Fortune Brands Innovations Inc (FBIN) 2012 Q3 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security third-quarter 2012 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).

Thank you. 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 third quarter of 2012. Hopefully everyone has had a chance to review the news release we issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our FBHS.com website.

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

Also, any references to operating profit, earnings per share, or cash flow on today's call will focus on results on a 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 the prepared remarks, 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 everyone for joining us today. We had a very good third quarter, which marks our first anniversary as an independent public company. Our core performance was driven by strong growth in sales and profits and was broad across their businesses. We continue to drive profitable growth in a market which continues to recover at an uneven pace.

Let me first spend some time on third-quarter highlights, and then I'll discuss our current thoughts on the full year.

First, with regard to the market, the overall home products market and the market for our products again grew mid single digits in the quarter, in line with our assumptions. New construction was strong again in both single-family and multi-family starts, and the pace of repair and remodel spending increased in the quarter as we expected with continued consumer caution for big-ticket purchases like cabinets.

Importantly, we continue to feel confident about our performance in this market and the execution of our strategies as we enter the final quarter of 2012.

Turning to our performance in the quarter, sales were up 7% and profits were up 34% from a year ago with all segments performing well. Cabinet sales grew 6%, ahead of our estimates for Cabinet market growth, which we think improved to roughly 3% in the third quarter. Importantly, our profits from cabinets were up over 60% in the quarter.

Moen continued its strong performance with sales growth of 12%, consistent with the prior quarter. Windows and doors sales were up 7%, and as expected, the segment generated strong profit gains. Security & Storage grew 2%, and within the segment, Security sales were up 6%. Now let me give you some top-line highlights by segment.

Sales in our cabin business were up around 6% for the quarter and met our expectations. We continue to perform well as the market leader in cabinets. The pace of new construction was a key driver as we again saw strength with dealers and builders in our new construction lines. In the dealer channel, where we're the clear market leader, we continue to grow by leveraging our portfolio of brands and our strong product and service reputation.

We also achieved solid growth in home centers by focusing on more sustainable long-term growth opportunities such as our recently-introduced value price point door styles for the Thomasville line at the Home Depot and the expansion of our vanities line at Lowe's. We believe innovation and our designer services continue to be competitive advantages in this channel.

Notably, we grew our Cabinet profits over 60% in the quarter. This performance reflects our ability to successfully target growth in channels, markets, and product segments that are not as promotionally driven, while continuing to enhance our supply-chain efficiencies to improve profitability. We continue to believe that our market leadership, combined with our world-class operating platform and service levels, provides us the strategic flexibility to drive profitable growth today and into the future as the Cabinet market recovers.

Plumbing sales were up 12% in the third quarter. Moen again saw gains in both the US and in our international businesses, particularly China. Gains were strongest in our US wholesale business where we saw continued volume increases driven largely by the pace of new construction. Our efforts over the past few years to build on our leading market share with the top builders and wholesalers, expand in the multi-family segment and upgrade many of our showroom displays have yielded strong results all year and continue to drive sales and profits in the third quarter.

Moen also continues to see strength from our steady pace of consumer-driven innovations. Spot-resist finishes are rolling out to more and more styles. Our successful Reflex technology for pulldown faucets will soon be launched in pull-out versions. And Moen's latest innovation, motionsense, a unique hands-free electronic kitchen faucet has recently began shipping into both retail and wholesale accounts.

Internationally, sales in China where there are now nearly 700 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 our wider range of price points and with products tailored to the Chinese market.

Window and door sales were up 7% for the quarter. Door products, which are heavily driven by new construction, saw double-digit sales gains. We also benefited from the recently-launched relationship with a major window and door company and growth in our wholesale distribution. Windows sales were up modestly, driven by new products and growth in targeted channels as the overall window market remained sluggish.

Importantly, for our three housing-related segments, we saw total sales increase 8% for the third quarter.

In Security & Storage, our sales were up 2% in the quarter. Security again saw broad gains, up mid single digits, driven by three factors -- continued solid growth in global safety solutions; innovative new products; and broader placement in retail, especially for the back-to-school season; and strong commercial lock sales. The Master Lock brand is strong, and our innovation continues to hit the mark with products like our new electronic combination lock, Dial Speed.

So to sum up the third quarter, the market continues to be led by significantly stronger new construction and a repair and remodel market that, while growing, is not yet as strong as the new construction market. I remain very pleased with our performance across the portfolio for both the quarter and year to date.

With a successful full year as an independent Company now behind us, we continue to execute on our strategies, innovate, and invest to capture profitable growth opportunities and leverage our market-leading positions.

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

From a market perspective, we continue to see signs of improvement relative to a year ago and a firming of the overall market as we enter the fourth quarter. While consumer-related challenges in the housing market remain, new construction was strong in the third quarter as demand for new homes outstripped supply in many markets.

Repair and remodel growth continued at a modest rate as we expected. It showed less strength than new construction. Concerns about the general health of the economy and the pace of recovery are still weighing on consumers' confidence and their willingness to embrace larger-ticket purchases.

Our updated full-year plans remain built on an assumption that the total market for our home products grows at a mid-single-digit rate. Within that assumption, we continue to expect repair and remodel growth rate of around 3% to 4% and a new construction growth rate of over 20%. Given our exposure to the slower growth Cabinet market, 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.

So, consistent with my comments last quarter, based on that market assumption, we continue to expect our 2012 full-year sales to increase at a high single-digit pace over 2011, although at the lower end of that range. Our market share gains in the past few years are now beginning to deliver growth, and we believe these shared gains position us to continue to outperform the market for our products as it strengthens.

Importantly, with only one quarter remaining, we're narrowing and raising our 2012 EPS guidance range to $0.86 to $0.88 for the full year.

Now I'd like to briefly update you on a couple of exciting recent organizational enhancements. Although a recovery appears to be underway and our performance is strong, we remain keenly focused on staying a chapter ahead of the competition to capture profitable growth both during and beyond the recovery. Therefore, as part of our talent management processes, we've recently made key strategic refinements to our organization, which we believe position us even stronger for our next chapter.

First, we believe the windows and door businesses are now positioned to leverage common growth opportunities managed together. So the window and door segment will now be under the leadership of one operating president, Mark Savan, who will lead the team as they pursue some common growth opportunities. Mark has been with Fortune Brands for over 10 years, and he's led our signage and window business through the downturn and previously led our Accessories business at Moen.

The second move we made was to match one of our most seasoned executives with our largest business in the early stages of recovery. Dave Randich will now head our industry-leading Cabinet business. Our Cabinet business has performed very well through the early stages of the recovery, but with Dave's experience, we believe we can now maximize the potential of all of our shared gains through this next phase of the industry's recovery. Dave most recently led our Therma-Tru Doors business through the downturn and has nearly 30 years of experience in managing within the building and residential products industry, including 24 years at Armstrong.

Both of these moves reflect our culture of continuous improvement built on our commitment to have the best management team in the industry and should better position these businesses to optimize opportunities both now and beyond the recovery.

So to sum up, driven mostly by new construction, the overall market remains firm. We've had strong year-to-date results, capped off by another strong quarter, and we're confident in our ability to deliver on our full-year guidance. We continue to execute our strategies and remain focused on outperforming the market. We expect to create value by capturing market share, expanding into adjacent markets, and improving our operating platforms. We believe our strong brands, management teams, and capital structure provide key flexibility to focus on profitable growth and should, therefore, position us to create value at any pace of recovery as we prepare to enter 2013.

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

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 third-quarter results.

Sales were $909 million, up 7% from a year ago. Consolidated operating income for the quarter was $73 million, up $19 million, or 34% compared to the same quarter last year.

EPS were $0.29 for the third quarter, up $0.09, or 45% versus the same quarter last year. Let me provide a little more color on segment results.

Our Cabinet sales were $330 million, up $19 million or 6% over the prior-year quarter. Operating income for the segment was $13 million versus $8 million in the prior year, up 64% as we benefited from leverage on higher sales volume through our continually improving supply chain.

Year-to-date operating income for the segment was $28 million, pacing well ahead of the prior year. Our strategy is working as planned. And, as I mentioned on our last quarterly call, we believe that we will continue to exceed the overall Cabinet market growth in the second half by introducing new products and expanding existing programs.

Plumbing sales for the third quarter were $278 million, up $29 million, or 12% versus the prior-year quarter. Operating income was $48 million, up $10 million or 25%. Both the US wholesale and China businesses experienced strong double-digit sales growth that drove the overall growth in both segment sales and operating profit.

Windows & Door sales were $158 million, up $10 million, or 7% from the prior year quarter. Within this segment, the Door business experienced double-digit growth, while the Windows business only increased slightly. Operating income for this segment was $6 million, $4 million more than last year as we achieved strong operating leverage on the incremental volume. We continue to expect our Windows & Doors segment to be profitable for the full year and meaningfully ahead of 2011.

Third-quarter Storage & Security sales were $143 million, up $3 million, or 2% versus the prior year quarter. Operating income was $21 million, up $1 million, or 4%. Within the segment, Security sales increased $6 million or 6% on the strength of US retail and commercial padlocks and global safety, while Storage sales declined due to changes in the retail promotional cadence.

During the quarter, we recognized net charges of $8 million, or $0.05, primarily related to the previously-announced closing of the Cabinet plant in Virginia.

Turning to the balance sheet, our September 30 balance sheet ended with cash of $216 million. Debt was reduced to $345 million, and net debt to EBITDA leverage is now less than 1 at around 0.4 times. We have nothing drawn on our $650 million revolving credit facility and are entering the last quarter of the year where we traditionally generate strong free cash flow.

Free cash flow was $167 million year-to-date, including approximately $80 million from option proceeds.

Let me now provide my thoughts and further detail on our outlook for 2012.

As we've said, our approach to planning and providing the annual outlook has three elements, which are market assumption, continued share gains, and business investments.

First, with the continuing firming we saw through the third quarter, our market assumption remains the same as we continue to project the market for our products to lag the overall market in this early stage of a recovery due to our mix of larger ticket items such as cabinets. Second, our plan still includes continued share gains in addition to overall market growth. And third, while we are pleased with our 2012 performance, we expect significant growth in the out years and want to invest ahead of the opportunity. Therefore, we continue to expect to complete approximately $20 million of incremental investments during 2012.

So turning to our outlook details, as Chris mentioned, for the full year, our planning assumption remains the same -- calling for the market for our products to be up mid single digits. Based on this market assumption and continued share gains, we continue to expect our full-year 2012 sales to increase high single digits compared to 2011 with all segments increasing. However, as stated before, the sales increase will likely be at the low end of the range.

Based on our market and sales growth assumption and with only one quarter remaining in the year, we are raising and tightening the range of our 2012 EPS before charges and gains. Our expectations for EPS are now in the range of $0.86 to $0.88. The new midpoint of $0.87 is higher than previous guidance and represents an increase of 45% over 2011 EPS of $0.60. We expect 2012 free cash flow to exceed $275 million after CapEx of between $70 million and $80 million, pension contributions of $20 million and over $80 million in proceeds from option exercises.

In summary, our business model continues to perform well, and we're pleased with our third-quarter and year-to-date results. We have raised the midpoint of our EPS outlook for the year. And while the pace and steadiness of market growth is not certain, year-to-date performance further indicates that we should be well positioned to continue to outperform the market at any pace of recovery by leveraging our foundation of leading brands, efficient supply chains, proven management team, and strong capital structure.

I'll now turn the call back to Brian.

Thanks, Lee. That concludes our prepared remarks for the third quarter. We'll now begin taking your questions and will 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. Mike?

(Operator Instructions). Bob Wetenhall, RBC.

Fantastic quarter. You're obviously doing a great job of outpacing the category like you've been talking about, and thanks as well for all the detail.

I just wanted to ask Lee, in your press release, you really have no leverage. You are at 0.4 times. You're on track to generate $270 million of free cash flow. What's the plan given very, very low leverage, investment-grade quality balance sheet and all the free cash flow. What's the purpose -- what are you going to do with the extra money?

I will answer it, and then I'll turn it to Chris and let him talk about our long-term prospects. But we are generating a lot of cash right now. Still only $200 million on the balance sheet at the end of the third quarter, but we're going to be patient. We do have an authorization for a share repurchase out there. It's a three-year authorization for $150 million.

But I would tell you that we're starting to see the pace of some M&A-type calls come in a little bit faster. So there might be some signs that over the next period of time we'll see a little bit more of that.

So it causes us to be patient and not rush. We have one goal, and that is to drive shareholder value to how we use this cash, and we're going to be patient and thoughtful to do that. And Chris, I can turn it over to you for cash.

I think what we said in the past is we're going to look for some combination of acquisitions, share repurchase, and eventually instituting a dividend. So that remains our long-term plan, and the timing will really be dictated by the pace of recovery and the pace of cash accumulation. But you're right. We're starting to accumulate, and we'll just be prudent with how we deploy it.

Okay. You guys have done a very aggressive job of disciplined cost management in terms of SG&A. And I was just curious, do you think there's further opportunities to drive SG&A lower as a percentage of sales? And if there is, how much is still available to get from that?

Yes, Bob, on the SG&A side, we've been very aggressive on taking costs out of here, and we continue to have continuous improvement programs that continue to take some out.

But I think the big leverage on SG&A going forward will be on the top line. I think as we drive sales and as we drive better margins out of that, we'll see the leverage on the SG&A. I don't think you'll see broad SG&A reductions as such, although you'll always get some from us. But the bigger issue on SG&A is just leveraging the top-line growth as this market recovers and as we continue to take share.

Got it. Thanks very much. Great quarter.

Thanks, Bob.

Dan Oppenheim, Credit Suisse.

Thank you very much. You're talking about in cabinets introducing a Thomasville value area. And I was just wondering as you think about the remodeling activity picking up where it's going to be potentially a bit less value focused, as you think ahead to, call it, 2013 or 2014, how is the product offering that you're thinking about for that in terms of margin-rich areas to help margins in that business there?

Well, the good news is we play across 80% of the price points in the market all the way from custom at the top end down to stock in stock at the bottom. So we're really set up to take wherever the consumer demand is and convert it, and we have a very strong semi-custom offering in the dealer network, as well as at all three home centers.

We've done a little bit of this drop-down, more value brands, and I think that is appropriate for a certain part of the population, and it will always be appropriate for certain consumer out there looking for good quality at a very reasonable price. We would rather do that and invest in those kinds of products than simply continue to promote and discount and basically give our product away. We'd rather match the quality of the product to the price point and deliver it. So that's our preference there.

But you're right. Over time, I think you'll see consumers starting to spend a little bit more. They can really get good value all the way up the continuum. So as they move up into a higher quality product, there is good value in that and then all the way up into custom.

So I just like the way we're positioned by channel and by price segment to really take the market however it comes back.

Great. Thank you.

Peter Lisnic, Robert W. Baird.

Chris, just on that last question, can you give us a sense as to whether or not you're seeing a consumer at all from a willingness perspective go up the price point chain and/or are whether or not dollar projects are increasing at all?

I haven't seen anything notable yet. I think there's still -- it's not getting worse, so that's good. For a long time, we watched the average price point go down. So I think the overall promo market is reasonably stable. We're still the least aggressive among the three in the promotional cadence, and we've seen consumers respond to that kind of quality and new products that we're putting in there without heavy promotion. So that's a good sign, too. But we haven't seen them aggressively start to move up that continuum. I think we're still waiting for a little bit more confidence in the market overall.

Got it, okay. And then you've done a very nice job obviously with share gains here in 2012. As you look to 2013, how do those share gains layer in when you think about 2013 growth and what sorts of growth opportunities from a share perspective might you have in 2013?

I think it really depends on how the market comes back. We worked hard -- what you're seeing right now is a byproduct of three to five years of activity across all of our product lines to gain share positions. We just didn't see enough volume flowing through them to convert it to revenue and profits. And so you're starting to see that, and you'll continue to see that.

So, on the new construction side, we'll continue to see faster growth for us than for competitors because we've got good, strong share positions. So, as you see, that new construction flowing through -- faucets, entry doors, some cabinetry -- you're going to see some of that drive through. And then across our other channels, similarly.

So it will really depend on more on where the volume comes back. We continue to bring in new products and are driving for new accounts every day. But I think the bigger leverage comes off of the volume coming into the share positions that we've got established.

Got it. That's very helpful. Thanks for your time. Nice quarter.

Thanks, Peter.

Dennis McGill, Zelman & Associates.

Just first question on the cabinets market. I think the incremental margins for this year may have been closer to 20%. And I think historically or as you look out over the cycle, you would hope or guide that to be something closer to 30%. So can you maybe just talk about puts and takes so far this year on what's limited that and how you guys think about that margin recovery in that business?

Yes, we have the expectation that we have over time on leverage on cabinets is part of the overall mix of 25% to 30% incremental margin. And I think what is happening as we see the sales growth, the volume growth on the base, we're going to see nice leverage.

So we'll get a volume component. But there's also a plant efficiency component that you are seeing this year. We have over the past several years as we've restructured that footprint, we've become much more efficient. And every day we work on efficiencies. We closed a plant in the third quarter just because we thought we could do that because the efficiencies were growing to a point where we wouldn't hurt long-term capacity, but we could become more efficient. And I think you are seeing some of those benefits.

I think as sales grow -- we're at that point right now, we're about $1.3 billion in revenue run rate basis, and that's kind of that point where you start really getting nice leverage over that footprint as it grows and as the market recovers. So I think that's what you're seeing now.

Okay. And then separately, with the guidance, correct me if I'm wrong, but it sounded like you bumped down sales guidance a little bit but bumped up the EPS range. So can you just talk to the puts and takes there on what changed relative to the last quarter?

Yes. Year-to-date, two, three quarters, we're up about 7.8%. We think 7% revenue guidance is a good number. You can be at 7% for the year and still have fourth quarter in that 6% to 7% -- 5% to 7% range. So we think that's reasonable given that -- R&R still remains uncertain. We think, as we've always told you, at least for the last two quarters, that R&R growth would be 3% to 4% annually, but still choppy. And so we're a little cautious there.

I think the real story is on the EPS side. Because two things are driving this ability to take EPS growth up on sales in roughly the same range. And that's an improving mix of our business and our supply chain efficiencies across our business. We talk about each of those.

So the mix is improving. That's a reflexion of our disciplined approach and our leadership across all of our business segments. We are growing and going after those businesses that have the high margin. And those are the ones that you see growing. You are seeing Moen grow 12%; Master Lock, 6%; doors, double digits. You're seeing the Cabinet growth at 6% being in the higher-margin fees just because we're not chasing the promotional stuff.

The things you're not seeing grow as much right now would be that high promotion cabinet things because we're just not going to chase the Windows. Lower margin, we're not going to chase incrementally low-margin stuff there. We still have strong business in Windows, but just not going to change that incremental low-margin sale.

And storage, which is low-margin, that is actually down a little bit in the third quarter.

So I think that mix is reflecting our discipline and our leadership in being able to grow those parts of the business that are going to drive the most profit. And that's a big part of our strategy going forward in this recovery.

The other thing is the supply chain efficiencies, and you're seeing that across all of our businesses. It's the things we've done in the past and that we continue to do from a continuous improvement and some modest restructuring now that allows us to drive that efficiency. So, as the volumes grow from a recovery and we continue to take share, you're going to see nice leverage. That's why we think 25% to 30% over the long-term is a nice leverage ratio.

And by the way, in the third quarter, we levered at 31%, even with some modest investment. So we feel good about where we are.

Can I just push on the 5% to 7% top line? What would be the driver either by segment or end channel for the deceleration? It would seem like you would have a tail wind and an acceleration of new construction, and you're describing a remodeling market that is holding pretty steady.

But I think as you look at the third quarter, you'd see home business was up 8%, and then our Security & Storage was up about 2%. And there's two pieces in that. The Security & Storage -- Master Lock grew nicely, but the Storage piece was a little lower.

Same thing with Windows. Windows only grew slightly in the business. So I think if you think the fourth quarter looks something like the third quarter in terms of sales, you could see that 7% number could be a little lower than that just because Security & Storage stays down at that 2% in Windows, given the R&R market being choppy right now. You could see it be at 6% or 5% or something.

But our business is strong. Our business momentum is strong. We feel good about that. We're just -- with the lumpiness of the R&R, we're just a little cautious on the top line.

Okay. I appreciate it. Thanks, guys.

Ken Zener, KeyBanc.

Given the rising demand, are you guys -- essentially a price question -- what was kind of pricing in the quarter, and are you able to realize price increases as any categories, and if so, is it more tied to demand or innovation?

Our pricing comes in two flavors. The first is to the extent commodities, there is commodity inflation. We're able to price, and it is pretty much dollar for dollars if you look at the last three- or five-year period.

Now pricing always lags the inflation increase, but it's a little sticky on the backend. So we tend to be able to price with that. And that's what we saw coming into this year and I think as we told you in the last two quarters, and that pricing has stuck.

The other way we get pricing is just through all the innovation that we do, and that's just embedded in that. So we feel good about our brand strength, our channel strength. That's what allows us to price the way we do. But we also want to be thoughtful about it. But we feel good about our ability to get pricing.

My follow-up, it's related to that, but the pricing, to the extent you're talking about dollar for dollar, given what commodity pricing has done, are you set to have actually somewhat of a tailwind next year?

And then second, if you could expand on comments perhaps with that channel, wholesalers or others are talking about it in terms of how they are carrying inventory -- are they pre-buying? Are they still running very thin? That would be good. Thank you.

All right. I'll take commodity and pricing increase to the last piece.

We came into this year saying that we would have a tail wind from pricing last year, from 2011. And we thought we'd have pricing of about $30 million tailwind coming into the year. And I think we said at the beginning of the year we'd have new commodity costs of about $20 million. We'd probably -- our new pricing of about $20 million, additional new commodity inflation of about $35 million. So we'd take that $30 million tailwind coming into the year; we'd get back probably $15; and we'd net out about $15 million of a tailwind this year.

And that's how it has played out. It's been very close to that. We may have picked up a couple of million dollars on some commodities that were a little better, but we've got other commodities that aren't. Hardwoods have not come down. Resins and paints have not come down. Diesel fuel still $3.90 or so for us. Labor costs in China is the other piece that has not come down, actually increased.

So we are kind of where we thought we would be for the year. I don't think we'll have any tailwind going into next year. I think we could have a flat to maybe a slight headwind, but it will be very manageable.

In terms of inventory, if we look across wholesale channels and then home sales channels, I would say folks are being pretty disciplined about inventory out there. We're mostly replenishing to POS. It's not perfect, but that is how they are ordering in. I think that's healthy. I also think they are relying on our ability to respond. We've surged and been cut off many times here over the last three, four years. And so unfortunately, we're getting pretty good at that, and we're pretty reliable in being able to meet demand. And so I think folks out there are just being prudent and not carrying too much excess inventory.

Have you picked up any business due to other competitors fill rates not being able to be as flexible?

Here and there. It's interesting. I think it's just starting. I think that will continue. But we've seen it a little bit because I'm not sure others are as flexible as we've become. And so we've gotten a little better than them, and we're watching it. That's just started to happen over the last six, eight weeks.

Thank you.

Michael Rehaut, JPMorgan.

It is Mike Rehaut. Nice quarter, everyone.

First question on the Cabinet segment, it looks like the industry is growing 2%, 3%. Last quarter you were just 0.5% of growth as you walked away from some of the more promotional type product. You've been able to get back with the 6% rate, and I think saying that you're still trying to stay away from the promotional side of the spectrum.

So I guess the first question really, the long-winded is, is the growth consistent from a market side? 2%, 3%, is that surprising you maybe on the downside? And any kind of color in terms of perhaps level of promotional activity as you have now gone -- had a much better growth number in the third quarter, has the promotional activity eased at all, or what allowed you to have that better rate?

So a couple of questions in there, I guess. First off, in terms of the marketplace, I'd say we're not at all disappointed on the new construction side. I think there's strong demand there. And while we're being selective there, too, there's plenty of demand to go around.

On the R&R side, it is just slow to recover. And I think you're seeing it across other big-ticket categories -- appliances, cabinets. Any place where it's thousands of dollars, consumers are still being cautious.

So it's improving. It's better than it was a year ago. I think it's more sustained. It's less up and down. It's more consistent. I think the fact that we were more disciplined over the last couple of quarters in promotion and yet really held our share positions in there speaks to the new product, the service, a number of other things, which is all good signs, because it means that consumers are discriminating, going with higher quality, better service. Designers are following.

So I think those are all good signs of a healthy recovering R&R model. It's just going to take a little while to gather momentum. I think that's the reality of where we're in.

So I'd say it's an emerging, healthy category. It is growing in the right ways at the right pace. I would rather have it do this and year over year build a little bit momentum as opposed to -- we've had a shot in arm and then fall back down again. I feel like this is -- we're on a good sustained track, but it's just going to take a little while.

New construction, I think, is going to be a continuing catalyst for some growth across cabinets and, frankly, across a lot of the categories.

And then in terms of the pace of promotional activity from Q2 to Q3, has that changed at all?

I think it's about the same. For us, we're flat to the prior year. Others are promoting on a higher level than we are, but they've been promoting at a higher level than we have for a while. So I think they are probably cycling flat, but at a higher level is the way I'd describe it. So that is what we're seeing.

We're pretty consistent; others tend to cycle in and out. But if I try to average it through, I think they're just -- if you total it all up, they're just consistent, say, at a little bit higher level. But it's not getting worse.

And how would you also characterize the plumbing markets growth relative to your growth? I mean I think if you perhaps strip out, let's say, and just look domestically, maybe you would take a point or two off the growth rate to adjust for China, but how are you looking at that type of growth rate relative to your own?

You know, there are no published indices for the plumbing space. I can tell you this. We've been very consistent. And the way I think you look at that is you look at the first three quarters of this year. In the first quarter, Moen grew 20%; we called out 7% of that being wholesale inventory fill where they were just building some inventory. We said China grew 3%, and the core grew around 10%. So that was your 20% growth in the first quarter.

In the second quarter, China grew 3%; core grew 9% -- 12% growth.

Third quarter, China grew 3% in terms of the points and your core grew 9%. So, 12% again.

So what we've done is settled into a very nice yet very strong cadence here of our growth, and we don't think anybody is growing faster than that.

Appreciate it.

Thank you.

Zahid Siddique, Gabelli & Co.

Just a couple of questions. The first one on the poison pill, I just wanted to confirm that it has expired. I believe it was supposed to expire in early October.

Yes, it has.

Okay. So there's no poison pill currently.

The second question I have is you mentioned that you are getting some calls on the M&A front. Could you comment on what areas are those calls coming from?

Yes, I won't go into any specifics, but as I say, it was kind of quiet up until the summer. And I expected that it would start to wake up over a 12-month, 18-month time period, and I think it has. There's a number of different sectors where things are getting busy again. And I don't think that surprising giving any business that is touching new construction is feeling the effects of a pretty good six to nine months here. And so you've got folks who have been waiting to maybe smaller business for quite some time, and a little bit of momentum builds a case for a better forward look.

So I think that pace will pick up, and we're just starting to see it. It's an encouraging sign. I don't think it's rushing ahead, but there's a little bit more discussion and chatter than there was certainly six months ago.

Thank you.

And your final question comes from the line of Stephen East from ISI Group.

Chris, could you just talk -- you talked that R&R is getting better, and I was interested in what type of trends you're seeing through the quarter with R&R. Really your channel performance is also -- you talked about new construction being strong, but was there an acceleration through the quarter, that type of thing and what you're really seeing at the home centers?

Sure. The thing with R&R, it's been an interesting year. Things start off strong, decelerated a bit as we moved into May/June, a little quiet and then woke up again August, September. And into the first couple of weeks of October, we're seeing water patterns consistent with what we saw in September.

So I think that 3% to 4% feels pretty good rolling through. I like the consistency across the businesses. I also like the geographic consistency. So that just says it's more tied to overall economic recovery, albeit at a pretty slow pace. If you look at GDP, look at credit availability, consumer confidence, it's a very slow walk. So it's picking up, and it's picking up consistently. And it's pretty widespread across a number of categories. And the one category we keep calling out a little bit weaker is the window marketplace is a little bit weaker in big-ticket. But I think it's moving across that direction.

In terms of channels, we've got wholesale channels in plumbing; we've got dealer channels in cabinets; we've got two-step distribution in doors. And I think they are responding to where the demand is coming back. So those that are heavily influenced by new construction are doing very well. I think where you see the channel is much more R&R-related. They're certainly doing better than they were a year ago, but they've got a long ways to go. So they starting to pick up, but it isn't a great charging growth.

Okay. Thanks. And then you talked about how you would grow and you mentioned expanding into related platforms. Could you talk about what you are doing now? I know you don't want to talk about what might come down the road, but what you doing now in looking at --?

Yes, we've got a number of adjacent marketplaces that we've expanded organically into over the years, and those are great opportunities to look at continued investment organically, as well as potential acquisitions or joint ventures.

So, if you look across our businesses in our Plumbing business with Moen, it's just such a terrific brand, great distribution both in America, as well as in China, and some other international markets. And so there are a number of things we can extend into under that brand that leverage the distribution, leverage the supply chain. So there's expansion opportunities there.

We look across our security market. Similarly with Master Lock, very, very strong brand, strong supply chain, great distribution, so where else can we extend into security products.

And you're going to see a lot more of these things at least organically coming out in terms of new product introductions over the next few quarters.

In Security, we are investing more and more into electronics. And so you'll see more electronic products that we're just getting ready to introduce right now. And so that cadence will build up.

That naturally leads to areas where you might expand through acquisitions because you could expand geographically or you could expand into some of these adjacencies and maybe get there a little bit faster. But I like to stay near the core to start and be able to extend some distribution, some brand, or some supply chain and then expand out from there.

There are no further questions at this time. I turn the call back over to Mr. Brian Lantz for closing remarks.

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

Today's call was recorded. A replay of this call will be available this evening through midnight, November 6, by dialing 1-855-859-2056 and using the conference ID number 37877566.

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