Fortune Brands Innovations, Inc. (FBIN) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon. My name is Dan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' 2014 Third Quarter Earnings Results Conference Call. [Operator Instructions] I'll now turn the call over to Mr. Brian Lantz, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, everyone, and welcome to the Fortune Brands Home and Security quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress during the third quarter of 2014. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investor section of our fbhs.com website. I would like to remind everyone that the forward-looking statements we make on the call today is in our prepared remarks or in the associated question-and-answer session are based on current expectations and our market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC such as our annual report on 10-K. The company does not undertake to update or revise any forward-looking statements. We speak only to the time at which they are made. Any references to operating profit, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis as described in today's news release unless otherwise specified. Also, Window business results have now been reflected as a discontinued operation in all periods and are therefore excluded from the results discussed on today's call. With me on the call today are Chris Klein, our Chief Executive Officer; and Lee Wyatt, our Chief Financial Officer. Following their prepared remarks, we've 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. Our teams delivered solid growth in the third quarter in the face of tough comps in a market that is currently running at the low end of our planning assumption. We continue to gain share and mix continues to improve and our core businesses are performing well. We're also taking actions to strengthen our portfolio and invest in capacity and capability as we prepare our company to deliver on higher growth as we expect our markets to continue to improve in 2015 and beyond. Let me first take you through some of the third quarter highlights and briefly discuss some of the steps we are taking to strengthen and focus our portfolio. And I'll comment on our view of the U.S. home products market and our 2014 outlook. Turning to the quarter, sales were up 5% and EPS was $0.55, up 20% from a year ago. This performance is particularly strong given the challenging comparison to the prior year quarter when sales increased 24% in a more robust market. Let me give you some highlights by segment. Sales for our cabinets business were up 1% for the quarter. Excluding the impact of both exiting builder direct business in the West and the comparison to a large bath vanity product launch in the third quarter of 2013, core cabinet sales increased 10%. Core cabinet sales growth was led by mid-teens growth in the dealer channel while big ticket remodeling activity remaining strong as well as high single-digit growth in the home centers. We again gained share in the dealer channel, where we continue to see growth across a full range of semi-custom and custom product lines, resulting in a better mix with higher price points. Our share gains are coming from deeper relationships with existing customers as well as new dealerships. Our new product launches, including our new Omega frameless custom line for dealers and new bath vanity offerings in home centers, continue to sell well and are driving share gains. Our refreshed Diamond line is performing well above expectations and new finishes in our Aristokraft, Homecrest and Kitchen Craft lines are also selling well. Despite a challenging third quarter comparison to product line review wins in the prior year, WoodCrafters performance has been solid. From a revenue perspective, WoodCrafters products are selling well. They have captured new program wins in home centers and begun to gain product placements in the dealer channel. With the integration nearly complete, WoodCrafters is also beginning to help our core cabinet business by producing lower cost componentry for our existing cabinet lines with its low cost North American manufacturing capacity. So overall, for cabinets, we continue to leverage our proven structural competitive advantages to generate sustainable momentum. Our teams execute well against a business model that is tough to replicate. Our share gains across channels with improving mix reflect the tangible impact of these advantages. Plumbing reported sales that were up 2% for the quarter led by growth in U.S. wholesale and retail. In the third quarter of 2014, Moen faced challenging sales in comparison to the wholesale channel. Wholesalers continue to reduce inventory versus our third quarter 2013, in which wholesalers carried inventory to support strong demand. Regardless, this year's mix was better, our sales grew and margins were strong. As a result, our U.S. Plumbing business grew high-single digits across wholesale and retail. We're encouraged to see consumers continue to select our innovative new faucet products for their new homes and repair and remodel projects, including new pull-out and pull-down faucets with reflex self retraction in our Brookshire, Hensley and Etch lines, sip beverage and filtration faucets and our Oxby bath accessories and faucets. Overall, we continue to see strength in the more premium end of the market supporting bigger remodel and renovation projects. International sales declined low-single digits, driven by weakness in Canada, which was negatively impacted by a stronger dollar and in China. China sales declined modestly over the prior year as new construction activity was weaker and direct to builder sales softer. However, our nearly 950 Moen stores continued to generate solid growth as we continue to add stores and rationalize lower performing stores to drive growth. We remain optimistic about both our long-term business model in China and the growth potential. Doors reported sales were up 13% for the quarter. For the first time, we are reporting doors by itself in this segment as we closed on the sale of Simonton windows in the quarter. In the quarter, door products saw healthy sales growth, driven by gains in new construction and ongoing distribution additions. We continue to see an increasing benefit from our expansion in the Western region that we put in place over the last couple of years. Mix also improved especially with consumers selecting our new decorative glass designs and new fiberglass door styles like our recently launched Pulse line of modern entry doors. The furniture brand continues to perform strongly across all channels. In the Security & Storage segment, sales increased 17% from the prior year quarter. Sales from the Sentry Safe acquisition added significantly to the growth, while organic security sales increased 4% and tool store sales decreased 3%. Master Lock security sales growth was led by mid-single digit increases in U.S. retail, high single-digit increases in international and solid double-digit growth in U.S. safety. Master Lock U.S. retail sales continued to grow as program expansions at retailers during the back-to-school selling season. And Master Lock Europe continued to gain share in a European market that saw mixed results. The Sentry Safe acquisition is on track and the teams are working hard to integrate the operation. We are excited about the opportunities we see between our Master Lock and Sentry businesses. So to sum up our results, our teams executed and continue to gain share in a lower-growth market. As we wrap up 2014, we remain positioned to gain additional share and deliver strong sales and profit growth in 2015 -- 2015 and beyond. First, in the third quarter, we decided to sell the Simonton Windows business and we're able to close on that sale more quickly than planned. The windows business was subscale within our portfolio and is better positioned to grow inside a larger Windows business. Meanwhile, we are very focused on driving profitable growth for our Furniture Door business, as you can now see more clearly with these third quarter results. Second, I'm excited about the growth opportunities that we have in our Security business with the addition of Sentry Safe. These opportunities include driving sales and innovation, averaging global distribution and generating cost synergies. Going forward, as we integrate Sentry, the security segment will operate separately from the Tool Storage business. As a result of integrating Sentry in the Tool Storage business, we are reviewing long-term strategic options given the challenges this segment has seen over the past few years. This business currently has annual sales of approximately $150 million and will be reported separately in the future. Third, we have continued to invest in capacity and capabilities to allow for additional growth beyond $6 billion in sales. We believe that the new construction market is gradually returning to historical levels in support of household formations and that the R&R market will grow annually at 5% to 6% in a steady-state. So in 2014, at the same time that we have been taking share and delivering growth in a market that has been growing slower than we assumed earlier in the year, we have also been taking a few steps to position ourselves for the growth we see in the future. Given our strong positions in these markets, even a modest improvement in market demand gives us a significant impact. Now let me turn to our updated full year outlook for 2014, starting with our assumptions for the market. In the near term, the pace of repair and remodel demand has been recovering more gradually than we expected earlier this year. New home construction, where our products are installed in the later stages, has also been slower to reaccelerate since last fall, but continues to pick up pace. And now we have a better view into a good portion of the fall season for both R&R and new construction. So while demand for both new construction and repair and remodel should still show growth for the balance of the year, we expect the overall U.S. home products market growth for the balance of 2014 will be lower than we assumed in July. Therefore, our updated 2014 annual outlook is now built on a revised assumption that U.S. home products market grows at a combined 4% to 5% rate in the fourth quarter. Based on that U.S. housing market projection, the assumptions we make for our other markets and continued share gains plus the Sentry Safe acquisition, we continue to expect solid top line growth for 2014 with our full year sales increasing at approximately 80% rate over 2013 and our Home Products business is again outperforming the market for our products. Based on this market and sales growth and the benefit of share repurchases, our teams are focused on delivering full year EPS of $1.84 to $1.86. So to sum up, we remain confident in our ability to continue to outperform the recovering home products market. We are gaining share. Our core businesses are strong and because of actions we are taking in 2104, we are well positioned to deliver even higher growth in 2015 and beyond as the housing market continues its recovery. We also continue to 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. 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 and on our recent capital allocation actions.

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gains from continuing operations. Also, the closing of the sale of the Simonton Windows business was accelerated into the third quarter, which reduced our reported EPS for the third quarter by $0.02. The Windows business is now reflected as a discontinued operation and its results are excluded for all periods. Let me start with our third quarter results. Sales were $1.1 billion, up 5% from a year ago. Consolidated operating income for the quarter was $138 million, up 15% or $18 million compared to the same quarter last year. EPS were $0.55 for the quarter versus $0.46 the same quarter last year, an increase of 20%. Now let me provide more color on segment results. Our cabinet sales were $453 million, up $4 million or 1% over the prior year quarter. To better understand the performance of our cabinet business in the third quarter, it's necessary to exclude both the impact of the planned exit of the Builder Direct business in the West, that was $15 million last year, as well as a $14 million inventory loaded in the third quarter of last year due to a large WoodCrafters vanity product launch. Excluding these 2 items, the underlying cabinet sales were up 10%. Our operating income for the cabinet segment was even with the prior year quarter, it was depressed by $6 million to $7 million by the impact from actions to expand capacity and flexibility across multiple clients. While these actions pressure profit in the quarter, they should provide strong returns beginning in 2015. Operating margin for the quarter was 8.1%. Full year operating margin is now expected to increase nearly 100 basis points compared to 2013. Turning to Plumbing. Sales for the third quarter were $346 million, up $8 million or 2%, led by U.S. wholesale and retail. Operating income increased $10 million to $76 million, up 15%. Operating margins for this segment was 22%. The increase above the anticipated annual operating margin of 19% was due primarily to the timing of expenses and improving product mix. Door sales were $114 million, up $14 million or 13% from the prior year quarter. Operating income for this segment was $12 million, a $5 million improvement from the third quarter last year. Operating margin for the segment increased to 10.6%. Security & Storage sales, which now includes Sentry Safe, were $185 million in the third quarter, up 17% to the prior year quarter. Organic security sales increased 4%, while sales of storage products decreased by 3%. Segment operating income was $28 million and operating margin for the segment was 14.9%. As Chris mentioned, now that we are integrating Sentry Safe into our Security business and are beginning to align our cost structure to future growth, we intend to focus separately on a strategic plan for the Tools Storage business. So to sum up the third quarter performance. The housing market growth was at the low end of our previous guidance. The impact of expanding capacity put pressure on profit. We continue to leverage our structural competitive advantages to drive share gains and our core businesses' performance remains solid. Before I turn to the balance sheet, I want to reiterate that we're continuing to make investments to build incremental capacity and flexibility. As mentioned on our last call, these investments should enable us to expand capacity and infrastructure to support sales growth as the housing market returns to steady-state levels over the next 3-plus years. We need to make these investments this year so that we are positioned to capture the potential growth and should begin to realize the benefits of these investments later next year. In the third quarter, these capacity investments were equal to approximately $0.03 of EPS and mainly impacted the cabinet segment. Turning to the balance sheet. Our September 30 balance sheet remains solid, with cash of $175 million, debt of $684 million and our net debt-to-EBITDA leverage is 1x. We have $155 million drawn on a $975 million revolving credit facility, our balance sheet reflects the impact of share repurchases and year-to-date capital expenditures of approximately $82 million. Turning to share repurchases. We continue to opportunistically repurchase shares with year-to-date purchases of $440 million compared to the $375 million reported on last quarter's call. Additionally, the Board of Directors has authorized an additional $250 million of repurchases over the next 2 years. Together with the prior authorization, the remaining unutilized authorization is approximately $300 million. Given our cash flow and balance sheet profile, these repurchases should not limit any potential M&A activity in the future as we continue to actively pursue accretive acquisitions. Turning last to the details of our outlook for the fourth quarter of 2014. As Chris mentioned, based on our projected 4% to 5% U.S. home products market growth in the fourth quarter, the assumptions we make for other markets and continued share gains, plus the Sentry Safe acquisition and the sale of Simonton Windows, we now expect full year 2014 sales to increase approximately 8% compared to 2013. Importantly, the investments made in capacity and flexibility and other actions taken this year should position us to continue with above-market sales growth in 2015 and beyond. Our resulting full-year outlook for 2014 EPS are in the range of $1.84 to $1.86. This outlook includes the impact of third quarter actions, including the acquisition of Sentry Safe, the sale of Simonton Windows and share repurchases. It also assumes that our fourth quarter tools storage profit is flat to prior year, as we complete a strategic review of that business in the fourth quarter. The reduction from our July guidance range is primarily the result of divesting the Window business and the market growth assumption, being at the low end of our previous expectations now that we have better visibility through the fall selling season. We expect 2014 free cash flow to approach $200 million for the full year after expected CapEx of around $120 million as we invest in incremental capacity to support long-term growth potential. Additionally, the board has authorized the December dividend of $0.12 per share. In summary, the performance of our core business, the investments we've made, the steps we're taking to position our portfolio for future growth and the expected continuing market recovery give us confidence in continued growth beyond 2014. Importantly, we remain focused on using our strong balance sheet and cash flow to make acquisitions and returning cash to shareholders through our dividend and share repurchases. We're well positioned as we focus on maximizing shareholder value. I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the third quarter of 2014. We will now begin taking your questions and we'll 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 Bob Wetenhall with RBC Capital Markets.

I wanted to ask Chris. Chris, speaking to the core business and excluding M&A activity in the past year, what's changed in your outlook since July? What are you seeing in October sales? And how do you feel about demand trends in the core business heading into year-end? Just trying to understand what you're expecting from the consumer as you close out the year.

Thanks, Bob. Yes, the core business is actually performing quite strong. There's a lot of stuff, obviously, going on in the quarter with Simonton going out, Sentry coming in, an aggressive comp from last year, 24% up. But if we look at the core, the Cabinet business was up 10% across the U.S., Dealer up mid-teens, Home Center up high single, the Plumbing business up high single, mix improving. We saw doors for the first time reported kind of up low teens. And so what we see is some real health in the end market. If I look at the quarter of July, it was a little soft and really the pickup was August, September and through October, we're seeing the same trends we saw in September. So good steady cadence for us. I think there's a bit of share gain in all that. So I'd say the market's okay and we're picking up share across our core markets. And I'd say the consumer -- you've got to kind of segment it a little bit, we still see the higher-end consumer wading in. The mix looks good for the projects that are happening. I think there's still some latent demand out there from entry level, both new construction as well as R&R, and so we think that's going to be coming in '15, '16. So overall, I felt good about the quarter and I think we feel good as we sit here at the end of October. The other thing is, I guess, in the fourth quarter, we've seen different trends over the last few years. Sometimes business slows down by the middle of November. Sometimes it keeps growing through early December. So we're going to wait and see if some of this momentum continues through November. So I say we feel pretty good about things.

That's a great update. I wanted to ask Lee, it looks like you're tweaking capital, spending down a little bit. I think you're lowering free cash flow guidance for this year down as well. Wanted to understand the reduction in free cash flow and what are your thoughts about capital allocation and using -- how you intend to use the balance sheet to create value as we head into next year?

Yes, we -- in terms of our forecast for free cash flow, we've come down. It's -- we now say approaching $200 million. Before, it was over $200 million, that's just the result of just taking the expectations, the guidance down for the year. Nothing significant in that reduction. That does include taking CapEx for the year down from about $140 million down to $120 million. That's a combination of some timing and it's also the result of just taking down our expectations for what we're going to have to spend. Recall the last quarter, we said we could probably spend $140 million in '14 and $140 million in '15. Now as we've just sharpened our pencil, got a little more efficient on this, we think we'll probably spend somewhere over $120 million in '14, probably $125 million in '15. So just getting sharper on the pencil on those and just really understanding what we need to spend. So that's actually good news.

Sorry, just a follow-up. Thoughts on using the balance sheet for M&A or share repurchases, and what you're looking for leverage. Any clarification or prioritization would be great.

We still feel strongly that we need a little more leverage to drive shareholder returns here. We ended the quarter around 1x net debt-to-EBITDA. We still think that at the middle of the recovery we are now, we could lever up to 3, 3.5x by the end of the -- kind of get to steady-state, our preference would be 1.5 to 2x. So have a lot more to do. We -- if you think about 2x leverage at the end of -- when we get to steady-state, that's about $3 billion. And all the actions we've taken to date, we've only committed about $1 billion of that. So we've got a lot of room left. We still like acquisitions if they're accretive and we can get the kind of benefits that we've gotten out of the Sentry Safe and out of the WoodCrafters. We'd do a lot of those. We're still repurchasing shares opportunistically. We've now repurchased $440 million about 11 million shares, so almost 7%. So we're going to do that opportunistically. But -- so it's still a combination of let's look for good acquisitions because we think those can drive the most value but let's still opportunistically repurchase shares as we've done this summer.

Your next question comes from the line of Stephen Kim with Barclays.

Wanted to ask you guys about the Cabinets business first. So I think you had indicated that the exit of the builder direct and the vanity launch last year, it was $29 million. But I don't think that gets you all the way -- that doesn't completely bridge the gap to get to a 10% organic. I was wondering if there was anything in there or if I heard those numbers wrong. And then also, you had said that last year, I think in the fourth quarter call last year, you said that you thought that the cabinet capacity or the capacity expansion in general in cabinets and plumbing would be about $5 million a quarter. It was kind of split evenly throughout this year. I was wondering whether that has actually come in more lumpily than you expected and maybe that's what drove something here in the third quarter margin, which was lower than we thought.

Yes, I'll take the first piece on the 10% growth in the core cabinet business. Basically, if you take out the builder West exit, which was about $15 million last year in the quarter, obviously, 0 this time, if you take out the $14 million on the inventory movement at WoodCrafters and then there's about $3 million or $4 million other dollars in there kind of related to WoodCrafters, if you do that, you get to the 10%. So if you take out basically the WoodCrafters change and the builder West, you should be at 10%.

And your second point was around capacity. Interesting, we kind of came into the year planning on capacity additions and had some tremendous success with the launch. We relaunched the Diamond line and some other product enhancements and saw some very strong demand coming in second, third quarters. So we accelerated some things. Basically, the expansion of some facilities, putting additional lines in to produce a different -- kind of the extension off of part of our semi custom line. So incurred a little bit more expense to do that, kind of a high-class problem, we're trying to service all the demand that's coming in. So we're through all that. We're in good position now coming into next year. So we still have some incremental things we're doing within cabinets, some expansion on the WoodCrafters side, around components down in Mexico and some other things we're doing, but on the kind of the big part of the SDK expansion, we actually moved through that a little bit harder and a little bit faster this year. So we're pretty well set coming into next year.

Okay. Could you quantify those at all, like how much more was 3Q versus, let's say, 2Q?

In terms of the overall expense per capital and the expenses associated with capacity enhancement, we're up actually and projecting we'll be up a little bit versus where we were before. We were going to come in about $0.08, we're now projecting we'll be about $0.12 for the total year and capital was projected at $1.40, it will now be about $1.20. So we elongated across the whole business a couple of parts of the capital and capacity increase. But specific to cabinets, we actually accelerated some of that work so we could handle very strong demand coming off of this Diamond relaunch.

Your next question comes from the line of Michael Dahl with Credit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: Lee, I wanted to ask, I guess conceptually, about the way that you think about guidance. I know you try to be as straightforward as possible with some of the market and share gain assumptions. But realizing that this is now a couple of quarters in a row where you've had to take down sales a bit and it's probably a period where it's -- there's unusually low visibility in some of the channels. Is there anything that you can be doing differently to gain a little more clarity into the top line? Or how do you think about baking in some cushion in the near term as we continue to deal with a market that is not quite certain here.

Yes. I think there's a couple observations. We try to be down the middle and always start with our market assumption and then we add our share gains to that and give you our sales. So we're not candidly big hedgers. We try to be down the middle of the road on that. One of the issues we always have at the end of the second quarter, when you're sitting at the end of July trying to give guidance is when 65% of your business, your Home businesses is R&R, you're sitting in July and you haven't started and you really don't have good visibility to the fall R&R season, which is significant for us. So that's one of the issues giving guidance at the end of July. You really don't -- you really can't understand the fall R&R season really until you get into October because it's generally September, October, November is the fall season. So that's one of the challenges we have and we try to call that out but it's always going to be a challenge giving guidance at the end of the second quarter. We're generally going to be better when we give guidance at the end of the first quarter and at the end of the third quarter because those were in the middle of the R&R season. So that's just part of our industry. But given that, we don't try to hedge a lot even though in July, we don't know, we just try to give you our best guess at the market. You can challenge that and if you agree or disagree, you can adjust our performance accordingly in your estimates. But we try to be pretty straight up and down the middle of the road and pretty transparent on all that.

It's the same philosophy we follow really since we came out 3 years ago as a standalone company and that's to say, here's what we're looking at as the market but we know we're not the best forecasters. We do our best, but here's what we're assuming. And then here's how we'll perform in that market and if anybody takes a different view of the market, well, now we've given them the metric to make the adjustment to say, oh, you said you were going to be -- the market was going to be up X percent and you're going to be up X plus 2%. Okay, great. Now I know how to change it if I believe more conservatively that the market will go in a different direction. So that's the kind of philosophy that we try to carry through.

The other thing that's been a challenge this year is just with that first quarter weather impact, especially as it relates to R&R, that was just very challenging and I think it's made understanding the normal patterns for R&R, at least in 2014, a little challenging because we never had that situation, where the weather has been that difficult. And it's actually kind of broken the process for planning large R&R big ticket items. So it's -- this has been a challenging year, no doubt. Michael Dahl - Crédit Suisse AG, Research Division: That's helpful and certainly I understand and appreciate the challenges on that side. Just shifting gears, the strategic options on the storage side. I guess what are the options here assuming there aren't so many buyers of a business like this currently? What are the things -- any color you can give around potential outcomes here?

Sure. Yes, that's a business that has not been strategic for a while, but has remained profitable. So it represents not even 4% of our total sales. We decided as we're making some significant moves with Master Lock and Sentry putting those businesses together and really focusing that segment hard on the security side, that it was the right time to really kind of separate the storage business and really look at the parts of that business that are performing better and that's really kind of the commercial and industrial or higher end consumer side of that business versus maybe some of the more valued parts of the business and really kind of thinking through some different scenarios around our go-forward plan there. So we just kicked that work off over the last 1.5 month. We'll talk more about it in January, but we'll be very clear about our plan going forward. We don't want it to be a distraction so that's why we're going to separate it away from the Security business. And that segment, that Security business with Master Lock and Sentry is going to look nice going forward. You're going to see some good growth in margins and it will be very easy to understand. So we think it's the right time to take all that under review.

Your next question comes from the line of Dennis McGill with Zelman Associates. Dennis McGill - Zelman & Associates, LLC: My first question is just on the Cabinets business, because of the addition to capacity and the actions you guys have taken this year. As you look forward to next year, if the top line looks somewhat similar to this year, let's say 4%, 5% organic growth, does the business lever like you've always thought about it levering? Or do you need more growth in that because you've added capacity?

We feel good about the capacity we added. I think we saw some surges this year in demand around some of the new products we're bringing in, really, new programs we're bringing in. So we think we've paced it at the right pace and so we do believe we'll see that kind of leverage that we've talked about, 25% to 30% leverage. The reality is we're gaining some significant share. On the dealer side, this year so far, we've signed up 300 new dealers. We're only shipping to about 20% of them right now, and we'll start with the remaining in the fourth quarter and into next year. We're having some very strong success at the home centers. And so we're just looking out, saying you don't have to believe the market's going to go up that much. But the success we're having out there, we want to make sure that we can service the customer, that our lead time stay in line and we've appropriately expanded, meaning realigns into existing facilities. You're not opening up new plants, requiring huge slugs of business to get the right kind of leverage. So the incrementals look good. I feel good about it. I think in reality, if we -- as I said earlier, we accelerated some of the work this year and worked through some of that a little faster than we thought. And I think that's great because we'll be ready next year and into '16, '17 as well. So that business is performing well. I like the fact we added some capacity. Dennis McGill - Zelman & Associates, LLC: So I guess, said another way, the lack of market growth or the weakness in the market growth relative to maybe what would have been expected beginning of part of the year really hasn't impacted that? If anything, the share gains that you've had have justified those decisions?

Yes, and the volume kind of came in latter part of the second quarter into the third quarter. We think it will continue to ramp fourth into next year. So it's coming in at the same time the capacity is coming up online. So it's kind of been matched up pretty good. So I think it's come together in the right way. I've always said, we can project in the aggregate but then you got to break it down into the individual lines that are growing and the successes we're having in certain parts of the market and are you matched up on capacity. So we've got different capacity around vanities and stock cabinets versus some semi-custom or high-end custom. And so that could depend on the success we have in the market and we have that matched up. So I think we did a pretty good job of matching that up this year and I feel good about going into next year that we'll be able to handle what's going to come at us. Dennis McGill - Zelman & Associates, LLC: And then, Lee, in the fourth quarter, did you give a number that has -- or guidance that embeds any cost for capacity additions of those programs?

Yes, probably modest. Probably it's a couple of cents in the fourth quarter. Chris mentioned $0.11 to $0.12 for the year. There's probably $0.02 or so in the fourth quarter. But we're also having a little easier comps on some of the -- because we've made some -- starting to make some investments in the fourth quarter of last year. So year-over-year, even though we put $0.02 in EPS impacted, probably you won't really see it in the fourth quarter. I expect fourth quarter results to be better.

Your next question comes from the line of Tim Wojs with Robert Baird. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Just looking at the Plumbing business, you've had 2 quarters there where margins have been above 20%. So just as we look forward, what do you think is more of a sustainable run rate in that business? And maybe how much did some of the international weakness this quarter impact the margins in Q3?

It's going to impact profit. And we also -- there was just some timing on some advertising spend. We rolled some new programs into the fourth quarter. We thought we might spend that in the third quarter, run it up, just roll it into the fourth quarter. So those 2 things elevated it kind of above 20%. We think that's probably kind of a high-teen, 20% is probably about where it should be longer term. And we look obviously at where we're making investments and what the mix is going to be. The other thing that kind of continues to perform well is just overall mix, not just geography, but a higher-end product that's selling through. And as I said earlier in my comments, there's some strength here at the higher-end remodel that we certainly see in cabinets, but we see in faucets, too. Consumers selecting up and that mix continues to go up. Same with entry doors, mix continues to shift up. So all that rolled together contributes, but we're not targeting something kind of in the 22% range going forward. It's a little high. And at some point, we'd rather be investing back into the business and driving for more growth and make that trade off. That's kind of what the trade-off becomes. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Okay. No, that's helpful. And then just in cabinets in Q4, I think the comp on a year-over-year basis from an organic growth perspective is pretty similar. Are there any other one-time items in the year-ago period in Q4 just to be aware of from a growth perspective?

Yes, it -- the fourth quarter comps for cabinets was 34% last year. And even if you back out WoodCrafters, it was 18%. I think the only -- the one thing that is beneficial for this year's fourth quarter is we were starting to make some investments, as I mentioned earlier, in the fourth quarter. So I think you'll see the fourth quarter for cabinets being better operating margin performance than the third quarter. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: And then maybe just in terms of growth?

Yes, I think the growth will probably be similar to the third quarter.

The things that some of the, say, the WoodCrafters load in, some of that's going to reoccur not as -- to not quite the same extent but it's still in the fourth quarter. So we'll see that for the entire second half. So I'd say...

The last quarter of the builder West will come out through the fourth quarter.

Yes. And there's probably another $13 million of that. We'll be about $50 million for the year and then the builder West exit will be over by the end of the fourth quarter, but both of the those things are going to be reoccurring. So again, I think modest growth similar to the third quarter but profits higher.

Your next question comes from the line of Michael Rehaut with JPMorgan. William W. Wong - JP Morgan Chase & Co, Research Division: It's actually Will Wong on for Mike. So my question is with regards to the competitive environment in cabinets especially with regards to the home center channel. One of your public competitors, which you talked about being more aggressive with regards to pricing and promotions, and I just want to get your thoughts around that and how you guys are expecting to respond to that sort of strategy or if you're seeing any sort of elevated levels of promotion at this time.

Yes, it's interesting. It's been almost 2 years since we started to really back down from promotional levels, and we've held them down that level. We've been executing strong just on the basics of the business, new products and programs, quality, reliability, service, support designers and with a lower level of promo than both of our competitors in the home centers, we continue to gain share. I mean it was pronounced in the third quarter and I'd just say, I guess, there's periods of time when we're succeeding and competitors feel like the only thing they got left is to promote and we're ready for that because of our execution. I'd say we'd rather be investing our resources in product, in service, in some capacity and in working with designers and that's a good use of our expense to long-term build the business as opposed to onetime promotions. So we'll continue to hold the line and be tough because it's working and we're winning. So that's about all. Obviously we react to whatever competitors are going to do in the marketplace, but we felt pretty confident because we got some really good teams out there in the market doing great work. William W. Wong - JP Morgan Chase & Co, Research Division: Okay, great. And just with regards to the M&A pipeline, just wondering how you're seeing that stack up relative to July? And also, sort of your confidence level in terms of maybe a bolt-on acquisition in the next 12 or 18 months?

Yes, the M&A market continues to be -- there's opportunities out there. There's things we're working on. I'd note that we did sell Simonton in the quarter and bought Sentry. So the team was kind of busy over the summer and -- but they're continuing to look at other things and I'd say, it's a reasonable market and there's discussions that we're having. And I can't ever project whether those will be fruitful or not, but I would just say if the pace of discussions are out there and there's a number of different things that we're looking at, if any of those come to fruition, that's great. So I'd say there is some activity. It has picked up relative to where we were kind of at the beginning of the year and expect that pace will continue over the next 18 months. So we'll continue to look at both of our core businesses and near adjacencies and we do see some opportunities out there.

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

Lee, if you could clarify, just 2 housekeeping questions before I ask my bigger one. But you talked about the security margin in the fourth quarter. I picked up the word flat. Was that EBIT? Was that a margin? Could you clarify? And what do you expect the full year diluted share count to be?

Yes. What we said was in giving our guidance, we are assuming for just the Tool Storage business, that the fourth quarter profit will be equal to last year because we're beginning that strategic review. So at this point, the easiest thing for guidance is just to say, let's assume it's flat with last year. So that's what we meant. It's not Master Lock, it's not Sentry. It's just the tool storage. And I'd say, for next year, I'd say, shares on a fully diluted basis, right now it looks like 161 million to 162 million shares.

You were referring -- you said next year. You mean 2014?

Well, for '14, I'd say, for the fourth quarter, I'd use 162 million roughly. You don't get the full average. I think we're going to use 166 for the full year of '14. I think next year is a little more like the fourth quarter of 161 million or so.

Good. I wonder -- realizing you're investing in the business for growth, is there a way that you could kind of talk about maybe -- you talked about the builder business cabinets in the West or load-ins or plumbing, is there a way or is the long term kind of 30% incrementals, which you've done quite well delivering over time, I would say, and if you call out kind of these one items, do we still kind of get to that range? Is there something that you're aware of? We're in October as you look into kind of the first half of '15 that would kind of cause a lot of variance off of that roughly 30% incrementals that many people think about for your business operations? I mean is there anything that you can kind of just, on the horizon, highlight so we don't necessarily have margin -- the lower margin incrementals and one might think that you know of currently?

Yes. We will -- remember, our planning assumption is around 25% incremental margins until we get back to the kind of steady-state housing market and that's our planning assumption. As we give guidance at -- on the next call for 2015, we'll generally tell you then what our expectations for the incremental margins are. And it's historically been 25% to 30%. It's 30% if we're not investing as much. It's 25% if we're investing fully. So we'll tell you at the end of the next quarter when we give you our guidance.

Right. And I believe for kitchen cabinets, for this year, you did talk about you expected margins to be up roughly 100 basis points year-over-year for the fiscal year on moderate growth in the fourth quarter, right?

Yes.

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

Could you just clarify so we know the scope of the fourth quarter change in your view, the 4% to 5% end market forecast, what were you assuming previously? And I'm curious what the dealers are telling you now in the sense of earlier, it seems like they were pointing to traffic growth that didn't materialize. So is that sort of -- do you view that as pent-up or does that -- maybe we're in a lower growth backdrop?

Yes, when we gave our guidance at the end of July, we were looking at a U.S. home market for the full year of 6% to 8%. So for this -- when we just gave guidance, it's really now just about the fourth quarter. So we said 4% to 5% in the fourth quarter. I think if you looked at the second half of the year, we're saying it's probably 4% to 6% for the entire second half. So it was 6% to 8% before, now it's kind of this 4%, 4.5% to 6%. That's when we said we're kind of at the low end of our market guidance before.

In terms of the Cabinet business on the dealer side, the Dealer business was up mid-teens for the quarter. There's still pretty good traffic going through the showrooms. Our home centers' special orders is up high single-digits. So that's about what we would've expected. So I don't think it's softer than expected. Yes, some of that is share gains, but I do think there's activity out there. Is it at a kind of rapid pace? No. I mean I think there's still some upside there, but I wasn't disappointed with the activity kind of flowing through the showrooms and setting up a reasonable fall season for us.

Okay. And just to clarify, I think last quarter you discussed in plumbing the margins were helped by promotions that got deferred into the third quarter from second quarter. And it just seems like you probably didn't see those with 22% margins. Can you just clarify that?

Yes. It wasn't promotions. It was ad spending primarily. So as we looked at our business, we basically said it probably makes more sense to run the ads in the fourth quarter. Last time, when we reported the second quarter, we said probably happens in the third. As the guys looked at it a little closer, they said let's just bundle it in the fourth quarter. So it was -- it's just really the timing of some of the annual ad spending is really what drove that. The other thing that drives it candidly is in our business, you have to earn expenses and investments. So when your top line is a little slower, we spend a little less. So 22% is high. I'd say for the fourth quarter, I would think it would be 20% or less. And for the full year, it will be somewhere between 19% and 20%.

Great. And then just finally, I'm curious if you can comment in terms of how much of the share gains you're seeing in cabinets is coming from the Diamond launch versus just other general product innovation. And within the dealers, are you actually gaining shelf space or is it just consumers flocking to your products?

So it's a combination of things. The Diamond launch is specific. That's primarily flowing through the home center channel. The dealer side was not that heavily impacted by that. So the dealer side was just more fundamental demand and I think there it is both us picking up new dealers as well as going deeper into the dealers that we have. So if we had 1 line there expanding that to 2 lines or 3 lines incrementally, and that's just something we've been working on over the last 4 or 5 years. But we saw some pretty good success with it this year in particular in that marketplace. So you set it up either kind of one at a time and you're working through it and as we perform well and deliver on expectations to give us more business. So kind of earned our way through all that.

Your next question comes from the line of Stephen East with the ISI Group.

Chris, if you look at your business with all the moving pieces that are going on and also the slowdown in the new construction, what would you say your split of business is now moving forward with new construction versus R&R?

We're at probably 65, 35 right now, R&R, new construction. I think going into next year, we'll talk a little bit about what our assumptions are but you could see some pickup on new construction that would shift some of that. The only other moving piece in all that was Simonton was a little more R&R. So that will come out but furniture is also growing at a pretty significant pace and that's more tilted toward new construction. So that might tilt us a little bit more toward new construction, but not dramatically more.

Okay. I've got you. And then just 2 other questions. When you look at that mid-teens improvement in the dealer network, how much of that do you think is actually incremental demand flowing through that channel versus you all taking market share?

I think it's both. I mean I think there's some incremental demand. If I look at kind of the strength across product lines and segments from all the way to high end at Omega and Decorá, down through the middle of the market and then down into our stock programs, Aristokraft, you're kind of competing against different folks at each of those and we're picking up share across. So I'd say some of it is we're taking it away from some individual competitors, but some of it's just more widespread strength of us working with the best dealers in the markets that we're in, working hard with those dealers and executing well. So it's -- dealers just -- it's thousands of accounts. So you've got to be doing a lot of things right in a lot of places to see that kind of improvement on a consistent basis. And we've been -- I mean we look at our comp last year overall in the Cabinet business even taking WoodCrafters out, we were up 18% in the third quarter last year. And so it will be up again mid-teens in -- on the dealer side of the market. We're just doing a lot of good things year-over-year and taking advantage of whatever growth there is out there.

Yes. I've got you. And then just last question. You mentioned in your prepared remarks, talking about Sentry Safe, you thought there was some -- you didn't use the word synergy, but I'll use that. I guess as you look at integrating between Master Lock and Sentry Safe, what are the opportunities when we sit here and look at revenues, manufacturing, overlapping sales, marketing forces, that type of thing?

Yes. I mean it's early. We just closed on it in late July, but we see opportunities across all of those on the revenue side. There are product applications that work with locks and security devices on a Master Lock that also work within the safe. So electronics is a big area that we can leverage across both. There's distribution. So there's some cross pollination on distribution that we can leverage between the 2 that should give us some incremental revenue growth. On the cost side, there will be some synergy. We took some expense out of Master Lock as we re-prioritize some things even here in the fourth quarter. And so we see some rationalization there, both back-office as well as kind of the manufacturing side. So we think bringing those 2 together, frankly, it will be easier to understand now moving the storage side out, you'll have a clear picture of both revenue growth there and we'll talk about that next call about kind of our outlook on the business, but we'll be more specific about where those opportunities are. But I'm pretty excited about that business. I think that the 2 of them together are going to yield some pretty good impact.

Your next question comes from the line of Eli Hackel with Goldman Sachs.

Just want to go back to the market adjustment changes. How much of the change was due to R&R versus the new construction? You sound pretty positive on R&R, at least how that's coming through the last couple of months. So I want to understand that better. And just on cabinets, clearly faced some headwinds this quarter and next quarter. Is this -- is cabinet growth or the market growth on the low -- not the market, but your growth in low-single digits, was that close to what you're expecting or is it much about what you're expecting much better than the market growth, which is lower.

Yes. I'd say on the reduction in the market outlook in our guidance, I think we are fairly positive on R&R. I think -- we took it down a little, I'd call it 50 basis points or something from -- in the second half from what we'd originally thought. New construction, we took down much more. And in terms of the cabinet growth in the fourth quarter and in the third quarter, it's relatively close to what we thought once we understood the R&R. Remember, it's the R&R market that drives so much of that Cabinet business for us and it's through that dealer channel. So as we understood more, it felt right. We had some headwinds, as we've talked about, with the inventory builds and WoodCrafters and exiting the builder West that we knew. So we -- those were right on track to what we thought. So it came in pretty much where we thought given that the market is a little softer.

We've reached the allotted time for questions for today's call. I'll now turn it back over to the presenters.

Thank you. This is Brian. I'd like to thank everybody for attending the call, and we certainly look forward to speaking with many of you again very soon. So thank you again.

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