Fortune Brands Innovations Inc (FBIN) 2012 Q4 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 fourth-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. Mr. Brian Lantz, you may begin your conference call.

Thank you. 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 fourth quarter of 2012 and 2013 guidance. 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 Investor 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 the 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 are made. Also, any references to operating profit, earnings per share, or cash flow on today's call will focus on the 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 our prepared remarks, we have allowed ample time to address any questions that 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 an excellent fourth quarter and a terrific first full year as an independent public Company. Our quarter performance was driven by strong sales and profit growth, which came in slightly ahead of our expectations. We again outperformed the market for our products and continued to drive profitable growth as the market recovers. Let me first spend some time on the fourth-quarter highlights and then I'll discuss our 2013 guidance.

First, with regard to the market, new construction was again strong in both single-family and multi-family starts, and the pace of repair and remodel continued in the same 3% to 4% range, despite consumer caution for big-ticket purchases, like cabinets and windows. Importantly, we feel confident about our performance in this market and the execution of our strategies as we enter 2013.

Turning to our performance in the quarter, sales were up 8% and EPS was up 35% from a year ago, with all segments performing well. Cabinet sales grew 12%, ahead of our estimates for cabinet market growth in the fourth quarter, driven by new construction. Importantly, our profits from cabinets were up $15 million in the quarter and more than doubled for the full year.

Moen continued its strong performance with sales growth of 15%, slightly stronger than the prior two quarters, and profit was up 7%. Windows and Door sales were up 1%, and as expected, the segment generated strong profit gains. Security and Storage sales were down 4%, while profit was up 22%. Taking out the benefit of the fifty-third week in 2011, segment sales were flat to prior year and Security sales were up mid single digits.

Now, let me give you some top line highlights by segment. Sales for our cabinet business were up 12% for the quarter and exceeded our expectations. We continued to perform well as the market leader in cabinets, with strong results across the business. The pace of new construction was a key driver, as we again saw strength with dealers and builders in our new construction lines, while big-ticket repair and remodel continued to lag.

In the dealer channel, where we are the clear market leader. We grew by leveraging our portfolio of brands and our strong service and product reputation. We also achieved strong growth in home centers, where we focused on sustainable long-term growth opportunities. We believe innovation and our designer services continue to be competitive advantages in this channel, especially as we remain restrained in our promotional activity.

Notably, we grew our cabinet profits by $15 million in the quarter. This performance again reflects our ability to successfully target growth in channels, markets, and product segments that are not as promotionally driven, while enhancing our supply chain efficiency to improve profitability. We 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 15% in the fourth quarter. Moen again saw sales gains in both US retail and wholesale and in our international businesses, particularly China. Gains were strongest in our US wholesale business, where we saw volume increases driven largely by the pace of new construction.

Our leading market share with the top builders and wholesalers, expansion in the multi-family segment and upgraded showroom displays continue to yield strong results, driving sales and profits again in the fourth quarter. Moen has also seen strength from our steady pace of consumer-driven innovations, like MotionSense, a unique hands-free electronic kitchen faucet. The rollout to retail and wholesale was significant with investments in displays and increase in overall brand spending.

Internationally, sales in China, where there are now nearly 750 Moen branded stores, were again up strong double digits over the prior year, driven by new construction growth and our continued expansion. The team in China continues to build our business with a wider range of price points, and with (technical difficulty) the Chinese market.

Windows and Door sales were up 1% for the quarter. Door products saw mid single-digit sales gains driven by heavily by new construction, partially offset by exiting some less profitable programs. We also benefited from our private label relationship with a major window and door company and growth with our wholesale distributors.

Window sales were down 2%, driven by continued softness in the repair and remodel side of the window market. Importantly, for our three housing-related segments we saw total sales increase 11% for the fourth quarter, ahead of the overall market for our products.

In Security and Storage, our sales were down 4% for the quarter. Security sales were relatively even with the prior year, again, taking out the fifty-third week in 2011, segment sales were flat to prior-year and Security sales were up mid single digits. Security gains were driven by solid growth in global safety solutions, and innovative new products.

The Master Lock brand is strong and our innovation continues to hit the mark with our new electronic combination lock dial speed and our new line of commercial electronic access control solutions, which are having success at securing cellular telephone towers and other storage facilities.

So to sum up the fourth quarter, the market continues to be led by significantly stronger new construction and the 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.

Now, let me turn to our top line outlook for 2013, starting with our assumptions for our market. Lee will then take you through the specific full-year guidance for 2013 in a few moments. From a market perspective, we see ongoing signs of improvement in the overall market as we enter 2013.

While consumer-related challenges in the housing market remain, new construction was again strong in the fourth quarter, as demand for new homes continued to outstrip supply in many markets. However, concerns about the general health of the economy are still weighing on consumers' confidence and their willingness to embrace larger-ticket repair and remodel projects. So while repair and remodel has sustained moderate growth, large-ticket items, like cabinets, windows, have yet to fully benefit from this growth.

Our 2013 plans are built on our assumption that the US home market, including both repair and remodel and new construction, grows at a combined 6% to 8% rate. Based on that market assumption, we expect our 2013 full-year sales to increase at a high single-digit rate over 2012, again outperforming the market for our products, as we continue our disciplined approach to profitable growth throughout the businesses.

Within the businesses, we believe cabinets should see an increase driven by new construction momentum, innovation, and investments in new programs. For faucets, we'll continue to invest in the Moen brand and launch innovative new products that consumers want. We expect to leverage our market share gains with builders, which should position us well for new construction. And we plan to further invest to expand our innovation, distribution, and footprint in China, where we have nearly 750 storefronts throughout the country.

In the Window and Door segment, we believe both the Windows and Doors businesses are now better positioned to leverage common growth opportunities managed together and Doors should see ongoing growth from new construction. Security and Storage should benefit from investment in new products innovations, including digit electronic padlocks, other electronic products and services, and further expansion into commercial safety.

So to sum up, driven mostly by new construction, the overall market remains firm. We again had strong results and we are confident in our ability to outperform our market in 2013. We believe that our strong brands, management teams, and capital structure provide 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 would like to turn the call over to Lee, who will review our financial performance and provide more details on our 2013 guidance.

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 fourth-quarter results. Sales were $948 million, up 8% from a year ago. Consolidated operating income for the quarter was $61 million, up $17 million, or 39% compared to the same quarter last year. EPS were $0.23 for the fourth quarter, up $0.06, or 35% versus the same quarter last year.

Now, let me provide a little color on segment results. Our Cabinet sales were $340 million, up $38 million, or 12% over the prior-year quarter. Operating income for the segment was $12 million versus a $3 million loss in the prior year. Up $15 million, as we benefited from higher sales volume, running through our continually improving supply chain.

Full-year operating income for the segment was $40 million, more than double the prior year. Our strategy of disciplined sales growth is working as planned, as we continue to exceed the overall cabinet market growth, while improving profitability.

Plumbing sales for the fourth quarter were $296 million, up $38 million, or 15% versus the prior-year quarter. Operating income, which was negatively impacted by approximately $6 million of increased spending, related to the MotionSense launch and timing of overall brand spend, was $42 million, up 7%. Operating margin was 14%. All channels performed well, with both the US wholesale and China businesses experiencing double-digit sales growth.

Windows and Door sales were $156 million, up $2 million, or 1% from the prior-year quarter. Within the segment, the Door business experienced mid single-digit growth, while Windows business declined 2%.

Operating income for this segment was $4 million, $2 million more than last year, as we achieved strong operating leverage on the incremental volume and realized supply chain efficiency savings, particularly in Windows. For the full year, our Windows and Door business profit was $4 million, increasing $8 million from a $4 million loss from the prior year.

Fourth-quarter Security and Storage sales were $156 million, down $6 million, or 4% versus the prior year quarter. Excluding the fifty-third week in the fourth quarter of 2011, the segment would have been flat and Security sales would have increased 4%. Strength in Security was driven by US retail and global safety. Operating income was $21 million, up $4 million, or 22%, driven by productivity enhancements and cost-reduction programs.

We incurred certain charges and gains in the quarter that did not impact our EPS before charges and gains of $0.23. These charges and gains totaled $0.12 and are reflected in our GAAP EPS of $0.11. Specifically, we recorded a loss of $0.14 for actuarial losses related to our defined benefit pension plans, due to a lower required discount rate that more than offset pension asset returns.

We also recorded a $0.06 loss related to the results of our impairment testing, which were also discount rate driven. And finally, we recorded an $0.08 gain related to the completion of federal income tax audits for tax periods 2008 and 2009, prior to the spend.

Turning to the balance sheet, our December 31 balance sheet ended with cash of $336 million. Debt was reduced to $326 million. Our net debt-to-EBITDA leverage is now zero. We have nothing drawn on our $650 million revolving credit facility. Free cash flow was $326 million for 2012, which included $104 million of option proceeds and gross capital expenditures of $75 million.

So we were pleased with our first full-year performance. For 2012, sales grew 8%. Operating profit grew 40%, and EPS increased 48% to $0.89. Let me now provide our thoughts in further detail and guidance for 2013.

Just like in 2012, our approach to the 2013 planning and annual outlook begins with a market assumption. Our approach also includes continued share gains in addition to overall market growth. So turning to our outlook details, as Chris mentioned, for the full year 2013, our planning assumption calls for the market for our US home products to be up 6% to 8%, with new construction growing over 20%, and repair and remodel growing at 3% to 4%, with purchases of big-ticket items continuing to lag.

Based on this market assumption, and continued share gains, we expect our full-year 2013 sales to increase high single digits compared to 2012. Again, outperforming our market and with all segments increasing. Based on our market and sales growth assumptions, our expectations for EPS are in the range of $1.13 to $1.23. The midpoint of our guidance represents an increase of 33% over 2012 EPS of $0.89.

2013 free cash flow should be at least $200 million after CapEx of approximately $100 million, pension contributions of $35 million, and proceeds from option exercises around $35 million. Longer term, we believe this puts us on track to generate $1.4 billion in cumulative free cash flow over an assumed five-year period during which the housing market would recover by 2016.

Over this period, we assume total housing starts reach 1.5 million per year, and repair and remodel growth reaches 5% to 6% annually, with no lag in purchases of large-ticket items. And as we previously stated, over that assumed five-year time horizon, this strong free cash flow, combined with our flexible balance sheet, could provide at least $2 billion of cash to drive incremental shareholder value.

In summary, our business model is performing well and we're pleased with our fourth-quarter and full-year results. We should be positioned to again perform well in 2013 at any pace of recovery by leveraging our foundation of leading brands, efficient supply chain, proven management team, and strong capital structure. I'll pass the call back to Chris for a few final remarks.

Thanks, Lee. With the successful close of the fourth quarter, we marked the end of our first fiscal year as an independent Company. I am excited about how well our business teams are performing, how well we are positioned in our markets and the strength and flexibility of our balance sheet. All of these elements should enable us to continue to drive profitable growth.

As we turn to 2013, we appear to be facing market conditions much like 2012, and I am confident that we will again outperform our market, delivering solid sales and profit growth. And longer term, we believe consumer caution for large-ticket purchases should eventually subside and consumers will act on pent-up demand to provide even more growth opportunities in years to come. I'll now turn the call back to Brian.

Thanks, Chris. That concludes our prepared remarks for the fourth quarter and 2013 full-year guidance. So we will now begin taking your questions and we'll continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Mike?

(Operator Instructions)

Dennis McGill, Zelman.

Good afternoon, thank you guys. Hi. Just on the Cabinets, you ran through some of these numbers quickly, but if you were to split out just the dealer business, what was that growth on a year over year basis in the quarter?

We don't disclose that, but it was pretty strong.

So it's above the segment average?

It was pretty strong.

Well, I guess if you think about the dealer business, you kind of alluded to it almost in the discussion of new construction, but is it wrong to assume that that is a combination of remodel and new construction?

Yes, it is, you look at the dealer market -- you look at the new construction market, part of that market is served direct to builder, especially for larger builders. The rest of the market actually goes through the dealer channels. We get a reasonable approximation because we've got dealer, builder-branded cabinets going into new construction. But some of the builders, especially on the higher end, will also take some of the semi custom line. Yes, the dealer is being influenced by new construction, but we're just so strong there, that we're getting kind of a lot of pickup in a lot of different places.

Your comments on the remodeling customer for cabinets not yet coming back, is that driven by what you see directly at retail, or even beyond the home centers?

It's, it's the home center and some of that R and R business, we track through dealer. It's up. It was positive for the year. It was positive for the quarter. It's just lagging where we think the overall R and R market is at maybe 3% to 4%. We think that it's positive still in those lower single digits and eventually will catch up. But it's just taking its time.

Okay. That's helpful. And then similarly, along the lines for the Window segment, so you gave the numbers for the quarter. For the year, the Windows and Doors was up 6%. How would that split between the two?

Doors are a bit stronger than Windows. So the Door business, again, heavily influenced by new construction and our distribution there goes into new construction quite strongly. Our Window business is much more of an R and R Window business. We do have some new construction exposure. We're at a higher price point than most kind of builder, especially entry grade vinyl windows are going in at. So we don't appeal to that kind of higher segment of the new construction side.

What is that mix roughly and do you have any ambitions to get into a price point that would benefit from the new construction market?

We're not going -- it's hard for us to kind of take quality out of our product. The way we're producing that product in terms of just the quality of the window, the quality of the assembly, the quality of the service. The whole proposition lines up to a higher price point. We're okay there. We think eventually the R and R market comes back and there's a stronger construction market on that side of the market. So we'll pick up some construction side in Windows. We're just not going to track on the Windows side to where the whole new construction market is. Surprisingly, the quality of some of the windows that go into new construction are across the country isn't as high as what you might think.

Okay, and then last question, which I have to ask, I feel like every quarter. But from a cash flow standpoint, at what point do you sort of get frustrated by holding too much, just from a capital allocation standpoint and I guess kind of wrapped into that, looks like there was an acquisition in the quarter. If you could just talk about that, too.

Yes, we've been consistent in saying we're going to invest in our business. We're going to look to return cash to shareholders through a combination of share repurchase and eventually put a dividend in place. And then we'll look at acquisitions. And so we're still pursuing kind of all fronts. I think we're early in terms of where we see acquisitions coming back. We think that market will come back more in the next 12, 18, 24 months. But we're looking at all other options on the cash front as well.

We did a small acquisition on the safety side of the market within the Master Lock business. And that really is to support that business. We've been growing pretty rapidly, it's actually a service platform around the safety business that we think will complement the products that we sell in there. So we'll talk more about that as it becomes more meaningful. But relatively small. But we're committed as we've talked about to being efficient with cash and our objective is not to stockpile. It's just that we've had strong performance second half of the year and so we find ourselves in a pretty good spot.

All right. Good luck this year.

Thanks, Dennis.

Stephen East, ISI Group.

Thanks. Good afternoon, guys. Lot of the same questions that I had were already answered here, but if you can talk a little bit more, Chris, on the M&A environment, and how long would you feel comfortable riding your balance sheet and letting the cash grow and net debt turn negative, et cetera, before you really felt it was time to put something in place?

Yes, I don't have that much more to say on the M&A market. I think things are starting to be a little bit more active and we'll be disciplined there. But as we see attractive opportunities, we'll take advantage of them. In terms of other uses of cash, safe to say the Board's actively looking at it and we'll take action as we kind of look at where the market firms up across the board. I think new construction's in very good shape coming into the year and all trends look positive. As we said, R and R, you know, still kind of moving through at 3% to 4%, and big tickets lagging that. So as we think about a dividend, we want to make sure the consistency of earnings flowing through and signs look good, but we'll be deliberate in taking any actions that we take. But we're not going to -- our strategy is not to just accumulate, stockpile cash. We'll be efficient with that and you'll see us do things throughout the year.

Okay, and then just looking at your guidance, your revenue assumptions underlying seem to be fairly conservative given that, the housing construction, at least what all the builders are reporting, seemed to be accelerating fairly aggressively. I guess, one, could you just sort of talk about how you came -- I understand where ultimately you said 1.5 million, 1.6 million in 2016. But just how you came to your underlying assumptions today and then on the, on the cost side, what you're seeing in raw materials, et cetera, that the impact your guidance for 2013.

Sure. I mean, we start with our outlook on the market itself. So if we look at the market, the home product market, we called it at 6% to 8%. That's a combination of new construction, kind of in the low 20%s which I think is relatively consistent where you see builder, some estimates will take you up into the mid-20%s or higher than that. We're kind of calling it low 20%s. Then R and R market at 3% to 4%, pretty consistent I think. The big issue for us would be growth in the bigger ticket items. So if it's going a little bit slower than 3% to 4% there, that will impact us.

So today we're running about 70% R and R, 30% new construction. Obviously, the busier we are in new construction, the more that mix will shift over time, but that's kind of where it's at today. Kind of net that all out and that's how you get to 6% to 8%. We'll grow in our home business 2% better than that. And then we've got our Security and Storage business, which will kind of grow at roughly GDP. So kind of roll all that together, I think it's -- it's reasonable for what we see. Obviously, if the market performs a little bit better or folks have a different outlook on the market, that is more aggressive, then we should perform better than that. What I'm trying to do is just kind of give you the transparency around here's the market that we see, here's how we're planning, and therefore, here's how we should perform.

That's really helpful.

Thank you. On the commodities side, little bit of plus, little bit of minus kind of nets it out to zero. I don't know if you want to add anything else, Lee, but there's not that much going on. It's a fairly stable market right now. Do you want to add anything, Lee?

Yes, I would close out '12 by saying we came on right on top of where we had told you that we would have maybe a $15 million to $20 million tail wind in '12 and that's about where we came on. And as Chris said, as we think about guidance, we're thinking about pretty modest inflation in '13 and any of that will be covered by a very modest price increase. So fairly flat impact in '13 of the net.

Only real impact we would see is, China wage inflation continues to be an issue out there that, kind of 10% to 15% a year. So we continue to kind of work that side of it.

Okay. On the wood side, you're not seeing a big pickup, then?

No. We saw, for example, in the fourth quarter, you saw wood and parcel board up 1 point, 2 points actually.

Okay.

But we had other commodities that were down, so they kind of offset.

All right. Thank you, guys.

Sure.

Bob Wetenhall, RBC.

Good afternoon. Hey, nice job on the year. Just wanted to hear your thoughts on incremental margins in the various business units. Where do you think the greatest upside is as we move into 2013?

We finished '12 at right around 25% incremental operating margins on the sales growth, which is right in that 25% to 30%, where we told you. And, and as we think about guidance, if you go through the math on it, it's the same kind of place, 25% to 30% incremental growth there, on margins. So kind of right in the spots where we've told you and within that range. I think you kind of see the upside in several of the segments that you see the Cabinets. I think you see Moen and you see Doors having some margin improvement. But you net all that together and it's in that 25% to 30% incremental range.

Got it. And I think you had said it's $1.5 billion of cumulative free cash flow, with the housing recovery. But you said in conjunction with the balance sheet, it could be as much as $2 billion.

Yes, we took a little bit of debt on, so obviously we don't have much debt right now. If you ran it at the modest leverage incrementally, you could have $2 billion, yes.

Bob, that assumes that the housing market recovers, five-year recovery by '16 and we get back to that 50-year averages for the metrics by '16. That's the $1.4 billion roughly in free cash flow.

Got it. One final, if I could sneak it in. Any thought to selling the Windows and Doors business as being non-core, given your leadership position in Cabs and Plumbing?

No, what I've talked about before is we've got a very strong Doors business. It leveraged incredibly well in new construction. So we're at the front end of a pretty significant recovery in new construction. So I expect terrific things there. On the Windows side of the market, it's really downstream assembly capacity, and there's still a bit of an overhang coming off of the volume that we had a couple years ago. So we're watching that market carefully and our guys have done an exceptional job taking costs out of the business, creating a much more efficient platform. It's making good money now, so I think we'll see an improving situation there over the next couple of years. Obviously, we look at everything, but I expect that that's going to generate some pretty good earnings for us. So we're kind of evaluating the markets as they evolve.

Great stuff. Good luck next year.

Thank you.

Michael Rehaut, JPMorgan.

Thanks. Good afternoon, everyone. First question I guess on the incremental margins, Lee, you kind of mentioned that you expect a little modest inflation offset by modest price improvement to I guess net out. But what would be the biggest drivers of perhaps getting to the higher end of that range versus maybe getting to the lower end of the range, which we saw in 2012?

Yes, I think, I think the market drives much of that. I think, for example, in repair and remodel, if big ticket items start moving back and that lag starts going away, I think that would have a significant impact. We continue to invest in productivity improvements. So those should flow through the year. So it's our productivity improvements. It's some volume, obviously helps if you're going to grow high single digits on the sales line. So it's, it's the leverage. It's the markets specifically, R and R, and it's our productivity enhancements that we do.

And also, I guess just going back to the balance sheet for a moment, Chris, you mentioned that this is something that is more particularly when you think about dividends and share repurchase, something that would be reviewed with the Board, can you give us any timing in terms of how that might play out this year? Obviously, things like the dividend, the dividend has been discussed and, for quite some time now and it seems like every quarter I would think we would get closer to something on that front and also share repurchase.

Sure. Yes, just put it in a little bit of context, we began life as an independent Company, you know, 15, 16 months ago. And so I think you kind of start there and say, we started the housing recovery at about the same time and we really wanted to show some pretty good trajectory in the market overall as we thought about, kind of how we were going to return cash to shareholders. So I think that's kind of first piece is kind of are we in the midst of a robust recovery and therefore is there a good trajectory, established dividend, and establish a cadence for increasing that over a period of time. Looking at share repurchases as well and kind of the returns on those. So I think that -- it's very much part of the discussion. We don't have a set time line, but we continue to talk about it and we'll be efficient as we kind of move through it. And then we'll continue to evaluate any acquisition opportunities as well. So rest assured, we're focused on it and I think it's a high class problem. I mean, it's a result of the performance that we've had in the business and the way we've managed the balance sheet and frankly, the efficiency of the business platform that we've got that we're seeing this kind of growth, but not having to plow a lot back into infrastructure. Where we are investing is in new products and brands and other things that we're getting pretty good returns off of and we look at where we can get incrementally some growth off of those things as well.

But I guess nothing that you would like to venture, Chris, in terms of giving us a sense of timing first half of '13 versus second half of '13?

No, thank you.

Okay. All right. One last one, if I could, Lee. Just a couple of bookkeeping. Thoughts around the tax rate for 2013 and also corporate expense, should that drift a little higher, similar to the $8 million increase in 2012?

I think with the tax rate, I would plan on 33% to 34%, somewhere in that range. So, pick a midpoint for '13. I think you'll see we should, as we continue to grow, if we're growing at high single digits I think in sales, I think you'll see a little more leverage on SG&A. We've been around 25.5%, 26% here this year. I think you'll see a little bit of leverage on that.

But in terms of the corporate expense, it was $60 million in 2012. Any thoughts around 2013? I would assume again it should drift a little higher.

I would say, we had some one-time items that's in there in our first year spin-off. It will be at that range or lower probably.

Okay. Thank you.

Dan Oppenheim, Credit Suisse.

Thanks very much. Going back to the whole issue of big ticket items you talked about in terms of the R and R market up 3% to 4%, big ticket lagging. What is it that you're looking for in terms of what's driving the conservatism with that, what is it that you're looking for in terms of getting a bit more optimistic there?

We look at the -- it's really the semi custom marketplace across both the dealer channel and the home center channel. And where are we seeing the activity and at what price points and kind of what kind of cadence are we seeing. The good thing is the promotional environment we talked a lot about at the home centers seems to be abating a bit. So it's getting a little bit better. I wouldn't declare a victory yet, but it is improving there. So it's a good sign that consumers are active, but not needing a huge level of promotion to get them active. I think there they are still dealing with the overall economy, which is improving at a fairly modest pace. And so as they think about having to deploy cash, there's not a lot of credit out there for them to borrow against to invest in their homes yet.

So a lot of what we see the investment coming into the home on the bigger ticket remodeling projects is coming out of savings. And frankly, it's kind of the older cohort that has got savings that are moving money into the home. So eventually, you'll see a broader base of people doing remodeling. The encouraging thing is, we do consumer research, which suggests that there is pent-up demand. People are still aspiring to remodel their kitchens, their bathrooms. They still want to make that the showcase of the home. That's all positive. I think it's just the broader economic indicators that will drive that piece back up to really 3%, 4%, and eventually 5%, 6%, 7% as the market moves into a full recovery.

The other thing that will eventually help is there has historically been a correlation between new construction and the R and R market. And I think because we're coming off such a low base in new construction, the number of new houses out there, meaning people moving from either apartments or an existing house into a new house, the overall numbers are still pretty small. And so you've got to get back up to a number of single-family houses that people are relocating into, and then leaving another single-family house that's getting sold to create that linkage where then they go and remodel that new existing house that was bought. So that's just going to take a little while to get rolling. But I think it's improving. It's just not there where it should be yet. So I'm not discouraged by it, but we're just being pretty realistic and how do you plan for a year and based on the activity we see, that's where we come out.

Got it. Okay. Thank you. Then in terms of the plumbing, where do you see margins as some of the costs in terms of product introductions roll off, what do you see in terms of potential for margins within that business?

Yes, you look at the full year, we were about 15.5% operating margins. We would, we would assume even with new product introductions, which we do on a regular basis historically, we see nice improvement in that, in our guidance.

Okay. Thank you.

Ken Zener, KeyBanc Capital Markets.

Good afternoon, gentlemen. Well, I think your comments that your models is performing well might be modest here as we look back to 2012. With strong leverage that we saw in cabinets in the fourth quarter above that kind of 25%, 30% range. Could you give us a sense of what might cause you to get better operating leverage? Might it be your exposure to the wholesale, were you able to extract a little more price or conversely, what would be some of the factors, would volume moving perhaps a little more volatile than people expect, that might cause you to have less operating leverage, just so we could get a sense obviously if things pick up quicker than people think.

Yes, I'll make some broad comments and then maybe Lee can follow up as well. But I think you'll see some reasonably good leverage in our business as we start to run more volume through the businesses. In the case of cabinets, you're really just kind of coming off of a breakeven position two years ago, into a profitable position. And now we're starting to get reasonable leverage off of really the fixed costs and the infrastructure of the business, and we're maybe moving away from dependency on a promotional environment to more of the fundamental pricing in that marketplace, which will improve overall and I think the market will improve as capacity utilization across the whole market improves. So that's definitely a positive and you kind of get a more sustainable outlook on that marketplace. Case of faucets, we've got terrific position on the builder/wholesaler side of that market. As that volume picks up, you'll see good margins there.

We're also seeing consumers starting to trade up a little bit. So where, 2009 to 2010, the houses that were being built, consumers and builders were being pretty conservative in terms of the price point, so they were taking the base grade product in faucets and showers, now they are starting to actually go to maybe a first upgrade, maybe a second upgrade in that market and that's a better mix for us. Same would be true for entry doors, where you see a base level product and eventually as they get to building a little bit nicer houses, they are going to upgrade on entry doors. All of that kind of -- that mix piece factors in with better utilization to really drive that incremental margin. Lee, I don't know--

Wouldn't it seem to me like since you're coming off the bottom and you're already performing so well that given the over/under, you might actually be doing better than your normalized fixed cost absorption?

Well, you know, we talk about 25% to 30% incremental margin.

Right.

We feel pretty good about that over a recovery period that as a Company. The other thing I think you have to understand, we talked a lot about big tickets, R and R. That helps drive margins obviously, because you leverage that fixed cost base in cabinets when that happens. I think the other thing you see is our investments, whether they are CapEx or P&L related, the investments we're making are productivity improvements. That's a lot of our investment. It's -- we invest more in productivity in our plans than we do in just capacity. So we're always investing, we're always getting more efficient. I think that helps drive some of that as well on a macro level.

All right. Maybe thinking about it a little differently, the M&A angle, one of your peers in the broad building product space has been quite active the last three or four months, finding deals that are based out of Europe predominantly, I would say, with some US exposure. How do you think, I think you're really wanted to say US-centric. You've talked about working in a two-step channel that kind of mirrors the success you had in your current businesses. Can you talk about perhaps the pluses and minuses to that US-centric? Sound like a little later cycle focus in your M&A appetite.

I'm not sure, I'm not sure I--

Would you go into Europe, for example? There's obviously been some attractive deals for a variety of reasons over there, for one of your competitors matches their portfolio is one reason.

I think -- yes, as we look at M&A, I think we start by saying there are opportunities around our core businesses. And so where that makes sense, obviously that's -- we can leverage more of what we have into an acquisition. We're not averse to international. I would still say Europe is uncertain and so it's not a place that we're actively looking. I think there's more international opportunities, again, that may be leverage market positions that we've already got established that we can expand and grow. So that's where our start is.

Let's look at where we are. We are US-centric today, that doesn't mean that we're not looking internationally, it's just that we're looking internationally in places that we already are to expand that footprint. So we're active in Asian markets. We're active in South America. Could we expand that? Yes, we could. So that's how we start answering that question.

And the other piece is just adjacent to the businesses that we're in, gives us more leverage, more synergy, more growth opportunities. So those would be ideal. We're pretty patient. I wouldn't say that means that we're not active. I just think we're looking very carefully on the acquisition side and we're fortunate to have very strong businesses today so maybe that makes comparisons difficult.

Understood. Thank you.

Peter Lisnic, Robert W. Baird.

Good afternoon, gentlemen. I guess first question, you talked about plumbing in the $6 million of spend in the fourth quarter that hit that margin a little bit in the quarter. Can you give us a feel for 2013 in terms of spending both in that segment and across the business, what the incremental spend might look like and then maybe talk about what some of the key growth initiatives might be just outside of the cyclical opportunity that's emerging?

Yes, when you -- when you think about promotional spending, and we won't give you specific dollars, but I would tell you, we're just now in 2012 for say Moen back to where we would historically have spent before we took that down because of the recession. So we feel good about that. In terms of '12 in the year, we spent over a third of our total year spending in '12, in the third quarter, did two things. It helped us with the MotionSense launch. It drove some -- it drives some momentum into '13, so we feel very good about that timing and that was planned and it was expected. And if you kind of balance out the timing of all that, operating margins for Moen 15.5%, so very good and we feel good about that.

Probably given now that we have a second year look at the market and in our guidance where we think the market's up 6% to 8% for our products, that's equal to or greater than what we think it grew in '12, so you'll see us spend a little bit more and invest a little bit more to drive that brand. It's a very powerful brand and it's gaining a lot of momentum, so we feel very good. Those are good investments. We'll get very high returns off of them. And yet at the same time, we'll still have operating leverage of 25% to 30% in our '13 plan.

Okay. That's helpful on that. And then switch gears back to the Cabinet business, strong year over year incremental margin. If I cut the numbers a little bit differently though, if I look at it sequentially, revenue up and the op margin down a little bit, is there something in the mix there? You talked about some of the strong growth in a couple of channels there. Is there something in the mix there that maybe tempered the leverage as you look at it at least on a sequential basis?

No, we had, we had nice leverage each of the last two quarters. And there's a couple things going on there and even for the year. One, we're being very disciplined, as Chris has talked about a lot, in terms of not chasing unprofitable or low margin business. So we're not doing that. I think we're continuing to improve our productivity in our plants. We've closed a couple of plants in the last 12 months. We're continuing to invest in productivity gains and that's driving some of this. And we've also had some line expansions that, where as opposed to chasing low margin business with high promotion dollars, we're basically broadening our lines with better profit margin items. So those three things are actually what we're doing to drive margin and we feel pretty good about the margin improvement in the last two or three quarters.

Okay, and how should we, how should we think about mix in terms of profitability in that business. If new construction continues to grow, should we think about that business or grow at a pace above and in excess of R and R, should we think about that business as maybe tempering the incremental leverage that we could see out of Cabinets?

The R and R for us, and especially the big ticket items, the organic remodeling, as we've said, is good business for us. The new construction business for the Cabinet segment is a little bit lower price point item. So the good news is we're doing very well. We're leveraging very well for Cabinets in terms of margins, even with it being driven by new construction. As R and R comes back even stronger and gets back to that 5% to 6% annual growth and big ticket comes back, you'll get really nice leverage because, again, that's 70% of our business is R and R. So we're looking forward to the future as this R and R comes back, which it typically does over a recession. Big ticket items tend to come back a little bit later.

All right. Got it. Thank you very much for your time and your help.

Sure.

Keith Hughes, SunTrust.

Thank you. Questions around Plumbing, very good numbers in the quarter. You had mentioned some product share gains and strength at wholesale market. So my question, can you give me any more detail on the product introductions and how did wholesale compare to retail markets in the United States?

Yes, so in terms of new products, we had a number of new products, but the biggest one would have been MotionSense, which is our hands-free electronic kitchen faucets. Big launch in the fourth quarter, both at retail and in wholesale. We also backed that up with some advertising brand spend across a number of channels. So it ended up really kind of priming the pump. We consciously did that because we saw pretty good demand coming into 2013, so that made good sense for us to move that spend into the quarter. We actually moved some spend out of the third quarter into the fourth quarter to support that as well. So quite a bit of activity there.

In terms of your question on wholesale retail different markets. Obviously retail's a big home center business. Some of that goes into new construction, a lot of it is R and R. The wholesale business is showrooms and then to builder to support new construction business. We've got a very strong share in that wholesale side of the business with some pretty robust product lines there. So that's real good business for us. It's a business we kept and supported throughout the downturn. It's performing very well. We've got a terrific team on that side of the business. I don't know if there's more--

Yes, the growth rates between retail and wholesale, were they substantially different or both in this double-digit number you referred to?

Wholesale would have been stronger, really supported by that 20-plus new construction volume. So that business is growing quite strongly. Retail grew fine in the quarter, but was nowhere near growing as strong. So retail probably looked more like, a little bit better than the R and R numbers, because we picked up share there. On the wholesale side, it really was stronger off that new construction.

Okay. Thank you very much.

Sure.

Eric Bosshard, Cleveland Research Company.

Hi, good afternoon. This is Tom Mahoney calling in for Eric this afternoon. My question was on the increase in CapEx for next year from $75 million to $100 million. What are the areas of incremental investment? And what's the, what's the payback you expect, you expect from that, and I guess a timeframe would be helpful as well.

Yes, well, we spent gross CapEx in '12 $75 million, well below depreciation and amortization, which is a little over $100 million. So we think it's -- and we've always said we would get back to D&A kind of levels of spending when we were confident in the markets. Well, we're now pretty confident in the market, so we're going to move it up to about $100 million, so we'll increase it back to kind of this normal run rate of D&A. It's actually spread across our segments. A lot of it is investments in productivity in our supply chain and plants, a little capacity, and some CapEx to kind of drive some sales. So you'll see it increasing in Cabinets, in Plumbing, Security and Storage, a little less in Windows and Doors at this point, but still investment so it's across the business. And we get strong paybacks on these returns. And you can see the productivity improvements we're making when you have 25% to 30% operating margins improvements.

Great. Thank you, guys.

Jim Barrett, CL King & Associates.

Hi, everyone. Chris, could you discuss the business in China, a bit about the competitive set, and how the profitability there compares to your divisional average?

Sure. So we continue to have strong performance in China. We added about 200 incremental storefronts, so we're up to about 750 storefronts there. Business there is driven off that traditional retail business, which is the Moen storefronts, as well as some direct to builder business. Still very strong double-digit growth there. The market has slowed down a bit, but they are still building roughly 5 million housing units a year. So not bad business and really the middle class there is trading up from pure utilitarian faucets, showering, to branded product. And so we're in the right place, in the right markets, and we're seeing good lift there.

In terms of the competitive set, there are some local players there. We're the third largest import faucet brand, so Kohler, Toto and then us and we're having strong results. We -- the brand is positioned. We built that business over the last 15 years organically and really had touted the fact that we're the number one faucet in America. The consumer there is increasingly looking for brands that represent quality, reliability, and good value for dollar, and so they find kind of good fashion and yet they get that reliability that they get with our brand. So we like the market, we have a great team there. We're developing products specifically for that market, so we don't bring product out of North America there. There's a design team there that's making product specifically tailored and we're having good success.

In terms of profitability, yes, as a market, it's profitable for us. As we invest in that market, it depresses near-term profitability. But the older stores are profitable. The younger stores, we've got capital going into them and they are in developing marketplaces. So, yes, it's profitable. Eventually it will become more profitable as we slow down the growth. But for now, we're really looking at that as an attractive, longer-term business for us. It's certainly generating profit, which is more than a lot of folks can say about their investments in China, so we really like it.

Okay. Well, that's very helpful. Thank you very much.

Sure.

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

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

This concludes today's conference call. You may now disconnect.