Fortune Brands Innovations, Inc. (FBIN) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d like to turn the call over to Mr. Brian Lantz, Vice President of Investor Relations and Corporate Communications. You may begin your conference call, 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 second quarter of 2015. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and a market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC, such as our Annual Report on 10-K. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Any references to operating profit, earnings per share or cash flow on today’s call will focus on our results on a before charges and gains basis for continuing operations with the exception of cash flow unless otherwise specified. Quarterly results for 2013 and 2014 on a continuing operations basis are posted on our website. 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’ll allow 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. In the second quarter, our teams again delivered profit growth that was on plan in our home products market that improved modestly over the first quarter and prior year as we expected. Importantly, our core businesses are performing well across all segments, and we continue to build momentum in the market. In the second half, our plan anticipates stronger market improvement driven by higher levels of new construction activity. Based on that market assumption, solid execution of our plan through second quarter and the momentum we have inside of our businesses, we’re maintaining our full year outlook for our core business and updating the outlook for the Norcraft acquisition and interest expense from long-term financing. Let me first spend time on our view on the home products market, and then I’ll provide my perspective on our underlying business performance. Starting with our view of the U.S. home products market, in the second quarter the growth rate in the market for our home products improved modestly as we expected it would. We estimate that both repair and remodel and new construction grew approximately 5%. Due primarily to the timing of holiday starts, the market for our products should show stronger growth in the second half as our products go into homes in later stages of construction. Our overall assumption is that the U.S. home products market, which impacts 70% of our sales, grows at a combined 6% to 8% rate for the year. Within that overall assumption, the pace of repair and remodel demand is assumed to grow at around 5% range. New home construction is assumed to grow 9% to 10% over 2014. The new construction activity over the next few months will give us a better sense of where within the full year range the market growth may fall. Now watching closely to see what the positive impact on our sales in the fourth quarter might be and the pace of construction activity remains robust and extends into the normally quieter months of November and December. Now let me provide some perspective on our business performance. For the second quarter, sales increased 13% for the total company and 17% for the U.S. businesses. Importantly, operating income grew 20% and saw performance across all operating segments. Starting with our Cabinet segment, as I discussed on our last earnings call, we’re following a disciplined strategy for cabinets with the goal of being the best cabinet supplier in North America. That the center of this strategy is our dedication to the designer as the key customer and our focus on the most attractive segments in the market. Cart innovation and our high-levels of reliable service to our channel partners drive growth. The largest segment of the cabinet market is the dealer channel, which services more than half of the semi-custom cabinet market. We have the long-term structural competitive advantages that allow us to grow together with our over 5,000 dealer partners, including a regional supply chain for optimal service, multiple brands to avoid general conflict and the industry’s best sales and service teams and a consistent flow of consumer-focused innovation. In May, we acquired Norcraft cabinets, which fit perfectly into our strategy. Norcraft will help us build on our structural competitive advantages with their proven capabilities, great relationships with dealer channel and strong operating management throughout their business. The combination will strengthen our overall product offering, while that our regional market penetration and enhance our [indiscernible] capabilities. With more overlap in our dealer channel customer basis, we see tremendous opportunity for accelerated growth by bringing these businesses together. And with this acquisition over half of our annual cabinet sales should come from this very attractive cabinet market segment. We are also sharply focused on profitable growth in home center in-stock cabinets and vanities. We plan to continue our strong growth in this market segment with our new product introductions and program wins, executed through our dedicated and increasingly efficient supply chain and logistics model. Most importantly, our overall cabinet business is now solidly positioned in the most attractive segments of the market. 75% of our annual cabinet sales should be generated from the dealer channel and home center in-stock cabinets and vanities. These are not only the most profitable segments of the business, but are also where we have our strongest structural competitive advantages. Turning to the second quarter of our cabinets. Our overall cabinet sales were up 18% over the prior year quarter with sales in the U.S. increasing 20%. Sales for dealer and in-stock cabinets and vanities, which account for approximately 75% of our annual sales were up 29%. Specifically, sales in our largest channel dealers grew 32% and 10% excluding the Norcraft acquisition. Our share gains in this key channel are coming from deeper relationships with existing customers as well as new dealerships. Our home center in-stock cabinets and vanity sales increased high teens due largely to the impact of new programs and product upgrades that we began shipping in the second quarter. We expect continued growth in the coming quarters from these new products and programs. The remaining 25% of our cabinets business focuses on the home center semi-custom, builder direct in select markets in our Canadian sales. We are disciplined in our approach to the segments of the cabinet market as we focus on where we can capture profitable growth. Together these segments, we are up slightly in the quarter, but up mid-single digits when adjusted for Canadian FX. Overall, for cabinets, our teams continuing to execute well across multiple facets of a complex category. Our recently expanded capacity is through the transition phase and our plants are increasingly more efficient. We are happy to have added this capacity and transition through its integration ahead of stronger market demand that we expect over the next couple of years. On the frontend of the business, we’re performing particularly well as we gain share on the most attractive segments of the market. The impact of our consistent execution can be seen in our share gains, our stronger mix and our improving margins. To our Pluming segment, sales were up 5% for the quarter. Sales increased 10% in U.S. led by growth in both wholesale and retail. Again, in the second quarter, our mix was solid and margins were strong. Wholesale sales increased 5% with the pace of new construction and retail grew mid-teens driven by new product performance and strong POS. Channel inventories remain lean in wholesale with POS running ahead of shipments. We are encouraged to see consumers trade up and continue to select our innovative new faucet shower products for their new homes and repair and remodel projects, including new pullout and pull down faucets with reflex self-retraction in our notch and [ph] boss lines, our Wynford traditional bath suite and magnetics easy docking, easily re-leasing shower heads. Sales in Canada were down double digits to the prior year, but were nearly flat when you exclude the impact of currency. China sales declined 4% versus the prior year due to slower direct-to-builder activity. However, retail and e-commerce generated mid-single-digit growth, as we continue to focus our marketing efforts at the local city level and increased store network productivity. We remain optimistic about both our long-term business model in China and the growth potential and are encouraged by the R&R activity that we’re beginning to see. Doors reported sales were up 6% for the quarter. Door products saw sales growth driven by gains in both new construction and retail. Mix continued to improve with consumers more frequently, choosing our decorative glass designs and responding to our new styles, like our recently launched Pulse line of modern entry doors. The Therma-Tru brand continues to perform strongly across all channels and we’re benefiting from our expanded distribution. In the Security segment, sales increased 28% from the prior year quarter with U.S. sales up 37%. Sales from the SentrySafe acquisition drove the growth while Master Lock sales increased 3% in U.S. driven by retail and safety. FX and international softness a little bit offset the U.S. growth. We’re excited about the opportunities we see between our Master Lock and Sentry businesses over the next few years and the teams are working hard to integrate the operation. So to sum up, the second quarter was better than the first quarter and we continue to expect the second half to be stronger than the second quarter. Our teams are executing well and delivering profit results on plan. Before I wrap up, I’d like to comment on our efforts to use our cash flow and balance sheet to drive incremental long-term growth. We continue to believe that we can create meaningful incremental shareholder value by using our strong cash flow and balance sheet to make strategic acquisitions, repurchase our shares and increase our dividend. I’m excited that Nick Fink has joined us in our newly created role of senior vice president of global growth and development. He brings a wealth of development experience and is a proven operator. He is joining us at a very good time as the acquisition pipeline is the most robust we’ve seen since before the downturn. Over the next three years, we believe we have the potential to deploy an additional $2 billion to drive incremental growth and shareholder value. So to sum up, 2015 is progressing as we expected. We remain confident in our ability to continue to outperform the home products market, our core businesses are strong and we remain well-positioned to deliver solid growth in 2015, and even more growth beyond 2015 as the housing market continues its recovery. We also continuing to believe that our strong brands, management teams, and capital structure provides flexibility to both focus on profitable organic growth and drive incremental shareholder value with our balance sheet and strong free cash flow. We’ve begun to build significant momentum, and we have the ability to create incremental value at an accelerated pace. Now, I’d like to turn the call over to Lee, who will review our financial performance and provide detail on our updated guidance.

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gains from continuing operations. Let me start with our second quarter results. Sales were $1.17 billion, up 13% from a year ago and as Chris mentioned, sales increased 17% for our U.S. businesses. Consolidated operating income for the quarter was $151 million, up 20% or $25 million compared to the same quarter last year. EPS were $0.59 for the quarter, versus $0.51 for the same quarter last year, and we’re on plan for the second quarter and first half of the year. Let me now provide more color on segment results. Our cabinet sales were $551 million, up $83 million or 18% versus the prior year quarter. Norcraft added $46 million of the sales growth. Dealer sales were $253 million, an increase of 32% from the prior year. In-stock cabinets and vanities sales of $136 million, increased high-teens, reflecting shipments to support new product wins. The remaining sales for our home center, semi-custom, builder direct in Canada, increased 4% excluding the negative impact of $5 million from Canadian currency. Operating income for the cabinet segment increased 23% or $11 million over the prior year quarter, with Norcraft adding $5 million of the increase. Operating margin for the quarter increased to 10.3%. For the full year, we continue to expect to add over 100 basis points to the prior year operating margin of 7.7% and approach it to 9%. Turning to the Plumbing. Sales for the second quarter were $358 million, up $18 million or 5%, led by U.S. retail up mid-teens and U.S wholesale up 5%. Excluding the negative impact of currency, total plumbing sales increased 7%. Canadian sales were flat, excluding the negative impact of $5 million from Canadian currency and China sales were 4% lower. Operating income increased $5 million to $75 million, up 7%. Operating margin for the segment was 21%, up 40 basis points from the prior-year quarter. For the full-year 2015, operating margin should be close to 20%. Door sales were $118 million, up $7 million or 6% from the prior-year quarter. Operating income increased $6 million to $15 million, up 57%. Operating margin for the segment was 12.9%, up 410 basis points from the prior-year quarter. Full-year operating margin for this segment should approach 9%, a significant improvement over 7.1% the prior year. Security sales, which now include SentrySafe, were $139 million in the second quarter, up 28% to the prior year. The impact of foreign currency reduces sales by $3 million in the quarter. Segment operating income increased 41% to $20 million and the operating margin increased to 14.3%. To sum up consolidated second-quarter performance, sales increased 13% and EPS were on plan at $0.59. With our total company operating margin at 12.9%, we are on track to reach our long-term goal of 14% plus operating margin, when the housing market returns to steady state levels. Before turning to the balance sheet, let me comment on the cumulative impact of currency. A strengthening U.S. dollar reduced our total second quarter sales by approximately $14 million with Canada being the primary source, the EPS impact was approximately $0.01. Turning to the balance sheet, in June, we took advantage of the opportunity to secure long-term financing by issuing $900 million in corporate bonds. Our solid business model, consistent cash flow, and strong balance sheet supported both the investment grade ratings received from all three agencies, and a favorable long-term rates realized. The refinancing was leverage neutral and the bonds have traded well since their issuance. Importantly, with the proceeds used to pay off our $975 million revolver, we will have significant financial flexibility to drive incremental growth. Our June 30 balance sheet remains solid with cash of $224 million, debt of $1.39 billion and our net debt-to-EBITDA leverage is 2.1 times. By year-end, we expect leverage to be about 1.5 times. We currently have nothing drawn on our $975 million revolving credit facility. Turning last to the details of our outlook for 2015. Based on our projected 6% to 8%, U.S. home products market growth, the assumptions we make for our other markets, and continued share gains, plus the Norcraft acquisition, we expect full year 2015 sales to increase 13% to 15% compared to 2014. Our updated outlook 2015 EPS, which now includes the impact of the Norcraft acquisition as well incremental interest expense as a result of our bond issuance, calls for EPS in the range of $2.03 to $2.10. Our updated outlook reflects market assumptions similar to our prior outlook, plus $0.04 to $0.05 from Norcraft, net of interest and amortization, less $0.02 from incremental interest expense from refinancing the non-Norcraft debt, less approximately $0.01 from the additional impact of foreign currency. We expect 2015 free cash flow to be around $270 million, after expected CapEx of a $135 million. The annual EPS outlook includes the following assumptions. Interest expense of $32 million, a tax rate of 32.5% and average fully diluted shares of approximately $163 million. In summary, the second quarter EPS was on plan in an improving market. The [indiscernible] core business, the recent investments made to increase capacity, and steps taken to reposition our portfolio for stronger growth, as well they expected continuing market recovery gives us confidence and continued solid growth in the coming years. As demonstrated by the Norcraft acquisition, we remain focused on using our balance sheet and cash flow to drive incremental shareholder value with the new debt structure giving us significant flexibility. I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the second quarter of 2015. We will now begin taking your questions and will continue if time allows. Since there may be a number of you who would like to ask a question, I’ll ask that you limit your initial questions to two and then re-enter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Thank you. [Operator Instructions] And your first question comes from the line of Bob Wetenhall from RBC. Your line is open.

Hey. Good afternoon and congratulations on a very solid quarter. Hey, Chris, I was hoping you could take a moment and just give us a little bit more granularity, what’s giving you confidence in the guidance, you’re moving up the bottom end to the range, what are you seeing from the demand side that’s giving you comfort to be aggressive about your outlook for profitability?

Thanks Bob. Obviously two parts of the market on the R&R side, we just continue to see a good steady cadence. Our new construction, really we look at a lot of factors and looking out throughout the year. At this stage, most of what we’re looking at is showing positive. So, we’re looking at drivers of new family demand, household formation, employment, wages and we look at actual activities. We look at the order books of the builders which turn into permits – so the permit data, purchase financing applications and then you move on to starts and we clearly going to [ph] culminate in closings. If you run that whole sequence out, a lot of what we’re seeing is setting up a strong second half. And I just draw a parallel to some prior periods where we look at this data and saw the similar patterns and kind of the second half of 2009, which set up a strong fourth quarter and first half of 2010 for us. The second half of 2011, which was when we came out as an independent company, all those indicators indicated a strong demand coming at us and 2012, 2013 saw some good demand. And we’re going to looking at the same sort of factors right now. I’d say the only caveat, labor looks pretty tight and obviously there was some wet parts of the country, which probably saw some building activity, but everything else we’re looking at, looks very positive. So, we had a year I’d say a little bit more conservative than the market, we were below consensus in terms of our own internal view, and the market has got to come into us. So all that lines up or what we think is going to be pretty good growth in the second half, and we’re performing well in all of our segments.

It’s – thanks, it’s very helpful. Second question and then I’ll pass it over. Could you just talk for a second about what your thoughts are about the M&A pipeline that you mentioned in your prepared remarks, what are you seeing in terms of segments where you would like to invest in, how do you see evaluations today and kind of what’s the pipeline thinking from a timeframe for Fortune to start deploying its balance sheet? Thanks very much and good luck.

Yeah. I guess, I’d say it’s really picked up over the last four months, five months, a lot of stuff coming at us, inbound. We’ve also had a lot of outbound activity which has resulted in some interesting discussions. I can never speculate on whether any of these result in a successful transaction, but I’d say the pace of activity is stronger than we’ve seen since before the downturn. And looking across our segments, a lot of discussions in plumbing, some discussions in security, some discussions in the exterior part of the home, and some international discussions. So I’d say all of that is going to moving through us right now, and I’d say it’s notable, it’s much stronger than it had been. What’s driving it, I guess, I think there was quite a bit of pent-up transaction out there and as sellers look at the market and that’s been unfolding in a fairly systematic way, and expecting a huge pop that’s going to realize in something extraordinary. So it sets up a pretty good dynamic. I’d say in terms of valuation expectations are coming more inline as well which is buyers and sellers getting a little bit closer which is probably what’s leading to the transactions that are happening out there. So obviously we did Norcraft 11. 5 times EBITDA but strong growth characteristics and I’d say that’s typical, paying that range if you got strong forward growth that you can count on that isn’t juts speculative, but it’s concrete based on the trajectory of the businesses and good margin profiles and I think we’re in an environment where you can probably calculate those has some confidence in and so that’s really what’s driving that.

Your next question comes from the line Tim Wojs from Baird. Your line is open.

Hey, guys. Good afternoon. Nice job.

Thank you.

I guess just focusing just on the cabinet’s business in the back half of the year I guess coming back to look at Q2 and we take our Norcraft, I’m getting kind of $5 million EBIT improvement in the core business and maybe that translates to low to mid-teens incremental and so could you just talk a little bit about what gives you the confidence in the back half of the year just given the pretty substantial EBIT ramp that I guess is implied in guidance?

Yeah. This is Lee. I characterize a couple of pieces here. One is the market that Chris talked about that’s as we expected continuing to improve both in new construction and R&R, on top of that, when you think of sales just even excluding Norcraft and you look at our second half comps last year, our cabinet sales in the second half last year were basically flat and Moen actually was only up less than 4% in the second half. So, we’ve got pretty nice comps to go against in the second half of this year. So we feel good about that on the sales line and then we just got the normal growth on top of that that comes from this market. On the profit side, in terms of cabinets, you remember, we moved quickly in the second half of last year to put capacity into cabinets, getting ahead of the demand that we saw over the next few years and that cost us significant inefficiencies and we actually in the third quarter called out $7 million of inefficiencies and then we called out $12 million in the fourth quarter. So, we’ve had those that will not be there this year. So when you start adding back those inefficiencies, and then you add the incremental sales at kind of a reasonable incremental operating margin, you kind of get to nice growth and that’s – so it’s a combination of all those things. Basically it’s a combination of the market improving as we’d expected, it’s a combination of weaker comps on the sales line and just continuing to improve that profitability, especially in cabinets where we had some one-time items last year.

Okay, great, now and that’s helpful. Thanks Lee. And then, just on the investments that you guys had earmarked for this year, can you just remind us the pace of that in the first quarter versus the back half and if that’s going according to plan?

Yeah, so remember in 2014 just to frame it, we had about $0.12 in investments primarily in cabinets around those capacity ads in the second half. In 2015, we talked about $0.07 to $0.08 of investments, and right now we’re thinking at probably around the $0.07 range. Moen would be a little more than half of that, probably $0.045 of the $0.07 for the year. As we think about the timing by quarter, we think we had about $0.01 in each of the first two quarters, probably have $0.02 in the third quarter and $0.02 to $0.03 in the fourth quarter, as we really ramp up some of that Moen capacity in both the North American assembly and in the China manufacturing. So about $0.07 for the year, $0.02, $0.025 in the first half, $0.045 to $0.05 in the second half and all built into our forecast.

Right. Great. Thank you.

Thanks.

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

Thank guys. Strong results.

Thank you Stephen.

Wanted to – yeah, first question, I guess is related to the comments about the strength in housing, we certainly have seen some figures had been pretty good, coming out of builders in terms of top line or orders I would say, but we’ve also seen absorptions per community there kind of coming in more flattish for a lot of the guys. In addition with the recent little move up in rates, there’s also been some concern about, how that’s going to be affecting demand going forward. And I was just curious is to what degree, some of those more offsetting factors have been incorporated into your outlook. If you could just sort of talk a little bit about, why those factors particularly the lack of absorption growth that the builders would suggest that they’re just gaining share of the market as opposed to the overall market and I would think you would care more about the overall market than the builders gaining share?

Yeah. I guess I’m just looking at the – even near end, looking at second half, you just look at permits and starts, orders are still pretty strong even with the absorption issue, we see a pretty good pipeline across our customer base and it’s not just the data we’re looking at an aggregate, it’s also discussions with the large builders that we support through Moen in large parts as well as Therma-Tru and it kind of lines up to what our expectations are. I’d also say there are expectations are slightly below where consensus is. So as we’re talking about where our growth is for our products coming in with a slight lag to the actual construction. What’s embedded in our guidance, assumes slightly less than consensus new construction numbers. So we’re not really kind of stressing out there, as we’re looking at the balance at this year. As we look into 2016 and 2017, we create a wider range because frankly we’re doing this to plan capacity to plan inventory to do those sorts of things. And so at that point we’ll probably look more like consensus in the 2016, 2017 range, just because that we need a wider range to plan around. So I’d say, there is no great leads of faith in the second half of the year, it’s based on data we’re looking at, discussions we’re having in the market, the activity that we see. So, I’d say it’s just – I guess it’s also the preponderance of green versus yellow versus red in terms of all of the score cards I’m looking at and where the indicators are, I’m seeing a lot more green than I’m yellow or red, so.

Great. Okay. That’s helpful. And I guess the second question, if you could talk about the competitive dynamics or the competitive environment in cabinet as particularly, there’s been some conversation about maybe the pricing environment, promotional environment getting better in cabinets. I was wondering if you provide a little more granularity around what you’re seeing in that segment? Thanks.

Sure. So for us I guess, half of our sales are going into the dealer channel. I guess pretty fragmented markets, not a lot of systematic promotions going on in that segment, you’ll see it from time-to-time, and we might do things in a certain region, but it’s a pretty stable environment. On the home center side, in terms of special order, semi-custom that’s the probably the most intensive side of promotional activities historically. It can cycle up or down in the quarter. Our approach has been to be pretty disciplined in there and we retained that approach so that we’re instead investing in new products, new programs, which we have had success with at the home centers and that’s worked well for us. So for us, in terms of our exposure on the competitive side to promotions, it’s increasingly a smaller and smaller part of our overall business. The in-stock business is not promotional driven, so we’re going to have vanities or in-stock kitchens, that’s not subject to what you hear about us promotional. So it really is just a small portion today as we sit here and we’ll manage it the way we managed it really for the last three years, which is to be disciplined and focus on the things, the designer really appreciates and the consumer values in terms of innovation and just supporting everybody with great service and that seems to work for us and we’re going to stick to that.

Okay. Great. Thanks a lot. I appreciate it.

Thanks.

Your next question comes from the line of Mike Dahl from Credit Suisse. Your line is open.

Hi. Thanks for taking my questions. Just wanted to go back to the last comment quickly, I guess, to be clear, were you seeing increased promotional activity in the semi-custom business, I guess the profitability wasn’t quite as strong as we would have expected in the quarter, but it looks like you’re expecting the back half to still be decent. So was there any promotional activity, was it a mix thing or were there still some of the – some of the lingering expenses related to the investments coming through in the second quarter?

Yeah. It was really more, still some of the lingering investment although we’re through that from an efficiency standpoint certainly in the early part of the quarter that was still moving through. There was some promotional activity, but I’d say given the part of the market that that’s occurring in, not a big factor. So I think second half leverage as we walk through certainly will improve. I think from an overall OI margin 10.3%, we haven’t seen anything over 10% since 2008. So we’re making good progress in terms of kind of building that margin in the second half certainly expect we’re going to continue on that track. I think from an efficiency standpoint, plants are running well. We got through what we invested in last year and as we highlighted last year, lead time you’re increasing capacity inside of a plant, it’s going to be disruptive and that was expected and we work through it and now we’re starting to deliver against that. So you’ll definitely see stronger leverage coming through second half and into next year. We are just too kind of talk about mix a little bit on the cabinet side. Surprisingly the higher end of the market continues to perform really well. So our higher price points are selling strong and I think that just for those out there who have real investment interest in their homes and are doing bigger on our projects, they are spending on more premium price points, which is pretty healthy and all that’s coming through the dealer channel.

Okay. Great. Thanks. And then I guess shifting to plumbing, there was a comment that POS is selling faster than shipments and inventories continue to be lean, are you seeing any signs or having any conversations with the customers around when you could see an inflection point in that?

Yeah, it’s been kind of trickling down, so POS for wholesale is around about 8% for Moen, and sales up 5%. I think what we see at this time of the year, here in July, nobody is going to make big commitments at this point. Typically, what we see is in August, if their expectation is that they’re going to need support, more demand and so we could start to see some inflection in ordering patterns. So, we’ll watch it, sometimes it kicks in August, sometimes in September and then that will support the balance of the year. So, I view it as a pretty healthy in that and that door is out there, and the channels are leaner as demand starts to build, we respond pretty quickly and we’ll just ship into the demand as it comes. So services, I guess, our customers are relying upon that and we have a good service to build and support that and we’ve been delivering on that in the past. So, that’s pretty rationale for them to do is to manage it and start it as possible as they can.

Okay. Thanks and good luck.

Thanks.

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

Afternoon gentlemen.

Hi.

My one question is going to be about on cabinets. Obviously Norcraft adds different element to your business and they were kind of higher end, if you could talk to the difference on perhaps how much price/mix is part of your organic growth rate and/ or Norcraft’s, is that that was the contributing element for them? And second, if you could just comment on WoodCrafters, you obviously talked about the – that part of the market being less promotional. So, is that business on track with the EBIT margins that you did expected when you acquired it? Thank you.

No, on the Norcraft side, the Norcraft business mix actually looked a lot like our dealer business. So there are Mid-Cont, which is got a good kind of mid price point, looks a lot like ALK in the bottom end of our semi-custom business. And then there are higher price point brand, looks like some of our price point [ph] brand, so pretty good overlay. And they have that pricing power in the market. I’m in a good margin structure. So I would say, it will fit nicely, into the dealer side of the market, but it really kind of looks very similar to what we have before. The big opportunities we talked about last time is there’s very little overlap in terms of dealer customer base. So only about 25% overlap, which means we can take [above it that we’re selling into our dealer network and move it into those dealer customers required with Norcraft. And then take their products, especially similar frameless products and move into our dealer base. So that work is started, just a terrific company, great management, great associates, only good surprise is to this point and you like to say that on our acquisition, is only good surprise to sell. So far it’s been a just a terrific experience in – we’re pretty optimistic about that. On what factors, yeah. That the – if you look at, that kind of the in stock camp business which we were involved, before WoodCrafters and then the WoodCrafters business and then other vanity business that we were in as well. We roll that all together, significant part of our business now 27% plus and it’s really dependent upon the operating efficiency of the business. So we have dedicated plans, of the Mexico as well as in the U.S. and so operating those wing plant structures to support that business, focus on logistics, so we can support our customers there. And kind of good efficient logistics, business system just remembering innovation, such a pretty tight business and again not a lot of promotion, their share price point. We’ve got good low cost base of manufacturing and support, and logistics to that business. So it’s a really good business model, we got a lot of sustainable competitive advantage inside of that business model and that’s what makes it attractive there.

And I think part of the question was has Woodcraft performed as we thought it would, yes it has. In fact, we’ve expanded operations down to Mexico, part of the investment we made last year was to expand out big facility in Mexico and we’re making components now for some of our other North American operations out of those plants and ramping up so, it’s not just kind of the woodcraft or product but rather the component that feeds a big part of our other cabinet business, which supplements some component suppliers out of China, which we still have but certainly like the balance between China and Mexico just running on China for that.

Thank you.

Thanks.

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

Hi, this is actually Ryan Hunter filling in for Mike. First question, in terms of cabinets and Norcraft, has there been any early feedback from new potential cabinet dealers that you could pick up to your expanded product portfolio, so how quickly is the rollout from bringing Norcraft product into your existing channel and vice-versa?

Yeah. Feedbacks like that I think people said wow two best cabinet companies just got together. So I think that’s always good to hear from our customers is that they like us both and they’re happy we are working together and as a team are in the process now of kind of rolling through, first targeting where those cross-sell opportunities will be and then working with our customers. So our expectation is that you’re really going to see the impact of that in 2016 and 2017, even in 2018, but certainly you’ll see some impact in 2016, I’d say we can’t do some right now [indiscernible] . We really didn’t expect that would flow through. The cost side in terms of synergies, purchasing synergies just overall the efficiency side of that, we’ll see some of that this year and then into next year. So, everything is on track. As I said before, only good news is going to coming out of where we see the opportunities and we’re excited about it a couple of months into it.

Great. And then one question on plumbing. Industrial companies have broadly seen a slowdown in China recently, are you guys seeing any impact on your China plumbing business, and what’s happening with the profitability at stores in China, and the pace of new store openings?

So, China, yeah, the direct to builder business has slowed and really we’re starting to seeing that late last year. On the other side, our stores business, which is we’ve got about 1,000 stores there, and that business combined with our e-commerce business, which is actually growing is still positive. So that’s kind of the core of the business. The direct to builder sometimes is in favor, out of favor and then that market overall can fluctuate obviously as construction does. The dynamic is, a lot of these units are built without plumbing finished in them. So as people go to occupy previously built unit that could have been built a year or two years or five years or more years ago, they are needing to come to these home product malls into our stores to shop for their faucet, their showers, their sinks, their vanities and so that’s what’s really driving that part of the business. So I’d say we’re encouraged that’s holding up okay. From a profitability standpoint, not a big hit. As we’ve said in the past, profitability in China is less than where is North America because we’ve been in an investment mode. So to the extent that sales are a bit slower, it doesn’t really impact the profitability and obviously strong margins once again at Moen of 21% of operating margins obviously not overly impacted by anything going on China. So...

Great. Thanks.

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

Thanks. Good afternoon everyone. First question, I just wanted to circle back to your comments around acquisitions and certainly helpful in terms of the some of the directional comments, but it seems like if I go back two years or three years, it seems like your thoughts around acquisitions at that time was more talking in terms of let’s say moderately sized type of targets and that’s by and large, the types of the companies that you’ve acquired in terms of WoodCrafters, SentrySafe, Norcraft in terms of the sales. By your tone and comments given, you’re talking around the increased level of more robust pipeline and kind of even talking about exterior home and international, and we’d also think that perhaps the size of the deals could also increase and related to that when you talk about exterior home, is that something beyond doors or more sticking around just the doors, in another words, will there be kind of another leg to the stool that you would add from a product portfolio standpoint?

Yeah. So I’d say, we have consistently looked at in the size of acquisitions from small tuck-in $20 million, $30 million in sales up to much larger things that we could make the numbers work sort of locked away. I think, as you reflect correctly here, we’ve kind of been successful in the middle. I’d say, we’re still looking at that wide range and so I think, you could see us do some small things and medium things and there maybe some big out there. I’d say, we’re just pretty disciplined about it and so the accretion needs to work, the value accretion for shareholders needs to work and that’s – we don’t waiver from that. So we stepped away from simply in the past and just haven’t met that test, but obviously it doesn’t mean we wouldn’t pay a full price, and I think we did for Norcraft because of certainty of where we saw the growth and where we saw the margins. In terms of adding another leg in the assisted category, yeah, we’ve looked at that from time-to-time and continue to look at that in terms of exterior, has to really involve the consumer. So, we don’t want to move into anything that is commodity like just because we’re not – that’s not our business, it doesn’t mean those aren’t good business, that’s just not where we’re strong, as we’re strong as where there is heavy consumer involvement and where innovation really gets paid for and that’s where we’ve been successful with the businesses that we’ve got so. So, any of those categories that would have those characteristics we’re looking at and it doesn’t mean something might happen, but yeah we look at those from time-to-time and also interior of the house we look at some categories where has those characteristics, but heavy consumer involvement is probably the biggest thing that we focus on. So, yeah, I’d just say that the activity in terms of number of things we’re looking at is picked up, and that’s what’s really remarkable is it kind of got busy the first quarter and it’s kind of not let up, and I can never predict how many things will get done, because you never know where expectations are, but I just say that more things you look at typically the higher the probability of getting something done.

I appreciate that. Thanks, Chris. And just a couple of technical questions, modeling related, if you could just kind of review with us – if you continue to think maybe roughly speaking what corporate expense, how we should think about that for the full year. And also as you talk about the $32 million for full year interest, I guess that implies a quarterly run rate in the back half of around 11% to 11.5%, and if that something that we should extrapolate into 2016?

Yeah. This is Lee. So I think for what I would do on a quarterly basis for corporate, I think the run rate is around $16 million, I would use that from the last two quarters. And on interest, we had a partial interest, a partial quarter in the second quarter of interest. So I’d say each of the second quarters of the second half I’d have overall interest expense around $11 million or so a quarter, getting to $32 million in total.

Great. Perfect. Thanks, guys.

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

Well, hi, thank you. Just had a question on the in-stock and vanity in cabinet channel saw that occurred in the second quarter. Just wondering if that is completely around this course sort of is any of that bleeding into the third quarter? And then also, if you look at the second half of the year, you’ve called out – and you have been calling up for a couple of quarters now, incremental expenses particularly in plumbing. Are there any other onetime items whether it’s from a channel full perspective or from an additional cost perspective that we should be aware of?

Yeah. I’ll take the first which is on kind of the vanity and in-stock loading to support new products that we’ve lunched as well as the new programs, that was really pretty heavy second quarter, and it’ll continue into third quarter, we’ll then get into a replenishment cycle. The programs are doing pretty well, so you could see some good growth coming out. So I think you’ll see some support on that third quarter as well as kind of continuing in next year as those are successful. And then I think we – once we protect the second half.

Yeah and in terms of the second half any – the question is any incremental one-time expenses, I really don’t see any. We talked in a previous question about the investments being $0.07 EPS for the year and 4.5% or 5% of that in the second half. Other than that, nothing that’s we’re talking about and calling anyone’s attention to.

Okay. Thanks. And then just a follow up question on the door segment. Just wondering if you can maybe provide a little bit more context around margins and the expectation for margin expansion moving forward?

Yeah. So, doors, you have to remember doors are 13% to 14% operating margin business when we hit steady state. So they were 7.1% last year, full year. We think, they’re heading to 9% or 9% plus even in 2015 for operating margin. So they’re getting on that progression to get back to that 13% to 14% when we get to steady state. So that’s positive, that’s what we planned. If you look specifically at the quarter, it’s just a combination of things that allow them to go up the 400 plus basis points. It’s – they’re getting nice sales growth which gives them leverage on their fixed costs, that’s a big piece of it, they’re getting very nice mix – that’s a piece of it. They’re getting some price in the industry, so that’s a piece of it. All those things kind of add together to kind of keep them getting on that trail to getting back to that 13% to 14% operating margin and 9% plus this year.

Great. Thank you.

Your next question comes from the line of Jim Barrett from CL King & Associates. Your line is open.

Good afternoon everyone.

Hi.

Chris, could you talk a bit, you mentioned acquisitions in pluming, security, exterior products, is it possible to rank those categories in terms of the number of strategic competitive bidders you likely to have in those categories or is that too difficult to gauge?

Yeah. I mean it’s very situational by any target that we’re looking at or anything if there is obviously an auction process around a particular company then you are going to see both strategics and private equities involved in kind of a more robust process, if it’s something that we might have been working on because of just being in these industries and then having good discussions with folks over period of time then it’s a less competitive environment. So it’s hard to break it out between the different segments because it’s just really more situational of any individual company if it’s going to be a company held by maybe a private equity owner, it might be more than auction process, if it’s a situation where we’ve been just talking about what we could do strategically with a certain privately held company or otherwise then that probably limits the number of folks involved. The final caveat is it’s a competitive world out there and it is something like Norcraft where it’s a public transaction typically in those cases there’s what we had which is a go shop precession and then they go scout the world to see they can do better and they got competitive and have good strategic rationale for what you’re doing and then hopefully you’re successful on those things. So, I’d say they’re just a lot of different things that are particular to the given situation and I just come back to the bigger the pipeline the better opportunity we got because of some many individual factors.

Okay and then finally international geographies of any that are particular interest and specifically could you comment on how interested you are in China expanding Moen plumbing?

Actually, there are many opportunities in China in plumbing and beyond, but I think it would have to be in the category [indiscernible] we’ve got in terms of distribution I think, being in the bathroom and adjacent categories make sense, being in the kitchen makes sense. Going into other parts of the home in China, feel lot tougher just because we don’t have natural distribution relationships or even from a supplier standpoint, just kind of learning maybe a [ph] topic of learning, so I think there’s other opportunities looking at things over there and so it’s probably more than adjacencies to where we are today.

Thank you very much. That was helpful.

Your next question comes from the line of Nicholas Coppola from Thompson Research. Your line is open.

Good afternoon.

Hello.

In the Cabinet segment, are you seeing any change in the competitive environment particularly and sales and new construction?

No, I’d say it’s probably the same as it’s been for the last four quarters. I think we and a couple of others have really deemphasized some parts of the country where it was tough to have profitable business. So, some of the southwestern markets from a builder direct standpoint were just tough to make profitable, and so I think that was going on with us and with some of our competitors as well, and it’s been deemphasized. That’s probably the biggest changing dynamic, otherwise I think we’ve picked our spots in the market by geography and by relationship, where we’ve got good contractor builder relationships and we focused on those and we are doing well there. And I think others are really going after other parts of the market. So we take a pretty good disciplined approach on that builder direct side of the business. Then there is the other part of business, we are serving builders through our dealer network and yeah, I don’t know that competitive environment there has changed that much.

Okay, that makes sense. And then just my last question here, again on in cabinet, what did you see throughout Q2 just in terms of raw material pricing?

Yeah. So, second quarter is similar to first quarter, overall inflation fairly flat, commodity inflation very flat. In the first half and the second quarter, we did see some of the wood products still having some inflation, particleboard being one and certain other smaller segments, we saw some inflation in a lower single-digits. We saw some categories like brass and copper, where we saw slight reductions, but it all nets out to the quarter being basically flat for us versus last year.

That’s my questions, guys.

Thank you.

Your next question comes from the line of Dennis McGill from Zelman & Associates. Your line is open.

Hi, thank you. Chris, just first question, I guess, on the revenue side, holding guidance for the full year, can you just talk to how the second quarter played out as you expected? Was there the same amount of momentum through the quarter that you saw at the beginning that quarter or is there more of this come in the second half of the year than previously?

No, I think it was pretty consistent with what we thought at the start of the second quarter was a little weaker and we saw some building momentum throughout the quarter. So as we come into the third quarter, we feel pretty good about, where we’re seeing order patterns today [ph] branded it’s three weeks into the quarter. But certainly it looks like it would have looked in June, so you see some pretty good momentum tracking. So, yeah, I’ll go back to earlier comment I made, there’s no big leaps of faith in the building blocks of how we look at the second half of the year. It’s a reasonable outlook internally around where we see repair and remodel, where we see new construction and then just laying over where we’ve got share positions and then new programs coming in and the mix that we’re seeing, you kind of build all that together and we’re on track for where we think the second half will be.

Okay. Thank you. And then second question as it relates to acquisitions and leverage, I think, you’ve talked about being comfortable in that to 2% to 2.5% range. Given the pipeline that you’ve talked about earlier, if there were multiple deals that came along that fit your criteria or even one big one, would you be willing to stretch that to above the high end or some range above the high end in the short term?

Yeah. We would. I think given that we still think, we’re in the – you can call it earlier, you can call it middle early stages of recovery and we’ll have a review on that, but there’s a plenty ahead of us and I think, given the efficiencies we’re seeing in our business and the cash flow that we throw off, I think we’d be comfortable taking more incremental leverage on certainly over the next 12 months, 18 months and then having a period to pay down, so that you’re in a healthy position going forward. So I think – again for the right opportunity that makes a lot sense for us, I think we’d stretch to do that.

All right. Thanks, guys.

And the last question comes from the line of Omarr Aleem from Cleveland. Your line is open.

Thank you. Two questions. First from a cabinet category growth perspective, dealers have been in pretty good shape, the home centers have shown slower growth through this recovery, one of the categories I have spend maybe a little bit underperforming the other building product categories out there. How do you guys think about the recovery in cabinets in this cycle versus previous ones? Do you think any differently about the pace of it and where consumers are looking to spend their discretionary dollars this time around versus prior?

Yeah. I think what’s different is the higher end of the market lean back faster and has really remained pretty healthy and that perhaps is supporting the dealer side of the market and that part of the market doesn’t rely to the large extent on credit who are big remodel projects. Part of the markets that has been slower to recover and is impacting both dealers and home centers is really the younger households who maybe are moving into an existing home and want to do their remodel project, but credit is only now starting to become available in terms of home equity lines or extending credit beyond the purchase price. So that traditionally you would have seen more kind of right after existing housing sale, there would be more remodel activity for that younger segment and that’s the part that has been slower to recover. If you look at it from a glasses half full standpoint, that’s still ahead of us. There is still demand to do those remodel projects for those homes [indiscernible] they don’t particularly like the kitchen, but they’re just going to cut it for a little while until home values rise, they can have better access to credit, wages increase. So that’s the part I think that’s lagged and as those pieces come together and I think you’d see, the whole remodel side of cabinet market could exceed beyond 5%, 6%, which we’ve seen in prior cycles. Toward the end of the cycle, there’s a greater demand on that side.

Thank you. And secondly, you had mentioned a little bit, some weather as a piece of a quarter, I think right at the beginning of the quarter, do you see any impact within your business from weather, that may be pushed out demand a little bit into the second half at all in any of the piece of your business?

To the extent, construction activity, people who were trying to build houses, couldn’t be active, there were a number of days or weeks during the quarter, it probably slowed down some of that activity that will pick up second half. Our products are exterior product, so to extent was a remodel project or our products were growing into the new construction project, they’re typically not going to be impacted by weather as a constraint. So any comment I made earlier just about the pace of construction activity, to extent there was weather in certain part of the country, it would have slowed that down.

So, April being a little bit slower, and the quarter ending a little bit stronger, you wouldn’t say weather was a piece of that?

It could have been, I think depending on part of the country, so May was pretty heavy for some parts of the country, and even into early June but I don’t know, it felt more like just kind of as we exited and came into April, the momentum build through the quarter kind of April to May to June.

Thank you, guys.

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

Thank you. This is Brian. I would like to thank everyone for attending the call today, and look forward to speaking with all of you again very soon. Thank you.