Fortune Brands Innovations Inc (FBIN) 2014 Q1 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 and Security First-Quarter 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)

I would now like to turn the call over to Mr. Brian Lantz, Vice President of Investor Relations and Corporate Communications. You may begin your conference.

Good afternoon everyone, and welcome to the Fortune Brands Home and Security Quarterly Investor Conference Call and Webcast. We're pleased to be here today to provide an update on our progress during the first quarter of 2014. 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 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 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 any questions that you may have. I will now turn the call over to Chris.

Thank you, Brian. Thanks to everyone for joining us today. Our teams executed well in the first quarter, as we handled the challenges of extreme weather, and anticipated lower level of new construction. We remain well-positioned to deliver strong growth this year, and offset some of the first-quarter weather impact, as the pace of demand re-accelerates. Our 2014 annual outlook has been updated to reflect the impact of first-quarter weather on our business, and calls for profitable growth based on our continued share gains and the recovering markets for new construction, and repair and remodel activities in the balance of 2014.

Let me first take you through our view of current market conditions, and provide some insights on the impacts of weather. Then I will cover some of the first-quarter highlights. Finally, I'll wrap up with our updated 2014 annual outlook. Our view on the fundamental market for our products over the next several years is very much the same as when we entered 2014, as we continue to see signs of strength in the overall home products market, despite the near-term disruptions from weather. 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.

While last summer's increase in mortgage rates, combined with higher home prices, continues to impact the pace of new construction, the market for new homes is still expected to show double-digit growth in 2014. Housing inventory remains low, mortgage rates have remained stable over the past nine months, and single-family homes are at historically affordable levels.

More importantly, in the repair and remodel market, which is around 65% of our home business, we have seen a continuation of the strong growth that we saw in the fall season. Notably, in regions not impacted by severe weather, we saw double-digit sales growth for bigger-ticket, semi-custom, and custom cabinets. We also saw increased project size, and stronger demand for more premium faucets in our Moen wholesale showrooms.

Despite the strength we see in the long-term home products market, the first quarter was significantly impacted by severe winter weather. In our businesses, we have done detailed work to estimate that this unusually severe weather negatively impacted our sales by $40 million, and EPS by $0.08 in the quarter. It's important that I take just a few moments to provide a better understanding of exactly how the weather impacted our businesses.

From a revenue perspective, overall consumer shopping behavior was clearly tempered in those areas impacted by severe weather, and there are three important points that I would like to make here around what happened in these parts of the country. First, the weather broke down the consumer planning and purchase process. Current homeowners' ability to design, plan, shop, and start significant remodel projects was constrained in the challenging conditions.

Specific to our business, large remodel projects involving kitchens, bathrooms, windows, and doors require significant activity around the home, and are not easy to undertake in extreme weather. New home buyers were not out ordering or buying new homes at the rate they otherwise would have been.

Second, approximately 50% of our revenues come from the Midwest and Northeast regions, which were the areas heavily impacted by the severe weather. Third, our sales in these regions were down 3% when compared to the milder winter of 2013. This was substantially weaker than the double-digit increases we experienced in the remainder of the US, which had a more normal winter, and continued on a pace consistent with the second half of last year.

From an operating perspective, our ability to efficiently make and deliver product was significantly restricted in the region affected by severe weather. For example, not only were there challenges of getting trucks in and out of markets on certain days, but production was disrupted by less than full shifts, or even complete closures. Some locations dealt with frozen pipes, and some of our cabinet facilities struggled with the impact of low humidity levels, as the buildings were being constantly heated, which caused some hardwood to split, and increased scrap.

In the Midwest and Northeast, consumer traffic is now increasing, and consumers have begun to plan and design remodel projects, as evidenced by the number of quotes being generated, and activity reported in our dealer network. We remain focused on gaining share as demand begins to re-accelerate this spring. We are also encouraged by the strong performance in those areas of the country not impacted by severe weather, where we have seen continued momentum.

Turning to the quarter, total reported sales were up 9%, but we estimate sales would have increased 13%, excluding the impact of weather. I'm going to give you some highlights by segment. Sales for our cabinets business were up 19% for the quarter. Cabinet sales growth was driven by Wood Crafters and the dealer channel, where big-ticket remodeling activity remained strong. We again gained share in the dealer channel, where we saw strong double-digit increases in the regions not impacted by severe weather, and continue to see growth across a fuller range of semi-custom and custom product lines, resulting in a better mix and higher price points.

We are also launching several new products this year, including our refreshed Diamond line, new bath vanity offerings in home centers, and a new Omega frameless custom line for dealers. We continue to leverage our proven structural competitive advantages to generate sustainable momentum. If we exclude the sales for Wood Crafters, the impact from a planned exit of low-margin builder-direct business in the West, and the impact from weather, underlying cabinet sales were estimated to be up 13%.

Plumbing reported sales that were equal to the prior-year quarter, led by US wholesale in China. In the first quarter of 2014, Moen faced a challenging sales comparison to last year's first quarter, when we posted a 26% gain for the total business. More specifically, the wholesale business was comping against a 40%-plus increase in the first quarter of 2013, which is driven by emerging demand for new homes, and wholesalers building inventory throughout the quarter, in anticipation of strong demand in the first half of last year.

In the first quarter of this year, our US wholesale channel was buying only based on current new construction product orders, and had not yet started to build inventory to meet future demand. As a result, our sales in the channel grew only 5%. However we are encouraged to see the continued improvement in the product mix, as consumers continue to select new faucet packages from their new homes with our more 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 (inaudible) collections, our Aris Modern Suite, and our new Brookshire traditional kitchen pull-out.

Moen retail also faced strong double-digit 2013 comps and extreme weather, but continued to benefit from consumer-driven innovations rolled out in Q4, including our new Walden and (inaudible) faucets, with reflex self-retraction and faucets with our microband finishes. Internationally, sales in China, where there are more than 900 Moen-branded stores, were again up double digits over the prior year, driven by the improved performance of the existing Moen stores, and our direct-to-builder efforts. We estimate that total plumbing sales increased 3%, excluding the impact of weather.

Windows and doors reported sales were up 5% for the quarter. Door products saw healthy sales growth of 8%, driven by gains in new construction, and our ongoing distribution expansion. We continue to see an increasing benefit from our distribution improvement, and expansion in the Western region that we put in place over the last couple of years.

Mix also improved, especially with consumers selecting our new decorative glass designs and new door styles, like our recently-launched Pulse line of modern entry-door styles. Door sales growth was estimated at 14% excluding the impact of weather. Window sales were even to prior year. Window sales growth was estimated at 6% excluding weather, and we saw continued progress in this market in the West.

In the security and storage segment, our reported sales increased 3% to the prior-year quarter. Security sales were up 4% to the prior-year quarter, led by increases in US retail, international, and safety, while storage increased 2%. MasterLock US retail sales continue to grow, in programmed expansions at retailers. MasterLock's roll-out of new commercial electronic access control solutions designed to secure high-value sites, such as cellular telephone towers and other storage facilities, again contributed to our sales gains.

To sum up our results, our teams executed well in a challenging quarter. With the first quarter behind us, we remain positioned to continue our share gains and deliver a strong full year of sales and profit growth. Now let me turn to our updated full-year outlook for 2014, starting with our assumption for the market. Lee will then take you through our specific full-year 2014 guidance in more detail in a few moments.

Our updated 2014 annual outlook is built on a revised assumption that the US home products market grows at a combined 9% to 10% annual rate. In the first quarter, consumer traffic remained robust in regions not impacted by weather. Importantly, traffic, quotes, and orders are now beginning to increase in the Midwest and Northeast, where consumers are now able to focus on planning and designing their large remodel projects. New home construction, where our products are installed in later stages, is also expected to re-accelerate.

As we begin to build momentum through the second quarter, we believe that we are positioned to have an even stronger second half of the year than initially planned. Based on that US housing market projection, the assumptions we make for our other markets and continued share gains, we continue to expect solid top-line growth for 2014, with our full-year sales increasing at a 10% to 12% rate over 2013, and our home products businesses growing faster, and again out-performing the market for our products. Based on this market and sales growth, our teams are focused on delivering full-year EPS of $1.90 to $1.99.

To sum up, we remain confident in our ability to continue to out-perform the recovering home products market, and intend to deliver strong profitable growth in 2014. We believe that our strong brand 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'd 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. Before I describe our first-quarter results and revised full-year outlook, let me summarize some factors that impacted our results in the quarter. First, our 2013 first-quarter performance provided a challenging comp, as our home segment sales grew 16% in that quarter, and EPS tripled to $0.24. Second, extreme weather negatively impacted our results. The magnitude of the impact required that we quantify this to better understand both the first-quarter run rate of our business, as well as forecast performance for the balance of 2014.

In early February, each of our businesses began preparing detailed bottoms-up reviews of performance by region. The resulting estimates were relatively consistent, with the Northeast and Midwest regions performing substantially below other regions. As Chris mentioned, in these two regions sales declined 3% in the quarter, while the other regions experienced double-digit growth.

The total impact of these two regions was estimated at $40 million in sales, and $0.08 in EPS, $0.06 from lower sales, and $0.02 from production inefficiency. Third, given our continued confidence in the longer-term growth and demand for housing, we needed to begin to invest in capacity, as we said last quarter.

Now for our first-quarter reported results. Sales were $966 million, up 9% from a year ago. Consolidated operating income for the quarter was $65 million, up 4%, or $3 million compared to the same quarter last year. EPS were $0.25 for the quarter, versus $0.24 the same quarter last year. Importantly, excluding the estimated impact of weather, total Company net sales would have increased by 13%, operating income by $22 million, or 35%, and EPS by $0.09, or 38% compared to last year.

Now let me provide more color on segment results. Our cabinet sales were $411 million, up $66 million, or 19% over the prior-year quarter, led by Wood Crafters and growth in dealers. Operating income for the segment increased to $20 million, up $5 million, as we benefited from higher sales volume, Wood Crafters, and our improving mix from repair and remodel growth.

Excluding the estimated impact of weather, operating income would have been $30 million, or roughly double the prior-year quarter, and operating margin around 7%, over 200 basis points higher than the same quarter last year. For the full year 2014, our cabinet team has the potential to generate operating margin approaching 10% after investments.

Turning to plumbing, sales for the first quarter were $310 million, and operating income was $55 million, both relatively even with the prior-year quarter. Operating margin was 17.9%. Excluding the estimated impact of weather, operating income would have been $60 million, up 10%, and operating margin approaching 19%, over 100 basis points higher than the same quarter last year.

For the full year 2014, Moen has the potential to generate low double-digit sales growth, with operating margin expanding 100 basis points from 2013 after investments. Windows and door sales were $130 million, up $6 million, or 5% from the prior-year quarter. Operating loss for this segment, which is normal in the first quarter, was $8 million, an improvement from the first quarter last year. Excluding the estimated impact of weather, operating loss was $3 million better than the same quarter last year. For the full year 2014, windows and doors has the potential to generate low-double-digit sales growth, and expand operating margin.

Security and storage sales were $115 million in the first quarter, up 3% to the prior-year quarter. Segment operating income was relatively even at $12 million, with security increasing $2.6 million. To sum up the first-quarter performance, we continue to leverage our structural competitive advantages to drive share gains, and we're continuing to see better mix, driven by the improving R&R market.

Before I turn to the balance sheet, I want to point out that we also made significant investments in the quarter to begin building incremental capacity. As mentioned on our last call, these investments should enable us to expand capacity and infrastructure to support sales growth to around $6 billion, and EPS to over $3 over the next three-plus years. We will begin to realize the benefits of these investments later next year, but we needed to take steps now to begin implementation, so that we are positioned to capture the potential growth.

These capacity investments in the first quarter will equal the $0.04 of EPS, and are mainly for expenses related to planning, designing, and the early stages of implementing incremental capacity from the cabinet and plumbing segments. Beginning in the second quarter, we will pace additional investments with the pace of the recovering market. Approximately $0.08 of incremental investment spending is reflected in our EPS guidance for the full year, including the $0.04 we spent in the first quarter.

Turning to the balance sheet, our March 31 balance sheet remains solid, with cash of $124 million, debt of $485 million, and our net debt-to-EBITDA leverage is 0.7 times. It's normal to use a revolver early in the year, so we have $125 million drawn on our $650-million revolving credit facility. During the quarter we repurchased $69 million of our shares.

Turning last to the details of our outlook for 2014. As Chris mentioned, based on our projected 9% to 10% US home product market growth, the assumptions we make for other markets, and continued share gains, we now expect our full-year 2014 sales to increase 10% to 12% compared to 2013. Our resulting expectations for full-year 2014 EPS are now in the range of $1.90 to $1.99. The mid-point of our guidance represents an increase of 30% over 2013 EPS of $1.50.

We expect 2014 free cash flow to be at least $250 million for the full year, after CapEx of approximately $130 million to $140 million, as we begin to invest in incremental capacity to support long-term growth potential. Additionally, our quarterly dividend payment was increased to $0.12 per share, beginning with our March payment. The board has now authorized a June dividend of $0.12.

In summary, after considering the impact of challenging 2013 comps and the extreme weather, our first-quarter performance and the expected continued market recovery give us confidence for 2014 growth, but also for potential growth beyond 2014, as we continue to benefit from our structural competitive advantages. 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 now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks in the first quarter of 2014. We will now begin taking your questions, and will continue as time allows. Since there may be a number of you that would like to ask a question, I'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)

Bob Wetenhall, RBC Capital Markets.

Thanks for the detail on there about the weather, and how it impacted results. It was extremely helpful. Could you give us a little sense, since the end of the quarter on a regional basis what you are seeing from demand, and on a regional basis how you're thinking about the consumer demand trends unfolding in R&R purchases during the balance of the year?

Sure. We're actually encouraged that in the parts of the country people were frozen in the first couple of months of the year, we are seeing more activity there. I'd actually bifurcate a little bit and say that through our dealer network we're actually seeing good orders coming through, a lot of activity. On the retail side, we're seeing a lot of activity and a lot of bids, but we're still watching for those to get converted into orders. I would say the general pace is good. What we're watching for is that to continue through the quarter and that will build into the balance of the year.

It was encouraging because we saw that kind of activity in the non-snow belt regions, and it very much felt like a continuation of last year in those parts of the country. Yet we started to observe in late January, early February wow, this is going to be significant, and we started to really dig in. Now we're pleased to see that there is kind of a return back. The big question will be how much do you get this year; but we're optimistic we will pick up quite a bit of it this year. It just means we're going to have a stronger second half of the year. We'd already thought we would have a strong second half, but this will be even stronger.

Got it. If I could ask Lee, could you expand a little bit on your comments about reinvesting in the business? You had mentioned that there was tighter capacity, which sounds like utilization is up across your business lines. Can you just give us an idea of how much is real CapEx, and what's going to flow through the P&L, and kind of where utilization is, just to frame it so we know how to think about it for the rest of the year. Thanks very much.

Yes, utilization right now -- of course, it's seasonal. But that's fine. That's fine for 2014, and it's fine for the majority of 2015. This capacity is really for 24 to 36 to 48 months from now. As we have always said, as we approach $5 billion in revenue we'd need to increase capacity. To kind of take the mid-point of our guidance this year, it gets you to $4.6 million to $4.7 million, so we are there. You always need to improve -- when you're talking about manufacturing capacity -- you really need to start that 18 to 24 months in advance, so that's what we're doing.

What you're seeing in the first quarter was primarily P&L-related expenses. Those are the planning, those are designing, and some very early stages of shifting some capacity around just for planning purposes. You didn't see a lot of CapEx. The CapEx will start flowing a little bit later in the year.

From a P&L perspective, last call we talked about $0.08, and it's primarily Moen and cabinets. We saw $0.04 of that. We just wanted to get ahead of the planning and the design, and some very early stages of moving, so we needed to get that started. We can pace the balance of the year, the additional $0.04, because we have $0.08 in our guidance. That additional $0.04 now we can start pacing, and the CapEx will get paced as we move through the year.

Michael Dahl, Credit Suisse

Hi, thank you. Maybe just a quick follow-on to Bob's question, and also appreciate all the color that you've provided on the weather impact. But maybe if we think about back to the fourth quarter of last year, do you have a quantification of the sales trends in those regions relative to the overall increase, just so we can have even more confidence that it really is just weather impact here?

We didn't see any impact in the fourth quarter regionally that was different. I think we normally see more concentration in R&R in the Midwest, Northeast, because the housing stock's a little bit older, so you do see a different pace there. What we're doing is comparing to normal trends. This isn't sequential quarter to quarter, this was for a normal seasonal trend, and where our expectation was for the macro market, how were we performing relative to that expectation.

In the non-snow belt areas, we performed to our expectation, to our market projection, and delivered as we would have thought in that season. In the areas that were impacted, it was significant. We're talking the difference between down 3% versus in the other areas of the country up low teens. You've got a material impact. We also built it account by account, region by region to validate it. We did it bottoms up; then we stepped back and looked at it against the formula, if you will, of our market assumptions relative to the seasonal demand that should've been driving through there, and it tied out.

We started monitoring this in late January as it started unfolding, and started trying to react appropriately. We've been tracking it now for -- through. We actually saw it then start to improve. That gave us confidence, as well. Now we're starting to move back to trend line, back to what we would have expected in those areas. You have confidence that you measured the cause and effect.

Got it, thanks. I guess what I was looking at was just the 16% year-over-year growth in the fourth quarter for the total business. Would it have been fairly even across regions, or has there been a -- are we seeing lower growth generally in the Northeast and Midwest?

You really have to look at R&R versus new construction. As Chris said in his comments, over 50% of our sales in the first quarter of last year were in those two regions, the Midwest and the Northeast. A lot of that is R&R related. The age of the housing stock much greater in the Northeast, much more concentrated.

We didn't really see any change in general direction, like for R&R, we saw a strong second half of last year. We saw that continue into the first quarter in those areas that weren't impacted by the weather. But when the Northeast is impacted by weather and it impacts R&R in such a big deal, I think that's what generate a lot of the profit impact. It's kind of normal when you look at it.

That's helpful. Just as a follow-up, on the cabinets exits in the builder business, could you just remind us how we should think about that for the next couple of quarters, before -- as you're getting closer to lapping that, and maybe what was the specific impact of that in this quarter? Thanks.

Yes, the exit of the direct-to-builder was a basically in the Southwest area. That's low margin new construction cabinetry for us. It follows our general approach to businesses. We're going to be disciplined. We don't need to chase low-margin business, so we made the proper notices last fall fourth quarter, exited it starting this year. In the quarter, first quarter, it was about $10 million impact on cabinets, negative impact --

On revenue.

On revenue. Then for the balance -- for the full year, it's probably going to be $50 million to $60 million.

Okay, thank you.

We're seeing that offset by share gains, though, that are really going to help offset some of those fees.

Part of that is that capacity is then freed up to be used either in more profitable parts of the country, direct-to-builder, or is being utilized through the dealer channel. The P&L impact is quite modest. That was not direct-to-business.

Stephen Kim, Barclays.

Thanks a lot, guys. I just wanted to be clear, how much of this lost $0.08 are you actually incorporating in your guidance to be gained back, and maybe of 2Q specifically? Are we talking pretty much all of it to be regained?

You really have to break the $0.08 down. $0.06 was sales related and $0.02 was actually production inefficiencies. We won't get that $0.02 back, basically. When you think about that, we took our guidance, we narrowed that guidance from $1.91 EPS to $2.01. Now to $1.90 to $1.99. Slightly narrowed, basically around those things.

We took our sales guidance from originally 11% to 13% growth for the year down to 10% to 12%. We will get most of that back, either through a combination -- based on our market assumptions for the year -- based on sales and some cost controls as we move through. We try to hit our guidance, and so we will work hard, either from a cost control or from sales.

We're also assuming a significant part of that isn't flowing back in the second quarter. It's flowing back through the balance of the year, especially into the second half. What we're seeing in the business right now is a gradual improvement and a ramping up, and literally week to week. This week is better than last week, which was better than the week before. It's starting to catch, and I think that's going to flow through.

We're assuming we're just going to have a busier second half. Typically you'd see July would be kind of quiet and December would be kind of quiet. As the market's absorbing some of this demand, we think you could have a busy six months the whole second half of the year. That's the way we've played it through the business, and that's the expectation we've got as we're running the business.

Great. That's very helpful. As a follow-on to that relates to the way in which the business is returning. One of the things that we've been hearing from several other places is that the recovery is -- the rebound from the depressed weather effect is being regained, but it does seem to be somewhat gradual. It doesn't seem to be all at once.

I'm curious as to whether or not you think that there could be another factor also at work. For example, the housing market that is slow for reasons that appear to be maybe other than just weather. I was curious as to whether you see any evidence that there has been some slowness or deterioration in the rate of growth due to simply the housing market sort of recovering from the massive price increases that went through, and maybe even some of the lagging effect of interest rates last year?

I think that is still the case. That was what we had expected would be the case coming through, and in our plans for the first and second quarter. There is a lag in our business, so the slow-down you would have seen in the fall would be playing through right now, and that's what we expected. That was an issue. I think that is impacting businesses like Moen on the wholesale side, where we expected we would see a slower first quarter and rolling through.

We expect the housing market will be growing this year. Our expectation is that we will be up on new construction in the low to mid teens type range, and therefore there is going to be strong demand in that part of the market. We are have very strong share with Moen on the builder side of the market with NBCI, and some -- parts of the direct-to-builder business, as well as through dealers. Certainly with Therma-Tru, as well.

We will see that contributing to a stronger second half, and then it will gradually be comping against what will be weaker numbers, as well. That is definitely flowing through, but that was expected. We would've been talking about that. In any case, we would been discussing that right now.

Got it. Thank you very much. Appreciate it.

Dennis McGill, Zelman and Associates

I guess the first question would be along the lines of the cabinet business, where you are walking away from builder business. You mentioned you're essentially picking up business elsewhere, and it's essentially a capacity decision.

Maybe just walk through in a little bit more detail what you are seeing with respect to price in the builder channel? It seems like it's maybe more competitive than other areas that are getting price, and maybe your outlook, Chris, on what that might be over the next year or two as more competitors work into a tougher capacity situation?

Sure. The decision we made in the West on the builder-direct business was not a short-term decision. It was something we've been looking at for a long time. The builder-direct business requires a certain amount of cost structure that we've got to support that business. In other regions of the country, the product mix supports that. There's a slightly higher price point -- cabinets, there's more margin there to support that cost structure.

In the Southwest, the product going in was just at a price point that had trouble supporting the cost in that market. We struggle with it. Others struggle with as well. It was a part of some of the competitors. There was a competitor that went out of business down there. Others have reduced their exposure to those markets. It was really a market price point in that part of the market discussion.

That's not the case with all of the houses being built in those markets. We've got a very strong dealer business in those markets where we are selling higher-price-point product, with the appropriate level of support and sale. It really was something we had been working through for a while, to the extent that that market didn't support that.

I would say your broader question around is builder market attractive for us to be serving? I would say absolutely. There are places, especially East, Midwest, Southeast, where we have very strong direct-to-builder business, terrific relationships, profitable for us, good partner for them, and so no issues there. Certainly then through our dealer network we're supporting smaller builders, and those builders building maybe more upscale houses, very attractive product mix.

Actually, the builder business is good business. It was just this piece was something that we just looked at and said longer-term is not a price point which will support the level of service that we feel we need to be an NBCI company. That's part of our proposition is the level of service we provide. Others may not need to do that. Others may me feel comfortable not providing everything we do. Maybe that price point works for them. That just doesn't work for us in the way we support that business.

Would you say within the cabinets business if you were to compare that against some your other products that are particularly new-construction focused, do you have more or less pricing power within cabinets versus others?

I'd say we do fine where the markets are healthy, and that I'd say balance of the country is pretty healthy. Everything going through the dealer channel looks good. In fact, a lot of the strength we've seen has come through that. In the direct-to-builder business and the other parts of the country, I would say we do just fine. A lot of that we roll through as new product, new finishes. I think it is appropriate. It's good balance.

Thank you, guys.

Michael Rehaut, JPMorgan.

The first question I have is going back to guidance for a second. I think we summed it up in that it appears that the primary change in the EPS is that $0.02 of the extra costs that you parsed out of the $0.08 hit. Also, you had sales to your home products markets down by 1 point, which would imply maybe another incremental small hit. Is there anything going on that's maybe offsetting that as you think about that? Maybe we're getting a little too granular, but it seems like there was maybe a couple little minor negatives, but EPS really didn't come down as much as you would think, perhaps?

Yes, I think those are small pennies here or there. It is primarily we will get better leverage as we grow 10% to 12% our sales. We'll get some leverage around that, and we will also, we will continue as the market comes back to pace our cost. Now we'll still make our investments for capacity over the next two to four years, but there are other places we'll be thoughtful. If the sales aren't quite as good, well we can control some cost in that equation. Our goal is to hit our guidance.

The mix was a little bit better. That was one of the positives coming out of the quarter as we continue to see some good mix trends that we saw coming out of the fourth quarter into the first quarter, even on the volume that was there.

Great. That's helpful, Chris. Just flowing into the second question on cabinets, I guess you mentioned that you expect the lost builder-direct business to be about $50 million, $60 million for the year. I want to make sure I heard correctly that you expect that to be offset by share gains? Being a lower margin business, that's kind of baked into your full-year outlook of approaching 10%?

Yes. The exited business is definitely lower-margin business, and yet the core business continues to grow, I'd say in a very solid way, and is taking share. That offset.

Yes. You can see that in just the growth of -- as we said, we could approach 10% operating margin in cabinets this year. We were at 7.3% last year, so it's that mix, as we continue to be disciplined in that mix, and still get good sales growth. You will see those operating margins come back. Our long-term goal, as we've said, is 14%, which was kind of pre-recession levels for our operating margins in cabinets.

One last quick one, if I could. A competitor mentioned last week -- your large other public competitor -- that they saw a little bit of increase in promotional activity in cabinets. Did you see that as well during the quarter? Any thoughts around that, or that perhaps was that more temporary in your view, or any thoughts around that?

I think in retail there was a little bit. I don't think it is sticky or at a higher level. We held where we were, and I think that channel on the retail side in general is pretty healthy right now. It didn't really concern us. The dealer side didn't see the same thing. I think the market is obviously despite the quarter we just had with the weather impact, the market overall is pretty healthy on that regard, and we're all off running and bringing better stuff into the market.

Okay. A little more temporary, then, in your view?

Yes, that was our take on it.

Great. Thank you.

Kenneth Zener, KeyBanc Capital

Cabinets. There's more companies out there today than there were several quarters ago commenting on the trend. If you wouldn't mind, there is a lot of numbers today, and I appreciate the extra work you guys did there. Could you answer just on the cabinet side, for example? Could you start, or comment on your ability to start commenting on volume and price/mix within that category, so we can understand how revenue is being impacted, if it's largely by price/mix, or in fact if it's end-market volumes?

Sure. I will give you a broader look at it, and then maybe we will follow up with some specifics. But I would say in general it's volume. We are getting improved mix. As the volume is coming to our dealer channel, that does have a higher price point, better mix coming through. The performance that we saw, especially in this quarter through that channel, was really quite strong. Our strength in the channel is being led by that. That will have volume share gain, as well as mix included in that as it translates into revenue. Lee, I don't know if you want to give him --?

Yes, we've always talked about getting back to operating margins of 14% -- the pre-recession targets and levels. A big part of that is leveraging cabinets and the R&R growth, because we have said over a recession recovery period, you always get R&R big ticket that lags in the early stages, and then actually accelerates on a dollar basis beyond normal growth at some point in the market.

It's that kind of acceleration and big-ticket R&R that really helps us improve from the 9.3% operating margin we had last year to getting back to that 14% when we hit kind of a normal run-rate market. If you take the mid-point of our guidance, you start approaching in 2014, 11% operating margin. A good piece of that is what Chris described. It's the better mix coming through big-ticket items, which is very helpful. That's why that dealer base in cabinets is so strong to us.

Okay. If you could, maybe Lee, sticking with cabinets here, I think in the prior quarter you talked about the contribution ex-WoodCrafters, and how that was. Would that be something you could update us on, or does it matter because WoodCrafter's kind of passed [on the accounting]?

I would tell you generally about WoodCrafters, when we made the acquisition last June, we basically said it was a $230-million revenue company, and in 2014 would generate incremental EPS of 11% to 13%. It's spot on that. We're very pleased with that. Those were really good estimates. It is performing well. It is getting harder and harder to break that out, as they now start becoming more integrated, and actually providing componentry into the broader cabinet business. We're going to struggle to have that happen.

I would tell you this. If you take -- if our cabinet business for the full year approaches 10% operating margin, which is what their target is, you will see incremental margins, even with WoodCrafters in there, between that 25% and 30%. We are really not worried about it. They have very good leverage in that business, especially as R&R comes back, and with their great strength in that dealer channel. It was good.

Thank you.

Stephen East, ISI Group

Thank you. Hi, how are you doing Chris, and thanks for laying everything out. It's extremely helpful on this call to see where the weather impacted you. You can't go without a capital allocation question, and what you're seeing on that front with M&A, with your share repurchase, and you've talked about your CapEx. But if you all can just elaborate on, one, what you're seeing, how optimistic you feel about it on the M&A. If it's not going to come through this year, sort of how do you think about your capital allocation from there?

Sure. I'd start with -- and I hate to sound like a broken record, but we're going to be very efficient with our cash and capital allocation and bringing leverage in, as well. I'd say first off on the M&A side, the market is getting busier. We are seeing more opportunities. I can't predict or project when those things will materialize into something that we end up closing on, but I would just say market feels stronger over the last 90 days than it had as we were in third and fourth quarter last year. We are looking at a number of different things. Our teams are busy. I think that's encouraging. Expect that to continue.

It's the start of what I would expect to be the next couple of years of an increasing pace on there. As we talk about it, the more opportunities we have to look at and folks to talk to, the more likely it is that we will be able to actually get some things done. We're hopeful on that. That's a good sign that is emerging as we are four months into 2014.

On the dividend side we obviously increased our dividend late last year, and we've declared that just recently, so we're on that trajectory. Then the share repurchase, Lee, can you comment for a minute on our activity so far?

As we've always said, we don't need to accumulate cash. As we began planning for 2014, we basically said let's make sure we avoid any share dilution, so let's use cash early in the year to just systematically buy back shares. We've -- in the first quarter we spent about $69 million to buy back shares, just to kind of avoid any dilution as we use cash. We will do that, and we'll pay the dividend each quarter.

We'll still by year end have net-debt-to-EBITDA basically around zero. We're using the cash efficiently, and using it where we can. As M&A develops then we will figure that out. We've got a lot of leverage potential on our balance sheet, as Chris said.

Okay. That is great, helpful. Just two odds and ends questions. One, on the cabinet side, we've heard different stories on wood inflation. Are you seeing it and can you pass it through? The other thing, China. You talked about it had remained strong. They've seen a lot of slow-down there. Why do you think -- are you such -- so early in the process that you're just growing through it, or what do you think's driving that?

I'll talk about China, and then we can touch on the wood. I was just out there with our team a few weeks ago. I would say a lot of discussion about where the growth is, and where it's not. Our business is concentrated in Tier 1 and Tier 2 markets. They are performing better than the Tier 3, Tier 4 right now. I think that we're well-positioned there.

Obviously a broad network of stores, really working with the stores to improve the flow there. Over time we've been a heavy new construction market in China. Over time, we're starting to see some R&R activity come through there. I think that will build over time, so we remain optimistic.

All that being said, I wouldn't rule out that there is a slower new construction market flowing through China in the next year or two. It's pretty well documented and we've talked a lot about it. I'd say I was encouraged that our own performance is pretty good. I think we're being quite prudent in terms of our expansion into the markets that are showing good growth and paying attention to the velocity within those stores. Not getting out ahead of the development in the Tier 3, Tier 4 markets, where the absorption out there might not be keeping up.

That's our take on it now. The other thing I can say is we're going to continue to watch it closely because it is evolving, the situation is a little different now than it was six months or nine months ago.

Yes, I got you. What type of store growth are you expecting this year?

We look at that every quarter. Typically, we might target 50, 70, 100 stores. That will depend on where we see the opportunities. If we don't see the opportunities, we'll be more modest in the store growth this year. I think we will evaluate it quarter over quarter. Another part of our focus is both the direct-to-builder business, which is growing over there, and increasing the velocity within the existing stores. It's really that mix that we're trying to optimize to get the growth.

Stephen, on the inflation, the first quarter was very much a repeat of the fourth quarter, where we saw total inflation across the Company as in the low-single-digit range. We did see wood at the higher -- wood, plywood, particle board at the higher end, kind of the mid-single digits. We do get pricing.

We continually get pricing to offset inflation, so we have seen that. Inflation was not an issue. Pricing more than offset it. Overall for the quarter, pretty minimal impact on either when you net them.

Keith Hughes, SunTrust

Thank you. Looking specifically at April, I know you talked about acceleration. But based on the summary of your comments, are you still not quite at this 10% run rate we are expecting for the year?

I would say we are building toward that. We're not there yet. January, February was hard negative down. March started to improve. I would say April improved a little bit better than March, but still not kind of up to that ramp. The activity that we're seeing more recently as we look into activity in orders that we expect and then are going to convert into revenue in May are picking up.

I view the second quarter very much as the on ramp into the second half of the year. I'm encouraged by the activity we're seeing. I think there is real strength. It's pretty widespread. It's both in the recovery in the Midwest, Northeast. There continues to be good activity around the whole country.

It's just pacing. It's just basically I think getting the consumer back into the flow in those parts of the market where they were quiet for the first part of the year.

The second question on the cabinet acquisition last year. It looks like that may have added about $30 million of revenue. Is that number roughly correct?

It's for the quarter a little higher than that. It was a $230-million revenue estimate, so probably closer to $50 million in the quarter.

Oh, $50 million in the quarter. That's all for me. Thank you.

Garik Shmois, Longbow Research

Thank you. Question. You talked about the potential sales and margins by segment. Wondering how we should think about that in relation to your guidance. Is this a framework by segment that should take us towards the mid-point of the guidance? Is this the best-case scenario? Wondering if you could provide a little bit more color around the language.

Yes. What we tried to do in the first quarter, whenever you have weather that really confuses the performance, so we tried to add the weather back so you could see it. But then we still tried to give you just a sense -- not as much guidance by segment, but just kind of the potential, and some of the things we are working towards. But I think if you would look at those generally, and say it's probably moving towards the mid-point of the guidance.

Okay, thank you. A follow-up is a competitor had indicated they're seeing some extended lead times between new housing starts and when their products are starting to be shipped in, and whether it's bigger mix of multi-family construction, or whether it's supply constraints. Are you seeing any evidence on your end that as housing -- if and when it does come back -- there might be delays in timing from when a start occurs or when your products actually get shipped?

We don't really see that. If you go across our portfolio with cabinets, you're kind of shipping in to when they're ready for that, and I don't see that changing in the sequencing of how they're building the home. We are producing to be delivered into when they're ready for that install.

Within faucets, the inventory is flowing into wholesale, and the wholesalers are holding that inventory and shipping it in as the plumbers are installing when they need it. On entry doors, we're shipping out into the market. Our distributors are holding and then assembling to be installed on site. I haven't seen any of that impacting our businesses at this point as I'm sitting here. I certainly through the last couple of quarters haven't seen that change.

Okay. Thanks so much.

Eric Bosshard, Cleveland Research

Thank you. I'm wondering if you could talk a little bit about in the cabinet business how the home centers grew, or what you saw in terms of growth rate in home centers relative to what you saw in dealers?

I tell you the different. Dealer market, certainly in the non-snow-belt regions, were very strong. I mean very strong in kind of in the over-30%-growth type very strong. We certainly didn't see that kind of volume flowing through, or that kind of activity flowing through the home centers. In the areas where the weather was impacting, we were down in dealer, and I'd say it was probably more consistent with what we're seeing coming out of the home centers. That is where the big change was.

As we're sitting here in April coming into May, I would say dealer activity is translating into orders, and there is a good pace on that side of the business. In home centers there is a lot of activity, and we're working closely with them. But there's probably not as fast a conversion from a lot of the quotes that we're seeing and all of the work we are doing.

It's again ramping up toward firmer orders. There's a pace issue, is what we're seeing. I'm encouraged that there's consumers out there shopping, and that we're helping and working through quotes. But the conversion then from the quote to the order is just -- isn't coming at the pace yet of where the dealers are. That's the biggest difference I see right now.

In terms of the builder-direct business, the $59 million -- I think you quantified the impact of walking away from that in the quarter. In terms of when you will offset that with other share gains or basically re-purposing that capacity, I want to make sure I understood when will that happen, or when will those two -- when will that loss be zeroed out? Is that a 2014 event, first half, second half? How should we think about that?

It's $50 million, roughly $50 million for the year 2014, and we exited right at the beginning of the year. We give notice in the fourth quarter. It will take all year. It will flow through. It was $10 million in the quarter, the first quarter, and $50 million for the year. It will flow through the year. I think we have such a good position and a good service proposition in that dealer channel that we are gaining share there. It will offset it, and it will be much more profitable.

The gross impact of the $50 million on the net offsetting it with the success of your strength in the dealer channel -- how much of that be offset, is what I'm trying to figure out?

Hard to tell. I can tell you the profit impact will be minimized. The sales, you could still get a little slippage, but by the end of the year I think we'll make that up with the way we're gaining share in the dealer channel. By the end of the year, I wouldn't think it's going to be an issue, but we will see that each quarter that we're walking away from roughly a fourth of $50 million.

Okay. That's helpful. Thank you.

This concludes our Q&A session for today. I would now like to turn the call back over to Mr. Lantz.

Thank you, Jeremy. I'd like to thank everybody for attending the call today, and we look forward to getting out and working with all of you very soon. Thank you.

Thank you for participating on today's Fortune Brands conference call. This call will be available for replay beginning this evening, and continuing through May 14, 2014. The conference ID number for the replay is 26420646. Again, the conference ID number for the replay is 26420646. The number to dial for the replay is 855-859-2056. This concludes today's conference call. You may now disconnect.