Fortune Brands Innovations Inc (FBIN) 2015 Q2 法說會逐字稿

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

(Operator Instructions)

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

Good afternoon everyone, and welcome to the Fortune Brands Home & Security quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress during the second 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 on 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. 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 Brain, and thanks to everyone for joining us today. In the second quarter our team has again delivered profit growth that was on plan in a home products market that improved modestly over the first quarter in prior year, as we expected. Importantly, our core businesses are performing well across all segments, and we continue to build momentum in the market.

In the second half, our plan anticipates stronger market improvement driven by higher levels of new construction activity. Based on that market assumption, solid execution of our plans for the second quarter, and the momentum we had inside of our businesses, we are maintaining our full-year outlook for our core business, and updating the outlook for the Norcraft acquisition in interest expense for long-term financing.

Let me first spend some time on our view of the home products market, then I'll provide my perspective on our underlying business performance. Starting with our view of the US home products market, the second quarter the growth rate in the market for our home products improved modestly, as we expected it would. We estimate that both repair and remodel and new construction grew approximately 5%. Due primarily to the timing of housing starts, the market for our products should show stronger growth in the second half, as our products go into homes in the later stages of construction.

Our overall assumption is that the US home products market, which impacts 70% of our sales, grows at a combined 6% to 8% rate for the year. Within that overall assumption, the pace of repair and remodel demand is assumed to grow at around a 5% rate. New home construction is assumed to grow 9% to 10% over 2014. The new construction activity over the next few months will give us a better sense of where within the full-year range the market growth may fall. We are watching closely to see what the positive impact on our sales in the fourth quarter might be if the pace of construction activity remains robust and extends into the normally quieter months of November and December.

Now let me provide some perspective on our business performance. For the second quarter, sales increased 13% for the total Company and 17% for the US businesses. Importantly, operating income grew 20%, with solid performance across all operating segments. Starting with our cabinet segment, as I discussed on our last earnings call, we're following a disciplined strategy for cabinets with the goal of being the best cabinet supplier in North America. At the center of this strategy is our dedication to the designer as the key customer, and our focus on the most attractive segment for the market. Product innovation and our high levels of reliable service to our channel partners drive growth.

The largest segment in 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 that allow us to grow together with our over 5,000 dealer partners, including a regional supply chain for optimal service, multiple brands to avoid channel conflict, the industry's best sales and service teams, and a consistent flow of consumer-focused innovation.

In May we acquired Norcraft Cabinets, which fits perfectly into our strategy. Norcraft will 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. And with this acquisition, over half of our annual cabinet sales should come from this very attractive cabinet market segment.

We are also sharply focused on profitable growth in home-centered in-stock cabinets and vanities. We plan to continue our strong growth in this market segment with our new product introductions and program wins, executed through our dedicated and increasingly efficient supply chain and logistics model. Most importantly, our overall cabinet business is now solidly-positioned in the most attractive segments of the market. Nearly 75% of our annual cabinet sales should be generated from the dealer channel and home center in-stock cabinets and vanities. These are not only the most profitable segments of the business, but are also where we have our strongest structural competitive advantages.

Turning to the second quarter for cabinets, our overall cabinet sales were up 18% over the prior-year quarter, with sales in the US increasing 20%. Sales for dealer and in-stock cabinets and vanities, which account for approximately 75% of our annual sales, were up [29]%. Specifically, sales in our largest channel, dealers, grew 32% and 10% excluding the Norcraft acquisition. 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 increased high teens, due largely to the impact of new programs and product upgrades that we began shipping in the second quarter. We expect continued growth in the coming quarters from [the new] products and programs. The remaining 25% of our cabinets business focuses on home center semi-custom, builder direct in select markets, and our Canadian sales. We're disciplined in our approach to these segments of the cabinet market, as we focus on where we can capture profitable growth. Together these segments were up slightly in the quarter, but up mid single digits when adjusted for Canadian FX.

Overall for cabinets, our teams continue to execute well across multiple facets of a complex category. Our recently expanded capacity is through the transition phase and our plants are increasingly more efficient. We are happy to have added this capacity and transition through its integration ahead of stronger market demand that we expect over the next couple of years.

On the front end of the business, we are performing particularly well as we gained share in the most attractive segments of the market. The impact of our consistent execution can be seen on our share gains, our stronger mix, and our improving margins.

For our plumbing segment, sales were up 5% for the quarter. Sales increased 10% in the US, led by growth in both wholesale and retail. Again in the second quarter, our mix was solid and margins were strong. Wholesale sales increased 5% with the pace of new construction. And retails grew mid teens, driven by new product performance and strong POS. Channel inventories remain lean in wholesale, with POS running ahead of shipments.

We are encouraged to see consumers trade up and continue to select our innovative new faucet and shower products for their new homes and repair and remodel projects, including new pull-out and pull-down faucets with Reflex self-retraction in our Notch and [vos] lines, our Woodford traditional bath suite, and our Magnetix easy-docking easy-releasing shower heads.

Sales in Canada were down double digits to the prior year but were nearly flat when you exclude the impact of currency. China sales declined 4% versus the prior year due to slower direct-to-buidler activity. However, retail and e-commerce generated mid 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, and are encouraged by the R&R activity that we are beginning to see.

Doors reported sales were up 6% for the quarter. Door products saw sales growth driven by gains in both new construction and retail. Mix continued to improve with consumers more frequently choosing our decorative glass designs and responding to our new styles, like our recently launched Pulse line of modern entry doors. The Therma-Tru brand continues to perform strongly across all channels and are benefiting for our expanded distribution.

In the security segment, sales increased 28% from the prior-year quarter, with US sales up 37%. Sales from the SentrySafe acquisition drove the growth, while Master Lock sales increased 3% in the US, driven by retail and safety. FX and international softness [more than] offset the US growth. We're excited about the opportunities we see between our Master Lock and Sentry businesses over the next few years, and the teams are working hard to integrate the operation.

So, to sum up, the second quarter was better than the first quarter, and we continue to expect the second half to be stronger than the second quarter. Our teams are executing well and delivering profit results on plan.

Before I wrap up, I'd 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.

I am excited that Nick Fink has joined us in our newly-created role of Senior Vice President of Global Growth and Development. He brings a wealth of development experience and is a proven operator. He is joining us at a very good time, as the acquisition pipeline is the most robust we've seen since before the downturn. Over the next three years, we believe we have the potential to deploy an additional $2 billion to drive incremental growth and shareholder value.

So, to sum up, 2015 is progressing as we expected. We remain confident in our ability to continue to outperform the home products market, our core businesses are strong, and we remain well-positioned to deliver solid growth in 2015 and 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 balance sheet and strong free cash flow. We've begun to build significant momentum, and we have the ability to create incremental value at an accelerated pace.

Now I'd like to turn the call over to Lee, who will review our financial performance and provide detail on our updated guidance.

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gains from continuing operations.

Let me start with our second quarter results. Sales were $1.17 billion, up 13% from a year ago. And as Chris mentioned, sales increased 17% for our US businesses. Consolidated operating income for the quarter was $151 million, up 20% or $25 million compared to the same quarter last year. EPS were $0.59 for the quarter versus $0.51 in the same quarter last year, and we're on plan for the second quarter and first half of the year.

Let me now provide more color on segment results. Our cabinet sales were $551 million, up $83 million or 18% versus the prior-year quarter. Norcraft added $46 million of the sales growth. Dealer sales were $253 million, and increased 32% from the prior year. In-stock cabinets and vanity sales were $136 million, increased high teens reflecting shipments to support new product wins. The remaining sales for home center semi-custom, builder direct, and Canada increased 4%, excluding the negative impact of $5 million from Canadian currency.

Operating income for the cabinet segment increased 23% or $11 million over the prior-year quarter, with Norcraft adding $5 million of the increase. Operating margin for the quarter increased to 10.3%. For the full year, we continue to expect to add over 100 basis points to the prior-year operating margin of 7.7%, and approach at 9%.

Turning to plumbing, sales for the second quarter were $358 million, up $18 million or 5% led by US retail up mid teens and US wholesale up 5%. Excluding the negative impact of currency, total plumbing sales increased 7%. Canadian sales were flat, excluding the negative impact of $5 million from Canadian currency, and China sales were 4% lower. Operating income increased $5 million to $75 million, up 7%. Operating margin for the segment was 21%, up 40 basis points from the prior-year quarter. For the full year 2015, operating margin should be close to 20%.

Door sales were $118 million, up $7 million or 6% from the prior-year quarter. Operating income increased $6 million to $15 million, up 57%. Operating margin for the segment was 12.9%, up 410 basis points in the prior-year quarter. Full-year operating margin for this segment should approach 9%, a significant improvement over 7.1% the prior year. Security sales, which now include SentrySafe, were $139 million in the second quarter, up 28% to the prior year. The impact of foreign currency reduced sales by $3 million in the quarter. Segment operating income increased 41% to $20 million, and the operating margin increased to 14.3%. To sum up consolidated second quarter performance, sales increased 13% and EPS were on plan at $0.59. With our total Company operating margin at 12.9%, we are on track to reach our long-term goal of 14% plus operating margin when the housing market returns to steady-state levels.

Before turning to the balance sheet, let me comment on the cumulative impact of currency. The strengthening US dollar reduced our total second quarter sales by approximately $14 million, with Canada being the primary source. The EPS impact was approximately $0.01.

Turning to the balance sheet, in June we took advantage of the opportunity to secure long-term financing by issuing $900 million in corporate bonds. Our solid business model, consistent cash flow, and strong balance sheet supported both the investment-grade ratings received from all three agencies and the favorable long-term rates realized. The refinancing was leverage-neutral and the bonds have traded well since their issuance. Importantly, with the proceeds used to pay off our $975 million revolver, we will have significant financial flexibility to drive incremental growth. Our June 30 balance sheet remains solid, with cash of $224 million, debt of $1.39 billion, and our net debt to EBITDA leverage is 2.1 times. By year-end we expect leverage to be about 1.5 times. We currently have nothing drawn on our $975 million revolving credit facility.

Turning last to the details of our outlook for 2015, 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 Norcraft acquisition, we expect full-year 2015 sales to increase 13% to 15% compared to 2014. Our updated outlook for 2015 EPS, which now includes the impact of the Norcraft acquisition, as well as incremental interest expense as a result of our bond issuance, calls for EPS in the range of $2.03 to $2.10.

Our updated outlook reflects market assumptions similar to the prior outlook, plus $0.04 to $0.05 from Norcraft net of interest and amortization, less $0.02 from the incremental interest expense from refinancing the non-Norcraft debt. That's approximately $0.01 from the additional impact of foreign currency.

We expect 2015 free cash flow to be around $270 million after expected CapEx of $135 million. The annual EPS outlook includes the following assumptions: interest expense of $32 million, a tax rate of 32.5%, and average fully diluted shares of approximately $163 million.

In summary, the second quarter EPS was on plan in the improving market. The (technical difficulties) of our core business, the recent investments make increased capacity. And steps taken to reposition our portfolio for stronger growth, as well as the expected continuing market recovery, gives us confidence in continued solid growth in the coming years. As demonstrated by the Norcraft acquisition, we remain focused on using our balance sheet and cash flow to drive incremental shareholder value, with the new debt structure giving us significant flexibility.

I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the second 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 will 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?

Thank you.

(Operator Instructions)

Bob Wetenhall, RBC.

Hey, good afternoon and congratulations on a very solid quarter. Chris, I was hoping you could take a moment and just give us a little bit more granularity.

What is giving you confidence in the guidance? You're moving up the bottom end of the range; what are you seen from a demand side that is giving you comfort to be more aggressive about your outlook for profitability?

Thanks, Bob. Obviously two parts of the market on the R&R side. We just continue to see a good steady cadence.

On new construction, really, we look at a lot of factors in looking out throughout the year. At this stage, most of what we are looking at is showing positive. So we are looking at drivers of -- could affect new family demand, household formation, employment, wages. And we look at actual activities, we look at the order of books to the builders, which turn into permit so the permit data, purchase financing applications, and then we move on to starts, and we culminate in closings.

If you run that whole sequence out, a lot of it we are seeing is setting up a strong second half. And I just draw a parallel to some prior periods where we look at this data and saw the similar patterns. Kind of the second half of 2009, which set up a strong fourth quarter and first half of 2010 for us. The second half of 2011, which is when we came out as an independent company, all those indicators indicated strong demand coming at us and turned out 2012, 2013, saw some good demand.

I was kind of looking at the same sort of factors right now. I'd say the only caveats are labor looks pretty tight. And obviously, there were some wet parts of the country, which probably slowed some building activity. But everything else we're looking at looks pretty positive.

So we added a year, I'd say a little bit more conservative than the market, we were below consensus in terms of our own internal view. And the market is kind of coming to us. So all that winds up for what we think is going to be pretty good growth in the second half and we are performing well in all of our segments.

Thanks. That is very helpful. Second question and then I will pass it over.

Could you just talk for a second about what your thoughts are about the M&A pipeline that you mentioned in your prepared remarks? What are you seeing in terms of segments where you'd like to invest in? How do you see evaluations today?

And kind of what is the pipeline thinking from a timeframe for Fortune to start deploying its balance sheet? Thanks very much and good luck.

I'd say it's really picked up probably the last four or five months. A lot of stuff coming at us inbound. We've also had a lot of outbound activity which is resulting in some interesting discussions.

I can never speculate on whether (inaudible) result in a successful transaction but I'd say the pace of activity is stronger than we've seen since before the downturn. And looking across our segments, a lot of discussions in plumbing, some discussions in security, some discussions in the exterior part of the home, and some international discussions. So I'd say all that is kind of moving through us right now, and I'd say it's notable, it is much stronger than it had been.

What driving it? I guess I think there was quite a bit of pent up transaction out there. And as summers look at the market and it's been unfolding in a fairly systematic way, everybody's expected a huge pop, that's going to realize something extraordinary. So it sets up a pretty good dynamic.

I'd say in terms of valuation expectations, they are coming more in line as well. Which is, you know, buyers and seller are getting a little bit closer which is probably what's leading to the transactions that are happening out there. So obviously, we did Norcraft, 11.5 times EBITDA, but strong growth characteristics.

And I'd say that's typical of paying that range if you've got strong forward growth that you can count on that isn't just speculative but is concrete based on the trajectory of the businesses, and good margin profiles. And I think we are in an environment where you can probably calculate those and have some confidence in them. So that's really what's driving it.

Tim Weiss, Robert W. Baird.

Hey guys. Good afternoon and nice job.

I guess just focusing just on the cabinets business, in the back half of the year, send me back to look at Q2 and we take out Norcraft, I'm getting $5 million of EBIT improvement in the core business and maybe that translates to low to mid teens incrementals. And so could you just talk a little bit about what gives you the confidence in the back of the year just given the pretty substantial EBIT ramp that I guess is implied in guidance?

Yes, this is Lee. I'd characterize a couple of pieces here.

One is the market that Chris talked about that's as we expected, continuing to improve both in new construction and R&R. On top of that, when you think of sales, just even excluding Norcraft, and you look at our second half comps last year, our cabinet sales in the second half last year were basically flat.

And Moen actually was only up less than 4% in the second half. So we've got pretty nice comps to go against in the second half of this year so we feel good about that on the sales line. And then we have just got the normal growth on top of that that comes from this market.

On the profit side, in terms of cabinets you remember we moved quickly in the second half of last year to put capacity into cabinets, getting ahead of the demand that we saw over the next few years. And that cost us significant inefficiencies. And we actually, in the third quarter, called out $7 million of inefficiencies and then we called out $12 million in the fourth quarter. So we've got those that will not be there this year.

So when you start adding back those inefficiencies, and then you add the incremental sales at kind of a reasonable incremental operating margin, you kind of get to nice growth. And that's -- so it is a combination of all of those things, basically. It is a combination of the market improving as we'd expected, it's the combination of weaker comps on the sales line, and just continuing to improve that profitability, especially in cabinets where we had some one-time items last year.

Okay. Great, that's helpful, thanks, Lee.

And then just on the investments that you guys had earmarked for this year. Can you just remind us the pace of that in the first quarter versus the back half and if that's going according to plan?

So remember in 2014, just to frame it, we had about $0.12 in investments, primarily in cabinets about those capacity adds in the second half. In 2015, we talked about $0.07 to $0.08 of investments and right now we are thinking that is probably around the $0.07 range. Moen would be a little more than half of that, probably $0.045 of the $0.07 for the year.

As we think about the timing by quarter, we think we had about $0.01 in each of the first two quarters. Probably have $0.02 in the third and $0.02 to $0.03 in the fourth as we really ramp up some of that [Mullin] capacity in both the North American assembly and in the China manufacturing. So about $0.07 for the year, $0.02, $0.025 in the first half, $0.045 to $0.05 in the second half. And all built into our forecast.

Right. Great. Thank you.

Stephen Kim, Barclays.

Thanks, guys. Strong results.

First question I guess is related to the comments about the strength in housing. We certainly have seen some figures that been pretty good coming out of the builders in terms of top line or orders, I would say. But we've also seen absorptions per community there coming in more flattish for a lot of the guys. In addition, with the recent little move up in rates, there has also been some concern about how that's going to be affecting demand going forward.

I was just curious as to what degree some of those more offsetting factors have been incorporated into your outlook. If you could just sort of talk a little bit about why those factors, particularly the lack of absorption growth that the builders would suggest that they are just gaining share of the market as opposed to the overall market. And I would think you would care more about the overall market than the builders gaining share.

I'm just looking at the -- even a year in, looking at second half. You just look at from its starts, orders are still pretty strong even with that absorption issue. We see a pretty good pipeline across our customer base.

And it's not just the data we're looking at in aggregate, it's also discussions with the large builders that we support through Mullin in large part as well as Therma-Tru Norcraft. And it kind of lines up to what our expectations are.

I'd also say our expectations are slightly below our consensus. So as we're talking about where our growth is for our products coming in with a slight lag to the actual construction, what's embedded in our guidance assumes slightly less than consensus new construction numbers. So we're not really stretching out there as we are looking at the balance of this year.

As we are looking to 2016 and 2017, we create a wider range because frankly, we're doing this to plan capacity, to plan inventory, to do those sorts of things. So at that point, we probably look more like consensus in the 2016, 2017 range just because we need a wider range to plan around.

So I figure there's no great leaps of faith in the second half of the year, it's based on data we're looking at, discussions we're having in the market, the activity that we see. So I'd say it's just -- I guess it's also the preponderance of green versus yellow versus red in terms of all the score cards we're looking at and where the indicators are. I'm seeing a lot more green than I am yellow or red.

Great. Okay. That is helpful.

And I guess the second question, if you could talk a little bit about the competitive dynamics or the competitive environment in cabinets, particularly, there has been some conversation about maybe the pricing environment, promotional environment, getting better in cabinets. I was wondering if you could provide a little more granularity around what you're seeing in that segment. Thanks.

Sure. For us, half of our sales are going into the dealer channel, pretty fragmented market, so not a lot of systematic promotions going on in that segment. You'll see it from time to time, you might do things in a certain region but it is a pretty stable environment.

On the home center side, in terms of special order, semi-custom, that's probably the most intensive side of promotional activity historically, it can cycle up or down in the quarter. Our approach has been to be pretty disciplined in there, and we retain that approach so that we are instead investing in new products, new programs, which we have had success with at the home centers, and that's worked well for us. So for us, in terms of our exposure on the competitive side to promotions, it is increasingly a smaller and smaller part of our overall business.

The in-stock business is not promotional-driven so if we are looking at vanities or in-stock kitchens, that's not subject to what you hear about as promotional. So it really is just a small portion today as we sit here and we'll manage it the way we managed it for the last three years, which is to be disciplined and focus on the things the designer really appreciates and the consumer values in terms of innovation, and just supporting everybody with great service. And that seemed to work for us. And we're going to stick to that.

Okay. Great. Thanks a lot. Appreciate it.

Mike Dahl, Credit Suisse.

Thanks for taking my questions. Just wanted to go back to the last comment quickly.

To be clear, were you seeing increased promotional activity in the semi-custom business? I guess the profitability wasn't quite as strong as we would have expected in the quarter, but it looks like you are expecting the back half to still be decent. So was there any promotional activity? Was it a mix thing or were there still some of the lingering expenses related to the investments coming through in the second quarter?

It was really more still some of the lingering investment, although we are through that from an efficiency standpoint. Certainly the only part of the quarter that was still moving through. There was some promotional activity, but I'd say it was -- given the part of the market that that's occurring in, not a big factor.

So I think second half leverages we walked through certainly will improve. I think from an overall OI margin, 10.3%, we haven't seen anything over 10% since 2008. So we're making good progress in terms of building that margin in the second half, certainly expect we're going to continue on that track.

I'd say from an efficiency standpoint, points are running well. We got through what we invested in last year. And as we highlighted last year, any time you increase any capacity inside of a plant, it is going to be disruptive and that was expected, and we worked through it, and now we're starting to deliver against that. So you'll definitely see stronger leverage coming through second half and into next year.

We are, just to kind of talk about mix a little bit, the cabinet side, surprisingly the higher end of the market continues to perform really well. So our higher price points are selling strong.

I think that's just for those out there who have real investment interest in their homes and are doing bigger on our projects. They're spending on our more premium price points, which is pretty healthy, and then a lot of those come in through the dealer channel.

Okay. Great. Thanks.

And then I guess shifting to plumbing, there was a comment that POS is selling faster than shipments and the inventories continue to be lean. Are you seeing any signs or having any conversations with the customers around when you could see an inflection point in that?

It has been kind of trickling down. So POS for wholesale going about 8% for Moen and sales up 5%. I think what we see is this time of the year, you are in July, nobody is going to make big commitments at this point.

Typically what we see is in August if their expectation is that they're going to need to support more demand, that's where we could start to see some inflection in ordering patterns. So we'll watch it, sometimes it kicks in in August, sometimes it's September. And then that will support the balance of the year.

So I view it as pretty healthy in that inventories out there in the channels are leaner as demand starts to fill, we respond pretty quickly and we'll just ship into the demand as it comes. So part of this is our customers are relying upon us and our good service to be able to support that. And we've been delivering on that in the past, so that's pretty rational for them to do is to manage it as tight as they possibly can.

Okay. Thanks and good luck.

Ken Zener, KeyBanc.

Afternoon, gentlemen. My one question is going to be about cabinets.

Obviously Norcraft adds a different element to your business and they were kind of higher-end. If you could talk to the difference on perhaps how much price/mix is part of your organic growth rate and/or Norcraft's, as that was a contributing element for them?

And second, if you could just comment on WoodCrafters, you obviously talked about that part of the market being less promotional. So is that business on track with the EBIT margins that you had expected when you acquired it? Thank you.

On the Norcraft side, the Norcraft business mix actually looked a lot like our dealer business. So they're a Mid-Cont brand which has got a good mid price point. Looks a lot like A-OK in the bottom end of our semi-custom business. And then their higher price point brands look like some of our higher price point brands.

So pretty good overlay. And they do have good pricing power on the market. Good margin structures I'd say.

It will fit nicely into the dealer side of the market, but it really looks very similar to what we had before. The big opportunities we talked about last time is there's very little overlap in terms of dealer customer base, only about 25% overlap which means we can take (technical difficulties) that we're selling into our dealer network and move it into those dealer customers we acquired with Norcraft. And then take their products, especially some of their frameless product, and move it into our dealer base. So that work has started.

Just a terrific company, great management, great associates. Only good surprise to this point, and you like to say that on an acquisition, there's only good surprises, so far it's been just a terrific experience and we are pretty optimistic about that.

On WoodCrafters, if you look at the in-stock cabinet business which we were in well before WoodCrafters, and then the WoodCrafters business and then other vanity business that we were in as well, you roll that all together, a significant part of our business now, 20% plus, and it's really dependent upon the property efficiency of the business. So we have dedicated plants both in Mexico as well as in the US. And so operating those plant structures to support that business, focus on logistics so we can support our customers there, and good efficient logistics business system, and then bring innovation.

So it is a pretty tight business. And again, not a lot of promotion, there are sharp price points but we've got good low-cost base of manufacturing and support and logistics to that business. So it is a really good business model.

We've got a lot of sustainable competitive advantage inside of that business model. And that's what makes it attractive there.

And I think the final question was has WoodCrafters performed as we thought it would, yes it has, in fact we've expanded operations down in Mexico. Part of the investment we made last year was to expand out a big facility in Mexico. And we're making components now for some of our other North American operations out of those plants, and they're ramping up. So it is not just a WoodCrafter product but rather the component that feeds a big part of our other cabinet business, which supplements some component suppliers that are in China which we still have but I certainly like the balance between China and Mexico as opposed to just relying on China for that.

Thank you.

Mike Wood, Macquarie.

Hi. This is actually Ryan Hunter filling in for Mike.

The first question in terms of cabinets for Norcraft, has there been any early feedback from new potential cabinet dealers that you could pick up due to your expanded product portfolio? And how quickly is the rollout from bringing Norcraft product into your existing channel and vice versa?

Feedback has been good. I think people said, wow, two best cabinet companies just got together. So I think that is always good to hear from our customers is that they like us both and they are happy we're working together.

And the teams are in the process now of rolling through first targeting where those cost sell opportunities will be. And then working with our customers. So our expectation is that you're really going to see the impact of that in 2016 and 2017, even into 2018, but certainly we'll see some impact in 2016.

Not saying we can't do some right now because we're (technical difficulties) we really didn't expect the way that would fall through. The cost side, in terms of synergies, purchasing synergies, just overall the efficiency side of that, we will see some of that this year and then into next year.

So everything is on track. As I said before, only good news coming out of where we see the opportunities and we are excited about it. A couple months into it.

Great, and then I have one question on plumbing. Industrial companies have broadly seen a slowdown in China recently.

Are you guys seen any impact on your China plumbing business? And what's happening with the profitability at stores in China and the pace of new store openings?

So China, the direct-to-builder business has slowed down and really we started seeing that late last year. On the other side, our stores business, which is -- we've got about 1,000 stores there, and that business combined with our e-commerce business, which is actually growing, is still positive. So that is kind of the core of the business. The direct-to-builder sometimes is in favor, out of favor, and then that market overall can fluctuate, obviously, as construction does.

The dynamic is a lot of these units are built without plumbing finished in them. So as people go to occupy previously built units that could have been built a year or two or five or more years ago, they're needing to come to these home product [moths] into our stores, to shop for their faucets, their showers, their sinks, their vanities, and so that's what's really driving that part of the business. So I'd say we're encouraged that that's holding up okay.

From a profitability standpoint, not a big hit, as we've said in the past, profitability in China is less than where it is in North America because we have been in an investment mode. So not to the extent that sales are a bit slower, it doesn't really impact the probability. And obviously, strong margins once again at Moen of 21% operating margins under, obviously not overly impacted by any quote on China.

Great. Thanks.

Michael Rehaut, JPMorgan.

Thanks. Good afternoon everyone.

First question, I just wanted to circle back to your comments around acquisitions. Certainly helpful in terms of some of the directional comments. But it seems like if I go back two or three years, it seemed like your thoughts were on acquisitions at that time was more talking in terms of, let's say moderately sized type of targets. And that's by and large the types of companies that you've acquired in terms of WoodCrafters, SentrySafe, Norcraft in terms of sales.

By your tone and comments given -- talking around the increased level of -- the more robust pipeline and even talking about exterior home and international, are we to also think that perhaps the size of the deals could also increase? And related to that, when you talk about exterior home, is that something beyond doors or more sticking around just the doors? In other words, would there be kind of another leg to the stool that you would add from a product portfolio standpoint?

We have consistently looked at the size of acquisitions from small, tuck-in, $20 million, $30 million sales up to much larger things that we couldn't make it work so we walked away. I think as you reflect correctly here, we've been successful in the middle.

I'd say we were still looking at that wide range. And so I think you could see us do some small things, some medium things, and there may be something big out there. I'd say we are pretty disciplined about it and so the accretion needs to work, the value creation for shareholders needs to work, and we don't waver from that.

So we stepped away from some in the past that just hadn't met that test. But obviously that doesn't mean we wouldn't pay a full price, and I think we did for Norcraft because of certainty of where we saw the growth and where we saw the margins.

In terms of adding another leg, a fifth category, we've looked at that from time to time, we continue to look at that in terms of exterior. It has to really involve the consumer. So we don't want to move into anything that is commodity-like just because that is not our business, it doesn't mean those aren't good businesses, that is just not where we are strongest.

We're strongest where there's heavy consumer involvement and where innovation really gets paid for and that is where we have been successful with the businesses that we've got. So any of those categories that would have those characteristics, we are looking at. And it doesn't mean something might happen, but we look at those from time to time and also interior of the house.

We look at some categories where -- has those characteristics. But heavy consumer involvement is probably the biggest thing that we focus on.

So I'd just say that the activity in terms of the number of things that we are looking at has picked up and that's what's really remarkable, is it kind of got busy the first quarter and it has not let up. And I can never predict how many things we'll get done because you never know where expectations are. But I'd just say the more things you look at, typically, the higher the probability you'll get something done.

I appreciate that. Thanks, Chris. And just a couple technical questions modeling-related.

If you could review with us, if you continue to think, roughly speaking, what corporate expense, how we should think about that for the full year? And also, as you talked about the $32 million for full-year interest, that implies a quarterly run rate in the back half of around $11 million to $11.5 million, and if that is something that we should extrapolate into 2016?

This is Lee. So I think for what I would do on a quarterly basis for corporate, I think the run rate is around $16 million. I would use that for the last two quarters.

And on interest, we had a partial interest, a partial quarter in the second quarter of interest. So I would say each of the second quarters of the second half, I'd have overall interest expense around $11 million or so a quarter, getting to $32 million in total.

Great. Perfect. Thanks, guys.

Garik Shmois, Longbow Research.

Hi. Thank you.

Just had a question on the in-stock vanity cabinetry channel fill that occurred in the second quarter. Just wondering if that has completely run its course or is any of that bleeding into the third quarter?

And then also if you look at the second half of the year, you've called out -- you have been calling out for a couple of quarters now incremental expenses, particularly in plumbing. Are there any other one-time items, whether it is from a channel fill perspective or from an additional cost perspective, that we should be aware of?

I'll take the first which is on the vanity and in-stock loading to support new products that we have launched as well as some new programs. That was really pretty heavy second quarter and it'll continue third quarter. We are going to get into a replenishment cycle.

The programs are doing pretty well. So we could see some good growth coming out. So I think you'll see some support on that third quarter as well as continuing into next year as those are successful.

In terms of the second half, the question is any incremental one-time expenses, I really don't see any. We talked in a previous question about the investments being $0.07 EPS for the year and $0.045 or $0.05 of that in the second half. Other than that, nothing that is worth talking about and calling anyone's attention to.

Okay. Thanks.

And then just a follow-up question on the door segment. Just wondering if you could maybe provide a little bit more context around margins and the expectation for margin expansion moving forward?

So, doors -- you have to remember doors are a 13% to 14% operating margin business when we hit steady state. So they were 7.1% last year, full year. We think they are heading to 9% or 9% plus even in 2015 property margin so they are getting on that progression to get back to that 13% to 14% when we get to steady state.

So that is positive. That is what we planned.

If you look specifically at the quarter, it's just a combination of things that allowed them to go up to 400 basis points plus. It's -- they're getting nice sales growth which gives them leverage on their fixed cost; that is a big piece of it.

They are getting very nice mix; that's a piece of it. They are getting some price in the industry so that is a piece of it. All of those things kind of add together to keep them getting on that trail to getting back to that 13% to 14% operating margin and 9% plus this year.

Great. Thank you.

Jim Barrett, CL King & Associates.

Good afternoon, everyone. Chris, could you talk a bit, you mentioned acquisitions in plumbing, security, exterior products. Is it possible to rank those categories in terms of the number of strategic competitive bidders you're likely to have in those categories? Or is that too difficult to gauge?

It is very situational by any target that we are looking at. If there is obviously an option process around a particular company then you're going to see those strategics and private equities involved in a more of a robust process. If it's something that we might have been working on because of being in these industries and having the discussions with folks over a period of time, then it's a less competitive environment.

So it's hard to break it out between the different segments; it's really more situational with any individual company. If it's going to be a company held by a private equity owner, it might be more of an option process. If it's a situation where we've just been talking about what we could do strategically with a certain privately held company or otherwise that probably limits the number of folks involved.

The final caveat is it's a competitive world out there. And if it's something like Norcraft, where it's a public transaction, typically in those cases there's what we had which is a go shop for [three jim in mesh], go scour the world to see if they can do better, and you get competitive and have good strategic rationale for what you're doing and then hopefully you're successful on those things.

So I'd say there are just a lot of different things that are particular to the given situation. And I just come back to the bigger the pipeline the better opportunity you've got because of so many individual factors.

Okay. And then finally, international geographies of any that are of particular interest and specifically, could you comment on how interested you are in China expanding beyond plumbing?

Actually, there are remaining opportunities in China in plumbing and beyond. But I think it would have to be in the category (inaudible) coverage, what we've got in terms of distribution, I think being in the bathroom and adjacent categories makes sense. Being in the kitchen makes sense.

Going into other parts of the home in China would be a lot tougher just because we don't have natural distribution relationships or even from a supplier standpoint. Just kind of (inaudible) maybe tougher (inaudible). So I think there's other opportunities we ought to look at and things over there. So it is probably more adjacent to where we are today.

Thank you very much. That was couple.

Nick Coppola, Thompson Research.

Good afternoon. In the cabinet segment, are you seeing any change in your competitive environment particularly in sales and new construction?

No, I'd say it's probably the same as it's been for the last four quarters. I think we and a couple of others have really deemphasized some parts of the country where it was tough to have profitable business. So some of the southwestern, western markets, from a builder-direct standpoint, were just tough to make profitable.

And so I think that was going on with us and with some of our competitors as well and it's been deemphasized. That is probably the biggest changing dynamic. Otherwise, I think we have picked our spots in the market by geography and by relationship where we've got good direct-to-builder relationships and we're focused on of those we're doing well there.

And then I think others are going after the other parts of the market. So we take a disciplined approach on that builder-direct side of the business.

And there's the other part of the business, we're serving builders through our dealer network and I don't know that that competitive environment there has changed that much.

Okay. That makes sense.

And then my last question here, again on cabinets. What did you do you see throughout Q2 just in terms of (technical difficulties) real pricing?

Second quarter is similar to first quarter overall, inflation fairly flat, commodity inflation very flat in the first half and the second quarter. We did see some of the wood products still having some inflation, particle board being one. Certain other smaller segments, we saw some inflation, low single digits.

We saw some categories like brass and copper where we saw slight reductions. But it all nets out to the quarter being basically flat for us versus last year.

Thanks for taking my question, guys.

Dennis McGill, Zelman & Associates.

Thank you. Chris, first question on the revenue side.

The holding guidance for the full year. Can you talk to how the second quarter played out as you had expected? Was there the same amount of momentum through the quarter that you thought there'd be at the beginning of the quarter or is there more of this on the come in the second half on the year than previously?

I think it was pretty consistent with what we thought, the start of the second quarter was a little weaker. And we saw some building momentum throughout the quarter. So as we come into the third quarter, we feel pretty good about where we are seeing order patterns today.

Granted it's three weeks into the quarter, but it certainly looks like it would have looked in June. So you see some pretty good momentum tracking.

So to go back to an earlier comment I made, there's no big leaps of faith in the building blocks of how we look at the second half of the year. It's a reasonable outlook internally around where we see repair and remodel, where we see new construction. And just laying over where we've got shared positions and then new programs coming in the mix that we are seeing. You kind of build all of that together and we're on track for where we think the second half will be.

Okay. Thank you. And then second question as it relates to acquisitions and leverage. I think you've talked about being comfortable in that 2, 2.5 range.

Given the pipeline that you talked about earlier, if there were multiple deals that came along that fit your criteria, or even one big one, would you be willing to stretch that to above the high end or some range above the high end in the short term?

Yes, we would. I think given that we still think we are in the, you can call it early or you can call it middle-early stages of recovery. We'll have a review on that. But there's plenty ahead of us.

And I think given the efficiencies that we are seeing in our business and the cash flow that we throw off, I think we'd be comfortable taking more incremental leverage on certainly over the next 12 months, 18 months and then having a period to pay down so that you are in a healthy position going forward. So I think for the right opportunity that makes a lot of sense for us, I think we'd stretch to do that.

All right. Thanks, guys.

Omar Aleem, Cleveland.

Thank you. Two questions.

First, from a cabinet category growth perspective, dealers have been in pretty good shape. The home centers have shown slower growth through this recovery.

One of the categories that's been a little bit underperforming, the other building categories out there. How do you guys think about the recovery in cabinets in this cycle versus previous ones? Do you think any differently about the pace of it and where consumers are looking to spend their discretionary dollars this time around versus prior?

I think what's different is the higher end of the market came back faster and has really remained pretty healthy. And that perhaps is supporting the dealer side of the market. And that part of the market doesn't rely to a large extent on credit for big remodel projects.

Part of the market that has been slower to recover and is impacting both dealers and home centers is really the younger households who maybe are moving into an existing home and want to do the remodel project. But credit is only now starting to become available in terms of home equity lines or extending credit beyond the purchase price.

So that, traditionally, you would have seen more right after existing housing sale, there would be more remodel activity for that younger segment. And that is the part that has been slower to recover.

If you look at it from a glass is half full standpoint, that is still ahead of us. There is still the demand to do those remodel projects for those homes. They moved in, they don't particularly like the kitchen, but they are going to gut it out for a little while until home values rise, they can have better access to credit, wages increase.

So that is the part I think that's lagged. And as those pieces come together, I think we will see that the whole remodel side of cabinet market could exceed beyond 5%, 6%, which we've seen in prior cycles toward the end of the cycle. There is a bigger demand on that side.

Thank you. And secondly, you had mentioned a little bit some weather as a piece of the quarter. I think right at the beginning of the quarter. Do you see any impact within your business from weather that maybe pushed out demand a little bit into the second half at all in a piece of your business?

I'd say there aren't any to the extent construction activity, people who are trying to build houses couldn't be active for a number of days or weeks during the quarter, it probably slow down some of that activity and that will pick up second half. Our products aren't exterior products so to the extent it was a remodel project, or our products were going into a new construction project, we're typically not going to be impacted by weather as a constraint. So any comment that I made earlier it is about the pace of construction activity to the extent there was weather in a certain part of the country, it would have slowed that down.

So April being a little bit slower and the quarter ending a little bit stronger, you wouldn't say weather was a piece of that?

It could have been, I think depending on what part of the country, so May was pretty heavy for some parts of the country, leading into early June. It felt more like as we exited and came into April the momentum built through the quarter. April to May to June.

Thank you, guys.

There are no further questions at this time. I will now turn the call back over to the presenters.

Thank you. This is Brian. We would like to thank everyone for attending the call today and look forward to speaking with all of you again very soon. Thank you.

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