Fortune Brands Innovations, Inc. (FBIN) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security Fourth Quarter and Full Year Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Brian Lantz, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress during the fourth quarter of 2013 and 2014 guidance. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website. I want to remind everyone that the forward-looking statements we make on the call today, either on our prepared remarks or in the associated question-and-answer session, are based on current expectations and the market outlook, and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC, such as our annual report and 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. Also, 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, 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 have allowed ample time to address any 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. We delivered strong fourth quarter sales and profit, which capped off an excellent second full year as an independent company. We continue to leverage our structural competitive advantages and build on our momentum as the market for our products expands in both the new construction and repair and remodel markets. Importantly, based on our momentum and stronger performance in the early stages of this multiyear recovery, we are well positioned for continued growth over the next several years. Let me first spend some time on the quarter highlights, then I'll comment on the momentum we have created in our first 2 years and our potential for profitable growth over the next 3 plus years. And last, I'll discuss our 2014 annual outlook for top line growth. For the quarter, sales were up 16% and EPS was $0.38, up 65% from a year ago. Notably, our 3 housing-related segments saw total sales increase 20% versus a U.S. market that we believe was up high single digits, as we continued to gain share in our categories and benefited from the WoodCrafters acquisition. Now, let me give you some highlights by segment. Sales for our Cabinets business were up 34% for the quarter. Importantly, even excluding WoodCrafters sales, Cabinets sales were up 18%, well ahead of the market for our products, as we grew market share in this segment. We benefited from the Cabinet remodel market that led the momentum and continued growth in new construction. The stronger pace of R&R spending in Cabinets was a continuation of momentum we saw in the third quarter, with growth across a full range of semi-custom and custom product lines, resulting in a better mix with higher price points. We gained share in both the dealer channel, where we are the clear market leader, and in home centers, where we saw strength in our semi-custom and in-stock cabinets, as well as our bath vanity programs. We are leveraging our structural competitive advantages, including our portfolio of brands, our leading position in the dealer channel, a continuous stream of innovation and our unique service-oriented operating platform and logistics model to generate sustainable momentum. Notably, we grew our Cabinets profits by $21 million to a total of $34 million in the quarter, nearly tripling last year's fourth quarter profit, as we successfully target profitable growth and leverage our efficient operating platform. Plumbing sales were up 7% in the quarter, and adjusting for the comparison to last year's 53rd week, were up approximately 10%. Moen saw sales gains in both wholesale and retail in the U.S. and in China. Gains were again strongest in our U.S. wholesale business, driven by new construction demand, consumers choosing to upgrade faucet packages for their new homes and from sell-through at our new premium products, including our MotionSense hands-free faucet, which continues to be introduced with additional styles, contemporary kitchen pull-down styles in our line and steel collections and our Aris modern suite. Moen also saw growth at retail, with our steady pace of consumer driven innovations, including MotionSense and our new Walden pullout faucet with Microban finishes. Internationally, sales in China, where there are now more than 900 Moen branded stores, were again up double digits over the prior year, driven by the expansion of our store network, the improved performance of the existing Moen stores and the expansion of our direct-to-builder effort. Retail in China continues to build our business, with a wide range of price points and with products uniquely tailored to the Chinese market. Windows & Doors sales were up 13% for the quarter. Door products saw sales growth of 19%, with double-digit growth across all channels, driven by gains in new construction and our ongoing distribution expansion. Mix also improved especially with consumers selecting our new decorative glass designs and fiberglass door products, like our recently launched Pulse line of modern entry door styles. Window sales grew 7%, as the Window repair and remodel market momentum continued, albeit at a slower pace than our other product categories. In the Security & Storage segment, our sales were down 2% to the prior-year quarter as expected, while operating profit grew 8%. Security sales were up 8% to the prior-year quarter, led by increases in international and safety. Master Lock U.S. retail sales continue to grow, with program expansions at large retailers. And Master Lock's rollout of new commercial electronic access control solutions designed to secure high-value sites, such as cellular telephone towers and other storage facilities, also contributed meaningfully to our sales gains. Tool Storage sales were down 16% in the fourth quarter after our 21% increase in the third quarter, as our largest customer changed its promotional cadence. Therefore, tool storage sales for the second half of 2013 were relatively flat. So to sum up our results, we delivered another strong quarter and full year of sales and profit growth. I am excited about our performance versus a market that saw continued momentum in the repair and remodel market and some growth in the new construction. This performance demonstrates the strength of our operating model and our ability to generate profitable growth, as volume returns and we leverage our competitive advantages to gain share. I am even more excited about the strong momentum that we have built over our first 2 full years as an independent company. Over this period, as the housing market moved into recovery, we continued to gain share and confirm the performance and potential of our operating model. For instance, over the past 2 years, we grew sales by 25% to over $4 billion. We also leveraged the strength of our leading brands and our consistent pace of consumer-focused innovation. As a result, this was disciplined profitable growth with EBITDA up 84% and EPS increasing 150%. We further strengthened our balance sheet and began to deploy capital, as we reduced net debt-to-EBITDA to nearly 0, made our first strategic acquisition, WoodCrafters, which was immediately accretive, initiated a quarterly dividend of $0.10, which we have increased to $0.12 for 2014 and repurchased $61 million of our shares. While we've been working hard to outperform our market over the past 2 years, we have also strengthened our organization by aligning management compensation to drive shareholder value through an increased focus on equity incentives, bringing in proven and experienced talent for key leadership roles in the operating companies and the corporate office, including a new president for our Security & Storage business and a new general counsel, and enhancing our strategy and corporate development team to help drive our next phase of growth. So I am pleased with our accomplishments over our first 2 years. Our operating model is now even stronger and we believe that we are still in the early stages of a multi-year housing recovery. We are well positioned to leverage our structural competitive advantages to drive profitable growth in 2014 and well into the future. Importantly, we now believe that in this next growth phase, as the market expands towards 1.5 million starts and 6% to 7% growth in R&R, we have the potential to organically grow our top line sales to approximately $6 billion, and roughly double our EPS over the next 3-plus years, with additional upside from leveraging our cash flow and balance sheet. So, let me now turn to our full year top line outlook for 2014, starting with our assumption for the market. Lee will then take you through our specific full year 2014 guidance in more detail in a few moments. From a market perspective, we see ongoing signs of strength in the overall home products market as we enter 2014. While higher home prices and mortgage rates have slowed the pace of new construction through the fall and into the first quarter, the market for new homes is expected to show strong growth in 2014. The demand for new construction is outstripping supply in many markets across the country and developers are preparing for significant growth in 2014 and beyond. More importantly, for the repair and remodel, which is around 65% of our mix, we expect a continuation of the strong growth that we saw in the fall season. Notably, we see strength building in bigger ticket semi-custom and custom Cabinets and replacement Windows. We are also seeing increased project size and stronger demand for more premium faucets in our Moen wholesale showrooms. These trends give us reason to be optimistic as we enter 2014 and look forward to the spring remodel season. Therefore our initial 2014 outlook is built on a fundamental assumption that the U.S. home products market grows at a combined 10% to 11% annual rate. We expect the market growth to be relatively modest in the first quarter, but then accelerate throughout the remainder of the year, especially in the second half. Based on that U.S. housing market projection, the assumptions we make for our other markets and continued share gains, we again expect solid top line growth for 2014 with our full year sales increasing at an 11% to 13% rate over 2013, and our home products businesses growing faster and again outperforming the market. So to sum up, we delivered strong 2013 sales and profit growth. These results capped a solid first 2 years as an independent company. We remain confident in our ability to continue to outperform the recovering home products market and intend to deliver profitable growth again in 2014 and beyond. We also believe that our strong brands, management teams and capital structure provide flexibility to both focus on profitable organic growth and drive incremental shareholder value with our strong free cash flow by investing in our businesses, pursuing accretive strategic acquisitions and returning cash to shareholders. Now, I'd like to turn the call over to Lee, who will review our financial performance and provide more details on our 2014 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 fourth quarter results. Sales were $1.1 billion, up 16% from a year ago, with our home product sales growing 20%. Consolidated operating income for the quarter was $97 million, up 59% or $36 million compared to the same quarter last year. EPS was $0.38 for the quarter, up 65% or $0.15 versus the same quarter last year. Now, let me provide more color on segment results. Our Cabinet sales were $456 million, up $116 million or 34% over the prior-year quarter led by growth in dealers. Operating income for the segment increased to $34 million, up $21 million, as we benefited from higher sales volume and our improving mix from repair and remodel growth. Cabinet operating margin was 7.4%, 370 basis points higher than the same quarter last year. Our strategy of disciplined sales growth continues to work well, as we continue to exceed the overall Cabinet market growth, while improving profitability. For the full year, Cabinet sales increased 24% to the prior year. Operating profit tripled to $121 million, and operating margin increased 430 basis points to 7.3%. Plumbing sales for the fourth quarter were $317 million, up $21 million or 7% versus the prior-year quarter. Excluding the 53rd week in the fourth quarter of 2012, segment sales increased around 10%. Operating income was $54 million, up 28%, even as we made incremental brand investments in the U.S. And importantly, operating margin was 16.9%, 280 basis points higher than the same quarter last year. For the full year, Plumbing sales increased 17%, operating profit was up 36% to the prior year and operating margin increased 250 basis points to 17.8%. Windows & Door sales were $176 million, up $20 million or 13% from the prior-year quarter. Within this segment, the Door business experienced 19% sales growth, while the Windows business grew 7%. Operating profit for this segment increased to $5 million, up 18% to prior year. For the full year, Windows & Doors sales increased 12%, operating profit more than tripled from the prior year and operating margin increased 170 basis points to 2.4%. Security & Storage sales were $153 million in the fourth quarter, down 2% to the prior-year quarter. Security sales were strong and increased 8%. As expected, sales of tool storage products were down 16%, as the largest customer changed its promotional cadence. Segment operating income increased 8% to $22 million, driven by a combination of sales gains in Security products and cost reductions from changes to our benefit structure. So, to sum up consolidated fourth quarter performance, we continued to leverage our structural competitive advantages to drive share gains, and we're continuing to see better mix driven by the improving repair and remodel market. Turning to the balance sheet. We exit 2013 with a strong balance sheet. Even as we completed the $300 million WoodCrafters acquisition, repurchased $52 million of our shares and initiated a quarterly dividend during the year. As of year end, cash was $241 million and debt was $356 million, resulting in a net debt-to-EBITDA of 0.2x. We also announced a 20% increase in our quarterly dividend beginning in 2014, while maintaining a payout ratio under 30%. Turning to the growth potential of our business over the next 3-plus years. As Chris mentioned, we've booked strong momentum over the past 2 years. We believe we're in the early stages of a multi-year recovery and now have the potential to drive even higher levels of sales and profit over the next phase of our growth. More specifically, based on the market assumptions over the next 3-plus years, we believe that we have the potential to grow sales to approximately $6 billion, EBITDA to more than $900 million, operating margins to 14-plus percent and EPS to over $3, with additional upside from using our cash flow and balance sheet. Based on our view of the market and our own potential growth over the next 3-plus years, we're beginning to invest in additional capacity and infrastructure throughout our business. This is reflected in both our EPS and capital expenditure guidance for 2014. We also believe that we can deploy our cash and balance sheet over the same period to increase this growth through a combination of strategic acquisitions and returning cash to shareholders. Turning to the details of our outlook for 2014. As discussed previously, our approach to the annual outlook begins with a market assumption, but also includes continued share gains in addition to the overall market growth. As Chris mentioned, based on our projected 10% to 11% U.S. home products market growth, the assumptions we make for our other markets and continued share gains, we now expect our full year 2014 sales to increase 11% to 13% compared to 2013. As we consider timing of growth in 2014, we expect market growth to be lowest in the first quarter and then accelerate throughout the year. Our resulting expectations for full year 2014 EPS are now in the range of $1.91 to $2.01. The midpoint of our guidance represents an increase of 31% over 2013 EPS of $1.50. We expect 2014 free cash flow to be at least $250 million for the full year, after CapEx of approximately $130 million to $140 million, as we begin to invest in the incremental capacity to support long-term growth potential to approximately $6 billion over the next 3-plus years. In summary, our business model is performing well. We are pleased with our strong 2013 results and our performance over the past 2 years. This past performance and the continued market recovery gives us confidence for 2014 growth, but also for potential growth beyond 2014, as we continue to benefit from our structural competitive advantages in the recovering market. Importantly, this stable momentum in both the housing market and in our business performance, should allow us to create incremental shareholder value by making select acquisitions and returning cash to shareholders through our dividend and share repurchase. I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks in the fourth quarter of 2013 and full year 2014 guidance. We will now begin taking your questions and will continue as time allows. [Operator Instructions] I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Your first question comes from the line of Dennis McGill from Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: First question, Chris, I guess when you and the team are thinking about setting the targets for '14 and realizing kind of some moving pieces between new construction and home improvement, where you came out, do you feel like that's a scenario that the market is already geared to grow 10% to 11%, and absent economic shock, you feel good about that? Or do you think you have to see a reacceleration some of these metrics to get there? I guess any type of thought that goes behind how you guys were thinking about it.

Yes, I'd say I've been doing this for 5, 6 years and through a lot of different conditions. And I think what was unique this year is obviously a bit of a slowdown fourth quarter and we think into the first quarter. But on the other side, we see very strong fundamentals driving toward a strong balance of the year, strong spring selling season coming through a strong second half. And so it is a little bit of on faith that you're saying the fundamentals look good. We obviously run a lot of analytics around it, but anecdotally and through talking with all of our channels, as well as looking at the data, we felt good about it. I'd say the expectation would probably be softer first quarter and then seeing it ramp through. Some of our products are lagging a bit as they come in later in the building stage. To counter that on the R&R side, it doesn't take a lot of faith, because we saw a lot of momentum continuing in the fourth quarter. We talked about on our last call, third quarter momentum. Man, fourth quarter kept coming and that's unique. I mean, usually you'd see by the middle of November things kind of grinded off and our Cabinet business, especially on the dealers side, saw that momentum keep coming. And so with that side of the market, we feel really solid on. So that's kind of the pieces as they roll together. So I'd say we feel good about a 10% to 11% market projection. Dennis McGill - Zelman & Associates, LLC: Okay, that's helpful. And then, as you talk about that first quarter slowdown relative to the fourth quarter, can you maybe frame that a little bit, just for expectations, what type of deceleration you're seeing, and maybe which businesses you're going to expect that the most?

I'd say, again, I'll go back on the R&R side, things look pretty good. So, I'd say it's continuing to move. The new construction is going to lag a little bit, so I don't know the magnitude of it yet. But what was healthy actually was, as we move in to December, we saw some inventory positions coming down at Moen, and so we don't mind that because it takes out -- there's not excess inventory out in the market, they'll order to demand. So that looked pretty good. So I'd say, it really is more new construction. And new construction starts to ramp up again, that will help us second quarter, third quarter, fourth quarter. But R&R's continuing, so it's hard to balance those 2 precisely.

Your next question comes from Bob Wetenhall from RBC.

I just wanted to ask, you're updating your 3-year outlook to $6 billion top line, if I heard that correctly, $900 million of EBITDA, 14% operating margin and $3 of EPS. So, I just want to understand, in terms of visibility and confidence level, what's giving you the confidence to put that into the marketplace?

Yes, I guess we start with, we don't run our business quarter-to-quarterly, we run it over a 3-plus-year horizon. And really, as we started talking to investors when we became an independent company 2.5 years ago, we said, through our big restructuring, we have reserved capacity up to about $5 billion in sales kind of across all of our businesses. Well, as we exit the year and look into the next couple of years, we're going to hit that $5 billion in about 18 months. And so internally, we started planning in the fall for where we can expand some of our facilities, where we're going to add some production lines, where we're putting in some enabling technology. And really, those investments are supported by the longer-term outlook $6 billion and beyond. So we thought it'd be helpful to talk to investors today about that and say based on the trajectory that we see, a market returning to at least 1.5 million housing starts over that period. An R&R market that now looks like it's got good legs underneath it running 6% to 7%. We can see our way to $6 billion over the next 3-year horizon and given that, we're going to make some investments to support that so that we're ready and we can maintain our service levels to support that whole expansion. So it felt like a natural extension of kind of what we've been talking about. We've been very candid about our plans and our business is operating. And I could tell you, we have a ton of confidence coming out of the last 2 years. This unfolded really as well as or even slightly better than what we thought it would. And so we got the confidence to invest behind our operating platforms and really take the growth and continue to grow share.

Bob, we're not technically calling that guidance, we're trying to give you a sense of our potential over the next 3 years as we invest as Chris said. So, more of just potential view of our potential over the next 3-plus years.

And really, it's to support, as we start talking about investments, as we call out, we're going to make some capital investments and make some expense investments this year, next year. It's to give you a sense of why we're making those investments, well, it's because we're seeing that longer-term growth out there.

That's really what I was looking for. And Lee, thanks for the clarification. Just as a follow on, it seems like you guys are going to generate pretty substantial amounts of free cash flow. You touched on leveraging the balance sheet and free cash flow. Is -- from a capital allocation standpoint, any color on whether M&A will be the path where you want to go down, do share buybacks or dividends, would be helpful.

Sure. I think we've been consistent in what we've been talking about. We would like to expand the business and accelerate our strategies through some M&A activity, but we'll be disciplined around that. We'll look to grow in adjacent markets. We'll look to grow internationally. We'll look at categories that are close to what we do. To the extent we find good opportunities, we'll be enthusiastic about that. To the extent we don't, we'll be pretty disciplined in returning cash to shareholders through share repurchase and through increasing the dividend. As I highlighted earlier, we're also investing in the business. So that will be a part of what we're doing too, because we see some terrific organic growth opportunities inside the business today.

Your next question comes from Stephen East with ISI Group.

Chris, when you talk about capital spend in preparation for what could be a 3-year growth trajectory, could you rank order where that spending's occurring? And what needs the most investment?

It's primarily going to be in Cabinets and in faucets, so, obviously, our 2 biggest businesses. If you look at our Cabinets business, we've got a distributed network. Some of this expansion will be expanding existing sites, might be building adjacent to sites. So we're leveraging the nucleus of what we've got in terms of management and resources in that market, but we can add blinds, we can add some capacity that way and we're looking at it across all North Americans saying where it makes sense to put in, to service the demand that we see out there. We're just seeing some great demand coming through, especially on the R&R side. On the faucet side, we've got a -- kind of a global supply chain. We do assembly in both China and in North Carolina and so we're looking at an assembly capacity there. Make sure we've got enough capacity to handle the demand that keeps coming there and expanding all that out. And both of these aren't just up to 2016. These are looking at inflection point as we reach $5 billion in revenue how we're going to build the capacity to handle the next 5-plus years and do it in a disciplined way so you see it kind of feather in over time. We're just calling out that we're starting that activity in anticipation of in 18 months that we'd be hitting that $5 billion level.

Okay. And then my other question I'm going to wrap a couple in here if I could. One, could you split out this past quarter when you talked about growth, what type of growth you were seeing in R&R versus new construction? And then when I look at your segment margins, your incremental margins, you had a very strong plumbing and a bit weaker than what we expected on the Cabinets side. Could you address those? And then what you think the incremental op margin for 2014 is?

Sure. I think if you look at the split on new construction and R&R, we won't break it out explicitly, but it was a little stronger contribution on the R&R side. New construction was solid, but fourth quarter, it trailed off a bit and I think that's continuing in the first quarter. So more of a contribution coming out of R&R, which to be candid, was quite robust on the -- especially on the Cabinet side coming through the dealer market and showrooms for Moen, so quite strong there. On the Cabinets side, I'm not sure. We were thrilled with the growth that we saw on the Cabinet side of the market, sales up 34%, 18% without WoodCrafters there. And that was very high-quality growth. Obviously tripling profits in the quarter, strong margins coming through, great mix. So we're seeing some pretty strong mix in bigger packages, bigger remodel programs coming through especially on the dealer side. So we thought that was both strong fourth quarter growth, as well as a good indicator of what we could expect in 2014.

Your next question comes from Stephen Kim with Barclays.

Just wanted to follow up on the question of the capacity additions. Can you give us a sense, Chris or Lee, what you think the cost associated with any of these capacity additions might be that we might see in 2014? And sort of like when we might see some of those show up?

Yes, Stephen, the -- when you look at the capacity investments, they come in 2 flavors really. There's a P&L impact and then there's a capital expenditure. So we called out capital expenditures of $130 million to $140 million in the year. And those will happen throughout the year, candidly. If you look at the capital expenditures in 2013, gross was around $97 million. So we're up $30 million to $40 million. And as we look to the long term on CapEx, I'd say DNA is about $90 million to $100 million. So we've been below that. We caught up in '13 at $97 million. I think you could see for us a couple of years be over through the $130 million to $140 million, and I think then we'll settle back in long-term at kind of that DNA level. So you'll get a little bit of an acceleration for 2 years, but it's not that significant. In terms of the P&L impact embedded in our '14 guidance for earnings per share, we think it's probably at least $0.08 of incremental investment on the P&L side on this. Again, the biggest piece of those in Cabinets and Moen, as Chris said. And you'll see those start in the first quarter. So they'll be spread as a couple of cents a quarter spread throughout the year. Moen's got -- we have a disciplined analytical process of doing this, so we review and we approve each project and we have very high returns on the projects we accrue.

Yes, great, that's helpful. And then with respect to deploying capital. Obviously, one of the things that you've been talking about for quite a while has been the opportunity in M&A. And yet, we all have seen that the overall deal activity on the public markets have been pretty strong. And I was wondering if maybe, Chris or Lee, you could comment on how the conversations may have changed here or how they've been changing over the last 3 to -- let's say, 3 to 6 months. As you talk to potential candidates to -- for acquisition. Are they finding that, because we had a little bit of a pullback in the housing start environment, that maybe now is not the right time, they want to -- they're waiting for a stronger market or is the decision-making process completely unrelated to that? I mean, is it completely related to sort of personal issues and things like that? Can you just help us understand how the situation maybe changing there?

Sure, it's all of the above. So, I think that you're going to have situations where some owners, investors, will want to take advantage of the public market, situations where they would prefer a private sale. There are some family-owned businesses that this is a longer-term discussion over a long period of time, it's not a moment in time. And so their deliberations are going to be longer. And so this discussion will be, is this a better time now than it would have been 4 or 5 years ago, not, is it a better time now relative to a quarter ago. So that's why I say it's all of the above. We view it kind of over the next couple of years. And so things unfold as they unfold and we'll be deliberate about it. The important thing is we're active. We've got a strong team there. We're involved. And I think things will unfold. We're delighted to have the opportunity to acquire WoodCrafters. We're hopeful that over the next 12, 24 months there'll be other opportunities similar to that. And so we're active in discussions on that. So I'd say it's not a knee-jerk relative to a changing market, but these things are often fairly complex.

Your next question comes from Ken Zener from KeyBanc.

In the past, during your third year, you did talk about trying to manage your portfolio to certain metrics. And I believe Windows was one of the businesses that did not jump out as being a top performer. Can you update us on your thinking about your willingness to swing your portfolio given the industry structure in Windows, as you're entering your third public year?

Sure. Yes, what was described in the past is that the Window market has evolved a bit slower than some of the other markets going back to the energy tax credit, 2009, 2010. We still do think it pulled some demand into those periods, but it also delayed some of the rationalization in the industry. Every other building product industry was going through some dramatic restructuring, but there was volume that was keeping that industry, that part of the industry, from going through that restructuring. So it's lagged, and I'd say continues to lag. But in the second half of the year, we did see improvements. We saw revenue growth coming on. We saw a little bit better mix coming through. So we're obviously watching it very carefully. It's not performing as strongly as our other R&R businesses, but it is performing well -- better. So we'll see how it unfolds. And if it continues to build momentum, it'll be in a very good spot. If it's not building the kind of momentum that we'd like, then we'll evaluate things.

All right. It's a little late. I guess in Cabinets, Lee, you talked about disciplined growth relative to capital expenditures in margins. Could you talk about different growth rates you might be seeing by channel, what that means for utilization rates as it relates to how you deal with each of the 3 broad demand areas? And did you guys really kind of pass up a lot of business, because you didn't want to move towards lower margin business? If you could you could give us a sense of how capital spending is affecting those different demand rates?

We basically look at our businesses and we are the leaders in our industry. And we don't -- we're going to grow, we have strategic advantages that we can use to drive sales and we don't have the chase kind of low margin sales. And we've been very disciplined. You saw that on the Cabinet business with the promotions that were out there for a couple of years. And same thing on the Plumbing side. Moen is the leader in the industry, and we don't need to chase those things. So I would say, we do that without thinking initially about the capital investments. We think those are very good businesses. They're both growing significantly. They're taking share in a significant way and they're growing their operating margins. As we think of capital, we put capital into those 2 ahead of everything, but we invest in all of our businesses. So we're not really having to make what I would call restricted capital investments. Those businesses are growing very well. They're very strong and they're just -- we're starting to see over the first 2 years you're seeing the benefits of those leadership positions.

Your next question comes from Michael Rehaut from JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question I had was on the guidance. And just trying to understand a little bit better in terms of the timing of things and the components. Is it fair to say that when you think about the underlying -- kind of more than 2 questions in here, so apologies. But in terms of the 10%, 11% U.S. home products market, I assume that's being driven more by repair and remodel, perhaps an outlook for up high single digits? And as you think about the complexion of the year and you said that you expect things to be a little slower in the first quarter and accelerate. I would have actually thought the opposite given that the comps get tougher throughout, the year ago comps get tougher as you work through the year, particularly as they picked up in 2Q and 3Q. So just, a, about the end market growth composition; and, b, just any thoughts around why you're thinking that things will be slower in the first half, given that the comps actually just get tougher in the back half?

So a couple of questions in there. First on market assumption. 10% to 11% would imply new construction up high teens, R&R roughly in the 7% range. And so -- and I'd say that new construction really, for us, kicking in the second quarter and then accelerating even more so in the second half. So that's the first point I think you're looking for in terms of guidance on. The second piece is on comps. We actually had a very strong first quarter last year. So across the business if you look at our first quarter Moen is outstanding, across and other parts of the business. So they're -- I wouldn't say necessarily that kind of weaker comps in the earlier part of the year. Obviously, it performed well, but as we look at growth with a 10% to 11% market growth and we look at share gains on top of that, I think you just roll that through the different businesses, I think you're going to see some pretty strong growth numbers and profit conversion really kind of for the second quarter through the balance of the year. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Great. I guess just, second, just turning to the margins in a couple of the segments. Plumbing had -- whereas in the first 3 quarters of the year, Plumbing was working on an incremental margin of 30% to 35%, roughly. Really kicked up well above 50% in the fourth quarter. I was just wondering about any particular drivers in 4Q that may have been responsible for that? And similarly in Windows & Doors, not much of an incremental margin at all in Windows & Doors for the 4Q, whereas it was maybe a little stronger earlier in the year.

Yes. You look at Moen first, they had a very high incremental margin in the fourth quarter. I think some of that is just timing. For the full year, they were 32% incremental margin. That's a much better rate for them. So I think I wouldn't project that same 50-plus percent incremental margin going forward. They finished the year really with total operating margin up 250 basis points to 17.8% on 17% growth. So a very strong year with 32% incremental margin. That's -- I think that's the way to think about the business more. In terms of Windows & Doors, we saw -- we did see a low incremental operating margin in the quarter. We see higher in Doors and as the volumes coming in, in Windows, it's about how do you leverage that, the labor component of that and efficiencies. For the full year, we saw Doors up 21%, their incremental margin was 21% and 16% for the full year. So Doors doing really well, Windows a little more constrained.

Your next question comes from the line of Michael Dahl from Credit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: I just wanted to ask on free cash flow guidance. In light of the earnings guidance and even accounting for the increased CapEx here, it seems a bit conservative to think that you'll only be, I guess it's $250-plus million. But could you kind of walk through what are some of the puts and takes in there?

Yes, when you kind of compare it to say 2012 when we had $326 million of free cash flow and we're at $254 million, there are issues around between the 2 years. We have less option proceeds. For example, in 2012, we had $104 million of option proceeds. In 2013, we had about $51 million. And in 2014, we'll have, we think about $20 million. So that's declining somewhat. CapEx, for example, in 2012 net was about $62 million, in 2013, was about $95 million, and it'll be $130 million to $140 million. So the other piece of that is the CapEx because we report free cash flow after CapEx. And we're always -- we always start the year on our free cash flow guidance to be $250 million-plus or so and then we will modify it as we see during the year. But $250 million plus feels pretty good right now and we're continuing to invest in the business. Michael Dahl - Crédit Suisse AG, Research Division: That's helpful. And then second question, if we look at the Storage side of the business, can you talk about how -- you had a pull forward or timing issues in 3Q than 4Q. Can you talk about how the sell-through was in 4Q and I guess where the inventories stand in that business today?

Yes, so we talked a little bit in the third quarter about them pulling forward some demands, some orders into the third quarter. We then look at the fourth quarter and they altered some of their promotional activities, so moved some of that, actually into the first quarter this year. So, the inventories are getting absorbed into the market. I think we're going to end up looking at it kind of almost on a rolling 6-month basis. If you look at the prior 6 months, they're down a couple of percent, which is about what we would expect, with strong profit and cash generation I think if we look at the next rolling 6 months, we'll likely see a similar kind of story. So, it's what we would expect as we've described. It's a business that we're managing to modest growth expectation, but we're trying to continue to invigorate the product line. It's a profitable business for us, generates strong cash flow. So, it's kind of - as expected is the way I describe it.

Your next question comes from the line of Garik Shmois from Longbow Research.

It's about pricing in Cabinets in the quarter. I didn't see it called out specifically. How is the promotional environment? Did you get pricing? Or was pricing needed in the fourth quarter? And how are you thinking about pricing in 2014 plus promotional activity in the context of still a pretty challenging raw material environment?

So a couple of things in there. First, overall we'd say the mix continues to improve so we're getting a combination of price, which we take through the whole product line every year, as well as our mix, kind of average dollar per box within product lines continues to improve. And that's really demand driven; that's consumers selecting higher quality product, buying our new product, our new finishes coming through. In terms of price versus inflation, we're seeing a little bit of inflation on hardwoods and on particleboard and plywood, but we can recover that through some pricing. So it feels pretty healthy. On the promotional side of the market, that's been really a home center phenomena. I'd say that it is really much, much, much improved relative to where we've been over the last couple of years. We've been particularly disciplined there, really emphasizing our products, our service side of the business and working closely with associates to really match consumer demand to the best product within our portfolio. So all that has paid off. And I think we've continued to grow and gain share without having to discount. But I think that the industry in general, now that capacity is coming -- is being utilized and real demand is coming into the industry, the need for that promotional activity has abated. So, I'd say it's a healthy pricing environment, and it feels like it's really the byproduct of demand and capacity being better matched.

Okay. And just one more question on -- clarification on the deep sense of incremental investment in 2014. Is that embedded in your EPS guidance?

Yes, it is. It's in the 2014 guidance already.

Yes.

Your next question comes from the line of Mike Wood from Macquarie.

It's probably [indiscernible] to discuss some credit issues with distributors in China not having access to financing. Curious if that, at all, is impacting your retail operations there? And could you give us some update on the store count?

Sure. Starting with the store count, we're up over 900, we're about 910 as we closed the year. That was a combination of adding stores and we also pared back some lower performing locations. We're really focused on driving more incremental volume -- incremental margin through some of those stores. So it's a combination of both those things. On the credit side, we haven't. I'd say we're -- a lot of the relationships we've had, we've had for a long time we're close to a lot of the wholesalers. So I'd like to think we're very much on top of that and really haven't seen any of that issue coming through.

Great. And also, is there any substantial or material margin differential between Plumbing Products that you sell into remodeling versus new construction? And how that may have impacted fourth quarter?

It can be -- it's a complicated answer. So on the repair and remodel side, the answer is it depends. We certainly sell some lower price, lower margin product through some channels that consumers will buy at. As they move up into dealer showrooms into some of our wholesale showrooms, they're buying some pretty high margin products. So that's why it kind of depends on that mix. We're certainly seeing that mix improve, consumers are opting for a richer mix in our spending. On the new construction side, same phenomena. I mean, you've got a base grade product that's going into new construction and that was really your bread-and-butter 2010, 2011. But that mix has continued to improve in 2012 and 2013. So the general trend is toward improving mix into improving price points really across both repair, remodel and across new construction.

Your next question comes from the line of Nick Coppola from Thompson Research.

So I'm wondering if you can make any comments on the cadence of sales in the new construction throughout the quarter and to date. And I'm really trying to understand when things start to get a bit slower and whether or not there's been any incremental improvement?

So we kind of lagged at least a quarter relative to new construction if you think about our products, faucets, showers, sinks, entry doors, cabinets coming into a home, they're coming in within the closing phase of the construction build. So we still had a lot of volumes flowing through in the third quarter really completing homes that had been started earlier in the year. We started to see some slowdown really it was in the last 6 weeks or so and some of that might have been as well inventory coming out and fulfilling demand against inventory that was in the channel. We'd expect that will still be the same phenomena in the first quarter, and even as then new construction picks up and they start to see starts pickup in the late first quarter, we'll lag some of that unless our channels get out ahead and feel like they don't have enough volume and at which point they'll start ordering in anticipation of that. So that's a little bit of the dynamic, it was as expected. So I'd say it's we can kind of see it coming if we look out a quarter or 2. But the positive is obviously on the repair, remodel side of the market. That has been very strong and very consistent. We don't have that kind of a pattern. So that's kind of an offset to what we see on the new construction side.

Sure, that's helpful. And then kind of as a follow-up to that, what does give you more confidence that things are going to be picking back up in the second half?

I think it's a number of things. So I think if you look at the builder activity, going back over the last 9 months, they've certainly been more active in acquiring land in community development in their traffic. And so all of those things point for them, I think, toward a strong year and that season really is just starting to kick off. And so I think we'll have harder data on that obviously a quarter from now when we're talking again. But it's also the macro. We're still well under constructing what we need to actually house all the household formations and we demolish a couple of hundred thousand houses in the country every year due to storm damage or just dilapidation. So you just roll the macro numbers together and we're still well under the volume of housing that we need to build over the next 3 years. So we look at the year-end factors and we look at the macro factors and we roll that together and we probably rerun all those calculations at least once a week, especially in this planning period. So I'd say we're very comfortable with our outlook as we put it forward today.

Your next question comes from the line of Josh Chan from Baird. Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division: I'm just wondering about what you're seeing out there in the price versus commodity cost environment, as well as what's assumed in the guidance for 2014?

Yes, when we look at fourth quarter of '13 and really for the year, I'd characterize our inflation as kind of low-single digits. The only thing that was really above that was wood, plywood, particleboard was in the mid-single-digit range. But in total, kind of low-single digits. And then with our normal pricing increases it basically was. So there was a nominal effect net of price. But you we also saw mix improve so much, in both new construction and R&R that, that really dwarfs the entire pricing. As you think about '14 guidance, it's a little similar. We see slightly higher inflation, call it low-single digits again, but slightly higher than '13. And then we'll have price increases that will offset that. And it will continue through our innovation, we get indirect pricing through our innovation in our mix as it continues to improve. Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And if I can ask about the Security business. You talk about expansion to the commercial access market. Is there a way for you to sort of size what kind of opportunity you see, as you continue to expand that business forward?

Sure. We had a strong quarter in Security, up 8% across within that. Commercial was up mid-single digits. We see opportunities there to leverage our distribution. That market for us with Master Lock, 1/2 of that market is commercial and the other half is retail. Obviously, a very well-known brand in retail. But the commercial side is, I'd describe it as quietly strong. And so we see opportunities on the electronics side. We're investing in our own organic capabilities and we're also looking at opportunities to supplement that product line potentially with some acquisitions there as well. So strong on the commercial side and Safety as a subset of that, so we've got a line of products that help secure manufacturing sites, mining sites. And that was also up strong in the quarter. So it's a little bit of a dynamic rolling through the commercial side of the market.

This concludes our Q&A session. I would like to turn the call back over to our presenters.

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

And thank you for participating in today's Fortune Brands' Fourth Quarter and Full Year Earnings Conference Call. This call will be available for replay beginning at 7:30 Eastern Time today through 11:59 p.m. Eastern Time on February 11, 2014. The conference ID number for the replay is 36541635. The number to dial for the replay is (855) 859-2056. And this concludes today's conference call. You may now disconnect.