. We've also had some feedback from investors around the dividend.

So we're going to be efficient with the cash. We're not just going to accumulate and pay down debt or stockpile cash. We'll be efficient and use it to create some value.

Would you suspect that some action would be taken before the end of the year?

I would say it could. That would be the earliest, I think. If you look at our cash usage, second quarter, third quarter, early part of fourth quarter, we're still using cash as the business is performing well, and net user. And then we release a lot of cash in the fourth quarter. So that would be the earliest.

Okay.

Second question -- you mentioned, I think in a couple of different product categories, some inventory build at wholesale, and that aligning with more the new construction market. In your opinion, do you think that that's a catch-up to lean inventories, or is that a statement about the future in seeing backlogs build that people are getting ready for?

No, I think it's a catch-up. They were pretty lean coming into the year and built it in a very deliberate way. And so I don't think we saw -- if I compare it to what we were looking at back in 2010 -- felt like it was surging in 2010 -- now I think people are just being a little bit more disciplined around the whole thing. So I looked at it and saw that it was basically not [want to] go stock out, so bringing a little bit of inventory in so that they could service the expected business. So I thought it was pretty healthy in terms of the pace.

So from this point forward, you would think that demand's going to match up with the actual production?

I think so, unless we saw a real surge in demand, or new orders on the housing side -- therefore the expectation of product requirement. But I think if it's kind of a stable, gradual upward shift, that we'll see a good basically reorder-to-demand type pattern.

Okay. I appreciate it. Thanks, guys.

Thanks.

Dan Oppenheim, Credit Suisse.

Was wondering if you could talk about some of the free cash flow guidance clearly increasing a lot more relative to the guidance in terms of earnings. Any drivers of that to point out there?

I think the two drivers of the increase in free cash flow -- one would just be the operating profit and the EBITDA improvement. And the other is we're seeing the exercise of our options with the good performance in our stock price. So that's going to, we think for the full year, give us at least $50 million in free cash flow just from option exercises, which is obviously higher than normal. So that's the other piece. But the operating results are good as well.

Right. Okay.

And then, second question -- we talked about the Cabinet business, expecting improvement there during the second half of the year. How were the trends during the quarter there? And I guess, seeing any signs of improvement there, given some improvement in the housing cycle?

Yes. We were pleased with the results of the quarter. And it's lagging a bit. The category's lagging a bit, as you'd see kind of major appliances lagging a bit, to the overall category. But we saw positive performance on our side relative to the overall market. And we're navigating through the promotional environment. We kept discipline, kept our promo level constant. And frankly, our position in the dealer channel, being the leader in the dealer channel -- we performed quite well there. So we're kind of taking the business as it's coming and looking for the spots that look attractive.

Thank you.

David MacGregor, Longbow Research.

Can you just give us kind of a quick comment on each of the four businesses with respect to raw material outlook?

Sure. Yes, we came in, David, in our last call and basically said, from a raw material commodity cost perspective, we expected about $35 million in higher commodity cost in 2012. And we've generally been on plan with that in the first quarter, with probably the exception of -- diesel fuel was a little higher. We saw that up mid-single digits, or actually high single digits, in the first quarter. So that's a little bit higher. We're seeing a little creep up in steel. And we're actually seeing a little bit of increase to mid-single digits, or maybe even a little higher, on China source components there.

But generally, it's at this point within our expectations of what we had coming into the year, but with a little pressure on the upside.

So does that mean we're going to see more of that in, say, the plumbing category? Or --

Yes, I think --

-- how does that play out across the reporting segments?

I think there's two places you would see it. To the extent steel is a little higher, you could see that in our Master Lock tool storage business.

And in our Therma-Tru steel entry doors.

Yes. And then, to the extent it's brass and copper and zinc, you'd see that in the Moen business.

Okay.

And then, second question, just on the windows business -- I'm just trying to get a sense of where the breakeven revenue level might be. It looked like the business leveraged it kind of like a high-20s contribution margin this quarter. Is that how we should think about watching revenue growth before we get back to the black?

First thing I'd say is the first quarter is kind of tough because the volume in both Cabinets and Windows & Doors seasonally is at a very low point. So you'll see better evidence, kind of second quarter, third quarter, of where that business goes. We'll be profitable for the year. But we're running it just kind of, for the year, probably slightly over breakeven levels.

Is high 20s kind of a good contribution margin to be thinking about for that business?

Actually, we think yes, high 20s is good. Because it will -- it's more of a fixed cost business, and it will level well. Especially at the door side of the business, it'll lever well as recovery comes.

Okay. Thanks very much.

Ken Zener, KeyBanc.

Just a couple questions here. On the Cabinets -- last quarter you talked about, I think, a $5 million impact from discounting. How did that go in the quarter? And what are you seeing out there in the landscape?

So we held constant the last year. So for the quarter, we kept our promo spending at what it was. I wish I could tell you the rest of the category was as disciplined. So I think the place you see it most heavily is in the home centers in special order. So that remains competitive. I'd say it's not as bad in terms of the level of increase. But there's others who are definitely still discounting above where they were last year. We're trying to manage it, as I said, as disciplined as we can. We're still doing well in the home centers, but we're not chasing every last dollar there. We've got strength in the dealer market, which isn't as heavily discounting. And so that's really helping us. And then, the builder business, which is kind of more straight up the gut.

So I think that's kind of the general environment out there. We're hopeful that it'll rationalize over time. But we're just not going to chase every revenue dollar out there.

Okay.

Then, related to the growth as well as the margin, since you're talking about a pickup in that business in the second half -- how much of that is kind of, in your view, tied to the new housing? And then, with Moen, the load in of $12 million to $15 million -- that's about 7% of the 20% that you had -- should we be assuming that you were growing that kind of the core demand? If that was the load in -- 12%, 13% growth -- is that kind of the core demand you were seeing in the first quarter? Might there be easy comps? You talked about China, but --

Yes, your math is --

[Thank you].

Your math is right -- Moen was up 20%. About 7% was the load in. 3% was China, and then the balance is kind of just that core growth. So that core growth, if China continues to grow at this pace, is probably 10% to 13%.

Yes, we have very strong market share with the builder marketplace. And so as the builders start getting busy again, wholesale has got to be there with the inventory. So those things are pretty highly correlated.

And then -- are you still there? The padlock --

(Inaudible)

The padlock -- can you just kind of describe the volatility that -- obviously a very strong delivery -- you talked about the storage. Should we expect kind of lumpy results? Or is that kind of something that would carry through for a couple quarters? Just give -- you broke down the plumbing piece down nicely -- could you help a little bit on the volume or the percentage that you saw in the Security Storage, terms of the quarter, [versus] load in?

Yes. I think you have to break Security & Storage down into two pieces. So sales were up $20 million. The storage piece was about $12 million of that $20 million. So we don't think that will recur at the same pace, because we saw some heavy promotions, as Chris said.

So just a little background on that -- that is a heavy promotion-driven product category. Typically you see it around the holiday season -- every promo sell-in, every promo around Father's Day. This was a little bit off-cycle. And it was explained to us that they had a very strong tool selling season over the holidays. And so, storage seemed to make sense, and we brought a bunch of new products in.

So I'd say that will be lumpy. I think that's the word you used. I think that is a bit lumpy around kind of when they're promoting. And they're the ones kind of doing the promoting.

On the securities side, the $20 million increase -- $8 million was security. And that's just pretty strong, consistent US retail commercial.

Yes.

Global safety is strong. So that's pretty consistent business.

Yes. A lot of new products coming in in that category, and that safety business is growing globally. What's happening is that as operating, manufacturing environments around the world are looking to standardize around safety protocols in their factories, they're looking back to the US to the ERISA regulations. And all of our products provide kind of comprehensive solutions around that. And that's what's really driving that growth.

Thank you.

Peter Lisnic, Robert W. Baird.

The first question, if I could, just on the comments of the inventory load -- were there any particular product categories where you saw stronger sell-through than what you put into inventory in the channels?

I'd say other than doors and faucets, where we've talked about the inventory, everything else was sell-through. So there was not a lot of inventory everyplace else. It was really just some wholesale faucet volume, which Lee just kind of walked through, and then some on the door side through our distribution. But otherwise, all of our sales was basically to demand that we're seeing.

So as of today, you're pretty balanced across product categories.

Yes.

Okay.

And then, for Cabinets, I'm just wondering if you can give us a couple reads on Canada and what the demand trends there are like. And then, on the US side, with the promotional environment being what it is, just wondering what the success of the Martha line might be like. Is that being slowed by the fact that you've got aggressive competitors in that channel? Little bit of color there would be helpful.

Yes.

So Canada -- we had a big set of wins up there over the last 18, 24 months. We took on the Thomasville line at Home Depot, and we've also been growing with our Kitchen Craft line up there through our own dealer network. And that market picked up a little bit in the first half. It'd been -- kind of finished up the year kind of quiet. But it's picking up a little bit, especially in the urban markets -- in Toronto and Vancouver, we're seeing more activity.

Early signs of a little bit of promotion up there. I don't think it's anywhere near the level that we're seeing here. But a few folks are getting aggressive. But that remains a good, solid cabinet market for us.

Down in the US, in terms of promotion impacting Martha -- Martha came in -- the line is really priced at kind of entry-level pricing. It's great value for money. And so it's actually standing up well in the promo environment. Everything's getting some pressure because of promo, and we do a little bit of promo support on that. But from a price point, it's actually a great value, great-looking designs at affordable prices, so extending up. And we've just rolled in some new door styles into that line in the fourth quarter. Those are picking up traction as we're in the season [year]. So we would rather do that sort of thing, in terms of spending the money on some innovation and some new styles, than just kind of heavy promotion.

Okay.

And then, if I could sneak in one last one -- talked about capital allocation, but deal pipeline -- any sort of color commentary there would be great.

Yes, it's still a little slow. I think my expectation is it'll pick up here over the next 12, 18 months. I think what we saw, if you go back to 2010 -- we had a nice nine-month run on the home product market and housing market, with the new homebuyer credit. And that summer, you saw some activity where some companies all the sudden were kind of willing to sell. I think if we see the kind of year that we're talking about in our outlook here, by the end of year and maybe into the early part of next year, you could see some more activity start to flow out of there. So it's still a little quiet right now.

Okay. Perfect, thank you very much for the color.

Thank you.

Justin Maurer, Lord Abbett.

Just a follow-up on the incrementals -- so faucets -- if the amount is right, 27%, and hardware 30%. Is that -- and I think you guys mentioned the Windows & Doors, 30%? So all kind of within that range? Or is it fair to say, [particularly] in the Cabinet side, as the volume starts to build -- could those potentially be higher, you think? Or is that too far off?

No, your math is right on the quarter. And I think if you go to the full year -- and let me just frame the issue -- in the first quarter, as we said on the last call, we basically -- if we weren't making incremental investments, the whole Company would lever around 27%.

Okay.

But because of those $20 million roughly of investments that we would make, we'd probably take the year down to about 15%. But those are very strong investments, and they pay back very highly. So that's a backdrop. In the quarter, first quarter, with those investments in there of about $5 million, we levered about 21%.

Yes.

And if you back out those investments, total company was about 27%. But you're right -- we had Moen levering at 27%, and Security & Storage at 30%. So very much within our expectations.

If you take our outlook and go to the midpoint of that outlook, with about $20 million or so of incremental investments, for the full year we'd lever around 23%. If you back out that $20 million, we'd lever well over 30%.

[Yes].

And that's at the midpoint of the outlook. So we feel very good. It's right in our range, it's right where we thought, and things are working well.

Okay. And the big buckets of the incremental again, in terms of spend -- sorry, the $20 million -- are what?

Yes, it's really spread over the Security & Storage Moen, and some in Cabinets. And it's kind of pieces here and there. It's some systems work in Cabinets, it's Moen. In Moen, it's in China. It's a little bit of advertising increase to drive the brand. In Security & Storage, it's some international infrastructure, some digital security solutions, so things that really have good, quick paybacks.

Okay.

Thanks. Good job, guys.

Thanks.

Robert Wetenhall, RBC.

Hi, this is [Desi], filling in for Bob. Thanks for taking my question.

With regards to the windows unit -- you talked about -- there was some product mix that offset some of the gains, the efficiency improvements. Can you talk a little bit about that?

Yes. In that business, it was modestly -- the operating margins or profits were modestly pushed down, basically just because of mix. Doors would be a part of that, where you're seeing consumers, and I don't think it's specific to our business. Consumers are still being very cautious. We're very early in a recovery. So they're generally moving towards kind of lower-price point products within the same range.

All right. Thanks.

Joshua Pollard, Goldman Sachs.

Thanks for taking my question.

I really wanted to get around a comment you made about some gains and losses in the Cabinet segment specifically, at the home centers. Could you talk and give a little bit more detail about that? And also, if you could talk about how you guys are faring in the Lowe's line review, that'd be very helpful.

Sure.

First, in the home centers, Cabinets -- for the quarter, we're up in the home centers. The place where we see pressure is in special-order semi-custom, which is where the heavy promo is. And we had some gains there, we had some losses there. So if you look across the home centers, it kind of -- they were up some places, down some places. And it was kind of week-to-week, month-to-month.

Again, we held consistent. So where somebody was surging on promos, they did better than we did. And where they weren't surging, we did as well as better than what they were doing. So that's kind of the dynamic across there. It's about what we expected, so we're in line with where we were planning.

On the Lowe's line review -- I'd say you win some, you lose some. If we look across our businesses -- and Lowe's has talked a lot about the line review, and kind of the accelerated process, so they took all of our businesses through that process in the quarter. And we came out ahead in some places and didn't do as well in other places. If you net it together, we about broke even. And so that impact is reflected within our guidance that we gave out.

They're a very important customer to us. We work closely with them. And in the categories that we picked up some business, obviously we're very excited about that. Places where we lost a little bit of business, we've still got important product setups there, and we're driving growth in those categories.

So altogether, kind of well-run professional process that they took everybody through. And we're soldiering on.

Okay.

And then, can you talk about -- first off, I would love if you could give more detail on what products you gained, and which one you lost in [in] that Lowe's review -- that'd be helpful. And then, my real follow-up is -- can you talk about your trends by month, sort of where your revenue growth came in by month? I'm ultimately trying to understand if you exited the quarter at an accelerated path. And any comments on how things are faring in April? Thank you.

Sure, that's fine.

So in terms of gains and losses, I'll just speak broadly. We picked up some business in cabinets and in security, and we lost a little business in faucets and in doors. So it's about the scope of how we did.

In terms of trend and pace, Lee can give you a little bit more. But if I look at the quarter -- January was a little quiet. We saw a little bit of momentum coming out of December, but nothing to write home about. February picked up, and we were encouraged. March was about same level. And April is running kind of consistent with the average of the quarter. So April's order patterns look good. I mean, I don't think it's like -- we're not jumping up and down here, but it is consistent, and it's broad. And so, that kind of gives us the confidence to give a little bit more of a higher outlook on the marketplace overall is kind of -- how wide we're seeing it four months into the year already feels pretty good.

So, Lee, I don't know if you want to add anything else?

Yes, I think that's -- I think Chris is right. We built some momentum during the quarter.

Thank you, guys.

Eric Bosshard, Cleveland Research.

One question in terms of demand -- the guidance for revenue's fair; looks like it's three or four points better. I'm just curious if you could help understand a little bit of what you're seeing -- if that's on the new side or the repair/remodel side. And then also, I think you made a little bit of a mention of it in the release of how you're thinking about the influence of weather helping get some houses started sooner, and how you're thinking about that within what you're seeing and what you're projecting.

Yes. I think as we looked at it, and we saw that -- to frame it -- at the last call, we talked about market growth at 1% to 2%. Now we're talking about mid-single digits. And we're seeing that through R&R. We originally thought R&R would be at 2%; now we think it's closer to 4%. And on new construction, we now -- we originally thought it was in the mid-single digits. Now we think it's to the mid- to high teens. So that's what's really driving our projection.

And the reason -- when you think about market growth for us, that's about a 3% to 4% improvement in our outlook in market growth. That leads to about $0.12 in EPS. So if you look at -- the midpoint of our guidance in the last call was about $0.70, the midpoint of this call is $0.82. So that's basically the $0.12 -- it's market-driven.

And the other thing from the top line that we think about is -- we take the first quarter, and you dissect it, and you say we had a 12% sales growth. But you back out the one-time items that we've talked about -- the inventory build in wholesale, for example, and the tool storage -- and you get to a run rate of 8% to 9%. And we think that's kind of consistent to that high single digit sales growth that we talk about in the outlook.

And then, the second part of your question, I think, was weather and its contribution. I think, obviously on the new construction side, to the extent they can break ground, there are places in the country that could start building sooner. So that probably backed up some of the demand into the first quarter that might've been sitting in the second quarter. But the outlook for the year, I think, is -- at least, we're looking at it -- is a bit higher than where we were in January overall.

And then, on the R&R side, I think the biggest category where it impacted was in windows, where historically January and February are really quiet months, especially in the North, because people don't want to open up their houses. And this year, they were doing window projects. So that clearly benefitted that.

But that business, we're still seeing pretty good order patterns into April. So it didn't just completely suck inventory or project work out of April into the earlier part of the year. There's still a decent pace of activity there.

And I'm sorry to make you repeat yourself a little bit. But in terms of the 8% to 9% in 1Q that you think is sustained through the year -- I guess what I'm trying to understand is what is giving you the confidence that the weather that maybe helped the 1Q, that doesn't continue to help, is offset by improved underlying growth. Can you just talk a little bit more about what you're seeing in the business that suggests that the weather benefit that helped 1Q will be replaced by better underlying demand, so that that 8% to 9% can be sustained through the balance of the year?

Yes. Probably one of the larger points to the second half is the Cabinets lag. We think it lagged in, just in normal course, cabinets -- larger-ticket items lagged in the first quarter. We think we'll see some lag into the second. But in the second half, we would think it would start catching up. So that's a big part of the second half.

Okay. Thank you.

Matt McGinley, ISI Group.

I have a question on some comments you made on the retail channel. In your prepared remarks, you talked a lot about how China builders and the dealers were driving a lot of the strength in many of your channels. But I assume that retail is up. But when you think about it in the context of -- your sales were up 12%, and I believe you said the market was up 4% -- how much was retail up respective to those other segments that you saw?

I'd say kind of mid- to higher single digits in the categories that we're in that are heavily retail-driven. So mid-single digits is pretty solid. There were a couple of places where we saw higher-single digit growth in retail. It was reasonably healthy. And it was pretty much kind of ordering to demand. So not a lot of inventory build within retail across the board -- if I average across, there's maybe a little bit of inventory in some places, and a little takeout in other places. But across the board, look pretty stable.

So the point-of-sale data you would've seen from many of those retailers, you didn't see the demand higher in the first quarter versus what shipments were?

Not really, no. Not across the board, if you average everything out.

Got it.

And then, on the Cabinets side, you had a modest decline in the profit rate in terms of Cabinets. What drove that? Was that a mix shift of the builders that caused that to be a less profitable segment?

Yes, there were a couple of pieces. And again, you're right at the margin here. So it's small dollars, it's a couple million dollars. But we saw a little bit higher fuel cost in the first quarter --

Transportation logistics cost. I'd say there's a lot of logistics cost in that category. So there was a little bit of a bump there relative to plan.

Okay. Thanks a lot.

There are no further questions at this time. I'll turn the call back over to Mr. Lantz.

Thank you, Jessica.

We'd like to thank everyone for attending our call today and look forward to speaking with many of you again very soon. Thank you.

Today's call was recorded. A replay of this call will be available this evening through midnight, May 10th, by dialing 1-855-859-2056 and using the conference ID number 67488957.

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