Fortune Brands Innovations Inc (FBIN) 2016 Q2 法說會逐字稿

Good afternoon. My name is Mariama and I will be your conference operator today. At this time I would like to welcome everyone to the Fortune Brands' second-quarter 2016 results conference call. (Operator Instructions)

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

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 in the second quarter of 2016.

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 Investors 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 on 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.

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. Our teams drove strong sales and profit gains across all segments in the second quarter as the home products market continued to grow at the positive pace that we expected.

Our business has remained focused on driving profitable growth, targeting the most attractive segments of our markets. Based on the solid second-quarter performance, the momentum we have inside of our businesses for the remainder of the year, and a lower projected tax rate, we are increasing our full-year EPS outlook.

Let me first spent some time on our view of the US home products market. Next I will provide my perspective on our business performance in the second quarter. We will then provide more details on our second-quarter performance and increased 2016 outlook.

Starting with our view of the US home products market, in the second quarter the market for our home products continued to grow at the pace that we expected it would. We estimate that repair and remodel activity grew at roughly 5% to 5.5%, and new construction grew low double digits.

Repair and remodel activity continued to reflect consumers' demonstrated appetite for more on-trend styling product differentiation, and project complexity. This consumer demand continues to drive an improving mix across our categories.

As expected, new construction demand continues to grow at a low double-digit rate, with single-family growing faster the multifamily, and single family entry-level activity continues to improve.

Looking forward, our overall assumption remains that the US home products market, which impacts 70% of our sales, grows at a combined 6% to 7% rate for the full-year 2016. Our basket of near-term indicators for home products remains pointed to strong underlying demand, significant levels of construction activity and progress, and continued market momentum as we head into the second half of the year.

Now let me provide some perspective on our business performance. For the second quarter, our teams delivered strong sales and profit performance across all operating segments. Sales increased 11% in total, and 12% for our US home products businesses; and total Company operating margin increased to 14.8%.

Starting with our Cabinets segment, we continued to follow a disciplined strategy focused on profitable growth. Our consistent pace of product innovation and our high levels of reliable service to our channel partners continued to drive strong performance.

In the second quarter, our overall Cabinet sales were up 17% over the prior year, and increased 7% excluding Norcraft. Operating margins expanded to 12.9%.

Specifically sales in our largest channel, dealers, grew 30%, and 11% excluding Norcraft. Our share gains are coming from our new construction product lines in this channel and deeper multiline relationships with existing customers. We're cross-selling more of our product lines across our recently expanded dealer network.

Our in-stock cabinets and vanities, which are sold through home centers, grew sales mid-single digits were adjusted for the comparison to last year's second quarter, where we had a major new vanity program launch which required an inventory load throughout last summer.

The sell-through of the new program and product upgrades that we launched last year are performing well. Our cabinet team has been focused on partnering with our customers to consistently balance inventory levels with production, to further enhance service and manufacturing efficiency in our stock cabinet and vanity programs.

The remaining 27% of our Cabinet business, which includes home centers semi-custom, builder direct, and targeted markets in Canada, grew midteens. We are disciplined in our approach to these segments, as we focus on where we can partner with customers to capture profitable growth.

With our focused approach, we grew share in these segments and drove strong margin improvement. We are especially pleased with our home center special order business, where our partnership approach is working well and driving growth at above-market rates.

Overall for Cabinets we continue to execute and deliver strong sales and profit results. We are building share in the most attractive segments of the market by deepening our partnerships with dealers, home centers, and builders, and our plants are increasingly more efficient.

Our new product introductions and program wins are helping us drive our reach across a number of price points in the market. The impact of our consistent execution can be seen our share gains, our stronger mix, and our improving margins.

For our Plumbing segment, sales were up 6% for the quarter, driven primarily by strength in the US wholesale channel and China, with solid mix and strong operating margin. Across our markets we continued to see consumers trade up and our mix improve as innovation in design, finish, and function attract consumers who trust our brand.

As we look out to the second half of the year, our growth should benefit from incremental marketing spend as well as more focus on recently launched products, including additional Magnetix, easy docking, easy releasing showerheads, new Glyde, Via, and Dartmoor bath suites, and new bathroom faucets with Microban antimicrobial finish in our Hensley line.

Organic sales in Canada were up high single digits to the prior year. China sales increased high single digits versus the prior year, but were up double digits in local currency, driven by our direct-to-builder efforts, or Moen branded retail stores, and a rapidly expanding e-commerce marketplace. China's growth in new construction is picking up again, and we are also encouraged by the level of R&R activity that we are seeing.

Doors reported sales were up 9% for the quarter. Door products again saw sales growth, with gains in both wholesale, which was up double digits, and at retail, which was up mid single digits.

Therma-Tru continues to benefit from the rollout of a refreshed retail strategy that includes an enhanced product lineup, simpler, more intuitive display, and better sales support for our customers' associates. In wholesale we continue to benefit from strong new construction placements and our enhanced distribution in the Southern and Western US.

In the Security segment, sales increased 6% from the prior year-quarter, and were up approximately 8% excluding the negative impact of currency and the planned exit of some less profitable SentrySafe product lines as part of the broader Sentry integration. Growth was driven by increases in Master Lock US retail and US commercial and strong growth in international, particularly in Asia.

The integration of SentrySafe into Master Lock is now behind us, with only a few logistics changes left. We can now begin to ramp our Sentry sales efforts as our new production comes online. We continue to be excited about the opportunities we see between our Master Lock and Sentry businesses over the next few years.

So to recap the quarter, our results were strong and broad across all segments. We again executed well in the US home products market that is continuing to grow as we expected. Our teams are consistently leveraging that market momentum to deliver profitable growth.

Before I wrap up, let me comment on our efforts to drive 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.

Right now we are busy evaluating a healthy pipeline of potential acquisitions. We're assessing a number of opportunities; and while we cannot guarantee success in any one situation, we believe we will complete some transactions over the next six to 12 months.

Over the next three years, we continue to believe that we have the potential to deploy more than $2 billion to drive incremental growth in shareholder value.

To sum up, the demand for our home products remains strong, as we expected, and we continue to grow faster than our market. Importantly, 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 would like to turn the call over to Lee, who will review our financial performance and provide detail on our increased EPS outlook for 2016.

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 $1.3 billion, up 11% from a year ago, with organic growth of 6% across all segments. Consolidated operating income for the quarter was $192 million, up 27% or $41 million compared to the same quarter last year.

Earnings per share were $0.82 for the quarter versus $0.59 the same quarter last year, increasing 39% or $0.23, with $0.18 driven by continued stronger operating performance and $0.05 from a lower tax rate.

Now let me provide more color on segment results. Our Cabinet sales were $645 million, up $94 million or 17% versus the prior-year quarter. Norcraft added $60 million of the sales growth.

Dealer sales were $326 million and increased 30% from the prior year. In-stock cabinets and vanity sales of $130 million decreased 4%. However last year's major vanity program win drove 25% sales growth in the second quarter of 2015. Excluding this prior-year impact, in-stock cabinets and vanity sales increased 4%. Remaining sales for home center semi-custom, builder direct, and Canada increased 14%.

Operating income for the Cabinets segment increased $27 million over the prior year quarter, with Norcraft adding $10 million of the increase. Operating margin for the quarter increased 260 basis points to 12.9%.

Operating leverage excluding Norcraft was around 50%, as our recently added capacity continues to become more efficient, and product and channel mix improved. For the full year, we expect an operating margin of around 11% compared to 9% in 2015.

Turning to Plumbing, sales for the second quarter were $378 million, up $20 million or 6%, led by US wholesale and China. Excluding the negative impact of currency, total Plumbing sales increased approximately 7%, with organic Canadian sales increasing 7% and China sales increasing 14%.

Operating income increased $13 million to $88 million, up 17%. Operating margin for the segment was 23.2%. For the full-year 2016, operating margin is expected to be 20% to 21% including incremental spending on marketing and product initiatives in the third quarter.

Door sales were $128 million, up $10 million or 9% from the prior-year quarter. Operating income increased 29% with an operating margin of 15.3%. Full-year operating margin for this segment is expected to be 11% to 12%.

Security sales were $147 million in the second quarter, up 6% to the prior year and up approximately 8% excluding the negative impact of currency and the planned exit of less profitable SentrySafe product lines as part of the broader Sentry integration.

Segment operating income was $20 million, and the segment operating margin was 13.4%. We expect to exit 2016 at an operating margin run rate of 15%.

To sum up consolidated second-quarter performance, sales increased 11% and EPS were ahead of plan at $0.82. Our total Company operating margin was 14.8%, up 190 basis points from the prior year, with an incremental margin excluding acquisitions of over 50%.

We're squarely on track to reach our 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 segment sales by approximately 1%, with Canada being the primary source. The EPS impact was around $0.01.

Also, the lower tax rate of 28% in the quarter was due to the adoption of a new accounting standard that requires companies to reflect the tax benefit from stock-based compensation transactions and their tax rate and EPS.

Turning to the balance sheet, in the second quarter we amended our credit agreement. The duration of the credit facility has been extended to 2021. The revolver has been expanded to $1.25 billion and the term loan has been eliminated.

With the increased flexibility of this new credit facility, we are now better positioned to drive incremental growth with our balance sheet and cash flow. Our June 30 balance sheet remains solid, with cash of $279 million, debt of $1.6 billion, and our net debt-to-EBITDA leverage is 1.8 times. By year end we expect leverage to be about 1.4 times excluding any additional capital transactions.

We currently have $540 million available under our new $1.25 billion revolver.

Turning last to the details of our outlook for 2016, our market and sales assumptions for 2016 are unchanged. We continue to assume 6% to 7% US home products market growth and total global market growth of 5% to 6%. Accordingly, we continue to expect full-year 2016 sales to increase 10% to 12% compared to 2015.

However we have increased our full-year EPS outlook based on continuing our strong operating margin performance and a lower annual tax rate. Our outlook for 2016 EPS is now in the range of $2.70 to $2.78, with the midpoint reflecting a 32% increase over the prior year.

The $2.74 midpoint of our EPS outlook represents an increase of $0.19 over our previous midpoint of $2.55. Stronger than previously expected performance for the second quarter drove $0.02, and expected stronger performance primarily in the fourth quarter drove $0.04 of the increase. Stronger than previously expected performance in the third quarter will be offset by increased marketing and product spending to drive future growth.

The lower tax rate drove $0.13 of the increase: $0.05 in the second quarter; $0.09 in the first half; and $0.04 in the second half. We expect 2016 free cash flow to be around $400 million with a conversion rate of over 90%.

The annual EPS outlook includes the following assumptions: interest expense of around $50 million; a tax rate of approximately 31% in the second half of the year; the average fully diluted shares of approximately 158 million.

In summary, we are set up for a strong 2016. Second-quarter market growth was as expected, and we delivered strong sales and profit growth.

Due to continuing stronger growth in operating margins and a lower tax rate, we again increased our EPS outlook for the year. And we remain focused on using our balance sheet and cash flow to drive incremental shareholder value through acquisitions and share repurchases. I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the second quarter of 2016. We will now begin taking 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) Phil Ng, Jefferies.

Congrats on the solid quarter. Can you provide little more color on the brand spending you called out for the back half? How much are you planning to spend? How do you expect that to break out in 3Q, 4Q, and just the segments overall?

Yes, we will spend -- and it's primarily third quarter, so in the third quarter we will spend an incremental $0.03 on this spend. And it's broken out between media campaigns, some Internet marketing, some product initiatives. So it will all be in the third quarter; it will be $0.03. And it's basically Moen.

Okay, that's great. Then switching gears to Plumbing, margins were quite impressive, very high incrementals. Do you expect that to be sustainable in the back half with metal prices ticking up? And what were some of the key drivers for the stronger margins in 2Q? Thanks.

We think about the margins for the full-year in Moen somewhere between 20% and 21% for the full year. Included in that guidance is the fact that we think overall for our Company commodities will be fairly flat in the second half. We had some benefits in the first half, but basically flat in the second half; and FX will be basically flat.

So second half looks very different from a commodity perspective for us, but that's built into our guidance. I think what's driving Moen, the operating margins -- we had very nice channel mix with the wholesale business segment up 9% to 10%. We're getting some nice continuous improvements in our business model there as we continue to get more efficient.

And there was a little expense timing that will move from the second to the third. A little bit of that is part of the $0.03 in terms of the media campaign and the spending.

But very strong margins, consistently strong. We can now afford in the second half to spend some of that back, still maintain 20% to 21% margins, and be positioned well for driving growth in the first half of next year through that ad spend.

Bob Wetenhall, RBC Capital Markets.

Chris, congratulations on a nice quarter. I just wanted to ask you in terms of -- away from the updated guidance you've revised, what are you seeing day-to-day trend-wise for the consumer? You are obviously having a positive outlook for housing. What are the indicators you're looking at today that give you confidence to raise? And do you have any preliminary thoughts on the strength of the recovery?

We are seeing pretty widespread improvement. On the R&R side of the market, I'd say that the mix is probably the best indicator that we are seeing across all product categories, as consumers are spending more per project. So the mix continues to improve across.

It's been pretty consistent really. I mean, first quarter we saw some surge because of weather improvement, etc.; but that continued through the second quarter, and really we feel like the second half is going to be a continuation of what we saw in the second quarter on R&R.

So that's pretty widespread strength, keeping in mind we have enormous dealer network in Cabinets that we are seeing. Big wholesale channels in Plumbing that we are seeing this kind of growth come through.

Then on the new construction side, I think we are optimistic about second half and 2017, just given overall order rates, starts rates. And I'm not talking month-to-month; I'm talking what does the first-half total activity look like.

We hear through all of our builder relationships that everybody is busy. They are still looking for talent. They're still out acquiring land.

And so there's just a good, steady drumbeat which gives us the confidence in the business overall, and we're performing well against that. So our mix coming through really has to do with the channels that we are positioned against. We are positioned at the most attractive parts of the market with our channels.

And then within those channels we are really positioned against the product categories that offer the strongest growth in margins. So it's all of that together feels like a good, strong continuation of what was a good start to the year.

I think you have dedicated resources right now evaluating M&A opportunities. Obviously the equity markets have done really well recently and valuations are high. I was trying to understand if any of the adjustments to the credit agreement are intended to give you incremental flexibility to perform M&A by leveraging the balance sheet.

And perhaps you could give us a view on what you see in terms of the landscape valuation-wise, in terms of opportunities, and how much leverage you would be comfortable taking on to finance something in the next couple quarters. Thanks and good luck.

Thanks, Bob. Yes, obviously the new bank deal gives us a little more flexibility. I think we had good flexibility before that; we still have that flexibility.

I think we can do the things that we would like to. Our credit rating is strong. Our cash flow is very strong. So I don't feel like we're really that constraint on that front.

In terms of valuations in the market I think they're a bit -- kind of on a couple ends of the spectrum. I think where you see strong branded products, strong positions in the market, there's healthy expectations on value.

But I think given what those franchises can deliver, it's probably warranted. And you can see where things can get done that at that level.

On the other end of that spectrum, you see companies that are in more commodity parts of the market, I think with maybe higher expectations than might be warranted.

So our framework has always been looking at categories where consumers are heavily involved, extending off of our existing platforms, so continuing to grow inside of our attractive positions. And we see a number of things. We are busy on a number of things right now that we think can contribute to that.

So I don't think valuations have gotten beyond where we'd feel comfortable.

On the leverage side, Lee, you can chime in here, but I think we are more comfortable at this point in the cycle taking a little bit more leverage on and then working that down, but within I'd say reasonable parameters.

Yes, I think that's right. Long-term especially as we get closer to steady-state, we talk about 2 to 2.5 times net debt-to-EBITDA. But in this cycle, especially with the housing market, the recovery getting elongated here, it gives us a little longer timeline.

So we are comfortable going above that 2.5 in the interim, as long as within a year we are paying it back down and being in that same range. We've got a lot of flexibility, we generate a lot of cash, we've got a lot of room on our balance sheet. There's just -- we just have a lot of flexibility.

We're in a good spot.

Understood. Good luck and thanks very much.

Michael Rehaut, JPMorgan.

Thanks. Good afternoon and thanks for taking my question. Just wanted to focus in on the first question, and then I have a follow-up.

But just on the $0.06 of raised performance or operating performance you expect this year -- and obviously congrats on that -- it seems like it's being driven by slightly raised margins or margin outlook for the full-year for both kitchen and bath, Plumbing and Doors it appears.

Just wanted to get a sense of what's behind that, if it's -- you point to more just general manufacturing efficiencies; if mix is playing a greater role than expected; or commodities. Does that impact the incremental margin outlook at all?

Terrific question. I think it starts with where we were, going back two or three years ago, where we were really focused on profitable growth. We had come through the downturn and restructured, started seeing volumes coming over our fixed cost base, and within each of the businesses strategically directed where we were going to focus in areas where we could see more profitable growth.

So what you are seeing in the second quarter really is an extension of that. So on mix, stronger mix because we are focusing on the channels where you get stronger mix. Within those channels we are focused on product categories that are delivering stronger mix. That played out in a strong way in the second quarter.

Operating efficiencies, we've got very good leverage coming over our fixed cost base. We put some capacity in a couple years ago; that capacity is operating very efficiently right now. So we are just seeing that leverage come through.

And then import costs, stable to a bit improved for the quarter, and that we expect to continue throughout the year. So I guess we're just at a level where we're seeing that strong mix coming through, leveraging our fixed cost base in a consistent way. Our teams are operating very well in terms of efficiency and continuous improvement, and then input costs look good.

So across all of that we had the confidence to raise, based on where we saw those margins going out through the second half of the year.

That's helpful. Thank you, Chris. Just circling back to the M&A comments, you said you expect -- I believe your words were several, potentially several to be completed over the next six to 12 months. Any thoughts -- I mean, obviously if you're talking more than one, even one can move from a timing standpoint, so this might be hard to answer. But any thoughts around sales per acquisition here? The type of size?

Obviously in the last two, three years you've done more of that, let's say, small to midsized type of bolt-on pretty consistently, with Wood Crafters, with SentrySafe, Norcraft. Are we to think that what you have closer in on the pipeline could be of a similar type of size, plus or minus? Or would there be any differences there?

I'd say good probability of some small, midsize. We've just got a number of things that are progressing, and the comment was really just intended to say we're making good progress.

And I think, yes, consistent with the types of things we've done, you could see us doing some of those. There may be some other things out there that are more significant; harder to predict on those, but those are also in the evaluation or discussion phase as well.

So I think higher probability on small, midsized but there are some other things out there that we are working too. They obviously have to make sense; everybody's values have to be reasonable.

But I guess there's enough going on right now that we just thought it's worth mentioning that likelihood over the next six, nine, 12 months of us doing some of those things is probably a little bit better than maybe it was a quarter or two ago.

Thanks. Lee, tax rate for next year, any thoughts?

As we put our plan together for next year and then issue guidance in the first quarter, we will let you know about that. It's a little too early to predict that at this point.

We've given you the second half of this year around 31% for the second half, so that will give us about a 30% for the year. But we will let you know, as we get in the next quarter and start thinking about guidance, what it might look like.

Sam Eisner, Goldman Sachs.

Yes, good morning, everyone. On the Plumbing segment, I just want make sure I understand this correctly. You guys are guiding to a 20%, 21%. The midpoint of that, that implies roughly a 200 basis point decline in the second half of the year.

You said about $0.03 of spending; that's roughly $7 million, and I think that's about 50 bps. So I was wondering if you could help bridge what else is happening in the Plumbing segment in the back half of the year, aside from investment spending, that gets to that roughly 200 basis point decline on the second-half margins.

I don't think that math is exactly right. I think our sales will be better in the second half of this year than last year even though we had strong comps. And I think our operating margin will be better in dollars than last year.

So we can check the math in the after-call with you, but I don't think there's a margin drop like that.

All right; maybe I'm missing something there. I thought the math was right.

Maybe secondarily you can -- sorry, I lost my train of thought a little bit here.

That's okay. Maybe just an overall point, there's nothing going on in the business the second half of the year that is unusual, other than we are going to increase spending on marketing and product introduction because we see a lot of strung trends coming at us and we want to capture volume, not just for this year but going into next year. So we're launching some new advertising and we're aggressively pushing some new products that we've got in the market.

That's the only thing extraordinary. And those are good things, and I think Lee quantified the cost of those. Otherwise the business is performing very well.

So I don't want anybody to walk away with the impression that we are calling out some problem in the Plumbing business in the second half of the year. That would be exactly the opposite of what's going on in that business right now. That business is doing really well.

Got it. Then on the revenue, I have to nitpick here. I think from an organic standpoint, I think you guys said you did about 6%. We were expecting something a little bit higher.

Again, still, 6% very good. But curious if there's something in there that we should be paying attention to. Is there something at the low end where maybe we are not selling as much? Are you substituting volume for price here?

I just want to better understand, again recognizing 6% is a good number. But it's a little bit light of expectations.

The comps on the wholesale side of the business were up high single digits, 9%-plus, very strong mix coming through there. On the retail side of the business we are up against a midteens comp from last year. We had rolled new products out and there was some big load in.

So the second quarter of last year was up really strong, so you're running against that. So it's kind of low single-digits on the retail side this year. So that's the math that averages that down.

But if I look across wholesale for Moen, again up strong single digits. China a very strong market right now; it's come back. The government has actually made some changes policy-wise to reignite construction market. And we are seeing on the R&R side in China a lot of activity, which is a bit more stable relative to the government policy and everything else.

And then Canada is holding up well. So I think across Moen the one thing that as you look at the aggregate numbers that you'd say, gee, that is a little lighter than what we might have thought, is the comp in retail against a very strong second quarter last year, which is good business on the shelf, SKUs in the store today.

So those things happen from time to time as you get wins and placements and you load them in.

Got it. Thanks.

Mike Dahl, Credit Suisse.

Thanks for taking my questions. We just wanted to ask a two-part question about Norcraft. The first is, it seems like from a sales perspective there's still not really any traction on growing that part of the business. So first is just -- especially as it becomes part of the organic as we roll out to second half -- just how you are thinking about the growth for Norcraft and what some of the initiatives are.

The second part is just a clarification. I think you said the profit impact was an incremental $10 million year-on-year in 2Q. Or was that what the absolute number was for the 2Q profits? Because I'm just trying to reconcile the incrementals you gave ex-Norcraft.

I'll just address the first question. Norcraft is performing well. They are performing as well as our overall dealer business, and in that same market margins are the same. So I don't know how you are interpreting it as negative, but Norcraft is performing well.

We are cross-selling product out of their portfolio into [MCI] and vice versa. And the cost synergies are ahead of plan. So I'm not sure where that impression was created.

But Lee, if you want to tie up the financial side.

Sure. Second-quarter Norcraft sales $106 million; operating income $15 million. It's -- the $10 million is incremental to $5 million last year, so we've got really strong operating, double-digit operating margin in the quarter.

And I would tell you in the operating margin for the full year we'll be double digits also, performing well. And that's in spite of having a pretty significant charge of amortization. Purchase price amortization in there.

So I feel really good about where Norcraft is. Their profitability is very strong and their growth is fine.

Got it. Maybe I just have the wrong 2Q comparison. What was the 2Q 2015 sales number for Norcraft? I know it only impacted half your quarter, but just what's the clean comp?

It's a partial quarter to a partial quarter, so that might be the overlap.

Last year in the second quarter we had, remember, partial. It was $46 million of revenue. This year it's $106 million, so it's up $60 million in revenue.

Right, but I guess what was the stand-alone? What would stand-alone Norcraft be for the full second quarter of 2015?

I think if you compared our second quarter this year to combining when we -- the part we owned them in the second quarter and the part they were independent, it's double-digit growth in the second quarter.

Okay, got it. The second question, on security. Also wanted to just understand. I think you made a couple comments around full-year expectations for margins on Cabinets, on Plumbing, on Doors. And then Security the comment was basically the exit rate.

So if we think about that 15% exit rate, is that your way of framing what the 2017 opportunity is from a full-year standpoint? And then how much of that is a function of getting SentrySafe operating out of the new assets versus some underlying improvement in Master Lock?

Overall in the second quarter we wound down one facility in Rochester and then brought up the other facility in Nogales. So you basically had two cost bases that were running through, which depressed the margin for the second quarter.

That Rochester facility is now complete and shut down, so you've only got the new stand-alone site, which is why we're making reference to where the margins will head to. And yes, it's fair to say -- extrapolate that into 2017, that's where the margins will be as we are running a more efficient plant around the whole safe operation.

Just the hard data, so the exit rate is for -- that 15% fourth-quarter rate is for the whole business, so that's a starting point for next year. That does reflect taking the SentrySafe business from about a 7% annual operating margin to a 14% to 15%, so very strong there.

Last year in 2015 our full-year margin total Security was 12.5%. This year it will be about 100 basis points higher in spite of the fact that we are in the midst of -- or we were in the midst in the first half of integration. So we feel really good about where the margins are going.

Ken Zener, KeyBanc.

Good afternoon, gentlemen. Lee, Chris, you guys have talked about mix here. Obviously it's a good thing; it's very profitable.

For example in the dealer cabinet, you talked about up 115. Not an explicit percentage but could you talk about -- is that half-and-half? I mean, how much of a mix shift are we seeing? And if you could talk about how your long-term incrementals play out in the volume side versus the mix side.

Look at our Cabinet business. We think about it in three parts. We've got the dealer part of the market, which is about half of the business, very strong margins, and we are playing in the attractive parts of the dealer business. So as that business grows, that part of the business grows faster than total category and faster than the rest of our business, it improves the mix.

But then we've got our in-stock cabinets and vanities, another attractive part of the market. That segment of the market probably not growing as fast, but the margins are strong there. So it's a good mix part of the business.

Now we got the third part of the market that we are very specific about where we are playing. So that's special order in the home centers; that's builder direct; and that's our Canadian business. So there we are just looking at where are the best places to play.

So good mix there. And as we have reoriented ourself especially on builder direct, we are seeing some nice growth come through there.

So when I say it's channel mix, it's really driving toward where we are seeing the more attractive opportunities within those channels. And if over time we continue to grow dealer faster than other parts of the market, that's going to drive that mix more profitable overall for the Cabinet business.

That's what we've been driving through over the last three to five years. We are seeing Norcraft help that as well, as those margins are as strong for Norcraft as they are for the rest of the dealer business.

Thank you. Then my second question. There is obviously a lot of concern after a very strong 1Q around weather; there was concern around consumer trends as they related to how the quarter ended up. If you could comment on perhaps that run rate -- obviously you have your full year -- but if there was any momentum.

And more specifically, obviously the country is divided up into many regions. We are noticing very strong new construction in many parts of the country -- Midwest, mid-Atlantic, Tennessee -- that didn't always have that.

Can you talk about, in a way that you feel comfortable, regional trends? I mean, there's Texas; I know you guys have said it's not a huge part. But just in general: Northeast, Southeast, West, could you break down a little difference in the business cadence there, since we are seeing very different kind of housing trends? Thank you.

Sure. We feel good about the market overall. I think first quarter was stronger than we thought it would be. Second quarter was what we thought it would be.

So as we can into the year both new construction and R&R in the second quarter is running at what we thought the whole year would run out, and that's where we are projecting the second half. First quarter was stronger than we -- and I think most -- thought it would be. So I think second quarter moved into an expected range.

In terms of the regional differences I'd say Midwest is strong. The South is strong. South Florida is probably weaker than the rest of the South especially at the high end of the market.

The West still looks strong. And then the East is good but not as strong as Midwest, South excluding Florida, and West.

I'd say in Texas, Houston is probably the market that is weaker than the rest. North Texas we are actually doing okay in, because it's reasonably diverse and where our business is positioned there, and we've picked up some distribution. The rest of Texas is actually performing pretty well.

So there's a few weaker spots in the market. And again this is comp in some cases, like South Florida was up very strong last year; so to the extent that it's a little weaker this year it's because it's coming off of a very strong 2015.

So I feel good about the consistency of the growth in general both on R&R and new construction. And obviously some markets are a little hotter than others.

Thank you.

Scott Rednor, Zelman & Associates.

Chris, a question for you. R&R spending for your home products and broadly for the overall market has been incredibly resilient through all the macro volatility. And that clearly wasn't the case earlier in the downturn.

So I was just curious as to your view as to why, and what is allowing the consumer to continue to spend in the home where they are not spending to the same degree elsewhere.

I'd start with I think it's -- if you look, since we started recovering from the downturn kind of 2011, we have been recovering at a gradual but consistent pace. There was a long period of time where people weren't putting anything into their homes. So if you look from 2008, 2009, 2010, and then they just started in 2011, that created some significant pent-up demand.

As you are seeing -- now you are starting to see the turnover in existing housing stock. That prompts spending both before the home is sold and more so after the home is sold. And we're certainly seeing an acceleration there.

Home values are rising, and as home values are rising people get more confident putting money into the home. We are finally seeing refinancing, cash out refinancing and home equity lines coming back. We really starting to see that in a meaningful way in 2015. It's continuing into 2016.

Low interest rates, so to the extent people are investing now in their home and borrowing to do that, it's pretty affordable. So I'd tell you, you roll all that together, you see a picture of a lot of dated kitchens and bathrooms, which is where -- that's the bread-and-butter of where we live, and people doing everything from a quick bathroom remodel to a wholesale kitchen and bathroom and everything in between.

So I think our own view is that carries on for a while, especially as new construction is trying to catch up but not quite there on entry-level housing. So people are looking for existing housing to move into out of rental properties. And as they move in they are investing in those properties.

We're just going to see that as the consumer is moving through an aging housing stock and updating the look as they move in. So I'd say across the board the trends we're looking at on R&R look good.

And I like running it 5%, 5.5%. I hope that's the pace that we continue over the next three to five years, because I think compared to historic that's a good, stable pace. And for us, given our size and scale, that's a good way for us to continue to ramp over a period of time.

Shifting gears to some of your larger customers, I think their efforts to reduce in-stock inventories has been very well publicized. I'm curious if you guys have felt any impact, and/or how do you navigate that horizon?

I think they've moved through -- all the home centers have moved through different categories and have been more careful in their management of inventory. And we work with them as they move down.

So that impact in-stock cabinets, vanities. That impacts Plumbing. It impacts Doors.

But through all that we have continued to have some very good wins. So new business has come in; POS is strong. So it's I guess some headwind as you move through it, but you get to a new base level. And as long as we are winning with the consumer, our new products are coming into the market and there's good dropthrough on POS, we will call out when the headwinds occur on inventory drawdowns, and then help you tie it back out again.

But I'd say it hasn't hurt the business. I think they are being careful not to run stock too low so that it's not there. And our response times are good and getting better, so that to the extent that we have to rally because we've got some hot sellers and got to get inventory back in there, we are able to rise to it.

So that combination -- I think you work through it. But I think we will both come out in a very healthy place.

Okay, great. Then just one last one for Lee. Within the guidance was the 1Q EPS restated to include the lower tax rate?

No, it's not. The way -- what the pronouncement requires is basically you run the second-quarter EPS straight up; so that's $0.05 benefit in the second. There was $0.04 benefit related to the first quarter; but since we didn't elect at that point, that just goes into year-to-date EPS.

So everybody will have to adjust their model to say $0.05 ran through second quarter, but year-to-date is $0.09 of benefit. So we will just have to adjust the model that way.

Okay, thank you.

Nick Coppola, Thompson Research.

Good afternoon, guys. I wanted to ask you a question on Doors here. You had certainly some nice operating margin performance and flow-through. Can you talk a little bit about the performance that you are seeing there?

I think you talked about growth in wholesale and retail. In that margin, what it is mix versus price, and I guess what are you seeing in that segment there?

Sure. Another very strong quarter for the Door business. We've got a terrific position there.

Where we are seeing wholesale growing faster than retail, retail mid-single, wholesale up midteens. The mix is shifting heavy fiberglass, so -- our margin structure in fiberglass is very, very good and so our new products have really focused in fiberglass, is driving that.

We still have some steel to support our distribution and our customers. But definitely the consumer is drawing on fiberglass. We are supporting that, and that mix continues to shift very strong.

We expanded some distribution on the wholesale side. So we've talked about out West a little bit more distribution in Texas and Florida.

So all of that, that channel mix, the product mix really is what's driving the growth as well as the margin structure overall.

Okay, that's helpful. Then I guess my last question here, I wanted to ask you about China as well. You are seeing growth in the Plumbing segment there.

What kind of trends are you seeing? How much of that do you think is end market versus market share gains? Any commentary there would be helpful.

Yes, China can back strong for us. I think it's both. I think the market is back on the new construction side; we did well in that part of the market. But we also were strong within retail and e-commerce.

So I think we are growing at least a little faster than the market. The market there is always hard to gauge, but there is a lot more activity now on the new construction side.

The government reduced mortgage down payment requirements. Lowered mortgage rates, really trying to prompt some activity, and that has generated some activity.

But the other part of the market for us is as they build these units they haven't finished out the bathrooms and the kitchens. So consumers as they are moving in -- so as they are buying existing housing -- that's when they are fitting out those kitchens and bathrooms.

So year-to-date home sales in China is up like 30%. That market, just as sales are complete, there is then a cycle of six-plus months where they're shopping for -- to fit out their kitchens and bathrooms. So we benefit from that. And then we are seeing more R&R activity as well.

It's also concentrated more in tier 1 and tier 2, which is where we put our bets more heavily than tier 3, tier 4 markets. We were seeing that market evolve as retail continues to be important in 1 and 2; e-commerce is important there. But tier 3 and 4 are more shifting to e-commerce and light retail, and so that's where our mix goes.

We continue to upgrade our stores in our tier 1, tier 2 and try to get that mix right. So I'm happy with the way China has evolved.

Last year the market was soft, but we continued to perform and do all the things we were doing in terms of upgrading the stores, upgrading the mix. And I think some of that is what we we're seeing play through now.

It's a little bit like what we did with our whole business through the downturn. You never stop bringing on new products, you never stop changing the mix even if the market gets a little sideways. That's what we saw in China last year, and now as the market's picked back up again consumers are showing up and we've got a good array of product there.

We've got I think the right locations in terms of retail properties, and our focus is strong on the e-commerce side of the market. So I think all those things are working together.

I like China long-term. It's going to have surges in growth and then a more plateau. But there's a huge R&R cycle that is going to come through China over the next five to seven years as all these properties they added over the last 15 years start to enter into a cycle of R&R. And we are in a really good spot to pick that up, so that's a market I like.

All right. That makes a lot of sense. Thanks for taking my questions.

Laura Champine, Roe Equity Research.

Good afternoon. My question is on Europe. To the extent -- and I appreciate the comments on Canada and on Asia -- but to the extent that Europe is material for your business segments, how is that geography performing? And how do you think about your growth opportunities there, whether it's organic or through acquisition?

I would say that the Europe market is not material to our business. We do have a business there in our Security business, which is actually growing very nicely because we're taking a lot of share.

But overall it's a small part of our overall portfolio of business. So no real concerns there. Our business is doing fine there.

Is there any opportunity to grow there, given some of the market dynamics in that region?

We looked at it from time to time. The European home product market is not as attractive just in terms of overall R&R activity, overall new housing. There may be specific market segments that look good if we get it as part of a broader portfolio. So if we do something that really helps us in North America and really helps us in China, but there's an opportunity in that part of the market in Europe, I think that's the way we will come at it, and we will take specific parts of the market.

But I wouldn't say if equity values are down in Europe and it's a time to come is -- at the bottom of the market. We are not really looking at that as an opportunity today.

Got it. Thank you.

Josh Chan, Baird.

Good afternoon. Just wonder if you could ballpark for us any benefit that you had from raw materials maybe in the quarter or the first half. Does that just fall off, like you said, in the second half? Is that how you're thinking about it?

Yes, so we had -- in pure commodities we had $0.02 to $0.03 benefit in the quarter. But we gave $0.01 of that through FX.

And then if you look at other just overall input costs, healthcare, labor, those things, it kind of wipes that out. So we did have some benefit in the first half and the first two quarters were fairly similar in amount.

The second half, our guidance includes pretty flat commodities, no real benefit, and really no real impact from FX either. So second half very different model than the first half.

Okay, great. Then on Cabinets, how do you think about the growth trajectory for the balance of the year, given I think you have some tougher comps with load-ins and things like that in the second half of last year? Is the current growth rate sustainable?

When you look at the second in our comps for the total business in the second half of 2015, sales grew at 17% in the second half, pretty evenly by quarter 17%. So we do have tougher comps.

I would say our Cabinet business in the second half the way -- mid-part of our guidance will grow at market, which will be mid to high single digits. So we feel good about that.

Some of the other businesses, Moen and probably Doors will go slightly above market, more in the high single digit. So yes; tough comps, but our business is growing and our profitability is very substantial across our segments. So we feel good about the second half.

Great. Thanks for the color and congrats on the quarter.

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

Thank you. We would like to thank everybody for attending the call today and look forward to speaking with many of you again very soon. Thank you again.

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