Fortune Brands Innovations Inc (FBIN) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

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

Thank you.

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 third 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 the 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 some time to address 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.

As we expected, the rate of growth for the home products market accelerated in the third quarter and our teams again delivered sales and profit growth that was right on plan. Importantly, our core businesses are performing well across all segments and we are building momentum for 2016. Our outlook anticipates market conditions in the fourth quarter remain similar to the third quarter, driven by like levels of new construction activity and consistent growth in repairing the middle market. Based that market assumption, solid execution of our plans from the third quarter and the momentum we have inside of our businesses, we're confirming our full year outlook.

Let me first spend some time on our view of the US home products market, then I will provide my perspective on our underlying business performance. Starting with our view of the US home products market, the third quarter, the growth rate in the market for our home products improved at an increasing rate, as we expected it would. We estimate that repair and remodel activity grew at around 5% and new construction grew low double-digits.

We continue to see positive signs and look for similar market conditions in the fourth quarter and are building our momentum heading into 2016. Repair and remodel activity remains steady, growing at around 5%. We are encouraged by the richer mix we see coming through in remodel projects at all pricing tiers.

Some recent consumer research we completed this summer reinforces that homeowners are focused on creating unique and on trend styles and when they engage in a remodel project, they are looking to create authentic looks and more open spaces. This is translating into an appetite for stronger styling, product differentiation, and project complexity. We see the impact of these trends in the improving mix across our categories.

New construction activity and demand continues to build at an accelerated pace in the second half of 2015. We also note that the pace of starts and completions continues to be governed by constrained labor supply, which seems to be lengthening the normal lag we see between housing starts and when our products go into new homes.

We are watching closely to see how the more robust starts and new construction activity we are seeing in the second half of 2015 positively impacts our sales outlook heading into the first half of 2016. So our overall assumption is that the US home products market, which impacts 70% of our sales, grows at a combined 6% to 7% rate for the full year 2015. 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 at around 10% over 2014.

Now, let me provide some perspective on our business performance. For the third quarter, sales increased 22% for the US businesses. Importantly, operating margin increased 110 basis points to 13.5% with solid performance across all operating segments.

Starting with our cabinet segment, as I've discussed many times, we're following a disciplined strategy for cabinets focused on profitable growth. At the center of this strategy is our dedication to the designer as the key customer and our focus on the most attractive segments of the market. A consistent pace of product innovation and our high levels of reliable service to our channel partners drive growth.

Importantly, our cabinet business is now solidly positioned in the most attractive segments in the market. 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 consistent and profitable segments of the business, but are also where we have our strongest structural competitive advantages.

Turning to the third quarter for cabinets, our overall cabinet sales were up 33% over the prior year quarter with sales in the US increasing 38%, up 14%, excluding the Norcraft acquisition. US sales for dealer and in-stock cabinets and vanities, which account for approximately 75% of our annual sales, increased 52%, up 21% excluding the Norcraft acquisition. Specifically, sales in our largest channel dealers grew 60% and 11% 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 cabinets and vanity sales increased strong double-digits, due largely to the impact of new programs and product upgrades that continue to ship in the third quarter. We now have fully launched these new programs and expect continued growth in the coming quarters from strong sell-through and share gains.

The remaining 25% of our cabinets business focuses on home centers, semi-custom, builder direct and select markets in our Canadian sales. We are disciplined in our approach to these segments of the cabinet market, as we focus on where we can partner with customers to capture profitable growth. Together, these segments were up slightly in the quarter, but up mid-single digits when adjusted for Canadian currency. Overall for cabinets, our teams continued to execute well across multiple facets of a complex category. Our plants, with recently expanded capacity, are increasingly more efficient and we're pleased we added this capacity when we did to handle the growth that is now being realized.

On the front end of the business, we're performing particularly well as we build share in the most attractive segments of the market. The impact of our consistent execution can be seen in our share gains, our stronger mix, and our improving margins. For our plumbing segment, sales are up 5% for the quarter. Sales increased 8% in the US, led by growth in both wholesale and retail. Again, in the third quarter, our mix was solid and margins were strong. Wholesale sales increased mid-single digits as channel inventories remained lean. Retail also grew mid-single digits, driven by new product performance and strong POS.

We are encouraged to see consumers trade-up and continue to select our innovative new faucet and shower products for the new homes and repair and remodel projects, including new pull-down faucets with reflex self-retraction in our Essie and Benton lines and our Magnetix easy docking, easy releasing shower heads. And we will continue our pace of innovation in the coming quarters, as we introduce new products which include additional pull-down and pull-out faucets with reflex in our Kendall, Glenshire, and Kinzel lines and additional styles with our motion sense hands-free technology.

Sales in Canada were down low double-digits to the prior year, but were up high single-digits in local currency. China sales increased mid-single digits versus the prior year, due to increased direct-to-builder activity and retail. We remain optimistic about both our long-term business model in China and the growth potential and we are encouraged by the R&R activity that we're beginning to see.

Doors reported sales were up 8% 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 premium upgrades, like our recently launched Classic-Craft doors in the American style and Rustic collections that capitalize on the growing trend toward taller doors and wider openings. The Therma-Tru brand continues to perform strongly across all channels and we are benefiting from our expanded distribution.

In the Security segment, sales increased 2% from the prior year quarter, with US sales up 6%. Sales from the SentrySafe acquisition and a 5% increase in Master Lock US retail sales drove the growth. Currency and international softness offset the US growth. We're excited about the opportunities we see in our Master Lock and Sentry businesses over the next few years and the teams are working hard to complete the operations integration by the middle of 2016. So to recap the quarter, our performance improved in the US home products market where the growth accelerated as we expected due to new construction activity. Our teams are executing well and delivering profit results on plan.

Before I wrap up, let me comment on our efforts 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. The integration of the recent Norcraft acquisition remains right on track. The integration is very straightforward. Our new employees are terrific and the opportunities are as good as we thought they would be.

Looking forward, our acquisition pipeline remains robust. We're assessing a number of opportunities, both inbound and outbound, and while we cannot guarantee success in any one situation, I'm encouraged with the number of things we're looking at and the potential we have to create incremental shareholder value over time.

Our track record and capabilities in M&A are strong. Over the past 2 1/2 years, we have spent $1.1 billion on four acquisitions and repositioned ourselves for stronger growth by selling Simonton Windows and our tool storage business. Over the next three years, we believe we have the potential to deploy more than $2 billion to drive incremental growth and shareholder value. So to sum up, 2015 continues to progress as we expected. We remain confident in our ability to continue to outperform the home products market.

Our core businesses are strong and we're building momentum as we head into 2016. 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.

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

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 third quarter results, which were on plan. Sales were $1.24 billion, up 17% from a year ago. As Chris mentioned, sales increased 22% for our US businesses.

Consolidated operating income for the quarter was $168 million, up 28% or $36 million compared to the same quarter last year. EPS was $0.64 for the quarter versus $0.52 the same quarter last year, increasing 23% and we're on plan. Now, let me provide more color on segment results.

Our cabinet sales were $603 million, up $151 million or 33% versus the prior year quarter. Norcraft added $105 million of the sales growth. Dealer sales were $299 million and increased 60% from the prior year and 11% excluding Norcraft. In-stock cabinet and vanity sales of $139 million increased strong double-digits, reflecting load-in shipments to support new product wins.

The remaining sales for home center and semi-custom, builder direct, and Canada increased 5%, excluding the negative impact of approximately $7 million from Canadian currency. Operating income for the cabinet segment increased 75% or $27 million over the prior year quarter, with Norcraft adding $15 million of the increase.

Operating margin for the quarter increased 250 basis points to 10.6%. As expected, operating leverage excluding Norcraft was 33%, as our recent added capacity is becoming more efficient. For the full year, we continue to expect an operating margin of around 9% compared to 7.7% in 2014.

Turning to plumbing, sales for the third quarter were $364 million, up $19 million or 5% led by US retail, US wholesale, and China; all up mid-single digits. Excluding the $9 million negative impact of currency, total plumbing sales increased 8%. Canadian sales increased 7%. In China, sales increased 8%. Operating income increased $6 million to $82 million, up 7%.

Operating margin for the segment was 22.4%, up 40 basis points from the prior year quarter. For the full year 2015, operating margin should be around 20%. Door sales were $124 million, up $9 million, or 8%, from the prior year quarter. Operating income increased $5 million to $17 million, up 39%. Operating margin for the segment was $13.6%, up 290 basis points from the prior year quarter. Full-year operating margin for this segment should be around 9.5%, a significant improvement over 7.1% the prior year.

Security sales were $147 million in the third quarter, up 2% to the prior year and up 6% in the US. The impact of foreign currency reduced sales by $4 million in the quarter. Segment operating income increased to $21 million and the segment operating margin was 14.2% with Master L0ock operating margin at 16.3%.

To sum up consolidated third quarter performance sales increased 17% and EPS was on plan at $0.64. Our total company operating margin was 13.5%, with an incremental margin of 35% excluding acquisitions. We're on track to reach our long-term goal of approaching 15% 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 third quarter sales by approximately $21 million, with Canada being the primary source. The EPS impact was approximately $0.02.

Turning to the balance sheet, our September 30 balance sheet remains solid with cash at $351 million, debt of $1.3 billion, and our net debt-to-EBITDA leverage is 1.7 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. From July 1 until today, we have repurchased around $50 million of our shares.

In the quarter, we also closed on the sale of our tool storage business. Through working capital reductions, tax benefits, and the sales proceeds, we generated approximately $70 million of cash.

Turning last to the details of our outlook for 2015, based on our projected 6% to 7% US home products market growth, the assumptions we make for other markets and continued share gains plus the Norcraft acquisition, we expect full year 2015 sales to increase 14% to 15% compared to 2014. We narrowed the outlook for 2015 EPS, but maintain the mid-point of the range, resulting in EPS of $2.05 to $2.07.

We expect 2015 free cash flow to be around $300 million, after CapEx of $135 million. The annual EPS outlook includes the following assumptions: interest expense of $32 million, a tax rate of 32.7%, average fully diluted shares of approximately $163 million.

In summary, the third quarter EPS was on plan with market growth accelerating as expected. 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 continued market recovery give us confidence in continued solid growth in the coming years. As demonstrated by the Norcraft acquisition and recent share repurchases, we remain focused on using our balance sheet and cash flow to drive incremental shareholder value with our new debt structure providing significant flexibility.

I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the third quarter of the 2015. We will now begin taking a limited number of questions. Since there may be a number of you that would like to ask a question, I ask that you limit your initial questions to two and 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 Instructions)

Your first question comes from Bob Wetenhall with RBC Capital Markets. Your line is open.

Hey, good afternoon.

Hi, Bob.

Hey, Chris.

Just wanted to ask, you came in exactly, you've been very consistent with your guidance. I think there's been a lot of questions about the guidance and its achievability. Just for my first question, I was hoping could you give us a little bit more color on the market and really what you're seeing on the demand side? You obviously outpace the market, but how strong is demand on an underlying basis? What kind of volume growth are you expecting across the portfolio?

Well, Bob, it really came in as we expected it would. So as we sat here in the second quarter looking at all the data that we compare and then talked to our channels, it looked like we were setting up for a stronger second half. Our numbers are pretty consistent, around 5%, but a good mix coming through. I think you saw that coming through in our margins. New construction, we think it was low teens. New construction and if you roll it together probably 7% to 7.5% overall between R&R and new construction, and that compares to our growth if you take Norcraft out in the US market about 10%, so much we outpace that growth.

Really, I think it's the result of the activity, the demand that we see coming in the spring through the summer, orders translating into starts and then the construction activity picking up. What we have observed is there's a little longer lag between starts and when demand is coming for our products in the homes, we come in toward the end of the home construction with cabinets, entry doors, and plumbing and so we're seeing probably a month to two months additional lag in the system.

It's not hurting our current results because we're kind of living off what was happening in the first half. So we think it's probably setting up for a reasonably strong start to 2016, we're just trying to gauge how much of that's going to fall into 2016. So, we feel good about second half of this year and we're getting encouraged about how we're going to start off next year.

Got it, that's really helpful. I wanted to focus on profitability in the cabinet segment, what's driving that, and how sustainable are these levels? I was also hoping you could just give us a little color, the 35% incremental is really robust and maybe Lee could just talk about the sustainability of that. Thanks a lot and good luck.

Thanks, Bob. Yes, I'll talk a little bit, and then Lee can dive in here. It really is the result of some efficiencies coming through our manufacturing operations. We added capacity last year and when we added it, we said, as you bring capacity into a complex category like cabinets, you create inefficiencies and we worked through that and you can see the results of that now and that is sustainable.

That's going to -- moving through the flow of production within those facilities, that's the first part of it. The second part of it is mix. We continue to see a good mix coming through channels, especially on the cabinet -- on the dealer side of cabinets, that mix continues to be strong. New products are rolling through there.

So those things are combining to create what we think is a pathway to mid-teens, which is what we've talked about over the next couple of years. We're participating in the strongest parts of the cabinet category and that's reflective of our organic business, as well as the Norcraft acquisition.

But if you look at our business today, 75% of the revenues are coming from the dealer channel plus the in-stock vanities and in-stock kitchen category at the home centers. So those are consistent categories, where we've got real structural competitive advantages and we're really just leveraging that and bringing in volume in across it. We're having a lot of success in the category.

I think that's translating into the volumes that you're seeing and we're executing really well on the plants. So those things together create a lot of momentum. That team is -- had a good quarter, but they're having a good year and they're going to roll into 2016 really strong.

Lee, maybe you could just touch on the margin, the leverage.

Yes, Bob, you know as we've talked about since the spin, is we moved from the beginning of the recovery to steady state, which we define as roughly 1.5 million housing starts. We said we'd plan our Business with incremental margins on the net sales growth of about 25% to 30%, would be the normal range. We actually planned around 25%.

So we've stayed on that path since the recovery started, we're still on that path. That gets us back to that steady state operating margin of 14% to 15%. So we've been on the path, we're still on the path. We think it's very sustainable. When you look at the Company-wide in the third quarter, we were incrementally around 35% for the total company and for the year, I think we'll be at the high end of that 25% to 30% range. So we feel very good about that, it's been very consistent, and that's how we plan and manage the business.

Great, thanks very much.

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

Hi, good afternoon. I'm wondering with the uptick in new construction, whether you expect to see this restocking in the plumbing wholesale channel anytime in the next couple of quarters?

I think we will. We haven't seen it yet. They're ordering to POS, so they're not destocking, they're running it at where the market is. So we think they'll probably continue that until they see that strong demand come in. I think it'll be in the next quarter or two and then we'll be there to support them. We're in close contact with them and letting them know that with our supply chain, we need just a little bit of heads up to bring it in and get it assembled and shipped out to them. But it hasn't happened yet. That's upside to us, probably the first half of 2016.

Okay, great, and my other question is about raw materials. Just basically focusing on plumbing and maybe a little bit on cabinets, too, how much of the margin improvement this quarter could be attributed to maybe lower raw materials and how do you expect that variance versus price to play out over the next year or so? Thanks.

So our commodity inflation in the third quarter, this was the first quarter where we actually saw a net benefit versus the prior year. So, in the third quarter, commodities helped us somewhere over $3 million and our operating income from those commodities helped offset some of the FX hit. We see similar benefit, it's built into our guidance for the full year, so it's included for the fourth quarter.

We haven't done our planning yet for the 2016 plan. So we'll do that and when we get that done, we make those assumptions, we'll outline that for you when we give guidance for next year. But again, about $3 million this quarter should be similar to next quarter.

Okay, great, thanks for color and congratulations on the quarter.

Thank you.

Your next question comes from Stephen Kim with Barclays. Your line is open.

Yes, thanks very much. Good quarter.

Thank you.

I wanted to ask you about your comment about the pipeline for M&A. Obviously, this has been something that we've all been watching pretty closely and your commentary suggests that the activity is really heating up. I was wondering if you could give us a sense for maybe certain hotspots, sort of particularly on the outbound. The searches that you're kind of initiating. Is there any kind of common thread to that? Maybe certain regions or -- I know product categories would probably be something. If you could just elaborate a little bit more on what you're seeing terms of your pipeline?

Sure. Thanks for your question.

I think it's really the byproduct of a multi-year effort to focus on categories that are attractive. We've talked about expanding in plumbing and we've got a number of different efforts underway there, expanding both categories, as well as geography. Security is another area that obviously we completed the SentrySafe acquisition, but we're looking at some other things there.

Cabinets even, I don't expect anything soon in cabinets, but multi-year efforts just across the categories that we're in. And then we look at new categories. And I've said before, similar profile that we're in today which is not commodity building products, but rather consumer home products where consumers are involved where innovation can play a key role in growth in the category, where we can focus on our insights around consumer trends, consumer shopping patterns.

So those categories are things we're looking at, as well. I would just say there's receptivity out there. I think we're into this recovery now at a sufficient pace, there's enough time that passed since the downturn that folks are open and I think it kind of sets up what could be some productive discussions. My overall metric is just level of activity, because I can never predict whether any one situation is going to come to fruition and I don't push too hard to make any one situation come to fruition. We're pretty disciplined in what we look at. You can look at the things we've done already. We've been disciplined in the things we've done already.

So we apply that to it and I just want us to be involved in a lot of different discussions and if we're involved in the right set of discussions and we're disciplined, good things happen off the back half. Team's busy, I'm busy, it's good. It's productive and I see good opportunities ahead of us and we've obviously got the balance sheet capacity to be able to do some of these. That's about all I can say right now, other than the activity is strong.

Okay, that's helpful. Just a follow-up on that, if you could give us a sense for maybe certain things that you've looked at that you've decided you definitely are not interested in. Are there certain kinds of characteristics of things in your pipeline or things that are out there that are not in your pipeline that you're not interested in?

Things that are more commodity in nature. There are some really good companies out there, private and public, that are very good at managing in commodity environments, which means they really are just focused on lowest cost manufacturing and the level of innovation isn't that high, but they're really good at operationally driving the cost structure down.

I'd say that's different from us in that we're very good operators, we also invest in innovation and we expect to get paid for that investment in innovation and we have over time. It's allowed us to grow a little faster than our categories. So I'd just say those are different mindsets, and so I wouldn't have us go into a commodity category where you say, wow, I can only differentiate myself on my cost structure.

I can't really differentiate the product itself. There's not a really strong brand there where consumers or the pro is going to differentiate based on brand. So I think there are a number of things that fall on our side and there are a number of things that fall on the other side. And when I say we're focused and we know what we're good at, that helps us wean through those things.

That's really helpful. Thanks a lot. Appreciate it.

Your next question comes from Mike Dahl with Credit Suisse.

Thanks for taking my questions. The first question I had was around the guidance and it looks like the top end of the home products growth came down a little bit, but the low end of your overall sales guide came up a little, so organically or some kind of combination organic plus Norcraft increased a bit. So the first part would be how much of that is organic versus better trends at Norcraft? To the extent this is organic, where are you seeing the incremental share gains to get you to those levels?

So we moved from 13% to 15% range, to 14% to 15%. We kept Norcraft exactly where it was. We actually tightened it a little bit. Norcraft, we'd originally had said $250 million to $270 million this year. We've tightened that to $260 million to $270 million. So the increase was really organically spread across much of our business units.

Okay. Great, thanks. And then the second question, specifically on cabinets, I think you mentioned there was some load in helping the in-stock business. I'm just wondering if you can quantify that and how we should be thinking about it? Was it just in 3Q? Is there some event that is going to occur in 4Q and any magnitude there? Thanks.

Sure. Let me just back up on that a little bit. We've invested in some very strong innovation in vanities and in-stock kitchen cabinets for home centers and we're successful in getting some new placements. Talked a bit about that last quarter and that we were engaged in setting the aisle with those new products. That was a tremendous amount of activity late second quarter into third quarter. That new business is set, and rolling through.

We'll now be stocking to POS. So we'll see the incremental benefit around POS as that product sells through. It's doing well in the stores. So that sets that up. Those are share gains in those categories, really reflective of our competitive advantages in the way we manufacture, as well as the innovation we're bringing into those categories. Some pretty neat stuff rolling through there and we're fortunate that we have customers that appreciate that and took advantage of that. So, that really -- a lot of activity, but we've got that in and it should roll through to POS.

Okay, great, thanks for that color.

Sure.

Your next question comes from Dennis McGill from Zelman and Associates. Your line is open.

Hi, thank you. Chris, I was hoping to -- I guess as you look at performance so far this year, at least on our numbers, it seems like there's pretty clear share gains across the building products business as a whole. I know that's always been a hallmark for you. I was hoping you could maybe just talk about now where you're seeing the most share gains. Maybe put a little bit more behind -- you've touched on cabinets, but whether that's channel or product categories across the portfolio and then where you're most optimistic as you look into 2016 in the same regard?

I think if I look at the three businesses, I'd start with cabinets. I think we're clearly seeing growth above the market in the dealer channel and so that part of the market very strong organic growth and I think that's just depth of relationship, selling more product in through existing relationships, continuing to take share in bringing in new dealerships. So that's pretty consistent, but it is picking up, and I think Norcraft products will continue to help us on that front. This in-stock kitchen and vanities part, we're clearly growing fast in the market there, so really that 75% of the cabinet business is where we're seeing the most momentum and share gain.

On the Moen side, within plumbing, we're seeing good growth in retail. We've put in some new product placements and those are selling through quite well. Wholesale continues to grow slightly above where the market is, so that's good, especially on the mix side. We're selling a richer mix through -- on the wholesale on the plumbing side in general. So that picks up some. And then on entry doors, we expanded some distribution in the last couple of years, especially out west and there's quite a bit of activity out there and as we've brought in new products, new glass styles, again, our mix is improving, as well as our unit counts improving out there.

So it all sets up strong and then it comes back to the market grows, we should continue that momentum coming through the system. So I'm really happy with where the businesses sit here. I think we've done a lot, especially over the last year and a half and we're seeing that flow through the second half of 2015 and really into 2016.

And with respect to cabinets and the dealer, you've had Norcraft for five months or so, are you seeing anything along the lines of either cannibalization or opportunity on the cross sale side on the dealer side?

Yes, it's a multi-year effort on the sales side. So when we talked about the acquisition, we said on the cost side, we'll get up to that real quick and we have and that looks good. On the sales side, it's a multi-year effort to bring some of their products into our existing dealers and bring some of our products into that dealership network.

That has started, but it really will ramp up in 2016 and 2017. So the teams are doing a lot of work together, so no cannibalization. I think it's just the early stuff is going to be dealers who, frankly, want the product that's out there and like the product. There's big demand in the market right now around frameless and now we've got multiple lines, multiple brands, a lot of innovation going on there across both the Norcraft portfolio and our organic portfolio.

So we're taking the, call it the, low hanging fruit first where there's real demand and we're doing a lot of planning to figure out where we're going to drive hard in 2016. So it's all going according to plan. I'd say it's probably going better just because collaboration's really terrific, great culture, great people on both sides, and coming together well. That kind of is easy to say, but you just see it working well together, you get pretty excited that everything we thought would happen is going to happen and the early returns are good.

Great, okay, appreciate it. Thanks.

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

Afternoon, gentlemen.

Hello.

Cabinets, very good to 10% organic and not to take away from the success you've had there, but I was looking back at Norcraft's sales last year and if I take I think 23% acquisition growth that you had, this quarter kind of implied a 4% growth rate for Norcraft. Lee, if you could help me with those numbers, that's how I calculated it. Is there some reason that, if that's accurate, there was slower growth there? Was there something going on there? Because you obviously grew nicely overall.

Yes, no, the calculation is different because we changed the number of weeks in our months from what they had. So there's some math going on. So they actually grew the same cabinet business organically. So they were good. It's just when we put them into our system, we use a different number of months in the quarter or number of weeks in a month. So it's just a math difference. They grew well.

Okay. Just wanted to clarify that.

Plumbing, commodity costs are down. Can you talk about beyond the incremental volume leverage, what we're seeing in terms of lower input costs? Give us a context for that, if you would, and how that can be a tailwind above and beyond the volume?

So commodity costs and commodity inflation for us first half of the year was generally flat in places like cabinets, the kind of wood we use, we actually saw a little inflation in the first half. There's other places we've seen inflation like glass. So third quarter was the first quarter where we actually saw a benefit net versus prior year and that was between $3 million and $4 million.

We think that -- and we had planned that in our guidance as we gave guidance last quarter. We assume there's going to be similar benefits in the fourth quarter. So we built that into our guidance. As we think about 2016, we will go through those calculations, we'll see where the market is for commodities at that point, and we'll build that into our guidance for 2016. We'll give you that in early February when we give our full-year guidance, but it has been positive this quarter.

And just to focus in, obviously if you're facing inflation on cabinets, I assume you're facing a lot of cost input deflation in plumbing, given the commodity inputs there, the metals? Could you -- when you look forward, it seems like it's disproportionately benefiting plumbing. Would that be inaccurate? And how is that impacting perhaps pricing in that overall market? Thank you very much.

So when you look at plumbing operating margin, 19.5% last year, we think it'll be around 20% this year. It's getting marginal benefits. It's a few million dollars in the quarter for Moen. It's a few million dollars for the second half for Moen. Moen's operating margins are so strong, that's not driven by commodity benefits. It's a small piece of it. It's just their position in the market and their competitive advantages that are driving those kind of operating margins.

The mix is, frankly, a bigger part of that. We started improving that mix over the last two years and we've seen an increasing pace of mix improvement, which is consumers trading up within the category to higher price points, which have better margins. So it's especially prevalent in wholesale where they're trading up and we can see it just in every sales price per unit.

Thank you.

Your next question comes from Mike Wood with Macquarie Security Group.

Hi, thanks for take my question. You talked about richer mix in plumbing. Are you giving any higher ASP in cabinets from your new products and is the cabinets industry seeing any like to like price increases given how the demand has been strengthening?

Yes, we are, on the mix side, seeing good mix coming through on the dealer side, semi custom to the higher end custom. I talked a little bit about frameless and how strong that's been selling through. The new products that we bring in are selling strong. So mix, overall, has continued to improve in cabinets, especially in the dealer side of the business and to a certain extent, on special order in home centers, as well. So that's all positive. In terms of pricing, there's actually a reasonably healthy pricing environment and has been for the last couple of years on the cabinet side and expect that could likely continue.

Thanks. Then just an administrative question, I may have missed this, the one time charges from the capacity expansion and plumbing in the quarter, can you remind me what that was and if you're expecting the same thing for fourth quarter?

Yes, so just to recap the year, we basically said we'd have about $0.06 to $0.07 of EPS cost this year for investments and we said Moen would be about $0.04 of the $0.06 to $0.07. We got a couple cents in the first half, we'll get a couple cents in the second half for Moen. I think we had a penny or so in the third quarter. So that's built into our guidance. It's been consistent all year and really hasn't changed, so it's built in.

Thank you.

We have no further questions at this time. I'll turn the call back over to the presenters.

Thank you very much. We'd like to thank everyone for attending our quarterly call today and look forward to speaking with all of you again very soon.

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