Fortune Brands Innovations, Inc. (FBIN) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and my name is Sean, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security Second Quarter 2012 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Brian Lantz, Vice President, Investor Relations.

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security quarterly investor conference call and webcast. We're pleased to be here today to provide an update on our progress during the second quarter of 2012. Hopefully, everyone has had a chance to review the news release we 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 filings with the SEC, such as our annual report on 10-K as filed with the SEC. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Also, any references to operating profit, earnings per share or cash flow on today's call will focus on the results on a before charges and gains basis as described in today's news release 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 any questions that you may have. I'll now turn the call over to Chris.

Thank you, Brian, and thanks to everyone for joining us today. We had a very good second quarter with strong growth that met our plans for sales and exceeded our plans for profits. We continue to drive profitable growth in a market which, as expected, continues to recover at an uneven pace. Let me first spend some time on the second quarter highlights, and then I'll discuss our current thoughts on the full year. First, with regard to the market, both the overall home products market and the market for our products again grew mid-single digits in the quarter, in line with our assumptions. New construction was a bit stronger than expected in both single-family and multifamily starts. And the pace of Repair & Remodel spending slowed somewhat from the previous quarter due in part to continued consumer caution for big-ticket purchases like cabinets. Importantly, we continue to feel confident about our performance in this market and the execution of our strategies as we entered into the second half of 2012. Turning to our performance for the quarter, sales were up 5% from a year ago and up 8% excluding Cabinets as cabinet sales were negatively impacted by our disciplined response to high levels of competitor promotions in home centers. Moen continued its strong performance with sales growth of 12%, and also surpassed our sales and profit plans. Windows & Door sales were up 7% and the segment was profitable. Security & Storage grew 2%, surpassing our sales and profit plans, and within the segment, Security sales were up 7%. Cabinet sales grew around 1%, a bit below our estimates of the cabinet market growth in the quarter, which continued to lag the overall U.S. home products market in the second quarter. Importantly, our profits from Cabinets were up 22% in the quarter. And second quarter profits have already matched our full year 2011 profits for Cabinets. Now let me give you some top line highlights by segment. Plumbing sales were up 12% in the second quarter. Moen again saw gains in both the U.S. and in our international businesses, particularly China. Gains were strong at the U.S. wholesale business where we saw continued volume gains, driven largely by the pace of new construction. Our efforts over the past few years to build on leading market share with the top builders and wholesalers, expand the multifamily segment and upgrade many of our showroom displays again yielded strong results in the quarter. Moen also continues to see strength from our steady pace of consumer-driven practical innovations. Spot-resistant finishes are rolling out more and more sales and are now available in the wholesale channel. Our successful Reflex technology for pull-down faucets will soon be launched in pull-out versions, which provide exceptional reach and range of motion with dependable retraction. And Moen's latest innovation, MotionSense, a new hands-free, touchless kitchen faucet will begin shipping in the second half of the year. Internationally, sales in China, where there are now over 600 Moen branded stores, were again up double digits over the prior year, driven by new construction growth and our continued expansion into tier 3 and tier 4 markets. The team in China continues to expand our brand with wider range of price points and products. In Security & Storage, our sales were up 2% in the second quarter. Security again saw broad gains, up 7%, driven by innovative new products and broader placement in retail ahead of the back-to-school season, continued to outgrow within global safety solutions and strong international sales of padlocks. The Master Lock brand is strong and our innovation continues to hit the mark with products like our new electronic combination lock, Speed Dial. Our storage products were down in the quarter as promotional activity has shifted sales from the second quarter into the first quarter. Notably, for the first 6 months, storage products were up double digits to the prior year. Windows & Door sales were up 7% for the quarter. Door products, which are heavily driven by new construction, saw high single-digit sales gains. We saw incremental sales from a recently launched relationship with a major window and door company and growth at our wholesale distributors. Windows products were up mid-single digits, driven by a better market and some share gains from new products and growth in targeted channels. Sales for our Cabinets business were up about 1% for the quarter and met our expectations. We continue to perform well as the market leader in cabinets. As the pace of new construction picked up, we saw a particular strength with dealers and builders in our new construction lines. In the dealer channel, where we're the clear market leader, we continue to grow by leveraging our portfolio of brands, some new door style additions and our strong product and service reputation. In home centers, we saw some volume share losses because of our disciplined approach to promotional spending. While we did not increase our promotional spending relative to prior year levels, our competitors intensified their promotional activity. It's important to note that even though promotions can divert volume on a month-to-month basis, they have not resulted in a change in shelf space or program placement from us in home centers. We continue to focus on more sustainable long-term growth opportunities such as our recently introduced value price point door styles for the Thomasville line at The Home Depot and select enhancements to our vanities line at Lowe's. We expect these innovations and our enhanced designer services to help us outperform the cabinets markets in the second half of the year. Importantly, we grew our cabinet profits 22% in the quarter, which exceeded our plans and reflects our ability to successfully target growth in channels, markets and product segments that are not as promotionally driven. In the quarter, we once again demonstrated our ability to generate and grow profits in a business where some of our competitors still struggle to even breakeven. We believe that our market leadership, combined with our world-class operating platform and service levels, gives us the strategic flexibility to drive profitable growth to date and into the future as the cabinet market slowly recovers. So throughout the second quarter, the market continued to firm led by significantly stronger new construction in a Repair & Remodel market that while growing, remains uneven. I'm very pleased with our performance across the portfolio for the quarter and the entire first half. We continue to execute our strategies as we innovate to invest, to capture profitable growth opportunities and leverage our market-leading positions. Let me now turn to our current top line outlook for 2012, starting with our assumptions for our market. We will then take you through our specific full year outlook in a few moments. From a market perspective, we're seeing continued signs of improvement relative to a year ago and a firming of the overall market as we enter the second half. While challenges in the housing market remains, such as tight credit, foreclosures and some soft home prices in some parts of the country, new construction improved in the second quarter, particularly in single-family starts. Repair & Remodel continued to grow, albeit at a slightly slower pace than we would have thought as we enter the second quarter. As expected, concerns about the general health of the economy and the pace of the recovery are still weighing on consumers' confidence and their willingness to embrace larger ticket purchases like cabinets. Our updated full year plans remain built on an assumption that the total market for our home products grows at a mid-single-digit rate. Within that assumption, we now expect the Repair & Remodel growth rate of around 3% to 4%, and a new construction growth rate of about 20%. Given our exposure to the slower growth cabinets market, our plans assume that the market for our products grows a bit slower than the overall market but still within the mid-single digits range. So based on that market assumption, which includes stronger new construction and a little softer Repair & Remodel, we continue to expect our 2012 full year sales to increase at a high single-digit pace over 2011, although toward the lower end of that range. We believe our innovation and our execution are key competitive advantages that will help us to continue to outperform the strengthening market for our products. Importantly, we're reaffirming our 2012 EPS guidance in the range of $0.77 to $0.87 for the full year. So to sum up, driven by new construction, the overall market remains firm with strong first half results and we're confident in our ability to deliver on our full year guidance. We continue to execute our strategies and remain focused on outperforming the market. We strive to create value by capturing market share, expanding into adjacent markets and improving our operating platforms. We believe our strong brands, management teams and capital structure provide key flexibility to focus on profitable growth and should therefore position us to create value at any pace of recovery. Now I'd like to turn the call over to Lee, who will review our financial performance and provide more details on our full year outlook.

Thanks, Chris. As Brian mentioned, the majority of my comments will focus on income before charges and gains, which best reflects ongoing business performance. Let me start with our second quarter results. Sales were $935 million, up 5% from a year ago. Consolidated operating income for the quarter was $73 million, up $11 million or 18% compared to the same quarter last year. EPS were $0.29 for the second quarter, up $0.05 or 21% versus the same quarter last year. Now let me provide color on segment results. Plumbing sales for the second quarter were $282 million, up $30 million or 12% versus the prior year quarter. Operating income was $43 million, up $8 million or 24%. Both the U.S. wholesale and China businesses experienced strong double-digit sales growth that drove the overall growth in both segment sales and operating profit. Second quarter Security & Storage sales were $148 million, up $4 million or 2% versus the prior year quarter. Operating income was $21 million, up $2 million or 8%. Security sales increased $7 million or 7% on the strength of retail and international padlocks and global safety, plus Storage sales declined $3 million or 7% due to the shift in the retail and promotional spend in the first quarter and out of the second quarter. Windows & Door sales were $160 million, up $11 million or 7% from the prior year quarter. Operating income for this segment was $4 million, $1 million less than last year due to timing of expenses and some channel mix. We continue to expect our Windows & Doors business to be profitable for the full year and meaningfully ahead of 2011. Our Cabinets sales were $346 million, up $2 million or around 1% over the prior year quarter. Operating income for the segment was $18 million versus $15 million in the prior year, up 22%. While our disciplined approach to promotional spending limited our growth in the home center channel, second quarter profit of $18 million grew 22% and equaled full year 2011 segment profit. Our strategy is working as planned, and we believe that we will exceed the overall cabinet market growth in the second half by introducing new products and expanding existing programs. We expect our Cabinet business to be profitable for the full year and significantly ahead of the $18 million earned in 2011. Turning to the balance sheet. Our June 30 balance sheet ended with cash of $147 million, debt of $361 million, and net debt to EBITDA leverage is now less than 1, at around 0.7x. We have nothing drawn on our $650 million revolver facility and are entering the second half of the year where we traditionally generate most of our annual free cash flow. Free cash flow was $81 million year-to-date including $55 million from option proceeds. Our outstanding shares have grown by 5 million shares from option exercises since the spinoff. The resulting EPS dilution, combined with accumulating cash, has led our board to approve a modest share repurchase authorization of $150 million over a 3-year period. Given our expectation for growth and free cash flow, as well as the projected positive return from repurchasing shares at this time, we believe that this is an appropriate use of cash to create incremental shareholder value. Longer term, we expect to have a balanced approach to cash utilization to drive shareholder value, which includes additional organic growth investments, selective acquisitions and some combination of share repurchases and the initiation of a dividend. Let me now provide my thoughts in further detail on the outlook for 2012. As we have said, our approach to planning and providing the annual outlook has 3 elements: our market assumption, continued share gains and business investments. First, with the continued firming we saw through the second quarter, our market assumptions remained close to published market consensus. As Chris mentioned, new construction is trending stronger. However, Repair & Remodel, while growing, continues to be uneven. So we continue to project the market for our products to lag the overall market in the early stage of a potential recovery due to our mix of higher ticket items such as cabinets. Second, our plan still includes continued share gains in addition to overall market growth. And third, we plan to make investments across the business which should provide returns in 2012 and beyond. While we're pleased with our 2012 performance, we expect significant growth in the out years and want to invest ahead of the opportunity. Therefore, we continue to expect to make approximately $20 million of incremental investments during 2012. We've already made about 50% of that amount in the first half. So turning to our outlook details. As Chris mentioned for the full year, our planning assumption remains that the market for our product will be up mid-single digits with the mix shifting a little towards new construction. Based on this market assumption and continued share gains, we continue to expect our 2012 sales to increase high-single digits compared to 2011, with all segments increasing. However, the sales increase will likely be somewhat lower in that range due to the slower growth in Repair & Remodel and our disciplined approach to promotional spending in Cabinets. Based on our marketing sales growth assumption, our expectations for 2012 EPS before charges and gains is unchanged with a range of $0.77 to $0.87. Again, the midpoint of this range is $0.82 and represents an increase of 37% over 2011 EPS of $0.60. We expect 2012 free cash flow to be in the range of $225 million to $250 million after CapEx of approximately $80 million, pension contributions of $20 million and over $70 million in proceeds from option exercises. In summary, our business model continues to perform well, and we're pleased with our second quarter and first half results. We've maintained our outlook for the full year despite uneven growth in the Repair & Remodel market. While the pace and steadiness of market growth is not certain, our first half performance indicates that we should be well positioned to continue to outperform the market at any pace of recovery by leveraging our foundation of leading brands, efficient supply chains, proven management team and strong capital structure. I will now turn the call back to Brian.

Thanks, Lee. That concludes our prepared remarks for the second quarter. We'll now begin taking your questions and we'll continue as time allows. Since there may be a number of you that would like to ask a question, I'll ask that you limit your initial questions to 2 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] Gentlemen, your first question comes from the line of Dennis McGill with Zelman & Associates. Dennis McGill - Zelman & Associates, Research Division: Just the first question, I guess, with the share repurchase authorization, if you're going to generate $225 million, $250 million of cash this year and you're already under-levered, why not put an authorization that's larger or longer in duration just to send a message that if other opportunities don't come along, you have that flexibility to repurchase stock?

I'd say I'd do this as a good first step. So with the dilution coming in on the shares from option exchanges and the cash starting to accumulate, I think $150 million was a prudent first step. That doesn't preclude us down the road from initiating a dividend or initiating a larger share repurchase or frankly, it gives us firepower for acquisitions as well. So I think it was a prudent action to take at this time and that's kind of how we viewed it. It doesn't preclude anything else down the road. Dennis McGill - Zelman & Associates, Research Division: Okay. And then, I guess, separately in the Cabinets business, can you be a little bit more specific on the promotions, whether maybe some case through the quarter, designs to accelerate or decelerate? And then as well into July, any change in habit? And I guess just big picture, what do you think changes the dynamic where the incremental sale has to be driven by promotions?

Yes, it's very much a home center phenomena right now. And I think yet through the quarter, it's probably most intense mid-quarter, kind of not as bad at the beginning, not as bad at the end. So I kind of look at that through July. I think what abates that is the capacity is going to start getting chewed up by new construction volume, which I think our competitors and ourselves are responding to. For us, we're so strong in the dealer channel that we've got a lot of volume flowing through there. So I think at some point, that kind of balances it out and it should calm down a bit. We've been pretty restrained, and to be candid, I think we've done pretty well being restrained. And we've kind of been content to let the others duke it out at the home center level, kind of in the extreme sides of that. That's not to say we're not active in the promotion side, we are. But we're not jumping into that extreme end of the pond.

Your next question comes from the line of Keith Hughes with SunTrust.

My question is on Security & Storage. You talked about the changes of promotional calendar in the first quarter affecting second quarter. As we get into the second half of the year, year-over-year, are there any promotional changes or should we start seeing more consistent results?

Yes, my guess is second half of the year is going to line up a bit more like traditionally it did. It was pretty unique that our largest customer there promoted heavily in the first quarter. We haven't seen that before. If we look at the whole first half, we're up low single-digits for that business. So it's really pretty strong. First half performance is just that they surged in the first quarter and then we paid for a little bit in the second quarter. So I expect it's going to be more similar to traditionally what we've seen here in the second half.

And second question on Windows & Doors, can you speak to the profitability trend for window versus door?

Window versus door?

Yes.

Yes, we break it out separately, but I'll just give you kind of directionally. I think in doors with a strong quarter, really driven by new construction, and that drove some pretty good results. On the window side, we're doing better. Last year, it was pretty rough. It was good kind of the first 6 months following the energy tax credit. So this year, we're doing better, but I'm still watching that market on the window side. I've said before that we're looking for some capacity to come out of that market, some rationalization, if you will. So that's kind of the balance of that group right now.

Your next question comes from the line of Ken Zener with KeyBanc.

I guess my first question is kind of following up on the Windows & Doors. This might be just taking a step back, but they are very different businesses in terms of the current industry structure. On the doors, you take an OEM business. The largest window door company just acquired a door company. To the extent you're expecting capacity, how does that impact kind of the margin prospects? What is it directionally now versus kind of a peak, and if they're still kind of the same. And on the windows, is it more vertical or is it people maybe just doing the extrusion that you expect the capacity to come out?

I'll start with the window side. I think it's downstream [ph] . I don't think it's necessarily on the extrusion side and that market's actually okay. It's really downstream on the assembly side. And I think there are some companies out there that were supported by that '09 and '10 surge in demand from the energy tax credit and they're not going to be long term. It's just taking a while to work that through the system. On the door side, where we sit is really at the high end in fiberglass, wood grain fiberglass, and we sell the whole door system. And so we're really in the most enviable position in that industry. There's a lot of guys kind of down the quality stream and as you move into steel, pretty commodity-like building material. So our products are differentiated there and our margin structure reflects it. We do get a premium there. We keep innovating, we keep bringing in new styles, finishes, glass tiles [ph] . We're making our own glass. We're the only guy in the industry who does that, so we get a lot of design flexibility. So yes, I think we've got a pretty strong set of barriers around that business. As long as we just keep innovating, keep extending distribution, which is what we've done, we've got a pretty good business there. That responds [indiscernible] I was just going to say, that responds well to new construction, too. As we see the new construction volumes come, that business levers very well on new construction.

I appreciate that. And then on the Cabinets side, I know you're more dealer-oriented, yet I still think the -- your results probably are somewhat shackled to other industry players that are company decisions. Can you potentially discuss some profit differential that you have in channels where there's less discounting versus [indiscernible] dealer or wholesaler versus the big box to the extent you feel comfortable?

Yes, we don't really break it up by channel, but I would just say I think across channels, we're really trying to get disciplined in terms of what is good business. There is still a very good business in the home centers, and we're still working very hard with our partners in the home centers and delivering some excellent product there, excellent programs there. But all we're doing is not chasing that last bit, which is so very heavily promoted that it's just drawing the profitability in that slice of the market. So I'd say there's still a lot of very strong and profitable Cabinet business in the home centers. The dealer business just has less of that extreme promotional piece. And so that's why for right now, it's a bit more stable as a channel, and the new construction is coming to us directly from builder direct, as well as through our dealer channel. And so that looks pretty good. So that's about all I can say in terms of breakout on that.

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

Just a quick one on your guidance. Your sales forecast, you brought it down, but you're reiterating EPS. What line items went up such that your EPS didn't change? And also, can you talk about whether the 30%, 31% tax rate is what we should expect the rest of the year?

Yes, I would tell you, start with the tax rate. First, both first 2 quarters were around 31%. I think it'll be a little higher in the back half, and I'd say for a full year, you might think about 34-ish. We historically said 35%, I think it could be 34-ish to 35% this year. And I think the other thing in terms of the guidance, we're still in that high single-digit range. We've just cautioned that it could be a little lower because we're not chasing some of that low-margin business that Chris just talked about, especially in Cabinets. So I think where the sales are a little softer still on that high single-digits, that doesn't really impact profit that much. And mix overall is actually getting a little better.

But another way we could chase some revenue and hit those numbers, but it wouldn't really impact profit.

That's impressive. Let me ask one more question, and I'm sorry to beat the Cabinets horse till it's dead, but I'm trying to understand the drivers of your incremental margins in Cabinet. They were very, very large with the sales not quite making it, but you guys actually beating my forecast on margins. I'm trying to understand while you guys are promoting the same level as last year, what's really driving your margins up?

Well, it's a little bit of mix coming through, so I'd say there's a little leverage there. There's some -- a little bit of cost savings leverage coming through the business as well, some kind of continuous improvement cost savings type initiatives. There's some new product coming through there. So I'd say it's a combination of those things coming through. And I think we're just being a bit more disciplined in the kind of business that's coming our way. I think in general, the market, while soft in R&R, is a bit stronger on new constructions so there is a little bit of mix to the positive on that, too.

Okay. And if I could just sneak one last one in. Share repurchases, I was just under the impression that, that was much lower on your list of cash usage. So I'm a little bit surprised by the announcement. Is the deal flow just really not there for you guys or has the market actually slowed you guys down from really looking at some of the organic opportunities?

No, I don't think anything's off the table. I think, frankly, cash flow is so strong that we've got an excess of cash flow. We've said from the start, from the day of our spend that we're going to be efficient with cash flow. We've got a very good operating platform across our businesses so we don't need to have kind of this cash safety net. So we can be very efficient and we intend to be very efficient. I think as we consider the use of cash, the deal flow right now is still kind of slow in terms of companies for sale. So as we would expect that'll pick up in 12 to 24 months, we just keep playing at capacity to do the things that are strategic, and so that's still on the table. And the dividend's still on the table. I think we're just -- we'll wait to see the market firm up a little bit. And as we initiate that, that would -- we certainly want that to be sustained and increasing over a period of time. So nothing's off the table, I just think we're being efficient with cash. And this isn't a big share repurchase, but I think it's prudent for the time and shows that we're kind of living to what we say. And I'd expect everything else is still out there.

Your next question comes from the line of Dan Oppenheim with Credit Suisse.

This is actually Will [ph] on for Dan. I was wondering if you could try to isolate what the mix impact was on margins versus the investments. And what will be driving the better leverage in the second half for Windows & Doors?

Yes. In terms of the investment, we spent about $4 million in the second quarter. We spent about $5 million, so we're kind of halfway there. So you look at our overall leverage for the company, we were 25% on incremental sales in the second quarter. If you back out $4 million, we're over 30%. So that's kind of normal leverage for us. That's what we expect on incremental sales. So no real surprises there.

And then as a follow-up, I'm wondering if you could talk about price commodity relationships across the business?

Yes. We saw some commodities moving up in the first month or 2 of the year. But now, they've kind of come down and on a year-to-date basis, is relatively flat. You'll see a couple down 1 or 2 points, but generally flat, things like hardwood and glass. But on the other side, labor cost out of China has not come down and it actually is ticking up. So that's yielding into a little bit of those commodities savings. So generally, we thought we'd have a tailwind coming into this year of about $14 million, $15 million net of price, and we're kind of in that same range. So it's moving around a little bit, but it's kind of where we thought.

Your next question comes from the line of Bob Wetenhall with RBC.

I just wanted to touch on SG&A. SG&A was up around 10% year-over-year and revenues grew 5%. And I was hoping I could just get a little bit better understanding what's driving the increase in SG&A and how we should be thinking of that in the back half of the year.

Yes, the SG&A was driven by a couple of things. We had the $4 million of investments, of course, that we just talked about. And it's just truing up with some higher volumes. We're doing some catch-up on accruals in the quarter. So it's a little bit higher, a little bit of incentive increase there. So nothing significant. We're historically around 26% SG&A as a percent of sales. So we're going to be, I think, full year, in that same range, 25% to 26%.

Okay. And the $4 million is just kind of nonrecurring, and we can just assume that goes away at some point?

Yes, generally, it is.

Your next question comes from the line of Peter Lisnic with Robert W Baird. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: I guess for the first question, the volatility in Remodel. Can you give us a sense as to kind of how those trends played out there in the quarter? And I'd be really interested if you have any data points or anecdotes about repair versus discretionary and kind of how the trends there would be shaking out?

Sure. I think the quarter is a little weaker than the first quarter. People talk about weather, maybe that had something to do with it. But I think in general, it was a little weaker and then stabilized. So I didn't see it getting worse, which I think was good news. Discretionary certainly was a lot weaker, so that would be the Cabinets category. I think consumers are just being very cautious on big ticket. On our smaller ticket purchases, we didn't see as much so for us, it's looking pretty good as you can see in the numbers, so -- and I think that held up a little bit better. So I think it is just maybe a little bit more deflated consumer confidence rolling through the market right now on the discretionary side of the market. So it's holding in there. I look at it by -- over the last 3, 4 years, we're certainly on a positive trend. It just looked as if it might be a little bit more positive the start of the year than perhaps we're sitting right now, but it's still tracking positive. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay, perfect. That's good color. And then if I could switch gears over to Plumbing, it looks like China, good growth story continues there. How much of that can you maybe ascribe to just more feet on the street, more of a presence there for you versus strong consumer demand there given a lot of concerns with what might be happening over there? Just trying to get a little color on that.

Yes, I saw a little of both. I think it's fair to say that their market is slowing down a little bit. It isn't as bad as what I think you'd read that Chinese market, real estate market is on the downside. I think we're still seeing growth there. So I think there's definitely market growth, but it's cooled off a bit. Yes, and then in terms of our expansion, we continue to grow there. So the second -- I'm sorry, third, fourth tier markets continuing to open up storefronts feet on the street is definitely helping us. It's a big country so it's -- in terms of -- we're not quite there in terms of saturation, we've got plenty to go. And we're pleased with our results and our momentum there, but we're being appropriately cautious. We don't want to get too far out ahead especially if it does cool off even more. But I think we're at about the right pace for where that market's growing right now and our results are pretty strong.

[Operator Instructions] Your next question comes from the line of Justin Maurer with Lord, Abbett. Justin C. Maurer - Lord, Abbett & Co. LLC: Can -- I don't know if -- back to Pete's question about kind of Repair & Remodel versus new construction, are you guys at all -- is it surprising to you that the strength in -- so new construction is better than you thought. But you would think, if anything, that should be pulling up the repair and the remodel in the sense that presumably, most of the people that are -- the written orders for the new homes, those will largely move up people, I suspect, rather than new home buyers just from an inability to get credit. So you would think that those folks, if there's housing turnover, that, that should result in some R&R spend but might not have otherwise been the case. I guess I'm a little bit puzzled by the divergence. And I guess if it's just simply cabinets, I can kind of understand that, if somebody decided not to do a kitchen or something. But I don't know if you can make any sense of that.

Yes, it's most pronounced in cabinets, you're right. I think it is positive, so that's good. I mean I'm kind of -- like I'm happy it's positive relative to the last 3 to 5 years, so that's a good thing. I think we're calling the full year on R&R some place between 3% and 4%, which isn't where it should be in a full recovery. It should be 5% plus, north of 5% in full recovery. So it's a little softer than that. I think that is just discretionary. I think for those that are kind of required projects, people are doing them but I just see them being a little bit more cautious. It's also interesting to see the first quarter was stronger second quarter. Weather might have something to do with it, but I think it was more optimism in the market. So when optimism comes back in again and consumers don't feel like they've got to be as protective of their household assets, they are freeing up money. And that's a good thing. So I think where they need to be cautious in the short term, longer term, I think it does bode well for us. So I'm not overly concerned. In terms of new construction, I think it just reflects the overall marketplace. If you look at the builders, they are building in some markets and the overall numbers are up strong, and we're so strong in some of those segments, especially Moen and Therma-Tru in some segments of the cabinet market that, that's just flowing so strongly through our business. Justin C. Maurer - Lord, Abbett & Co. LLC: Yes. I guess, again, I just -- with seeing all the builders put up 30%, 40% order growth that you would suspect if 6 months ago, you would have said, posed that question, you would have thought that, that certainly would've meant good things for Repair & Remodel. Not necessarily that they have to be 100% correlation, correlated at least directionally and...

I think they will be eventually. That's my own forecast, and Lord knows enough smart people out there forecasting and -- but my own view would be eventually, that is exactly what will happen, that those 2 will correlate much tighter. I think right now, it's just a pause as you'd see a pause in the general economy, unemployment number still running a little bit high and people just kind of saying maybe a time to pause. That's what it feels like in the business. That's what it feels like when we're out talking to people, when we're in the dealers, when we're in the home centers talking and saying kind of "why is it a little softer?" That's the sense we get. It's just more of a pause than it is more of a fundamental issue like we would have seen back in 2008, 2009.

Gentlemen, your final question comes from the line of Stephen East with ISI Group.

Chris, you talked about plenty of capacity. I was hoping maybe you all could run through your 4 units and just talk about what type of operational leverage. In other words, what percentage is fixed cost versus variable cost on that?

Yes. We basically look at our portfolio of segments, they break into 2 simple kind of pieces. We've got 2 variable cost segments. That would be the Moen and the Security & Storage. Those are the guys that have that consistently high operating margins in the mid-teens and they're variable cost. So they move their -- they've got normalized [ph] supply chains where they basically source a lot of componentry. And the other 2 pieces, Windows & Doors and Cabinets, are much more fixed cost, much lower margin today. When we don't have as much volume, those will level -- leverage nicely in a recovery. So it's very different now. Throughout our total company, I think we said "where are we from a capacity standpoint?" We're probably below 60% utilization right now, probably somewhere 55% to 60%. So a lot of capacity to move up. We've always talked about being able to get that to high teen [ph] in revenue with the footprint generally that we have as long as the volume comes back in kind of a reasonable regional basis. So we feel pretty good about capacity.

Okay. That's helpful. And then you talked a lot about what your investment this year is, and could you just be a little bit more specific about primarily, could you rank orders sort of where the dollars are going? Are we talking in-store promos, primarily advertisement, co-ops? What are you trying to really focus on?

Yes, we basically -- the $20 million we've talked about is basically spread pretty evenly throughout the business. And there's no huge pieces, but examples would be, for example, some Moen brand spend as we get back into this -- as they continue to drive their business, a little investment in China. You've got some investments in systems, especially web-based systems. They're just kind of across this systemwide here. We try to get better there. Doing some infrastructure investment in security and safety, electronics, a little bit of international. So there's nothing huge, nothing that's a really big bet, but it's just trying to get each of the businesses well prepared as we come back to this recovery over the next several years.

Gentlemen, I turn the call back over to you.

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

Today's call was recorded. A replay of this call will be available this evening through midnight, August 9, by dialing 1 (855) 859-2056 and using the conference ID 98831186. This concludes today's conference call. Thank you for your participation. You may now disconnect.