Fortune Brands Innovations Inc (FBIN) 2015 Q1 法說會逐字稿

Good afternoon. My name is Amy and I will be your conference operator today. At this time I would like to welcome everyone to the Fortune Brands 2015 first-quarter earnings conference call.

( Operator Instructions )

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

Good afternoon, everyone and welcome to the Fortune Brands Home and Security quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress during the first quarter of 2015. 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 our 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 in which they are made. 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 for continuing operations, with the exception of cash flow, unless otherwise specified. Quarterly results for 2013 and 2014 on a continuing operations basis are posted on our website.

With me on the call today are Chris Klein, our Chief Executive Officer, and Lee Wyatt our Chief Financial Officer. Following our prepared remarks, we have allowed ample time to address any questions that you may have. I will now turn the call over to Chris.

Thank you, Brian, and thanks to everyone for joining us today. In the first quarter, our teams delivered profit growth that was right on plan, despite a home products market that is, as we expected, off to a slow start. Importantly, our mix continues to improve, our core businesses are performing well and we're building momentum in the market.

In the second quarter, our plan anticipates a market improvement and we are watching closely as the quarter unfolds in this important spring selling season. We also continue to anticipate improving new construction activity in the second half of the year. Therefore, based on that market assumption, and solid execution of our plan in the first quarter, we are maintaining our full-year outlook for our existing business.

I had also recently announced an agreement to acquire Norcraft, a leading cabinet producer. This should contribute additional growth this year and into the future as we expect our markets to continue to improve well beyond the 2015.

Let me first spend some time on our outlook for the home products market, then I'll provide my perspective on our underlying business performance and last I will update you on our strategy to drive incremental growth with our cash and balance sheet. Starting with our view on the US home products market, in the fourth quarter of 2014, we began to see signs of accelerating strength across many aspects of the market that pointed to a stronger 2015.

From a [facing] perspective, it was clear that, due primarily to the timing of housing starts, the market for our products would likely build momentum through the year, particularly in the second half, as our products go into homes in the later stages of construction. Importantly, the first quarter market for our home products grew as we expected it would. We estimate total growth was around 5.5%, with repair and remodel growing approximately 5% and new construction growing 6% to 7%.

In April, we've started to see more positive signs in order patterns and we entered the second quarter with modest channel inventory levels. This profile supports our view of the gradual acceleration in the second quarter which should lead us to a stronger second half.

Our 2015 annual outlook continues to be built under the assumption that the US home products market which impacts 70% of our sales grows at a combined 6% to 8% rate. Within that overall assumption, the pace of repair and remodel demand is assumed to grow at a 4% to 5% rate. New home construction, where our products are installed in the later stages of the building cycle, is assumed to grow low double digits over 2014. Based on that, US home products market projection, the assumptions we make for our other markets, continued share gains, plus the SentrySafe acquisition, we continue to expect solid topline growth for 2015 with our full-year sales increasing 9% to 10.5% over 2014; and our home products businesses again outperforming the market for our products.

Additionally, given that our products are later stage in new construction, we expect that this growth will skew much more to the second half with some improvement in the second quarter. With this market and sales growth, our teams achieved our first quarter plan and are focused on delivering full-year EPS of $2 to $2.10.

Now let me provide some perspective on our business performance, starting with our cabinet segment. We continue to follow the same disciplined strategy for cabinets with the goal being the best cabinet supplier in North America. At the center of the strategies is our dedication to the designer as the key customer and our focus on the most attractive segments of the market. The largest segment of the cabinet market is the dealer channel, which services more than half of the semi-custom cabinet market. We have built long-term structural competitive advantages to allow us to grow together with our dealer partners, including a regional supply chain for optimal service, multiple brands to avoid channel conflict, the industry's best sale and service team, and a consistent flow of consumer focused innovation.

We recently announced an agreement to acquire Norcraft cabinets, which fits perfectly into our strategy. Norcraft can help us build on our structural competitive advantages with their proven capabilities, great relationships in the dealer channel, and strong operating management throughout their business. The combination will strengthen our overall product offering, round out our regional market penetration and enhance our frameless capabilities.

With low overlap in our dealer channel customer bases, we see tremendous opportunity for accelerated growth by bringing these businesses together. Over the past several years, our cabinet team has had substantial success selling multiple product lines into our dealers. We intend to replicate that success with the Norcraft dealer base by adding our product lines to their portfolio.

Likewise, we also have the opportunity to leverage Norcraft products into our dealer network. We believe that in a few years this business could add more than $450 million in revenue and $0.20 of EPS annually. Regarding the status of the transaction, our tender offer is open, we have received antitrust clearance and expect to close by the end of the second quarter.

In the first quarter, our overall cabinet sales were up 1% over the prior-year quarter, excluding the impact of currency. Importantly, sales in our largest channel, dealers grew 8%. Our share gains in this key channel are coming from deeper relationships with existing customers, as well as new dealerships. Our home center in-stock cabinets and vanity sales were down 9%, due to the impact of a timing shift in shipments into the second quarter, as customers drew down inventory in preparation for a second quarter launch of updated product. We expect the first quarter impact will be more than offset with greater growth in the coming quarters.

Our home center semi-custom cabinet sales were relatively flat in the quarter. In 2014, we made investments in this part of our business and have seen success. As we enter 2015, we continue working with our customers to reshape the category and simplify the consumer shopping experience. The first quarter was impacted by competitive promotional activity but we remain disciplined and focused on our strategy to partner with our customers to help them reshape the category long-term through investments that help drive consumer behavior. Our builder-direct business where we are appropriately disciplined, was up slightly in the quarter, reflecting the pace of new construction.

Overall for cabinets, our teams continue to execute well across multiple facets of a complex category. Our structural competitive advantages have been built over a long period of time and are tough to replicate. The impact of this consistent execution can be seen in our share gains, our stronger mix, and our improving margins.

For our plumbing segment, excluding the impact of currency, sales were up 9% for the quarter, led by growth in US wholesale and retail as well as in Canada. In the first quarter of 2015, our sales grew broadly, mixed with solid, and margins were strong. Importantly, wholesale sales increased 9% even as wholesalers order slightly below POS and channel inventories contracted somewhat. We are encouraged to see consumers continue to select our innovative new faucet products for their new homes and repair and remodel projects, including new pullout and pulldown faucets with reflex self-retraction and our Brookshire, Hensley, and Etch lines, our line Modern Sweet, and our Oxby and Rizen bath faucets.

Excluding the impact of currency, international sales increased low double digits, driven by growth in Canada, partially offset by softer sales in China. China sales declined slightly versus the prior year, due to slower direct-to-builder activity. However, our nearly 1,000 Moen stores generated high single-digit growth as we continue to focus our marketing efforts at the local city level and increase store network productivity. We remain optimistic about both our long-term business model in China and the growth potential.

Doors reported sales were up 5% for the quarter. Door products saw sales growth driven by gains in both new construction and retail. Mix continues to improve with consumers more frequently choosing our decorative glass designs and responding to our new styles, like our recently launched Pauls line of modern entry doors. The Therma-Tru brand continues to perform strongly across all channels.

In the security segment, sales increased 41% from the prior-year quarter, excluding the impact of currency. Sales from the SentrySafe acquisition drove the growth. The teams are working hard to integrate the operation, and we're excited about the opportunities we see between our Master Lock and Century businesses over the next few years.

So, to sum up the quarter, the US home products market started the year slow as we expected. Not surprisingly, our teams executed well and our profit results were on plan.

Finally, I would like to comment on our efforts to use our cash flow and balance sheet to drive incremental long-term growth. We continue to believe that we can create meaningful incremental shareholder value by using our strong cash flow and balance sheet to make strategic acquisitions, repurchase our shares, and increase our dividend. We have begun to build significant momentum and we are laying the foundation for incremental value creation at an accelerated base.

During the first three years of the housing recovery through 2014, we deployed over $1.1 billion. We have made $450 million in acquisitions, repurchased $500 million of our shares, and declared approximately $200 million in dividends, laying the groundwork for incremental long-term shareholder value. Importantly, looking forward over the next three to four years, we believe we have the potential to deploy an additional $2 billion to $2.5 billion to drive even more growth and shareholder value. The potential $600 million Norcraft acquisition is just the first step in this next phase.

I'm also excited that Nick Fink is joining Fortune Brands in our newly created role of Senior Vice President of Global Growth and Development. Nick is a results-oriented leader with strengths in international markets, industry-leading consumer brands, and successful M&A transactions. He is also very familiar with our businesses, and I worked closely with him for several years when [Bean] and Fortune Brands were one company. I have confidence in his abilities and approach to business. Nick is a great fit to help us accelerate our global growth strategy and enhance our ability to complete value-creating mergers and acquisitions.

So to sum up, 2015 is developing as we expected. We remain confident in our ability to continue to outperform the recovering home products market, our core businesses are strong, and we remain well-positioned to deliver solid growth in 2015. More importantly, we have laid the foundation for even more growth beyond 2015 as the housing market continues its recovery. We also continue to 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.

Now I'd like to turn the call over to Lee who will review our financial performance.

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, a majority of my comments will focus on income before charges and gains from continuing operations. Let me start with our first quarter results. Sales were $951 million, up 7% from a year ago. Excluding the impact of currency, sales increased 8%.

As we discussed in February, when providing 2015 annual guidance, the first quarter was expected to have modest growth, with increasing growth in the second quarter, and the highest growth in the second half of 2015. Consolidated operating income for the quarter was $73.2 million, up 4% or $3 million compared to the same quarter last year. EPS were $0.28 for the quarter, versus $0.27 for the same quarter last year. Our EPS was on plan and supports the full-year guidance provided in February.

Now let me provide more color on segment results. Our cabinet sales were $411 million, flat to the prior-year quarter. Dealer sales were $168 million, and increased 8% from the prior year. Home center in-stock cabinets and vanity sales of $104 million declined 9%, due to the timing shift of shipments to support incremental product placements, as Chris described. Home center semi-custom sales of $79 million; builder direct shipments of $22 million; and Canadian sales of $37 million were relatively flat in the quarter. Currency reduced Canadian sales by $4 million in the quarter.

Excluding the impact of the ship and timing of in-stock cabinets and vanities from the first quarter to the second quarter and currency, cabinet sales increased 4%. Operating income for the cabinet segment decreased 6%, or $6 million over the prior-year quarter, due primarily to inefficiencies related to 2014 capacity expansion actions. As we discussed from our February call, these inefficiencies should now be behind us. We expect operating income to accelerate throughout the year, and add approximately 100 basis points to the prior-year operating margin.

Turning to plumbing, sales for the first quarter were $334 million, up $24 million or 8%, led by US wholesale of 9%, and Canada of 8%. Excluding the negative impact of currency, total sales increased 9%. Operating income increased $10 million, to $65 million, up 17%. Operating margin for the segment was 19.5%, up 160 basis points from the prior-year quarter. Store sales were $83 million, up $3 million, or 5% from the prior-year quarter. Operating loss for this segment was $1 million, reflecting investments to support business growth.

Additionally, the first quarter of 2014 included a $1 million benefit from a bad-debt reserve adjustment. Operating profit for this segment should accelerate throughout the year, and significantly exceed prior year. Security sales, which now include SentrySafe, were $123 million in the first quarter, up 39% to the prior-year quarter. Excluding the negative impact of currency, sales increased 41%. Segment operating income increased 8%, to $10 million.

To sum up consolidated first-quarter performance, sales increased to 7% and EPS were on plan at $0.28. Before turning to the balance sheet, let me comment on the cumulative impact of currency. The strengthening US dollar reduced our total first-quarter sales by approximately 1.5%, with Canada being the primary source. The EPS impact was approximately $0.01.

Turning to the balance sheet, our March 31 balance sheet remains solid with cash of $179 million, debt of $760 million, and our net debt to EBITDA leverage is 1.1 times. We have $235 million drawn on our $975 million revolving credit facility, as the first quarter is seasonally the highest cash-usage quarter.

Turning last to the details of our Outlook for 2015. As Chris mentioned, based on our projected 6% to 8% US Home products market growth, the assumptions we make for our other markets and continued share gains, plus the SentrySafe acquisition, we expect full year 2015 sales to increase 9% to 10.5% compared to 2014. We expect that this growth will skew much more to the second half with some improvement in the second quarter. We've reduced our previous guidance of 9% to 11% full-year growth due to the expected impact of currency movements.

We are maintaining our outlook for 2015 EPS, which calls for EPS in the range of $2 to $2.10. We expect 2015 free cash flow to be around $250 million, after expected CapEx of $130 million.

The annual EPS Outlook includes the following assumptions. Interest expense of $15 million, a tax rate of 32.5%, and average fully diluted shares of approximately $163 million.

Our updated outlook does not include any benefit from the Norcraft acquisition. Depending on the closing date, Norcraft could generate sales of $210 million to $230 million and EPS of $0.03 to $0.05 in 2015, net of amortization, interest expense, and taxes.

For the full year 2016, sales could be $400 million to $425 million, with EPS of $0.10 to $0.15. Longer-term, sales could grow to over $450 million, with EPS of at least $0.20. We're excited about the value that can be created through the Norcraft acquisition. The purchase price is $25.50 per share, with a purchase price multiple of approximately 11.5 times 2014 reported EBITDA, which should effectively decline under 8 times with synergies in the next few years. The transaction will be initially financed under our existing credit facility.

In summary, the first quarter of 2015 was on plan, in a market experiencing modest growth. The solid performance of our core business, the recent investments made to increase capacity, and steps taken to reposition our portfolio for stronger growth, as well as the expected continuing market recovery, give us confidence in continuing solid growth in the coming years. As demonstrated by the Norcraft acquisition, we remain focused on using our balance sheet and cash flow to make acquisitions and return cash to shareholders through our dividend and share repurchases. We are well-positioned as we focus on maximizing shareholder value.

I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the first quarter of 2015. 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 would ask that you limit your initial questions to two and then reenter the queue to ask additional questions.

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

(Operator Instructions)

Mike Dahl, Credit Suisse.

Thanks for taking my questions. I wanted to dig in on cabinets a bit more because I think, from a top line perspective, that seems to be the one thing that's still missing from hitting the type of high single-digit growth that you guys continue to expect. So just if you think about the timing of some of the in-stock shipments, can you help us understand maybe what April has looked like or over what period of time should we expect that business to recover? And maybe any snapshot you can give on overall cabinets and then the in-stock specifically post-quarter?

Sure. I think if you start and deconstruct the category a little bit for us, today we've got about 40% of that business in the dealer market which, by the way, will increase to over 50% after we complete Norcraft. So dealer business grew, high single digits and we expect will continue to perform quite well.

The in-stock business, which is now 20%, 25% of the business, is a very attractive category for us. We won some significant business in the fourth quarter of last year. To transition that business in the first quarter our retail partner brought down inventory, which they typically do, ahead of the shipments that started rolling in, early part of April.

And that's rolling hard right now and guys are working to ship all that in. It will come in primarily in the second quarter and then in through the third and then we'll have repeat business off the back of that. So it's a very positive thing, but obviously it makes the first quarter look a little soft.

On the semi-custom, special-order side of the business, which is really kind of high teens for us, we talked a little bit about promotional activity. Really as a result of some significant wins we have had over the last 18-plus months there, we've made some pretty good moves in the home centers.

And we've seen this happen before, we take share and our competitors seem to rely upon promotions. Promoting the same old stuff as we're rolling new stuff in, and so we're in a good place there.

If you look year over year, we've gained share in the home centers. If you looked at it versus the fourth quarter, we gave up a little the first quarter on some promo activity, but that's really not sustainable for them to continue just promote the old stuff while we're bringing in new stuff that's getting the consumer excited.

So you look at the overall category, obviously, first quarter is softest quarter for us for the whole industry, but we're pretty excited about where we're going. And that's even without Norcraft. You bring Norcraft in on top of this, it's now over half of our business on the dealer side. You look at the vanity, and in-stock business, another 20%-plus, you got over 70% of our business that's in very attractive sustainable parts of that market, which we like a lot.

So I think you will see, back to your original question, you will see that high single-digit growth that's in very strong margins. But, frankly, it's insulated against whatever competitors want to do on the promotional side and they're going to knock themselves out and we're going to stand tall.

Thank you. That's very helpful and then my second question is then on the profit side. How much did those timing issues impact the profits in cabinets this quarter?

That was a few million dollars. The other thing, though, that -- and we had talked about this in February, was when we made the investments in capacity in the second half of 2014, we created some inefficiencies around material usage, labor inefficiencies and those things and we had said in our February call there would be $5 million or $6 million of those inefficiencies flowing through in the first quarter and that's exactly what happened. And as we also said in February, those should be behind us at the end of the first quarter. And we think that's what's happening now, so about $6 million was inefficiency carryover that we had estimated and discussed.

There were a few million just on the timing of the in-stock business. And then in the first quarter, as always, very -- seasonally very low sales.

So you don't get very much leverage on your fixed cost. And we actually added a little fixed cost in the quarter just to -- ahead of what we think is going to be the market growing in the second quarter and even more in the second half.

So we didn't get much leverage there, so we're fine with our cabinet profitability. This is a business that we think by -- if you look at the midpoint of our guidance, we think that the operating margin will grow at least 100 basis points this year.

It will leverage incremental sales by around 25%, which is our target. And, again, I think it's just skewed a little in the first quarter because that's just the low sales and leverage period for us, so we feel fine about our cabinet profitability.

Okay. So that implies that then -- if it's 25% for the full year still, then you're going to get up above 30% on the flow-through potentially starting in 2Q?

Yes. It could be above 25% for sure.

Okay. Great. Thank you.

Tim Wise, Baird.

Yes. Hey, good morning, everybody -- or good afternoon, actually.

It's a long day.

Yes, it's been a long week. So just, maybe, on the last question with the cabinet profitability, how should we think of the year-over-year margin expansion? Should it be modest in the second quarter and then bigger in the second half? Just a little bit of clarity around that would be helpful.

Yes. When you look at our business, cabinets and other pieces of our business, you really have to look at the market growth. You start with the market growth assumption that we have.

And as we said in February, we thought the first quarter would be the lowest. It would improve some in the second, but most of the largest improvement would be the second half. And I think that's how you'll see the profitability as well because we will start leveraging.

I think you'll see better leverage in the second quarter than the first, obviously, especially as we make up the sales on that in-stock cabinets and vanity business. But we will also just leverage higher sales, so I think it'll be higher in the second, but I think the second half will be much higher.

Okay. Perfect. Thanks. And then, I guess just looking -- with Norcraft, could you maybe talk a little bit about just how you guys think about just the internal capacity for incremental acquisitions? And then maybe just describe a little bit of the process how the Norcraft deal came together and how you guys agreed on that.

Sure. Norcraft is a terrific company, first off, very high quality, very strong in the dealer side of the market, great reputation. And we've known them for a long time. Actually Mark Bullard, who is the CEO, he and his father ran a business that we bought as a company back in the early 2000s.

And so as typical in our categories, we know what other quality business is and we're always impressed with them and just reached out to Mark and started a dialogue. And these things take time, but they kind of unfolded in a way that made sense for both of us. And we came together and it made sense for them and it made sense for us.

We are excited because I think what we can do is very much what we've done already with our cabinet business. We've got this master partner program, where we've taken single-product dealer relationships and turned them into multi-product relationships and it's really been over the last five, six years a lot of hard work, but we know exactly how to do that.

We're going to take that same approach to their roughly 2,000- dealer network. There's only about 25% overlap on those accounts today, so we've got a lot of room to take our products into those relationships and, by the same token, they have some absolutely terrific products, Midcon, StarMark, UltraCraft, that we can take into our existing relationships.

So it'll unfold where there'll be cost synergies early on as there always are, and then the revenue synergies will come over time as we bring all that together. But this is a great example of heart of the market, terrific integration into an existing business, good degree of synergies and some strong accretion.

In terms of further capacity and things we're looking at, cabinet guys are going to be busy with Norcraft for a while, so we continue to focus in the plumbing sector; we continue to focus in security sector. And Nick Fink is joining us, who has been a long-time -- somebody I've known for quite a while, and he's a strong operator as well as strategy M&A guy.

So that combination is just terrific, so he's going to be able to help us and we will have capacity to be able to do some things. So we will be focused on the cabinet side, but we'll have plenty of room to go ahead and do some other things as well.

Let me put some numbers around what Chris is talking about and actually what he said in his remarks. So you assume the housing market recovers over the next 3 to 4 years to 1.4 million, 1.5 million starts and we have 5% to 6% R&R that.

Free cash flow cumulatively could be in the $1 billion range that we could generate in that, say, four-year period. And depending on the level of debt, if we wanted to go 2 times or 2.5 times, you could create another $1 billion to $1.5 billion.

So cumulatively during that roughly, say, 4-year period you could have $2 billion to $2.5 billion to spend. We've just committed $600 million of it, so we have substantial amount left. So we feel very good about the opportunities and we've got some really good momentum and just a lot of flexibility to drive that incremental value with that spending.

Great. Thanks.

Stephen Kim, Barclays.

Thanks very much, guys. I wanted to ask about the cabinets business. I think you mentioned dealer was up 8%. I wanted to know if you felt like that was a pretty good underlying demand run rate?

Is that kind of where you think the market overall is looking for cabinet growth? And do you think that, therefore, we might think that that's what you might have gotten in your home centers or in your in-stock and vanities business that it just got pushed out into 2Q?

I'd say high single digits feels like it's probably about where it is right now. If you deconstruct that a little bit on the dealer side, interestingly, the higher price point, more [custom] in the market was stronger than that and kind of the value part of the market was stronger.

The middle part, kind of the mid-price points were a little bit weaker. So if you blend it all together, we kind of get up to that kind of high single digits.

And I think that's probably -- the market overall is probably running more like 6%-ish and we're picking up some share. I think that's kind of where the market's sitting right now. I think you could see some stronger performance on the R&R side of that market, especially if we see some existing housing stock turn, you can see that pick up into the second half of the year.

And certainly new construction helped the cabinet business. It won't impact the in- stock business that much, but it will help the overall numbers on that side as well.

So, yes. Probably a reasonable proxy.

Great. And, Lee, I think you mentioned that the home center, semi-custom, build to direct in Canada, sort of combined, were flat. What was the home center semi-custom and the build to direct sort of individually? Were they -- in terms of year-over-year change?

They were all in that flat to 1% either side.

Got it. Okay. Perfect. And then lastly, on the cabinets, when you talk about the inefficiencies, I think you mentioned $6 million was directly related to the expansion investments. And then I think you mentioned a few million more for some other things and you mentioned fixed costs also for future growth. Was the fixed-cost comment -- was that the few extra million or just -- I just wanted to be really precise about what the incremental spend was this quarter related to expansion investments and inefficiencies and that kind of thing?

Yes. So when we end the year, 2014, we look at our growth prospects for 2015 in the space and we decide how much investment of fixed cost that we can support. So what we saw in the first quarter -- and so we make those and it could go in in the second half of 2014, so you haven't annualized them until you get through the first half of 2015.

So from a fixed cost in the quarter, which could be people and other things, probably saw between $1 million and $2 million increase. And you notice it in the first quarter because it's the lowest seasonal sales period, so you don't get the leverage on it, so it kind of stands out. A

s you go into the second quarter on, it gets totally absorbed as a sales increase seasonally. So that was $1 million to $2 million. We had a little bit higher cost, $1 million or so, just in some one-time items that will now wash out through the year and you won't have that same impact. So probably about $3 million there.

Got it. Okay. Thanks very much, guys. Appreciate it.

Stephen East, Evercore ISI.

Thank you. Good afternoon, guys.

Hi, Stephen.

Chris, if you look at your plumbing, tremendous results there, both topline and your op margin, of course, pushing 20%. I guess the question there is, one, what do you think was driving it? Are you seeing some raw material benefits, et cetera? And what do you think the sustainability is as you move forward and sort of what do you think is driving the top line as well?

Yes. The business is very healthy. The strongest part's the wholesale side of that market where we are serving the new construction side, actually that, you know, we think is going to build momentum throughout the year. We like the growth we saw there, high single digits; inventory also is down in the wholesale channel, so there's some pretty significant upside for that business from a sales side throughout the year. I think you'll see a stronger second half as some new construction comes in there.

When we sell product into new construction on the plumbing side, that's actually a more attractive product mix. It's a stronger product set and the consumers are buying up, they're trading up, so they are buying a more expensive product going into their new homes.

Retail side, results were good. But again, inventories are down at the retailers, so POS was actually stronger than what our results were. So I'd say strong POS, new products coming in, selling through, strong, and we think inventories will probably tick up through the balance of the year, so that should continue momentum.

Commodities, pretty stable, so that's helping on the profitability side. And I commented a little bit but China. Their direct to builder side of that market, as you'd expect, is down a bit, but our retail stores are growing, high single digits and we think there's some pretty good remodel activity flowing through there.

And we have also worked hard to increase those stores' productivity, call out the bottom performers and really focus on the stronger ones. So there's a lot of good things kind of moving through and helping on the Moen side.

Okay. All right. So if I hear you, then, it sounds like this type of op margin is probably sustainable as we go through the year?

Stephen, this is Lee. If you look back to 2014, we were in the 19%-plus range then. This is just a carryover of what we really did last year.

All right. And then, Chris, if you look at Norcraft, and I'm going to also drag in SentrySafe here, just sort of your acquisitions, are these primarily, when you look at the synergy that you're getting, are they primarily driven by the top line or would you expect a lot of cost synergy coming through Norcraft? It sounded like when you were talking it was primarily topline.

Yes. The Norcraft side, there's a lot of topline there. There's some costs that will come out because you're taking a public company and taking the public company costs out of it, so there is that infrastructure in any public company that you don't need to replicate because you're going to take them within our systems.

There will be some purchasing synergies on the cost side as well, so we're buying -- we're a pretty big cabinet company and we're buying a lot of those components and we're going to have more leverage. And, of course, we've got some manufacturing capability down in Mexico now on the component side, so we've got some good cost savings through that. That stuff will come earlier. That should be balance of 2015 and into 2016.

The sales side, that is significant. It'll just come 2016, 2017 and keep going. And that's been our experience as we looked at our core business and our ability to sell multiple lines into dealers, it's just a continuing process that helps continue that pace of growth. I don't know if you have a specific question on Sentry?

Yes, is that fully integrated now? And I assume that was all topline driven? And also, any update on Waterloo, if you have it.

Sure. On the Sentry side there's actually quite a bit of cost synergies and that's still ongoing and that's what we expected. It's running ahead of schedule, but that will continue.

We will get the Sentry operating margins up to the Master Lock margins, which have been pretty good, kind of at low teem, mid-teen type margins that we will get Sentry to that level, so that will be quite significant. And then there'll be some revenue synergies there as well.

On the Waterloo side, we announced that was in discontinued operations as of the end of the year. We've done work to consolidate operations there, and we're exploring what the right ownership should be longer-term there, and anybody else that's interested in that, but we've got it to kind of a tighter operation to really reflect the revenue side of that business, which, as we discussed before, highly dependent on Sears and so it is what it is.

All right. Thank you.

But that's moving along as we had hoped and probably even a bit ahead of where we thought we'd be right now on that process.

Okay. Thanks.

Dennis McGill, Zelman & Associates.

Hi. Thank you, guys.

Hey, Dennis.

Chris, I imagine this is a blend when you form your outlook using resources from the Street and macro-wise and so forth, but when you are forecasting the acceleration of businesses through the year, and I imagine 4Q is sort of the best of the year, what do you focus on most within your business? What do you focus on most today to give you confidence in that ramp?

I guess you kind of break it down between new construction and repair remodel market. And our assumption this year was R&R a little bit softer in the first quarter, and then pick up a little bit. But kind of reasonable, kind of it maybe [4, 4.5] first-quarter, rolling through to [5] -- maybe [5.5] in the better part of the year, so nothing dramatic there.

On the new construction side, we lag a quarter to almost two quarters, depending on the product. So the products that we build to inventory, so especially on the faucet side, our channels [will] anticipate a little bit, so there's about a quarter lag. Cabinets will be built more closely to when they are actually installed so that they lag 1.5 quarters, even more so.

So when we're looking at new construction numbers and starts, any activity that you'd see fourth quarter would show up in our business late first quarter, second quarter. Any activity we are seeing right now is going to show up on our business over the summer and into the fall.

If you look at 2013, it's a great example. So 2013, strong first half, everything kind of stopped in the summer, but there were plenty of houses they were still building and a lot of the activity.

We had some really big quarters in the third and fourth quarter, both in plumbing and in cabinets. And everybody's looking at us like what are you doing? And the rest of the market's kind of contracting.

Well, we're just finishing up what was started in the first half. So that kind of a lag flows through the business. So when we look at 2015 and we say, okay, we think building activity pick up late March, into April, through the second quarter, into the summer, that will drive the second half of the year.

So that's kind of the macro factor driving the market overall that we just kind of look at based on what happened last year, and then we model our businesses after that. And we picked up share gains throughout and so that keeps rolling through and you layer that on top, so --

So, Chris, is it fair to say then if you've got a visibility that what's happening now is going to be end of the year, that you're seeing sort of 15%, 20% growth among your new construction customers on the start side?

No. That's what we're seeing and hearing and talking to. I mean, there's a lot a positive discussion that we are having with the people that we are selling to, both on the builder side as well as the dealers and the showrooms. And some of that's translating into orders that we are starting to see right now, falling through in April. It's too soon to call the order flow for the whole spring, because it's kind of a funny first quarter; January was okay, February was soft, early March was soft.

And then all of a sudden, kind of later in March, things picked up again and in April things picked up. So it's starting to build momentum and our channels are positive, so I'd say, yes, I think that would support the kind of growth that we are looking for in the second half of the year.

Nothing that happened the first quarter scared us. It was a bit to plan and our EPS was right on plan. We came in right where we thought we'd be.

Okay. Great. If I could sneak another one in just on the Norcraft side, you mentioned, I think, that of their dealers -- I don't know how this would look on your side, 75% of their dealers you don't do business with? Can you just maybe educate us a little bit on why there would be that much of a gap in your overlap with your breadth in the market and the different price points and brands that you have and maybe that kind of leads into the opportunities as you see it?

Yes. That was, frankly, what made it so attractive. I mean, you're right, we're a big underwriting dealer. But what they brought, first on the product side, you've got Midcontinent, which is very strong in that $150 to $300 cabinet category, where we've got a presence but we're not as big as we are in full-on, semi-custom.

And so that product is a great addition to our own price point where we are, as well as UltraCraft, which is on the frameless side. And we've got some frameless product. We don't have as much frameless product as where the market is, so you have got that product set that would lend itself to a set of dealers.

And then, geographically, they're stronger in the West, really west of the Mississippi, so kind of through the middle West all the way out to the West Coast, they've got a better representation. So it was kind of a product and price point on the one hand, and then a geographic expansion. And so in kind of one fell swoop it helped us expand in some places that we weren't and we feel really good about where this sets us up.

And then the ability to cross-pollinate with some product that we've got, be it a stock-builder product with Aristokraft into some of these dealers, or it might be an Omega Dynasty type product line. So there's a lot of places we think we can take it into their dealers.

And then we're excited about their product, bringing Midcont, at that price point into some of our dealers, as well as UltraCraft, StarMark, two terrific brands and products at kind of the right price points into our dealers. So if you're ever going to sketch one out, this one kind of checked a lot of those boxes, which is why we tried to get it done.

All right. Good luck with it.

Thank you.

Michael Rehaut, JPMorgan.

Thanks; good afternoon, everyone.

Hi.

First question I had was on plumbing. You had some nice improvements there and I think -- but if you kind of look at the margins last year, you thought that excluding some of the harsh impacts from weather, could have been closer to like a 19% margin.

So here you have 19.5% off of a 7.5% topline growth. So just curious, actually, despite the good -- some improvement, what were the factors that perhaps prevented a maybe a more normalized, let's say, dropdown in margin expansion that you would get from the solid topline growth?

Yes. This is Lee. When we looked at 2014 margins for plumbing, we were at -- we averaged 19.5% for the year last year, so I think we got there last year and I think that's pretty set at this point that we are pretty comfortable with it. And that is a run rate that should be fairly sustainable unless we do something significant on the sales line. So having a first-quarter margin of 19.5% was pretty reasonable to us.

There were a couple of quarters, middle of two quarters, last year and 2014 from Owen, where they had a 20% operating margin. So 19.5% in the first quarter feels pretty reasonable.

And if we maintain something in the 19% range for this year, we'll be very happy. Our strategic issue with Moen is how do you drive more volume through with those kind of margins because they're very profitable, very successful.

And that's really where we're focused is we continue to invest in the brand; we're investing in new products; we invested in show rooms and continue to invest in the showrooms and displays. So all that we'd rather be driving growth at these margins than flowing that investment down, just to take the margins up high. So even higher than that, so -- and a lot of those things are what's on the docket for the year is to try to drive that growth at those margins and I expect that's what will happen.

Okay. So, in other words, I think you are kind of referencing some of the incremental investment that you're doing in that business today?

Yes. These are just ongoing normal investments that we'll make. Now we've said that we will make more investments in the second half of this year around our supply chain. As you recall, last year we talked about $0.12 EPS in investments, mostly skewed to the cabinet business.

This year we've talked about on our guidance -- previous guidance in February, we talked about around $0.08, with more of that skewed to Moen and a little bit more in the second half than the first half, so we will continue to make investments to drive that business. And we are still hopeful that we could have a 19% operating margins, even with those investments. So it's a great brand, it is strong, it has great structural advantages that just don't go away and it just keeps performing, so we'll invest all day in that business.

Okay. Fair enough. And then, just on the cabinet margins, you referenced some of the inefficiencies from 4Q continuing into 1Q and that was something that you highlighted in the last call. Is that behind you at this point? Or would there be any marginal lingering into the second quarter?

We think that's behind us and, really, it's a byproduct of putting the capacity in and in the cabinet industry, putting capacity in is -- it comes in in chunks and there is no avoiding it. You put the capital in and then you create the room in the plants and then you reorient the workflow and it screws up the workflow for a period of time. There is no other way to do it and so we did it at a time in 2014 ahead of what we think is going to be a very strong next three years because we saw the share gains that we've got, and so we feel good that it's behind us.

It is something that you've got to tackle from time to time. Every major cabinet company has got to take on if you're going to put capacity in and you're going to do it inside of an existing facility and not build a new plant, you are going to create some inefficiencies.

It's not inefficiencies that are created because the workforce somehow loses its way or we somehow stop being as efficient as we were before, it's really reorienting around putting in new lines, manufacturing lines, finishing lines, docking and everything gets rearranged in a plant. So, yes, we've got that; we worked hard at that last year.

It kind of carried over just on the flow that's coming through right now. But we're in a very good place to take on the demand that we see coming in the balance of this year, as well as going into the following year.

Norcraft is in a pretty good place as well. They've got capacity that should take us through 2018 and beyond. There may be some things we add to those plants on the margin, but we're buying a pretty healthy operating system, strong management team, everything else there, so we think we're going to be in a very good place to take the volume that's coming at us over the next few years.

Great. Thank you.

Mike Wood, Macquarie.

Hi. Thanks for providing all the color and taking my question. I just wanted to follow-up on the 5% to 6% compounded growth that you are forecasting for Norcraft in the numbers you provided. Can I just confirm that -- are any sale synergies actually in those numbers in that horizon? It seems relatively consistent with what you are reporting in your legacy cabinets business already.

I think we made reference to the fact that it could grow [450] beyond. I don't think -- we're not pegging it at that number, so it was more of a parameter that it could grow. We would expect it would grow greater than that, beyond [450], so I wouldn't do a linear calculation around that.

It should grow as well as its growing today, Norcraft. And then add to it the revenue synergies to take it up beyond that. So I think if it was going to grow high single digits, then you could assume it should be growing in the low teens.

Okay. And then you also gave the capacity in your pipeline, just in terms of the dollar amount you could spend. I'm curious if you can comment on whether or not you had larger deals in the pipeline and if you think there's any reasonable chance, near-term or over the next several years, you could actually bridge those valuation expectations and bring them over the finish line?

Yes. It's hard to predict. There are a number of things in the pipeline and there's a number of things we're actively working right now. I can never predict the probability of us successfully completing. I'd say Norcraft is a great example of something that we were working on for a while, and in parallel with a number of other things, and that's the one that came together in the right way and so we got it done.

I'd say the same is true with other things we're working on. If you're working on enough things simultaneously, your chances of having something come through -- or a couple of those things, it doesn't have to be one big thing. It could be a couple midsized things, if they are the right fit. And so we've got a number of those things in the flow.

We've got a great team that's working hard on all this and it's a combination of our -- at our business-unit level as well as our corporate teams here. And so, yes, I think probabilities are pretty good over the next few years that we'll be doing some more things. We will stay disciplined. And that'll be the governor around our ability to get things done or not get things done.

Great. Thank you.

Ken Zener, KeyBanc.

Thank you. Good afternoon. Your comment around in-stock cabinets, seems to be -- or I am assuming it refers specifically to WoodCrafters. Could you give us a sense, because that was a higher margin business when you -- a very high-margin business when you acquired it.

Could you comment on what your experience, having owned that company, should appear you have relates to how inventory at the core channels were and what impact that had, so what percent, first-quarter sales, it tends to be light or heavy? And then the impact that it actually had on your cabinet business? Because I assume if you missed sales there, that was actually somewhat of a margin drag as well? Thank you very much.

Yes. The in-stock cabinets and vanities business is actually composed of a number of pieces, so we had a pretty healthy business already providing in-stock kitchen cabinets into retail, into the home centers, quite a sizable business and we did some vanities. We bought WoodCrafters and that brought some additional capabilities. And then together, through our distributed assembly network across North America, we have been able to extend that out.

I referenced earlier we've had some significant wins within the home center channel. And so this year on the first quarter, the issue was managing through taking inventory down as we are preparing to bring the new products in. And so there are multiple products and I wouldn't reference it directly to WoodCrafters.

Our experience with WoodCrafters has actually been quite good. And it's both on the front end side of the market as well as the backend of the market in terms of manufacturing.

We talked about last year, we've actually expanded a major facility, built a second plant right next door to one we had down in Mexico and that's going to feed a number of parts of our business, both cabinetry, vanities, across all North America. And that's -- instead of expanding our supply chain through China, we'll maintain China as part of the supply chain, but having a low-cost manufacturing capability on components down in Mexico, with the kind of lead times that we got and the cost proposition is pretty exciting.

So it's really, at this point pretty well integrated, and so the acquisition's played out as we thought it would, but it's kind of integrated now into the overall stock side of the business. I don't know if there's any more color you want to give.

Yes. Just, Ken, on the operating margin, you're correct in we acquired WoodCrafters. It was a 13% to 14% operating margin, and that's a business that is -- the manufacturing process can be much more straightforward than, say, semi-custom cabinets.

So what we've done here is, when we talk about in-stock, as Chris said, it's vanities, and that's in home centers; it's in-stock cabinets where we have exclusivity in one of the large home centers.

So we brought all that together because it has similar manufacturing structure. It has similar product structure and it's in stock, versus make to order. So we bring that together, and right now it's 25% of our business, and that's the place where we have advantages.

So we're going to run all that together. And as we put it all together, and as we integrate the manufacturing, as Chris talked about, for example, WoodCrafters, we will have very strong margins.

That's why we like that channel and that's why we're going to call all that out together. And then coupled with dealer, which obviously you've seen Norcraft's kind of margin potential, now when you've got -- with them out there, when you've got 70% of your cabinet business in those two channels, which both have not only unique strengths and profitability profiles, but very defendable leadership positions, that's why we will focus on that. So very good margin structures over time as we get it all integrated together.

Thank you.

[Derrick Smoiz], Longbow Research.

Thank you. Just a quick follow-up to the last question. I just wondered if you could maybe provided little bit more color, as the install business ramps here in the second quarter, it sounds like it could potentially be mix positive to margins? Just wondering if you could confirm that thought and maybe just provide a little bit more color on how you would expect the margins in the cabinet business to progress.

You start with the long-term perspective for cabinets. Where we talk about getting -- we were a little under 8% last year, getting back to 14%-plus, as the housing market returns, so we'd like 100 basis points to 150, on an annual basis to kind of get us on that run rate by three or four years to get back to that 14% plus. What you'll see -stock, over time it will have high margins and it will lead us there and it will be in that range.

I think what you'll find this time when we're ramping up new product line wins, it will drive volume, it will help margins, but there is still other cost of getting in and other cost of ramping up in the short run that'll probably depress it, although it'll be favorable versus the first quarter. So it's a good investment; it's a good thing; and you'll see as the year progresses, just as the market improves, I think you'll see our profile in that in-stock category improve as well. So we feel very good about it; that's why we're focused on it.

Okay. Great. Thank you so much.

This concludes our question and answer period. Gentlemen, I turn the call back over to you.

Thank you, Amy. I just want to thank everybody for attending the call today and we look forward to speaking with all of you again very soon.

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