Fortune Brands Innovations Inc (FBIN) 2015 Q4 法說會逐字稿

Good afternoon. My name is Kyle and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands fourth quarter and full-year earnings results conference call.

(Operator Instructions)

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

Good afternoon, everyone, and welcome to the Fortune Brands Home and Security quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress during the fourth quarter of 2015 and provide our 2016 guidance.

Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the 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 as to the time at which they are made.

Any references to operating income, earnings per share or cash flow on today's call will focus on our results in a before charges and gains basis for continuing operations, with the exception of cash flow, unless otherwise specified.

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

Thank you, Brian, and thanks to everyone for joining us today. Our teams delivered strong results at the high end of our guidance for the fourth quarter and full-year 2015. We achieved strong sales growth, as the home products market accelerated in back half of the year, as we had expected. Our teams also delivered strong profit growth, driven by efficiency gains in our recently expanded capacity and our continued focus on profitable growth in all channels.

Our strong 2015 results again illustrate that our substantial and leading share positions in each of our categories generate outside sales and earnings growth when our underlying markets are positive. Our leading positions and the momentum we have built position us well for continued strong performance heading into 2016 and beyond.

Let me first take you through some of the fourth quarter highlights and my thoughts on our full-year performance in 2015. Then I will discuss our view of the US home products market and our 2016 outlook for top line growth.

So let me start with my perspective on our business performance. For the fourth quarter, sales increased 18% in total and 22% for the US businesses. Importantly, total company operating margin increased 200 basis points, to 12%, with solid performance across all operating segments.

Starting with our Cabinet segment, we continue to follow a disciplined strategy for cabinets focused on profitable growth, and that strategy is working well. We are focused on the most attractive segments of the market, where we have our strongest structural competitive advantages and the greatest profit potential. Our consistent pace of product innovation and our high levels of reliable service to our channel partners is driving growth.

In the fourth quarter, our overall Cabinet sales were up 33% over the prior-year quarter, with broad growth across all channels. Sales in the US increased 38%, including the Norcraft acquisition. US sales for dealer and in-stock cabinets and vanities, which account for more than 70% of our annual sales, increased 42%, up 12%, excluding the Norcraft acquisition.

Specifically, sales in our largest channel, dealers, grew 57% and benefited from the Norcraft acquisition. Our share gains in this key channel are coming from deeper relationships with existing customers, as well as ramping up recently added dealerships. Our home center in-stock cabinets and vanity sales increased strong double digits, due largely to strong sell through of new programs and product upgrades that launched earlier in the year.

The remaining 25% of our Cabinets business focuses on home center semi-custom, builder direct in select markets, and 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 our customers to capture profitable growth. With our focused approach, combined sales for these segments increased strong double digits in the quarter, excluding the impact of currency.

Overall for Cabinets, our teams continued to execute well across multiple facets of a complex category. Our plants are increasingly more efficient and we're pleased that we added 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 were up 7% in the quarter and increased 10%, excluding the negative impact of currency. Growth was led by US wholesale and retail, as well as China.

Again in the fourth quarter, our mix was solid and margins were strong. Both wholesale and retail sales increased high single digits, driven by new product performance and strong POS.

We're 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-down faucets with reflex self-retraction in our Kendall and Glenshire 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 pullout faucets with our new power clean technology that provides 50% more spray nozzle power and additional styles with our motion sense hands-free technology.

Sales in Canada were down some high single digits to the prior year, but were up high single digits in local currency as we gain share. China sales increased low double digits versus the prior year, driven primarily by our retail stores and e-commerce. 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 seeing, despite general economic concerns.

Doors reported sales were up 5% for the quarter, but increased 7% when you exclude the final quarterly impact of exiting some lower margin business in 2015. Door products 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 3% from the prior-year quarter and were up 6%, excluding the negative impact of currency. High single-digit increases in Master Lock US retail and new program wins for Sentry Safe drove the growth. We're excited about the opportunities we see between our Master Lock and Sentry businesses over the next few years, and the integration of Sentry into Master Lock is on track.

So to recap the quarter, we executed well in a US home products market that is improving as we expected. Results were strong and on plan. Our teams are executing well and delivering profitable growth.

Before I turn to our outlook for 2016, let me spend some time on our overall full-year 2015 performance. The US home products market saw steady growth in repair and remodel activity of around 5% throughout 2015, with growth for new construction accelerating to low double digits in the back half of the year. This was right in line with our initial planning assumption.

As a result of this market performance and our execution, we delivered sales growth across the businesses that was on plan for 2015, with sales increasing 14% despite the negative impact of currency. The sales growth was significant, with sales for our US home products businesses increasing 20%.

We also delivered operating margin that improved 110 basis points, to 11.8%, and EPS growth of 19%. Profit improvement was broad across the businesses. We completed our key capacity additions in Cabinets and generated significantly better manufacturing efficiency in the back half of the year. We also added capacity in our Door segment and began some modest capacity additions in our Plumbing Assembly operations.

During the year, we also took a number of steps to position ourselves for the growth opportunities that we expect over the coming years. First, in May, we purchased Norcraft Cabinetry, which is helping us build on our structural competitive advantages with their proven capabilities and positions us even more strongly for growth and share gains in the critical dealer channel. Norcraft has great relationships in the dealer channel and strong operating management throughout their business. The integration is very straightforward and remains right on track.

Second, in June, we took advantage of the opportunity to secure long-term financing by issuing $900 million in corporate bonds. This provides us significant financial flexibility to drive incremental growth.

Last, in July, we began integrating the Sentry Safe operations into our existing Master Lock platform. As I mentioned, we're excited about the opportunities we see between these two businesses, and the teams are working hard to integrate the operations by the middle of 2016.

Moving forward, we continue to focus on creating meaningful incremental shareholder value, by using our strong cash flow and balance sheet to make strategic acquisitions, repurchase our shares, and increase our dividend.

Our acquisition pipeline is robust, and I'm encouraged by the number of things we're looking at and the potential we have to create incremental shareholder value over time. Over the next three years, we believe we have the potential to deploy more than $2 billion to drive this incremental value.

So in 2015, we delivered solid sales and profit growth, driven by reasonable market growth and our strong execution. Importantly, as we enter 2016, our current assessment of the near and medium term market, based on the demand indicators that we monitor, point to overall market growth rates similar to 2015, and we see no challenges to our strong execution. Therefore, we are well-positioned to deliver similar growth in 2016.

Now let me turn to our full year outlook for 2016, starting with our view of the US home products market. Our 2016 annual outlook is built on an assumption that the US home products market, which impacts over 70% of our sales, grows at a 6% to 7% rate, which is similar to full-year 2015 market growth.

Within that overall assumption, the pace of repair and remodel demand is assumed to grow at a continued 5% rate. Consumers continue to demonstrate 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 home construction is assumed to grow at around 10% in 2016, a rate similar to full-year 2015 growth. Single-family growth is now expected to grow faster than multi-family, as single-family entry-level activity is beginning to accelerate.

Therefore, our total global market, which includes assumptions for US market, as well as our other international and security markets, is expected to grow at a combined 5% to 6% in 2016. Based on that total global market assumption, continued share gains, plus the Norcraft acquisition, we expect solid top line growth for 2016, with our full-year sales increasing 10% to 12% over 2015 and our home products businesses again outperforming the market for our products. With this market and sales growth, our teams are focused on delivering full-year EPS in the range of $2.42 to $2.52.

So overall, our 2016 outlook is based on reasonable market growth assumptions, based on the basket of market indications that we monitor. We continue to see steady mix improvement, our capacity is increasingly more efficient, and we feel good about the winning momentum that our teams are carrying into the year.

To sum up, we delivered strong sales and profit growth in 2015 and we are well-positioned to deliver similar growth in 2016. We remain confident in our ability to continue to outperform the home products market and our businesses are even stronger.

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 guidance.

Thanks, Chris, and good afternoon. 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 fourth quarter results, which were on plan. Sales were $1.22 billion, up 18% from a year ago. As Chris mentioned, sales increased 22% for our US businesses. Consolidated operating income for the quarter was $147 million, up 42%, or $43 million, compared to the same quarter last year. Consolidated operating margin improved to 12%. EPS were $0.56 for the quarter versus $0.44 the same quarter last year, increasing 27%, and were at the high end of our guidance range.

Now let me provide more color on segment results. Our Cabinet sales were $608 million, up $152 million, or 33%, versus the prior year quarter. Norcraft added $107 million of the sales growth. Dealer sales were $309 million and increased 57% from the prior year. In-stock cabinets and vanity sales of $121 million increased 15%, driven by strong sell through of new products. The remaining sales, for home center, semi-custom, builder direct, and Canada, increased 21%, excluding the negative impact of currency of approximately $8 million.

Operating income for the Cabinet segment increased 72%, or $26 million, over the prior-year quarter, with Norcraft adding half of the increase. Operating margin for the quarter increased 220 basis points, to 10%.

For the full year, Cabinet sales increased 22% over the prior year and operating income grew 42%, to $196 million, with the operating margin increasing 130 basis points, to 9%. Excluding the Norcraft acquisition and the negative impact of currency, sales increased 8% and operating income grew 19%.

Turning to Plumbing, sales for the fourth quarter were $359 million, up $23 million, or 7%, led by US retail, US wholesale, and China. Excluding the $9 million negative impact of currency, total Plumbing sales increased 10%, Canadian sales increased 8%, and China sales increased 14%.

Operating income increased $12 million, to $71 million, up 21%. Operating margin for this segment was 19.8%, up 220 basis points from the prior-year quarter. The negative impact of currency was $6 million.

For the full year, Plumbing sales increased 6%, operating income was up 12% over the prior year, and operating margin increased 120 basis points, to 20.7%.

Door sales were $115 million, up $5 million, or 5%, from the prior-year quarter. Sales were up 7%, excluding the impact of exiting some low margin business. Operating income increased $6 million, to $13 million, up 77%. Operating margin was 11.6% for the quarter.

For the full year, Door sales increased 6%, operating income grew 51%, and operating margin increased 290 basis points to 10%.

Security sales were $144 million in the fourth quarter, up 3% to the prior year. The US business was up 7%. The impact of foreign currency reduced sales by $3 million in the fourth quarter. Segment operating income increased to $19 million, up 21% and the segment operating margin was 13%.

For the full year, Security sales increased 15%, operating income increased 17% from the prior year, and operating margin was 12.5%. We expect significant operating margin improvement in 2017, after we complete the integration of the Sentry Safe manufacturing into our Master Lock platform in 2016.

To sum up, consolidated fourth quarter performance, sales increased 18% and EPS were on plan, at $0.56. Our total company operating margin was 12%, with an incremental margin of 44%, excluding acquisitions.

For the full-year 2015, sales increased 14% and EPS grew 19%, to $2.07, which was at the high end of our outlook. Total company operating margin was 11.8%, a 110 basis point improvement. We are 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 fourth quarter sales by approximately $20 million, with Canada being the primary source. The EPS impact was approximately $0.02. For the full year, currency movements reduced sales by $69 million and EPS by $0.07.

Turning to the balance sheet, our December 31 balance sheet remains solid, with cash of $239 million, debt of $1.2 billion, and our net debt to EBITDA leverage is 1.4 times. We had nothing drawn on our $975 million revolving credit facility. Since the beginning of 2016, we've repurchased approximately 2.1 million shares totaling $100 million.

Turning last to the details of our outlook for 2016. Based on our projected 6% to 7% US home product market growth and our total global market growth of 5% to 6%, as well as our continued share gains and additional sales from the Norcraft acquisition, we expect full-year 2016 sales to increase 10% to 12% compared to 2015.

Our resulting outlook for 2016 EPS are in the range of $2.42 to $2 52. The midpoint of our EPS outlook reflects an increase of 19%, similar growth to 2015, with a first quarter EPS growth rate similar to what we expect for the full-year 2016.

The annual EPS outlook includes the following assumptions. Interest expense of around $45 million, a tax rate of 33%, average fully diluted shares of approximately 163 million, a positive impact from commodity costs that will partially offset a negative impact from currency in the first half of 2016, and a double-digit increase in healthcare costs.

We expect 2016 free cash flow to be $350 million to $375 million, with a conversion rate of over 90%.

In summary, the fourth quarter and full-year EPS were on plan, with market growth as expected. The solid performance of our business for the year, the recent investments made to increase capacity, and the expected continued market recovery give us confidence in continued solid growth in the coming years.

Importantly, the 110 basis point operating margin increase in 2015 and an expected 100 basis point increase at the midpoint of our 2016 outlook place us right on track for achieving our three-year operating margin targets.

Also, as demonstrated by the Norcraft acquisition, share repurchases and the dividend rate increase, we remain focused on using our balance sheet and cash flow to drive incremental shareholder value. Additionally, our new debt structure provides significant flexibility to continue to drive incremental shareholder value. I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the fourth quarter of 2015 and our full-year 2016 outlook. We will now begin taking a limited number of questions. Since there may be a number of you who 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?

(Operator Instructions)

Bob Wetenhall, RBC Capital Markets.

Chris, Lee, and Brian, congratulations on a very strong finish to the year and the encouraging guide for 2016. Chris, I just wanted to start with you. Thanks for the detailed guidance and your underlying assumptions for end markets in 2016. I was hoping you could give us a bit more granularity and share some color on what you're using to drive your outlook, and what are you seeing in demand trends as we start the year that gives you confidence in the growth rates you outlined for growth in the home products market, domestically and internationally?

Thanks, Bob. We really look at a lot of different factors to drive our outlook. And to actually break it down a bit, on the supply side, we're looking at a lot of the fundamentals, land sales, land development, permits, starts, homes under construction, supply of inventory, labor availability, and then look at supply versus demand, the fundamentals around household formation, affordability, home prices, interest rates, levels of consumer debt. And then we look at builder reported new home sales order rates, and new and existing home sales, and purchase finance applications, and then look at the macro level stuff around consumer confidence, employment rates.

So we take all of that, plus more, and actually try to drive toward what we think are the fundamentals around the outlook for new construction, existing housing turnover, R&R. Then we compare it to the stuff that we're actually seeing from our customers and discussions that we're having. So keep in mind, we've got -- we're a leader in our category, so we've got a pretty broad network of customers we're getting input from. But we're listening to builders, home centers, plumbing wholesalers, 5,200 kitchen and bath dealers. We're looking at order patterns, we're looking at prior quarter patterns, we're looking at current quarter patterns. And we roll that all together, and then we compare it to what consensus is in the market and what others are saying.

So I'd say we've got a lot more proprietary. Last year, we came out and I'd say almost hit it dead on with where we wound up. So our estimates of housing starts overall, between single-family and multi-family, was 1.119 million. And I guess the year wound up at 1.107 million. Consensus was at 1.2 million. So we were off by 11,000 and the market was off by 100,000. I'm not gloating here, I'm just saying we've gotten much better at looking at the drivers at a very granular, data-driven level, and then comparing it to what we're hearing and seeing in the market.

The second part of your question was around what we're seeing right now. And actually, the year's off pretty good, off to a pretty good start. So both order patterns and then January, which is done now, are on plan, maybe even a little bit stronger, but we're seeing actually really encouraging signs. And that matches up well to, we were out to builder and kitchen and bath show two weeks ago, and a lot of positive commentary, and as we look at the current behavior and the builders with order patterns and what we're hearing from home centers. So I would say, we've built all this over the fourth quarter and what we're seeing over the first six weeks of the year support our outlook and where we think the year is trending and where the year will come in.

Well, that's a nice start to the year. That's obviously encouraging. And thank you for all the detail there. I wanted to switch gears and ask Lee about your assumptions on operating margin performance in your guidance. And I know that Fortune invested in Cabinets capacity two years ago. Last year, you spent money investing in Plumbing and Doors. I wanted to understand better how the absence of cost moving into 2016 might benefit margin expansion. And maybe if you could give us a flavor for how much operating leverage is in the business, based on the assumptions that Chris outlined for volume growth? Thanks and good luck.

So as we think about operating margin growth, it starts with our long-term strategy. We said at the spin that our focus was when we get steady state, which is 1.4 million to 1.5 million housing starts a year, which is not peak, but which we consider steady state, we be back to 14% to 15% operating margins, which was similar to what we had pre-downturn. And we think we've continued to do that each year. The growth of 110 basis points of operating margin in 2015, and then at the midpoint of our guidance, we're another 200 basis points improvement to maybe 12.8%, so we were right on track, if you assume over the next three years we hit steady state.

But what's really driving that? I think it starts with the focus on disciplined sales growth that drives profit. Not just driving sales growth for the sake of sales, but really targeting across all of our segments that we are going to really drive disciplined profit growth. I think secondly what you've seen in 2015 is with those lack of -- or the reduction in investments that we've had in 2014, and even early part of 2015, we're getting very good leverage across our business. For the full year, our incremental margin on incremental sales was about 36%. We will normally plan around 25% to 30% on an annual basis, but we're starting to see that real leverage comes when you reduce investments. And so that's driving a lot of this margin expansion.

I think the other thing you're seeing is the operating efficiencies are improving, since we're not increasing the capacity at this point. And we watch that closely. Our product mix continues to improve across our channels and across our segments. So I think that combination, you're seeing not only for the fourth quarter but for the full year and it's reflected in our guidance, that's the discipline that's going to continue to drive this operating margin growth.

Sorry. Could you just give us an idea, based on your top line guide, what kind of incremental margin we should be thinking about that ties in with your EPS guide? Thanks and I'll pass it on.

Sure. So for the midpoint of our 2016 guidance, we've got an incremental margin, we've got somewhere $300 million, $400 million in sales increases, with a 25% to 28% incremental margin on that sales growth. So continued within the range that we plan for and we manage around, so 25%, 26%, 27% somewhere in that range, of incremental margins in our guidance for next year.

Thanks and good luck.

Tim Wojs, Baird.

Nice job on the quarter.

Thank you.

First question, on the Cabinets business, curious how you're thinking about the margins in that business from both an absolute level in 2016 and an incremental level. And then also in Plumbing, how should we think of the pace of margin improvement in that business, just given how 20% has been your long-term view on where margins stack out there?

So for Cabinets operating margin, you look at 2015 for the full year was 9%. That's up 130 basis points. If you take midpoint of our guidance for 2016, I think you could see approaching an 11% operating margin, which would put them anywhere, around that would put that on that three-year trajectory to get back to the 14%-plus operating margin, which is our target for them. So again, they're making nice progress. We put capacity in in 2014, a little bit in early 2015, so now you're starting to see the leverage against that and that should continue to get them on track for that 14%-plus at steady state.

Moen, last year, in 2014, was 19.5%. This year, in 2015, they were 20.7%. We think our strategy there is that's a fine margin. It could go up. But the real strategy there is to drive sales above market growth sales at anywhere close to that margin. So we're very happy with the 20%-plus operating margin. We can retain that. But our real goal is to drive incremental value by really driving sales around that same margin rate would be a better way to create value than just increasing that margin year after year.

Okay. Okay. And then just on the quarterly guidance, I want to make sure I heard you right, I think you said Q1 growth, EPS growth should be similar to the full year?

Yes. So EPS midpoint of the guidance, $2.47, that's 19% over 2015 full-year. And we're basically saying first quarter should grow about the same pace.

Okay. Weren't there some inefficiencies in the Cabinets business last year that you guys lapped?

There were. There was about $5 million to $6 million in the first quarter of some inefficiencies that we'll get back. But we've also got some other things happening in the first quarter. We're continuing, in the first quarter, remember that's a low leverage quarter, because it's the lowest revenue. But we add period costs that will probably cost us $0.03 or $0.04, in the first quarter, versus last year. We're making the last piece of investment in Moen, which is probably another $0.01. Interest expense, because we did our refinancing in the summer of 2015, will cost us about $0.03, or $8 million, in the first quarter versus last year. And we've got some medical going up and some other things. So yes, there are a few tailwinds, but there's some other things that are going to pull it back down to make that similar 18% to 20% growth rate reasonable.

Great. Good luck on the year.

Thank you.

Mike Dahl, Credit Suisse.

Thanks for taking my questions. Just to follow up on the question around cadence, on a higher level, obviously this past year, you had forecast acceleration through the year, and ultimately, you were able to achieve that. I think if we look at some things like in aggregate builder order growth has decelerated a bit, existing home sale growth has decelerated a bit in the fourth quarter, just wondering if you could outline what the general cadence from a top line perspective is as you walk through the year? Is it evenly weighted? How would you characterize that?

It's evenly weighted. I think if you look at our business, we lag the construction cycle by a quarter or two, and that was extended out second half of last year. The average length of completing a home extended out, so our products were going in later. So we're still benefiting from activity in the second half of last year that will come in in the first part of this year. And then actually, the starts activity, enough order activity should support our overall guidance for the full year.

So we see it as a pretty steady cadence throughout, quarter-over-quarter, for our products coming in, because there's that lag built into the system. So should be a little bit more even than it was last year, where we started out slow and then ramped up second half. We don't see that happening. We see it as more of an even quarter-over-quarter.

Got it. And as a point of clarification So what is your single-family assumption within the guide?

Low teens, single-family, and mid-single, multi-family. So we're predicting that those two spread a bit. And on the margin, that helps us. A little bit more square footage single-family homes benefits us, more faucets, more cabinets.

Okay. Got it. And then Lee, another more detailed guidance question. When you get into a little bit of some of the other line items or other things impacting the P&L this year and noted commodity costs are partially offsetting FX and healthcare, could you give us any more granularity around the net impact, or breaking down the net impacts, how much are you benefiting from commodity and how much is it weighted towards Plumbing versus seeing some in Doors or Cabinets, and then how much of an FX headwind are you assuming? Thanks.

So when you start with, for example, FX, so for the full year of 2015, FX reduced our sales by around $69 million, $70 million, and that was about $0.07 of EPS. For 2016 around the midpoint of the guidance, we're saying FX could reduce our sales in the 50 to 75 basis point range and probably about $0.02 negative impact, and the largest portion of that is in the first half of 2016.

Around commodities, I think we said on our third quarter call that the third quarter 2015 was about $3 million benefit. We saw the fourth quarter around that same, maybe $4 million. Our assumption in our guidance - so that's $7 million for the second half. And the first half was break even, to be honest with you, a little bit of a cost in the first quarter of 2015, a little benefit in the second quarter, but those washed. I'd say our plans for 2016 midpoint guidance is first half of 2016, $7 million to $8 million benefit, very similar to the second half and then slowing down in the second half of 2016, so some of that benefit going away. So I'd say the first half of 2016 from a commodity benefit should be very similar to the second half of 2015.

Great. Thank you. That's helpful and good luck.

Ken Zener, KeyBanc.

Good afternoon, gentlemen. Lee, Chris, you guys obviously delivered well in 2015, despite the accelerating growth, as you guys described it, in the back half, which is similar to the cadence you expect, have outlined in 2016. I think existing home sales were up, let's say, 5%, 6% last year. And the NAR is talking more in that low single digit range this year. I realize you guys have a dashboard where you really look at a lot of things. I wonder if you could be specific to the things that there's a lag between turnover, historically, and building product activity demand. What is it that gives you the confidence that despite that headline slowdown, according to the NAR, I'd be interested in your number. Obviously, prices have gone up, equity's built up. But what gives you confidence to hold that same rate despite the slower turnover, if you will?

So the turnover rate has been running low- to mid-single in existing housing. We're encouraged by the credit availability, especially at the entry level. I think that the bigger constraint has been the inventory of existing housing that's been on the market than there is demand. And I think if you look at Case Schiller and other pricing surveys, the pressure that you see on existing housing prices rising is because inventory's not quite where demand is. So I'm encouraged by demand, I'm encouraged by credit availability.

I also look at, from a macro standpoint, level of spending per household on home improvements. We're not even back to a 50-year average yet. We've been running below that since 2008. So we look at that and how far up are we on that curve. It's a large number universe, so you're talking about the average is $725 to $750. But if you actually look at those who are really remodeling, it's in the $1,500, north of that type number.

Then you look at what the home centers activity has been. And that's running in single digits. And I think their outlooks are more for mid-single digits for the year. So there's a number of factors that get us pretty comfortable around a 5% rate, which is really the historic average. I think there's potential for upside over that over the next couple of years, just based on the fact that we've underinvested in the repair/remodel side of the market. Houses are getting older. We've under built relative to the housing stock over eight years. And so you're going to continue to lean on the existing housing stock.

So the turnover is one factor that used to be highly correlated, so back, I'm talking pre-2006, that was highly correlated to R&R spending. That completely disconnected in the downturn. It's gotten tighter, but it isn't back to that same high level of correlation. So it's important, but it's not the only driver in R&R that we look at.

I appreciate that. My follow-up question will be along the same lines, if you will. You're talking credit availability, HELOCs, for example, when you talk, especially in the very important dealer channel, what insights do you get from them as opposed to perhaps financial data talking about where those people are getting the money for these higher ticket projects? How do you quantify that in a way that we can't see, necessarily?

It skews by household type. So older households are drawing from savings, and they have been for a while. They're not really relying on credit as much. And for a long time, we saw that in the mix coming through dealers as being a richer mix, and when they were spending, they were actually spending not constrained by credit. Over the last 18, 24 months, we've seen much more activity at the entry level, semi-custom level, both in home centers, as well as in the dealer channel. We think there probably is some credit support to that. And that's, you could say it's HELOCs, you could say it's refinancing, it's general savings. And the price points are, frankly, lower, so they can afford, they're more affordable projects at that entry-level semi-custom, so you're not needing to really finance that much of a purchase.

So I think it's a combination of those two, depending on the level of activity we're seeing. Anecdotally, across the dealer channel, pretty consistent growth throughout the year. So about 10% in the quarter, 10% for the whole year. And we saw actually a mix shift a little bit more to some of that semi-custom out of the custom. So there is more of that support in the general broader market, but pretty consistent growth rates.

Thank you.

Scott Rednor, Zelman and Associates.

What are the planning assumptions for Canada and China? And maybe you could talk about specifically how you guys are generating pretty impressive growth there, given what we see as macro headwinds in both those regions?

Our planning assumption is pretty modest, in general, across Canada, China a couple percent growth, so low single digit type growth. Where we're seeing success in China is really retail and e-commerce. So the Moen brand, we've been there 20 years. We are very well recognized. And so just as e-commerce continues to expand across categories in China, we're benefiting from that. So that's driving some pretty good growth from us at good margins. And our traditional retail, where we've got 1,000 outlets in China, is supporting R&R activity that's coming through that market. There is some softness in direct to builder, but frankly, it's just down low single digits. So it's less than you might expect. It might be that faucets and sinks, fairly small ticket purchase, remodeling-type ticket purchase, is holding up reasonably well. But we obviously pressure tested it as we come to the year, and so we're looking closely at it, but so far we're seeing reasonable rates for our category, not relying upon new construction, but really more the retail side of that market.

Canada, relatively flat. I think it depends on part of the country. Obviously, out West, Calgary impacted by oil, but the cities are holding up okay. And I'd just say low single digits is what we're planning on for the year.

And then Chris, we can draw volume assumptions based on housing starts data, et cetera. But where do you think we are in the mix cycle, either across the portfolio or across your various product categories?

Where we are in the mix cycle?

Yes. Are we back to mid-cycle or are we approaching peak? Where do you guys think you are in terms of product mix, and how does that stand relative to prior peak or even a downturn?

From a mix standpoint, we've seen continuing improvement in mix. And I'd step back, we tested that over the summer, we did some proprietary research, some real consumer research. And this all comes back to the consumer desire to personalize their space. They want something rather complex, unique. And so that's translating into consumers buying up in our mix change, so from entry-level up to first, second upgrades, more semi-custom, more unique finishes, painted versus stained looks. Things that we can price for, not just raising prices but rather the mix is driving that.

Same on entry doors, with Thermo-Tru. They're buying more unique glass styles, different finishes in that entry. So I'd say we're not at peak. I'd say it continues to improve and is driving some of that margin improvement that we see. So the margin improvement's coming from efficiencies in our plants, but it's also coming from some of that mix improvement, as they're buying the new products that we're bringing in and mixing and matching for their own unique styles.

And that was something that we were sitting there saying, how long is this going to run for? And actually, based on research, it's going to continue to run. This is pretty fundamental around consumer behavior in the US, people like to customize more and more. And so we're working hard with our designers and our channel partners to provide that mix and provide more unique looks that the consumers are going to get excited about.

Great. Thanks for taking my questions.

Michael Rehaut, JPMorgan.

Good afternoon. Thanks for fitting me in. Just a couple questions here. First, on the margin outlook, always appreciate the detailed guidance and thought process. I was hoping to give -- if you guys could give a little bit on both Doors and Security margins, how to think about that for 2016. I know you referred to expecting some material margin expansion, I believe in the Security business following the integration of Sentry Safe. So I don't know if that puts you solidly above a 13% mark, or mid-13s? Also, with the Door business, a lot of improvement there. Certainly, some driven by the new mix. But from an incremental margin standpoint, I would love your thoughts there, as well.

Sure. I'll start with Security. So full-year 2015, operating margin of 12.5%. We are, as Chris mentioned in his comments, we started the integration in the end of June of 2015, of Sentry Safe manufacturing into Master Lock. That will take a year or so. So sometime this summer we should finish that. So at that point, at a minimum by the fourth quarter of 2016, we should be at a much higher run rate. I'd say you could see Sentry Safe going, pre integration of the manufacturing, from 7% operating margin to 13% 14% operating margin for at least the last quarter of 2016. And then by the time we hit 2017, if they're at a 13%, 14%, Master Lock is a 14% to 15%. So you've taken that whole business up nicely from 12.5% this year to 14% to 15% by 2017. But 2016 is a transition year. We won't get a lot of the benefit until probably the fourth quarter, maybe a little bit into the third quarter. So great profit growth potential there with that integration.

In terms of Doors, so Doors, nice growth in 2015, operating margin full-year, 10%. Doors are much like Cabinets. We expect them to get back to that 14%, 15% operating margin at steady state. They're making great progress there. I think if you looked at the guidance, midpoint of our guidance, you could see them approaching or exceeding 11% in 2016. So again, just like Cabinets, well on track to get back to that 14% plus at steady state. So this all goes back to the things Chris talked about and that really disciplined approach to sales growth that really drives profit. So these margin improvements are across all of our segments, because it's a philosophy.

Great. That's very helpful. And then aside from a modeling question around your outlook for corporate expense, I wanted to get a sense also, I think you mentioned in your guidance, it incorporates a roughly flattish share count. And I would assume, obviously, you'd also incorporate, you're not modeling in any future bolt-on acquisitions. You've been very good about creating a decent cadence over the last two or three years in terms of these bolt-on opportunities and when those don't present themselves, be willing to buy back some stock. I was wondering if that type of balance, let's say, would also be applicable to 2016, where I presume you're still, as of the last conference call, very active on the M&A side, but if that doesn't necessarily happen, given the strong free cash flow and good balance sheet position, that you'd still be willing to repurchase some shares throughout the year? So thoughts around that? And again, the first, minor modeling on the corporate expense for the year.

Sure. We remain, as we have, focused on total shareholder value. So we're very active right now on the M&A side. We've got a lot of discussions going on, are in the midst of a number of things, and I can never predict if any of these will result. But I'm encouraged by our level of activity. If anything, we're busier now than we were a year ago. And so I'd say that still is a real focus for us.

On the other side, we bought back $100 million worth of our shares, 2.1 million, in the month of January. I'd say at the value that we're seeing in the market right now versus our plans, we'll remain looking hard at share repurchase this year. We've still got about $148 million left under our authorization. So we're going to look at both of those, and we've got plenty of capacity to both buy back shares and complete acquisitions. We ended the year at only 1.4 times debt.

So we've got capacity to do things, we've got debt capacity, we've got strong free cash flow. So we'll be very efficient with our cash. We have been coming up on five years here, and we're going to continue to do that and there may be some really nice opportunities looking at us over the next few months. So that's about all I can say on all that. But I'd say we'll be balanced in our approach across those two.

And that 2.1 million the $163 million reflects that 2.1, so I guess there's some options and natural share creep. And then again, just the corporate expense, thoughts for the year?

The $163 million that we ended the year is what we modeled in guidance. The guidance, that includes the need to buy back about 1 million shares just to avoid dilution. So we bought back 2.1 in January. 1 million of that's built into the guidance; 1 million of it isn't.

In terms of corporate -- and we break corporate out into the G& A and then our net pension income -- that will go up from $63 million in 2015 to, we think, maybe $69 million in 2016, kind of guidance. And $3 million of it is just less pension income, $2 million of it is spending on cyber security, and the other $1 million is miscellaneous. So I'd plan on a net of $69 million.

Thank you.

I'll now turn the call back over to Brian Lantz for closing remarks.

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

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