Fortune Brands Innovations Inc (FBIN) 2013 Q4 法說會逐字稿

Good afternoon, my name is Jeremy 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 and full-year results 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. I would now like to turn the call over to Mr. Brian Lance, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Good afternoon, everyone and welcome to the Fortune Brands Home & Security quarterly investor conference call and webcast. We are pleased to be here to provide an update on our progress during the fourth quarter of 2013 and 2014 guidance. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the inventor section of our www.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 risks and uncertainties that may cause actual results that 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 are made. Also, any references to operating profit, earnings per share or cash flow on today's call will focus on our 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've allowed ample time to address 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 delivered strong fourth quarter sales and profit which capped off an excellent second full-year as an independent Company.

We continue to leverage our structural competitive advantages and build on our momentum as the market for our products expands in both the new construction and repair and remodel markets. Importantly, based on our momentum and strong performance in the early stages of this multi-year recovery, we are well-positioned for continued growth the next several years.

Let me first spend time on the quarter highlights then I'll comment on the momentum we have created the first two years and our potential for profitable growth over the next three-plus years. And last, I will discuss our 2014 annual outlook for top-line growth.

For the quarter, sales were up 16% and EPS was $0.38, up 65% from a year ago. Notably, our three housing-related segments saw total sales increase 20%, versus a US market that we believe was up high single digits as we continue to again share in our categories and benefited from the WoodCrafters acquisition.

Now let me give you highlights by segment. Sales for our Cabinets business were up 34% for the quarter. Importantly, even excluding WoodCrafters sales, cabinet sales were up 18%, well ahead of the market for our products as we grew market share in this segment. We benefited from the cabinet remodel market that led the momentum and continued growth in new construction.

The stronger pace of R&R spending in cabinets was a continuation of momentum we saw in the third quarter with growth across a fuller range of semi custom and custom product lines, resulting in a better mix with higher price points. We gain share in both the dealer channel, where we are the clear market leader and in home centers, where we saw strength in our semi custom and in-stock cabinets, as well as our bath family programs.

We are leveraging our structural competitive advantages, including our portfolio of brands, our leading position in the dealer channel, a continuous stream of innovation, and our unique service oriented operating platform and logistics model to generate sustainable momentum.

Notably, we grew our Cabinets profits by $21 million to a total of $34 million in the quarter, nearly tripling last year's fourth quarter profit as we successfully target profitable growth and leverage our efficient operating platform.

Plumbing sales were up 7% in the quarter, and adjusting for the comparison to last year's 53rd week, we're up approximately 10%. Moen saw sales gains in both wholesale and retail in the US and in China.

Gains were again strongest in our US wholesale business driven by new construction demand, consumers choosing to upgrade faucet packages for their new homes, and from sell-through at our new premium products, including our MotionSense hands-free faucet, which continues to be introduced in additional styles.

Contemporary kitchen pull-down styles in the Align and STO collections, and our Arris modern suite. And we also saw growth at retail with our steady pace of consumer-driven innovations, including MotionSense and our new Walden pullout faucet with Microban finishes.

Internationally, sales in China where there are now more than 900 Moen branded stores, were again up double digits over the prior year, driven by the expansion of our store network, the improved performance of the existing Moen stores, and the expansion of our direct-to-builder effort. The team in China continues to build our business with a wide range of price points and with products uniquely tailored to the Chinese market.

Window and door sales were up 13% for the quarter. Door products saw sales growth of 19% with double-digit growth across all channels, driven by gains in new construction and our ongoing distribution expansion.

Mix also improved, especially with consumers, selecting our new decorative glass designs and fiber glass products like our recently launched Pulse Line of modern-entry door styles. Window sales grew 7% as the window repair and remodel market momentum continued, albeit at a slower pace than our other product categories.

In the security and store segment, our sales were down 2% to the prior year quarter as expected, while operating profit grew 8%. Security sales were up 8% to the prior year quarter, led by increases in international and safety.

Master Lock US retail sales continue to grow with program expansions at large retailers. And Master Lock's rollout of new commercial electronic access control solutions designed to secure high-value sites, such as cellular telephone towers and other storage facilities, also contributed meaningfully to our sales gains.

Tool store sales were down 16% in the fourth quarter after a 21% increase in the third quarter as the largest customer changed it promotional cadence. Therefore tools store sales for the second half of 2013 were relatively flat.

So, to sum up our results, we delivered another strong quarter and full-year of sales and profit growth. I am excited about our performance versus a market that saw continued momentum in the repair and remodel market and some growth from new construction. This performance demonstrates the strength of our operating model and our ability to generate profitable growth as volume returned to a leverage our competitive advantages to gain share.

I am even more excited about the strong momentum that we have built over our first two full years as an independent Company. Over this period, as the housing market moved into recovery, we continue to again share and we confirm the performance and potential of our operating model.

For instance, over the past two years, we grew sales by 25% to over to over $4 billion. We also leveraged the strength of our leading brands and our consistent pace of consumer focused innovation. As a result, this was disciplined profitable growth with EBITDA up 84% and EPS increasing 150%.

We further strengthened our balance sheet and began to deploy capital as we reduced net debt to EBITDA to nearly $0, made our first strategic acquisition, WoodCrafters, which was immediately accretive. Initiated a quarterly dividend of $0.10, which we have increased to $0.12 for 2014, and repurchased $61 million of our shares.

While we've been working hard to outperform our market over the past two years, we have also strengthened our organization by aligning management compensation to drive shareholder value through an increased focus on equity incentives, bringing in proven experienced talent for key leadership roles in the operating companies and the corporate office, including our new President for our Security and Storage business and a new General Counsel, and enhancing our strategy and corporate development tea, to help drive our next phase of growth.

So, I am pleased with our accomplishments over our first two years. Our operating model is now even stronger, and we believe that we are still in the early stages of a multi-year housing recovery. We are well-positioned to leverage our structural competitive advantages to drive profitable growth in 2014 and well into the future.

Importantly, we now believe that in this next growth phase as the market expands toward 1.5 million starts and 6% to 7% growth in R&R, we have the potential to organically grow our top-line sales to approximately $6 billion, and roughly double our EPS over the next three-plus years. With additional upside from leveraging our cash flow and balance sheet.

So let me now turn to our full-year top-line outlook for 2014, starting with our assumption for the market. We will then take you through our specific full-year 2014 guidance in more detail in a few moments.

From a market perspective, we see ongoing signs of strength in the overall home products market as we enter 2014. While higher home prices and mortgage rates have slowed the pace of new construction through the fall and into the first quarter, the market for new homes is expected to show strong growth in 2014.

The demand for new construction is out stripping supply in many markets across the country and developers are preparing for significant growth in 2014 and beyond. More importantly, for repair and remodel, which is around 65% of our mix, we expect a continuation of the strong growth that we saw in the Fall season.

Notably, we see strength building in bigger ticket semi custom and custom cabinets and replacement windows. We're also seeing increased project size and stronger demand for more premium faucets in our Moen wholesale showrooms.

These trends give us reason to be optimistic as we enter 2014 and look forward to the spring remodel season. Therefore, our initial 2014 outlook is built on a fundamental assumption that the US home products market grows at a combined 10% to 11% annual rate. We expect the market grow to be relatively modest in the first quarter, but then accelerate through the remainder of the year, especially in the second half.

Based on that US housing market projection, the assumptions we make for our other markets and continued share gains, we again expect solid top-line growth for 2014 with our full-year sales increasing at an 11% to 13% rate over 2013, and our home products businesses growing faster and again outperforming the market.

So, to sum up, we delivered strong 2013 sales and profit growth. These results capped a solid first two years as an independent Company. We remain confident in our ability to continue to outperform the recovering home products market and intend to deliver profitable growth again 2014 and beyond.

We also believe that our strong brands, management teams, and capital structure provide flexibility to both focus on profitable organic growth and drive incremental shareholder value with our strong free cash flow by investing in our businesses, pursuing accretive strategic acquisitions and returning cash to shareholders.

Now, I would like to turn the call over to Lee, who will review our financial performance and provide more details on our 2014 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 fourth quarter results.

Sales were $1.1 billion, up 16% from a year ago with our home product sales growing 20%. Consolidated operating income for the quarter was $97 million, up 59%, or $36 million compared to the same quarter last year. EPS was $0.38 for the quarter, up 65%, or $0.15 versus the quarter last year.

Now let me provide more color on segment results. Our Cabinet sales were $456 million, up $116 million, or 34% over the prior-year quarter; led by growth in dealers. Operating income for the segment increased to $34 million, up $21 million as we benefited from higher sales volume and an improving mix from repair and remodel growth.

Cabinet operating margin was 7.4%; 370 basis points higher than the same quarter last year. Our strategy of disciplined sales growth continues to work well as we continue to exceed the overall cabinet market growth, while improving profitability. For the full-year, Cabinet sales increased 24% to the prior year.

Operating profit tripled to $121 million. And operating margin increased 430 basis points to 7.3%. Plumbing sales for the fourth quarter were $317 million, up $21 million, or 7% versus the prior-year quarter.

Excluding the 53rd week in the fourth quarter of 2012, segment sales increased around 10%. Operating income was $54 million, up 28%, even as we made incremental brand investments in the US. And importantly, operating margin was 16.9%, 280 basis points higher than the same quarter last year.

For the full year, plumbing sales increased 17%. Operating profit was up 36% to the prior year, and operating margin increased 250 basis points to 17.8%.

Windows and door sales were $176 million, up $20 million or 13% from the prior-year quarter. Within the segment, the door business experienced 19% sales growth, while the window business grew 7%. Operating profit for this segment increased to $5 million, up 18% to prior year.

For the full-year, windows and doors sales increased 12%. Operating profit more than tripled from the prior year, and operating margin increased 170 basis points to 2.4%.

Security and storage sales were $153 million in the fourth quarter, down 2% to the prior year quarter. Security sales were strong and increased 8%. As expected, sales of tool storage products were down 16% as the largest customer changed its promotional cadence. Segment operating income increased 8% to $22 million, driven by a combination of sales gains in security products and cost reductions from changes to our benefit structure.

So, to sum up consolidated fourth quarter performance, we continued to leverage our structural competitive advantages to drive share gains. And we're continuing to see a better mix driven by the improving repair and remodel market.

Turning to the balance sheet, we exit 2013 with a strong balance sheet. Even as we completed the $300 million WoodCrafters acquisition, repurchased $52 million of our shares, and initiated a quarterly dividend during the year.

As of year end, cash was $241 million and debt was $356 million, resulting in net debt to EBITDA of 0.2 times. We also announced a 20% increase in our quarterly dividend, beginning in 2014, while maintaining a payout ratio under 30%.

Turning to the growth potential of our business over the next three-plus years, as Chris mentioned, we've built strong momentum over the past two years. We believe we're in the early stages of the multi-year recovery, and now have the potential to drive even higher levels of sales and profit, over the next phase of our growth.

More specifically, based on our market assumptions over the next three-plus years, we believe that we have the potential to grow sales to approximately $6 billion, EBITDA to more than $900 million, operating margins to 14 plus percent and EPS to over $3. With additional upside from using our cash flow and balance sheet.

Based on our overview of the market and our own potential growth over the next three-plus years, we're beginning to invest in additional capacity and infrastructure throughout our business. This is reflected in both our EPS and capital expenditure guidance for 2014. We also believe that we can deploy our cash and balance sheet over the same period to increase this growth through a combination of strategic acquisitions and returning cash to shareholders.

Turning to the details of our outlook for 2014, as discussed previously, our approach to the annual outlook begins with a market assumption but also includes continued share gains in addition to the overall market growth. As Chris mentioned, based on our projected 10% to 11% US home products market growth, the assumptions that we make for our other markets and continued share gains, we now expect our full-year 2014 sales to increase 11% to 13% compared to 2013.

As we consider timing of growth in 2014, we expect market growth to be lowest in the first quarter and then accelerate throughout the year. Our resulting expectations for full-year 2014 EPS are now in the range of $1.91 to $2.01. The mid-point of our guidance represents an increase of 31% over 2013 EPS of $1.50.

We expect 2014 free cash flow to be at least $250 million for the full-year, after Cap Ex of approximately $130 million to $140 million as we begin to invest in incremental capacity to support long-term growth potential to approximately $6 billion over the next three-plus years.

In summary, our business model is performing well. We are pleased with our strong 2013 results and our performance over the past two years. This past performance and the continued market recovery gives us confidence for 2014 growth. But also for potential growth beyond 2014, as we continue to benefit from our structural competitive advantages and the recovery market.

Importantly, this sustainable momentum in both the housing market and in our business performance should allow us to create incremental shareholder value by making select acquisitions and returning cash to shareholders through our dividend and share repurchase.

I will new pass the call back to Brian.

Thanks, Lee.

That concludes our prepared remarks in the fourth quarter of 2013 and full-year 2014 guidance. We will now begin taking your questions and will continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then re-enter the queue to ask additional questions.

I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) I will pause for a few moments to compile the Q&A roster. Your first question comes from the line of Dennis McGill from Zellman & Associates. Your line is open.

Hi, good afternoon, thank you, guys.

The first question, Chris, I guess when you and the team were thinking about setting up the targets for 2014 and realizing some moving pieces between new construction and home improvement, where you came out, do you feel like that's a scenario that the market is already geared to grow 10% to 11%? And absent economic stock, you feel good about that, or do you think you have to see a re-acceleration in some of the metrics to get there? I guess any type of thought that goes behind how you guys were thinking about it.

I would say, I've been doing this for five or six years and through a lot of different conditions and I think what was unique this year is, obviously, a bit of a slowdown fourth quarter and we think into the first quarter. But on the other side, we see very strong fundamentals driving toward a strong balance of the year. Strong spring selling season coming through, strong second half.

And so, it is a little bit on faith that you're saying the fundamentals look good. We obviously run a lot of analytics around it, but anecdotally and through talking with all of our channels, as well as looking at the data, we feel good about it. I'd say the expectation would probably be softer first quarter and then seeing it ramp through. Some of our products are lagging a bit as they come in later in the building stage.

To counter that on the R&R side, it doesn't take a lot of faith because we saw a lot of momentum continue in the fourth quarter. We talked about it on the last call, third quarter momentum. Man, fourth quarter kept coming and that's unique.

I mean usually, you'd see by the middle of November, things kind of grinding to a halt. Our cabinet business, especially on the dealer side, saw that momentum keep coming. And so that side of the market we feel really solid. So that's the pieces as they roll together. So I'd say we feel good about a 10% to 11% market projection.

Okay, that's helpful. And then as you talk about that first quarter slowdown relative to the fourth quarter, can you maybe frame that a little bit just for expectations, what type of deceleration you're seeing and maybe which businesses you're going to expect it in the most?

I would say, again, I go back on the R&R side, things look pretty good. So, I'd say it's continuing to move. New construction is going to lag a little bit, so I don't know the magnitude of it yet. But what was healthy, actually, was as we moved into December, we saw some inventory positions coming down at Moen and so we don't mind that because to extent there's not excess inventory out in the market, they'll order to demand; so that looked pretty good.

So I'd say it really is more new construction. As new construction starts to ramp up again that'll help the second quarter, third quarter, fourth quarter. But R&R is continuing, so it's hard to balance those two precisely.

Your next question comes from Bob Wetenhall from RBC. Your line is open.

Congratulations, first, on a fantastic year.

Thank you.

A lot of positive stuff. I just wanted to ask, you're updating your three year outlook to $6 billion top-line, if I heard that correctly, $900 million of EBITDA, 14% operating margin and three bucks of EPS. So, I just want to understand in terms of visibility and confidence level, what's given you the confidence to put that into the marketplace?

Yes, I guess we start with -- we don't run our business quarterly, we run it over a three-plus year Horizon. Really, as we started talking to investors when we became an independent Company 2.5 years ago, we said through our big restructuring, we had preserved capacity up to about $5 billion in sales across all of our businesses.

Well, as we exit the year and look into the next couple of years, we're going to hit that $5 billion in about 18 months. And so internally, we started planning in the fall for where are we going to expand some of our facilities? Where are we going to add some production lines? Where are we putting in some enabling technology? And really those investments are supported by the longer-term outlook, $6 billion and beyond.

So we thought it would be helpful to talk to investors today about that and say based on the trajectory that we see, a market returning to at least 1.5 million housing starts over that period. An R&R market that now looks like it's got good legs underneath it, running 6% to 7%, We can see our way to $6 billion over the next three-year horizon and, given that, we're going to make some investments to support that, so that we're ready and we can maintain our service levels through that whole expansion.

So it felt like a natural extension of what we've been talking about. We've been very candid about our plans and how our business is operating. And I can tell you we have a ton of confidence coming out of the last two years. This unfolded, really, as well as or slightly better than we thought it would.

And so we got the confidence to invest behind our operating platforms and really take the growth and continue to grow share.

Got it.

We're not technically calling that guidance. We're trying to give you a sense of our potential over the next three years as we invest, as Chris said. So more of just potential, a view of our potential over the next three-plus years.

As really it's to support -- as we start talking about investments, as we call out we're going to make some capitol investments and make some expense investments this year, next year, it's to give you a sense of why are we making those investments. Well it's because we're seeing that longer term growth out there.

Thanks. That's really what I was looking for, and Lee thanks for the clarification. Just as a follow-on, it seems like you guys are going to generate pretty substantial amounts of free cash flow. You touched on leveraging the balance sheet and free cash flow.

From a capitol allocation standpoint, any color on whether M&A will be the pathway you want to go down to share buybacks, or dividends, would be helpful. Thanks a lot, guys.

Sure. And I think we consistent in what we've been talking about. We would like to expand the business and accelerate our strategies through some M&A activity. But we'll be disciplined around that. We'll look to grow in adjacent markets. We'll look to grow internationally. We'll look at categories that are close to what we do. To the extent we find good opportunities, we'll be enthusiastic about that.

To the extent we don't, we'll be pretty disciplined in returning cash to shareholders through share repurchase and through increase in the dividend. As I highlighted earlier, we're also investing in the business, so that'll be a part of what we're doing, too, because we see some terrific organic growth opportunities inside the business today.

Your next question comes from Stephen East with ISI Group. You're line is open.

Thank you. Good afternoon, guys.

Hey, Chris, when you talk about capital spend in preparation for what could be a three-year growth trajectory, could you rank order where that spending' s occurring and what needs the most investment?

It's primarily going to be in cabinets and in Faucets, so I would say our two biggest businesses. If you look at our cabinets business, we've got our distributed network. Some of this expansion will be expanding existing sites. Might be building adjacent to sites. So we're leveraging the nucleus of what we've got in terms of management and resources in that market.

But we can add lines, we can add some capacity that way. And we're looking at it across all North America and saying where does it make sense to put in to service the demand that we see out there. We're just seeing some great demand coming through, especially on the R&R side.

On the faucet side, we've got kind of a global supply chain. We do assembly in both China and in North Carolina. And so we're looking at assembly capacity there. Make sure we've got enough capacity to handle the demand that keeps coming there and extending all that out.

And both of these aren't just up to 2016, these are looking at inflection point as we reach $5 billion in revenue. How are we going to build the capacity to handle the next five plus years and do it in a disciplined way and so you kind of feather it in over time. We're just calling out that we're starting that activity in anticipation of in 18 months we'd be hitting that $5 billion level.

Okay, thank you. And then my other question, I'm going to wrap a couple in here, if I could? One, could you split out this past quarter, when you talked about growth, what type of growth you were seeing in R&R versus new construction?

And then when I look at your segment margins, your incremental margins, you had very strong plumbing and a bit weaker than what we expected on the cabinet side. Could you address those and then what you think the incremental op margin for 2014 is?

Sure. I think if you look at the split, new construction, R&R, won't break it out explicitly, but it was a little stronger contribution on the R&R side. New construction was solid, but, fourth quarter, but it trailed off a bit and I think that will continue in the first quarter.

So more of a contribution coming out of R&R, which to be candid was quite robust, especially on the cabinet size, coming through dealer market and showrooms for Moen. So, quite strong there.

On the cabinet side, I am not sure, we were thrilled with the growth that we saw on the cabinet side of the market. Sales up 34%, 18% without WoodCrafters there, and that was very high quality growth. Obviously, tripling the profits in the quarter, strong margins coming through, great mix. So we're seeing some pretty strong mix and bigger packages, bigger remodel programs coming through, especially on the dealer side. So we thought that was both strong fourth quarter growth, as well as a good indicator of what we could expect in 2014.

Your next question comes from Steven Kim with Barclays, your line is open.

Thank you very much guys. I just wanted to follow-up on the question of the capacity additions. Can you give us a sense, Chris or Lee, what you think the cost associated with any of these capacity and additions might be -- that we might see in 2014 and sort of when we might see some of those show up?

Yes, Stephen, if you look at the capacity investments, they come in two flavors, really. There's a P&L impact and then there's a capital expenditure. So we called out capital expenditures of $130 million to $140 million in the year and those will happen throughout the year, candidly.

If you look at the capital expenditures in 2013, gross was around $97 million, so we're up $30 million to $40 million. And as we look to the long-term on Cap Ex, I'd say D&A is about $90 million to $100 million. So we've been below that. We caught up in 2013 at $97 million.

I think you could see us for a couple of years be over, to the $130 million to $140 million, and I think then we'll settle back in long-term at that D&A level. So you'll will get a little bit of an acceleration for two years, but it's not that significant.

In terms of the P&L impact imbedded in our 2014 guidance for earnings per share, we think is probably at least $0.08 of incremental investment on the P&L side of this. Again, the biggest piece of those is in cabinets and Moen, as Chris said. And you'll see those start in the first quarter. So they'll be spread. It's a couple of cents a quarter spread throughout the year.

We have a disciplined analytical process of doing this, so we review and we approve each project. And we have very high returns on the projects we approve.

Yes, great. That's helpful. And with respect to deploying capitol, obviously one of the things that you've been talking about for quite awhile has been the opportunity in M&A. And yet, we've seen the overall deal activity in the public market has been pretty strong.

I was wondering if maybe Chris or Lee, you could comment on how the conversations may have changed here or how have they been changing over the last three -- let's say, three to six months. As you talk to potential candidates to -- for acquisition are they finding because we've had a little bit of a pullback in the housing start environment that maybe now is not the right time?

They're waiting for a stronger market or is their decision making process completely unrelated to that? I mean is it completely related to sort of personal issues and things like that? Can you just help us understand how the situation may be changing there?

Sure. I think it's all of the above. So I think that you're going to have situations where some owners, investors will want to take advantage of the public market. Situations where they would prefer a private sale. There are some family owned businesses that this is a longer term discussion over a long period of time. It's not a moment of time.

And so their deliberations are going to be longer, and so this discussion will be is this a better time now than it would have been four, five years ago. Not is it a better time now relative to a quarter ago. So, that's why I say it's all the above. We view it kind of over the next couple of years, and so things unfold as they unfold and we'll be deliberate about it. The important thing is, we're active. We've got a strong team there; we're involved. And I think things will unfold.

We're delighted at the opportunity to acquire WoodCrafters. We're hopeful that over the next 12 to 24 months there'll be other opportunities similar to that. And so we're active in discussions on that. So I'd say it's not a knee-jerk relative to change in market, but these things are often fairly complex.

Your next question comes from Ken Zener from KeyBanc. Your line is open.

Afternoon.

Hi, Ken.

In the past, [generally] your third year, you did talk about trying to manage your portfolio to certain metrics, and I believe Windows was one of the businesses that did not jump out as being a top performer. Can you update us on your thinking about, your willingness to slim your portfolio given the industry structure in Windows as you're entering your third public year?

Sure. What we've described in the past, is that the window market has evolved a bit slower than some of the other markets going back to the energy tax credit of 2009, 2010, which did two things. It pulled some demand into those periods, but it also delayed some of the rationalization in the industry.

Every other building product industry was going through dramatic restructuring, but there was volume that was keeping that industry -- that part of the industry from going through that restructuring. So it's lagged and so I'd say it continues to lag, but in the second half of the year we did see some improvements.

We saw revenue growth coming on. We saw a little bit better mix coming through. So we're obviously watching it very carefully. It's not performing as strongly as our other R&R businesses, but it is performing well -- better, so we'll see how it unfolds. And if it continues to build momentum, it will be in a very good spot. If it's not building the kind of momentum that we'd like, then we'll evaluate things.

Alright, I guess we'll wait. I guess in cabinet, Lee you talked about discipline growth relative to capital expenditures and margins. Could you talk about different growth rates you might be seeing by channel? What that means for utilization rates as it relates to how you deal with each of the broad demand areas?

And did you guys really pass up a lot of business because you didn't want to move toward lower margin business? If you give us a sense of how capital spending is affecting those different demand rates. Thank you.

And we basically look at our businesses and we are the leaders in our industry and we don't -- we're going to grow we have strategic advantages that we can use to drive sales. We don't have to have to chase low margin sales. And we've been very disciplined. You saw that on the cabinet business with that promotions that were out there for a couple of years.

The same thing on the plumbing side. Moen is the leader in the industry and we don't need to chase those things. So I would say we do that without thinking initially about the capital investments. We think those are very good businesses. They're both growing significantly, they're taking share in a significant way. And they're growing their operating margin.

As we think of capital, we put capital into those two ahead of everything, but we invest in all of our businesses. So we're not really having to make what I would call restricted capital investments. Those businesses are growing very well. They're very strong and they're just -- we're starting to see with the first two years you're seeing the benefits of those leadership positions.

Your next question comes from Michael Rehaut from JP Morgan. Your line is open.

Thanks, good afternoon, everybody. First question I had was on the guidance and just trying to understand a little bit better in terms of the timing of things and the components. Is it fair to say that when you think about the underlying, -- kind of work two questions in here, so apologies, but in terms of the 10%, 11% US home products market, I assume that's being driven more by repair, remodel, perhaps an outlook for up high single digits?

And, as you think about the complexion of the year and you said that you expect things to be little slower in the first quarter and accelerate, I would have actually thought the opposite, given that the comps get tougher throughout -- the year ago comps get tougher as you work through the year, particularly as they picked up in 2Q and 3Q.

A, about the end market growth composition and b, just any thoughts around why you're thinking that things will be slower in the first half given that the comps actually look to get tougher in the back half?

So a couple of questions in there. First on the market assumption, 10% to 11% would imply new construction up high teens, R&R roughly 7% range. And I'd see that new construction, really for us, kicking in second quarter and then accelerating even more so in the second half. So that's the first point, I think you're looking for in terms of guidance.

The second piece is on comps, we actually had a very strong first quarter last year, so. Across the business, if you look at our first quarter of Moen was outstanding across the other parts of the business. So they're, I wouldn't say necessarily that -- kind of weaker comps in the early part of the year, obviously it performed well.

But as we look at growth, with a 10% to 11% market growth and then we look at share gains on top of that, I think you just roll that through the different businesses, I think you're going to see some pretty strong growth numbers and profit conversion really for the second quarter through the balance of the year.

Great.

Thank you, Chris. Second, just turning to the margins in a couple of the segments, plumbing had, whereas in the first three quarters of the year, plumbing was working on an incremental margin of 30% to 35% roughly. Really kicked up well above 50% in the fourth quarter, and I was just wondering about any particular drivers in 4Q that may have been responsible for that? And similarly in windows and doors, not much of an incremental margin at all in Windows and doors for the 4Q, whereas it was maybe a little stronger earlier in the year.

You look at Moen first. They had a high incremental margin in the fourth quarter. I think some of that is just timing. For the full year, they were at 32% incremental margin, that's a much better rate for them. So I think I wouldn't project that same 50% plus incremental margin going forward.

They finished the year really with their operating - total operating margin up 250 basis points to 17.8% on17% growth. So it's a very strong year with 32% incremental margin. That's -- I think that's the way to think about the business more. In terms of windows and doors, we saw -- we did see a low incremental operating margin in the quarter. We see higher in doors and as the volume is coming in in Windows it's about how do you leverage that. The labor component of that and the efficiencies.

For the full year, we saw doors up 21%, their incremental margin was 21% and 16% for the full-year. So, doors doing well, windows a little more constrained.

Your next question comes from the line of Michael Dowell from Credit Suisse. Your line is open.

Hi, thanks.

I just wanted to ask on free cash flow guidance, in light of the earnings guidance and even accounting for the increased Cap Ex here, it seems a bit conservative to think that you'll only be -- I guess it's 250 plus, but you could you walk through what are some of the puts and takes in there?

We kind of compared to say 2012 where we had $326 million of free cash flow and we're at $254 million. There are issues are issues around between the two years. We have less option proceeds. For example, in 2012, we had $104 million of option proceeds. In 2013, we had about $51 million. And in 2014, we'll have we think about $20 million, so that's declining somewhat.

Cap Ex, for example, in 2012 net was about $62 million, and in 201 was about $95 million, and it'll be $130 million to $140 million. So the other piece of that is the Cap Ex because we report free cash flow after Cap Ex. And we're always, we always start the year in our free cash flow guidance to be $250 million plus or so and then we will modify it as we see during the year. $250 million plus feels pretty good right now, and we're continuing to invest in the business.

Thanks that's helpful. And then the second question, if we look at the storage side of the business, can you talk about how you had the pull forward or timing issues in 3Q then 4Q. Can you talk about the sell through was in 4Q, and where the inventories stand in that business today?

So we talked a little bit about in the third quarter about them pulling forward some demands some orders into the third quarter. We then look at the fourth quarter and they altered some of their promotional activities. So move some of that actually into the first quarter this year. So the inventories are getting absorbed into the market. I think we're going to end up looking at it on an almost rolling six month basis.

If you look at the prior six months, they're down a couple of percent, which is about what we would expect with strong profit and cash iteration. And I think if we look at the next rolling six months, we'll likely see a similar story. And so it's what we would expect as we've described it's a business that we're managing to modest growth expectation, but we're trying to continue to invigorate the product line. It's a profitable business for us - it generates strong cash flow, so it's going to -- as expected, is the way I describe it.

Your next question comes from the line of Garrett Shmois from Longbow Research. Your line is open.

-- a little bit about pricing in cabinets in the quarter. I didn't see it called out specifically. How was the promotional environment? Did you get pricing or was pricing need in the fourth quarter? And how are you thinking about pricing in 2014 plus promotional activity in the context of still a pretty challenging raw material environment?

So a couple of things in there, first overall we'd say mix continues to improve, so we're getting a combination of price, which we take through the whole product line every year, as well as our mix, average dollar per box within product lines, continues to improve. And that's really demand driven. That's consumers selecting higher quality product, buying our new product or new finishes coming through.

In terms of price versus inflation, we're seeing a little bit of inflation on hardwoods and on particle board and plywood, but we can recover that through some pricing. So it feels pretty healthy. On the promotional side of the market, that's been really a home center phenomenon. I'd say that it is really much, much improved relative to where we've been over the last couple of years.

We've been particularly disciplined there. Really emphasizing our products, our service side of the business, and working closer with associates to really match consumer demand to the best product within our portfolio. So all that has paid off and I think we've continued to grow and gain share without having to discount.

But I think that the industry in general, now that capacity is coming is being utilized and real demand is coming into the industry, the need for that promotional activity has abated. So it's a healthy pricing environment and it feels like it's a byproduct of the demand and capacity being better matched.

Okay, thank you. Just one more question on clarification on the sense of incremental investment in 2014. Is that imbedded in your EPS guidance?

Yes, it is. It's in the 2014 guidance already.

Okay. Great. Thank you.

Your next question comes from the line of Mike Wood from Macquarie. Your line is open.

Hello?

Hello, yes, can you hear me?

Yes, got you.

[Start with] corporate to discuss some credit issues with distributors in China not having access to financing. Curious, if that at all is impacting your retail operations there, and could you give us an update on the store count?

Sure, start with the store count, we're up over 900, we're about 910 as we closed the year. That was a combination of adding stores, and we also pared back some poor-performing locations. We're really focused on driving more incremental volume, incremental margin through some of those stores. So it was a combination of both of those things.

On the credit side we haven't, I'd say we're -- a lot of the relationships we've had, we've had for a long time. We're close to a lot of the wholesalers. So, I like to think we're very much on top of that and really haven't seen any of that issue coming through.

Great, and also is there any substantial material margin differential between plumbing products that you sell into remodeling and versus new construction, and how that may have impacted the fourth quarter?

It can be, it's a complicated answer. So on the repair, remodel side, the answer is it depends. We certainly sell some lower-priced, lower-margin product through some channels that consumers will buy at.

As they move up into dealer showrooms into some of our wholesale showrooms, they're buying some pretty high-margin products. So, that's why it depends on that mix. Certainly seeing that mix improve. Consumers are opting for a richer mix and are spending.

On the new construction side, the same phenomena. You've a base-grade product that's going into new construction and that was really your bread and butter of 2010-2011, but that mix has continued to improve in 2012 and 2013. So the general trend is toward improving mix, improving price points, really, across both repair remodel and across new construction.

Okay. Thank you.

Your next question comes from the line of Nick Coppolla from Thompson Research. Your line is open.

So, I'm wondering if you make any comment on the cadence of sales under new construction throughout the quarter and the date? And I'm really trying to understand when things started to get a bit slower and whether or not there's been any incremental improvement?

So, we lag at least a quarter relative to new construction. If you think about our products, faucets, showers, sinks, entry doors, cabinets coming in to a home, they're coming in within the closing phase of the construction build. So we still had a lot-of-volume flowing through in the third quarter, really completing homes that had been started earlier in the year.

We started to see some slowdown. Really, it was in the last six weeks or so, and some of that might have been as well, inventory coming out and fulfilling demand against inventory that was in the channel. We'd expect that'll still be the same phenomenon in the first quarter. And even as then new construction picks up, and you may start to see starts pick up in the late first quarter, we'll lag some of that unless our channels get ahead and feel like they don't have enough volume in them, at which point they'll start ordering in anticipation of that.

So that's a little bit of the dynamic. It was as expected. So I would say that we can kind of see it coming if we look out a quarter or a two. The positive is obviously on the repair-remodel side of the market that has been very strong and very consistent. And we don't have that kind of a pattern. So that's an offset to what we see on the new construction side.

Sure that's helpful. And as a follow-up to that, what does give you more confidence that things are going to be picking back up in the second half?

I think it's a number of things. So I if you look at the builder activity, going back over the last 9 months, they've been more active in acquiring land in community development, in their traffic. And so, all of those things point for them, I think, toward a strong year and that season really is just starting to kick off. So, I think we'll have harder data on that, obviously, a quarter from now when we're talking again.

It's also the macro. We're still well-under constructing what we need to actually house all the household formations, and we demolished a couple hundred thousand houses in the country every year due to storm damage or just dilapidation. So you just role the macro-numbers together, and we're still well-under the volume of housing that we need to build over the next three years.

So, we look at the near-in factors and we look at the macro factors and we roll that together and we probably rerun all those calculation at least once a week, especially in this planning period. So, I would say we are very comfortable with our outlook as we put it forward today.

Sure. And that certainly makes a lot of sense. Appreciate you taking my questions.

Yes.

Your next question comes from the line of Josh Chan from Baird. Your line is open.

I was just wondering about what you're seeing out there in the price versus commodity cost environment? As well as what's assumed in the guidance for 2014?

When we look at fourth quarter of 2013 and really for the year, I'd characterize our inflation as low-single digits. The only thing that was really above that was the wood, plywood, particle board was in the mid-single digit range. But in total, low single digits and with our price, normal price increases it basically washed. So there was a nominal affect net of price. We also saw mix improve so much in both new construction and R&R that that really dwarfs the entire pricing.

As you think about 2014 guidance, it's a little similar. We see slightly higher inflation. Call it low-single digits again, but slightly higher than 2013, and then we'll have price increases that will offset that. And then we'll continue to our innovation, we get indirect pricing through our innovation in our mix as it continues to improve.

Okay, great. And if I can ask about the Security business. You talk about expansion into the commercial access market. Is there a way for you to sort of size what kind of opportunity you see as you continue to expand that business forward?

Sure, we had a strong quarter in security up 8% across within that. Commercial was up mid-single digits. We see opportunities there to leverage our distribution. That market for us with Master Lock, about half of that market is commercial and the other half is retail. Obviously, a very well-known brand in retail. But the commercial side is, I'd describe it as quietly strong.

And so, we see opportunities on the electronic side we're investing in our own organic capabilities. And we're also looking at opportunities to supplement that product line potentially with some acquisitions there as well. Strong, on the commercial side.

And safety is a subset of that. So we've got a line of products that help secure manufacturing sites, mining sites and that was also up strong in the quarter. So that's a little bit of the dynamic rolling through the commercial side of the market.

Thank you and congratulations on the quarter.

Thank you.

And this concludes our Q&A session. I would like to turn the call back over to our presenters.

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

And thank you for participating in today's Fortune Brands fourth quarter and full-year earnings conference call. This call will be available for replay beginning at 7:30 eastern time today through 11:59 PM eastern time on February 11, 2014. The conference ID number for the replay is 36541635. Again, the conference ID number for the replay is 36541635. The number to dial for the replay is 855-859-2056. And this concludes today's conference call. You may now disconnect.