Fortune Brands Innovations, Inc. (FBIN) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Joana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Third 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.

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 third 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 some time to address questions that you may have. I will now turn the call over to Chris.

Thank you, Brian. And thanks to everyone for joining us today. As we expected the rate of growth for the home products market accelerated in the third quarter and our teams again delivered sales and profit growth that was right on plan. Importantly, our core businesses are performing well across segments and we are building momentum for 2016. Our outlook anticipates expect market conditions in the fourth quarter remain similar to the third quarter driven by like levels of new construction activity and consistent growth in repair and remodel market. Based on that market assumption, solid execution of our plans for the third quarter and the momentum we have inside of our businesses, we are confirming our full year outlook. Let me first spend some time on our view of the US home products market and then I will provide my perspective on our underlying business performance. Starting our view of US home products market, the third quarter the growth rate in the market for our home products improved at an increasing rate as we expected they would. We estimate that repair and remodel activity grew at around 5% and new construction grew low double digit. We continue to see positive signs and look for similar market conditions in the fourth quarter and are building our momentum heading into 2016. Repair and remodel activity remain steady growing around 5%. We are encouraged by the richer mix we see coming through new model projects at all pricing tiers, some recent consumer research we completed this summer, reinforces that home owners are focused on creating unique and on trend style and when they engage in remodel project, they are looking to create authentic looks and more open spaces. This is translating into an appetite for stronger styling, product differentiation and project complicity. We see the impact of these trends and the improving mix across our categories. New construction activity and demand continues to build in an accelerated pace in the second half of 2015. We also note that the pace of start to completion continues to be governed by constrain labor supply which seems to be lengthening the normal lag we see between housing starts and when our products go into new homes. We are watching closely to see how the more robust starts and new construction activity we are seeing in the second half of 2015 positively impacts our sales outlook heading into the first half of 2016. So our overall assumption is that the U.S. home products market which impacts 70% of our sales grows at a combined 6% to 7% rate for the full year 2015. Within that overall assumption the pace of repair and remodel demand is assumed to grow at around 5% rate. New home construction is assumed to grow around 10% over 2014. Now let me provide some perspective on our business performance. For the third quarter, sales increased 22% for the U.S. businesses. Importantly, operating margin increased to 110 basis points to 13.5% with solid performance across all operating segments. Starting with our Cabinet segment, as I discussed many times we are following a disciplined strategy for Cabinet focused on profitable growth. At the center of this strategy is our dedication to the designer as the key customer and our focus on the most attractive segments of the market. A consistent pace of product innovation and our high levels of reliable service to channel partners drive growth. Importantly, our Cabinet business is now solidly positioned in the most attractive segments in the market. Nearly 75% of our annual Cabinet sales should be generated from the dealer channel and home seller in start cabinet and vanities. These are not only the most consistent and profitable segments of the business, but are also where we have our strongest structural competitive advantages. Turning to the third quarter for Cabinet. Our overall Cabinet sales were up 33% over the prior year quarter with sales in the U.S. increasing 38%, up 14% excluding the Norcraft acquisition. U.S. sales per dealer and in stock cabinets and vanities which account for approximately 75% of our annual sales increased 52%, up 21% excluding Norcraft acquisition. Specifically sales in our largest channel, dealers grew 60% and 11% excluding 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 strong double digit due largely to the impact of new programs and product upgrades that continue to ship in the third quarter. We now have fully launched these new programs and expect continued growth in the coming quarters from strong sell-through and share gains. Remaining 25% of our Cabinet's business focused on 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 partner with customers to capture profitable growth. Together these segments, we are up slightly in the quarter, but up mid-single digits when adjusted for Canadian currency. Overall, for cabinets, our teams continuing to execute well across multiple facets of a complex category. Our plants with recently expanded capacity are increasingly more efficient. And we are pleased we have added this capacity when we did to handle the growth that is now being realized. On the front end of the business, we’re performing particularly well as we build 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. For our Plumbing segment, sales were up 5% for the quarter. Sales increased 8% in U.S. led by growth in both wholesale and retail. Again, in the third quarter, our mix was solid and margins were strong. Wholesale sales increased mid single digit as channel inventories remain lean. Retail also grew mid single digits driven by new product performances and strong POS. 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 Essie and Benton lines and our Magnetix easy docking, easy releasing shower heads. And we will continue our pace of innovation in the coming quarters as we introduce new products which include additional pull down and pull up faucets with reflex our Kendall, Glenshire and Kinzel lines, and additional styles with our motion sense hands-free technology. Sales in Canada were down low double digits to the prior year, but were up high single digit in local currency. China sales increased mid single digit versus the prior year due to increase direct-to-builder activity in retail. 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 8% 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 premium upgrades like our recently launched Classic-Craft doors in the American style and Rustic collection that capitalize on growing trends towards taller doors and wider openings. 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 2% from the prior year quarter with U.S. sales up 6%. Sales from the SentrySafe acquisition and a 5% increase in Master Lock U.S. retail sales drove the growth. Currency and international softness offset the U.S. growth. We’re excited about the opportunities we see in our Master Lock and Sentry businesses over the next few years and the teams are working hard to complete the operation integration by the middle of 2016. So to recap the quarter, our performance improved in the US home products market while growth accelerated as we expected due to new construction activity. Our teams are executing well in delivering profit result on plan. Before I wrap up, I’d like to comment on our efforts 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. The integration of the recent Norcraft acquisition remains right on track. The integration is very straightforward, our new employees are terrific and the opportunities are as good as we thought they would be. Looking forward our acquisition pipeline remains robust. We are assessing a number of opportunities both inbound and outbound and now we cannot guarantee success in any one situation. I am encouraged with the number things we are looking at, and the potential we have to create incremental shareholder value over time. Our track record and capabilities in M&A are strong. Over the past two and half years, we've spent $1.1 billion on four acquisitions and repositioned ourselves for strong growth by selling Simonton Windows and tool storage business. Over the next three years, we believe we have the potential to deploy more than $2 billion to drive incremental growth and shareholder value. So to sum up, 2015 continues to progress as we expected. We remain confident in our ability to continue to outperform the home products market, our core businesses are strong and we are building momentum as we head into 2016. 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. Now, I’d like to turn the call over to Lee, who will review our financial performance and provide detail on our 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 third quarter results which were on plan. Sales were $1.24 billion, up 17% from a year ago. As Chris mentioned, sales increased 22% for our U.S. businesses. Consolidated operating income for the quarter was $168 million, up 28% or $36 million compared to the same quarter last year. EPS were $0.64 for the quarter, versus $0.52 the same quarter last year, increasing 23% and were on plan. Now let me now provide more color on segment results. Our Cabinet sales were $603 million, up $151 million or 33% versus the prior year quarter. Norcraft added $105 million of the sales growth. Dealer sales were $299 million, and increased 60% from the prior year and 11% excluding Norcraft. In-stock cabinets and vanities sales of $139 million, increased grown double digit, reflecting load in shipments to support new product wins. The remaining sales for home center, semi-custom, builder direct in Canada increased 5% excluding the negative impact of approximately $7 million from Canadian currency. Operating income for the Cabinet segment increased 75% or $27 million over the prior year quarter, with Norcraft adding $15 million of the increase. Operating margin for the quarter increased 250 basis points to 10.6%. As expected, operating leverage excluding Norcraft was 33%, as our recently added capacity is becoming more efficient. For the full year, we continue to expect an operating margin of around 9% compared to 7.7% in 2014. Turning to Plumbing. Sales for the third quarter were $364 million, up $19 million or 5%, led by U.S. retail, U.S wholesale and China, all of mid single digit. Excluding the $9 million negative impact of currency, total plumbing sales increased 8%. Canadian sales increased 7% and China sales increased 8%. Operating income increased $6 million to $82 million, up 7%. Operating margin for the segment was 22.4%, up 40 basis points from the prior-year quarter. For the full-year 2015, operating margin should be around 20%. Door sales were $124 million, up $9 million or 8% from the prior-year quarter. Operating income increased $5 million to $17 million, up 39%. Operating margin for the segment was 13.6%, up 290 basis points from the prior-year quarter. Full-year operating margin for this segment should approach 9.5%, a significant improvement over 7.1% the prior year. Security sales were $147 million in the third quarter, up 2% to the prior year and up 6% in US. The impact of foreign currency reduces sales by $4 million in the quarter. Segment operating income increased to $21 million and the segment operating margin was 14.2% with Master Lock operating margin at 16.3%. To sum up consolidated third quarter performance, sales increased 17% and EPS were on plan at $0.64. Our total company operating margin was 13.5% with an incremental margin of 35% excluding acquisitions. We are on track to reach our long-term goal approaching 15% operating margin when the housing market returns to steady state levels. Before turning to the balance sheet, let me comment on the cumulative impact of currency. The strengthening U.S. dollar reduced our total third quarter sales by approximately $21 million with Canada being the primary source, the EPS impact was approximately $0.02. Turning to the balance sheet, Our September 30 balance sheet remain solid with cash of $351 million, debt of $1.3 billion and our net debt-to-EBITDA leverage is 1.7x. By year-end, we expect leverage to be about 1.5x. We currently have nothing drawn on our $975 million revolving credit facility. From July 1 until today, we have repurchased around $50 million of our shares. In the quarter, we also closed on sale of our tool storage business. Through working capital reductions, tax benefits and the sales proceeds, we generate approximately $70 million of cash. Turning last to the details of our outlook for 2015. Based on our projected 6% to 7%, 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 14% to 15% compared to 2014. We narrowed the outlook for 2015 EPS but maintain the midpoint of the range resulting in EPS of $2.05 to $2.07. We expect 2015 free cash flow to be around $300 million after CapEx of $135 million. The annual EPS outlook includes the following assumptions. Interest expense of $32 million, a tax rate of 32.7%, average fully diluted shares of approximately $163 million. In summary, the third quarter EPS were on plan with market growth accelerating as expected. The solid performance of core business, the recent investments made to increase capacity, and steps taken to reposition our portfolio for stronger growth, as well as the expected continuing market recovery gives us confidence in continued solid growth in the coming years. As demonstrated by the Norcraft acquisition and recent share repurchases, we remain focused on using our balance sheet and cash flow to drive incremental shareholder value with our new debt structure providing significant flexibility. I will now pass the call back to Brian.

Thanks, Lee. That concludes our prepared remarks on the third quarter of 2015. We will now begin taking a limited number of questions since the maybe a number of you would like to ask question, I ask that you limit your initial questions two and then reenter the queue to ask additional questions. I'd now turn the call back over to the operator to begin the Q&A answer session. Operator?

[Operator Instructions] Your first question comes from Bob Wetenhall with RBC. Your line is open.

Hey, good afternoon. Hey, Chris. Just wanted to ask, you guys came in exactly kind of very consistent with your guidance. I think there have been a lot of questions about the guidance and its achievability. Just for my question I was hoping could you give us a little bit color on the market? And really what are you seeing on the demand side? You guys obviously outpace the market but how strong is demand on underlying basis, what kind of volume growth are you expecting across the portfolio?

Yes, Bob, it really came of, we expected it would so as we said here in the second quarter looking at all the figure that we compare and then talk to our channels and looked like we are setting up for a stronger second half. Our number pretty consistent around 5% but a good mix coming through. I think you saw that coming through on our margins. New construction moving it was low teen new construction and if you roll together probably 7% and 7.5% overall between R&R and new construction and that compares to our growth if you take Norcraft out in the US market about 10% so we outpace that growth, really I think it's the result of the activities, the demand that we see coming in spring to the summer orders translating into starts and then the construction activity picking up. And what we have observed is there is a little longer lag between starts and when demand is coming for our products in the home becoming towards the end of the home construction with cabinets, entry doors and plumbing and so we are seeing probably a month to two months additional lag in the system, it is not hurting our current results because we are going living off what was happened in the first half. But we think it's probably setting up a reasonably strong start to 2016, we are just trying to gauge how much of that's going to fall in 2016 so we took bit of our second half in this year and we are getting encouraged about how we are going to start off next year.

Got it. That's really helpful. I wanted to focus on profitability in the Cabinet segment. What's driving that? And how sustainable are these levels? And I was also hoping you could just give us a little color, the 35% incremental really robust and maybe Lee could just talk about the sustainability of that. Thanks a lot and good luck.

Yes, I'll talk a little bit then Lee can dive in here but it really is the result of some efficiencies coming through our manufacturing operations. We added capacity last year and when we added that we said as you bring capacity into our complex category like Cabinet, you create inefficiencies and we work through that and you could see results for that now and that is sustainable but kind of moving through the flow of production within those facilities. That's first part of it. The second part of it is mix. We continue to see a good mix coming through channels specially on the Cabinet on the dealer side of cabinet that mix continues to be strong, new products are rolling through there so those things are combining to create what we think is a pathway to mid-teens, which is what we talked about over the next couple of years. We are participating in strongest parts of the cabinet category and that's reflective of our organic business as well as the Norcraft acquisition. But if you look at our business today, 75% of the revenues are coming from the dealer channel plus the in-stock vanities and in-stock kitchen category at the home centers. So those are consistent categories where we got real structure competitive advantages so we are just leveraging that, bringing volume in across it. We are having a lot of success in the category. And I think that's translating into the volumes that you are seeing and we are executing really well on the plan so those things together create a lot of momentum. That team had a good quarter but they are having a good year and they are going to roll into 2016 really strong. Lee, maybe you can touch on just the margin and the leverage.

Yes, Bob. As we talked about since this spin, we moved from the beginning of the recovery to steady state which we define as roughly I mean as housing starts. We said we plan our business with incremental margins on that sales growth of about 25% to 30% would be the normal range. We are actually plan around 25%. So we've stayed on that path since the recovery started. We are still on that path. That gives us back to that steady state operating margin of 14% to 15%. So we've been on the path, we are still on the path, we think it is very sustainable when you look at the company wide in the third quarter we were incrementally run 35% for the total company. And for the year I think we will be at the high end of that 25% to 30% range. So we feel very good about that. It has been very consistent and that's how we plan and manage business.

And your next question comes from Josh Chan with Baird. Your line is open.

Hi, good afternoon. I am wondering with the uptick in new construction whether you expect to see kind of this restocking in the plumbing wholesale channel any time in next couple of quarters.

I think we will. We haven't seen it yet. They kind of ordering to POS, so they are not destocking they are kind of running at where market is. And so we think they will probably continue that as long as until they see stronger income and I think it will be in the next quarter or two. And then we will be there to support them, we are in close contact with them and I know that with our supply chain we need just little bit of heads up to bringing in and get it assembled to shipped out for them but haven't happened yet, that's upside to us, probably the first half of 2016.

Okay, great. And my other question is about raw materials. Just basically focusing on plumbing and maybe little bit on cabinet too. How much of the margin improvement this quarter it could be attributed to maybe lower raw materials and how do you expect that variance versus price to play out over next year or so? Thanks.

Yes. So our commodity inflation in the third quarter, so at the first quarter where we actually saw a net benefit versus the prior year. So in the third quarter commodity helped us somewhere over $3 million and our operating income from those commodities helped to offset some of the FX. We see similar benefit; it is built into our guidance for the full year so it is included for the fourth quarter. We haven't done our planning yet for the 2016 plan. So we will do that and when we get that done we make those assumptions, we will outline that for you when we give guidance for next year but again about $3 million this quarter should be similar to next quarter.

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

Yes, thanks very much. Good quarter, guys. I wanted to ask you about your comment about the pipeline for M&A. Obviously, this has been something that we all have been watching very closely and your commentary suggest that the activity is really heating up. I was wondering if you could give us a sense for -- there maybe certain hotspots sort of particularly on the outbound, the searches that you are kind of initiating. Is there any kind of common thread to that maybe certain regions or I know product categories are probably be something. If you could just sort of talk elaborate a little bit more on what are you seeing in terms of your pipeline?

Sure. Thanks for question. I think it is really the byproduct of multiyear effort to focus on categories that are attractive. We've talked about expanding in plumbing and we've got a number of different efforts underway there, expanding both categories as well as geography. Security is another area that obviously we look at SentrySafe acquisition but we are looking at some other things there. Cabinet even, I don’t expect anything soon in cabinet but multiyear efforts just across the categories that we are in. And then we look at new categories that should be for similar profile that we are in today which is not commodity building products or rather consumer home products where consumers are involved, where innovation play a key role in growth in the category where we can focus on our insights around consumer trends, consumer shopping pattern so those kind of categories are things we are looking at as well. I would just say there is just receptivity out there. I think we are into this recovery now at a sufficient pace. There is enough time that passed since the downturn that folks are open and I think it kind of sets up what could be some productive discussion. My overall metric is just level of activity because I can never predict whether any one situation is going to come to fruition. And I don't push too hard to make any one situation come to fruition. We are pretty disciplined when we look at, you can look at the things we have done already, we've been disciplined at things we have done already. What we apply that to it and I just do want us to be involved in a lot of different discussions and then for involvement right set of discussion we were disciplined, the things happen after back half so team is busy, I am busy, it's good, I think it's productive and I see good opportunities ahead of us. And we've obviously got the balance sheet capacity to able to some of these. So I think that's about all I can say right now other than the activity is strong.

Okay. That's helpful. I guess just a follow up on that. If you could give us a sense for maybe certain things you've looked that you decided you definitely are not interested in. Are there certain kinds of characteristics of things in your pipeline or things that are out there they are not in your pipeline that you are not interested in?

Yes. I'd say things are more commodities in nature. There are some really good companies out there, private and public that is very good at managing in commodity environment which means they really are just focused on lowest cost manufacturing. And level of innovation isn't that high but they are really good at operationally driving the cost structure down. I'd say that's different from us and that we are very good operators but we also invest in innovation and we expect to get paid for that investment in innovation and we have over time that's allowed us to grow little faster than our categories. So I just say those are different mindsets and so I wouldn't have us go into commodity category where you say, wow, I can only differentiate myself and my cost structure, I can't really differentiate the product itself. There is not only strong brand there where consumers or the pro is going to differentiate based on brand. So I think there are a number of things that fall on our side and there are number of things that's fall on the other side. And I think when I say we are focused and we know we are good at, that helps us wean through those things so-

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

Hi, thanks for taking my questions. First question I had was around the guidance and it looks like the top end of the home products growth came down a little bit to the low end of your overall sales guide came up little so organically or some combination of organic plus Norcraft increased to this. So I guess first part would be how much of that is organic versus better trends in Norcraft? And then to the extent this is organic. Where are you seeing the incremental share gains to get you to those levels?

Yes. So we move from 13% to 15% range to 14% to 15%. We kept Norcraft exactly where it was, we actually tight a little bit Norcraft, and we had originally said $250 million to $270 million this year. We've kind tightened that to $260 million to $270 million. So really the increase was really organically spread across much of our business units.

Okay, great, thanks. And then the second question specifically on cabinet. I think you mentioned there was some load in helping the in-stock business, so I was just wondering if you can quantify that and how we should be thinking about it? Was it just in 3Q? Is there some of that's going to occur in 4Q and any magnitude there? Thanks.

Sure. Maybe just back up on little bit when we've invested in some very strong innovation in vanities and in-stock kitchen cabinet for home centers and we were successful in getting some new placements, talked a bit about that last quarter and that we were engaged in setting the aisle with this new product. That was a tremendous amount of activity late second quarter into third quarter, that business set and rolling through, we will now be talking to POS so we will see the incremental benefit around POS as our product sale through, it's doing well in the storage. So that set up, plus there are share gains in those categories really reflecting of our competitive advantages in a way we manufacture as long as the innovation will bring into those categories. Some pretty new stuff, we are all through there in and we are fortunate that customer appreciate that and took advantage, so that really a lot of activity but we've got that and it should roll through at POS.

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

Hi, thank you. Chris, I was hoping to -- I guess as you look at performance so far this year, at least on our numbers, it seems like there's pretty clear share gains across the building products business as a whole. I know that's always been a hallmark for you. I was hoping you could maybe just talk about now where you're seeing the most share gains. Maybe put a little bit more behind -- you've touched on cabinets, but whether that's channel or product categories across the portfolio and then where you're most optimistic as you look into 2016 in the same regard?

Yes. I think if I look at the three businesses I start with cabinet I think we are clearly seeing growth above the market in the dealer channel. And so that part of the market very strong organic growth. And I think that's just stepped up relationship selling more product into exiting relationships continuing to take share and bringing in new dealership. So that's pretty consistent but it is picking up I think Norcraft products will continue to help us on that front. This in-stock kitchen and vanities part, we are going faster than the market there. So those are really that 75% of the cabinet business where we are seeing the most momentum in share gain. On the Moen side, within plumbing we are seeing good growth in retail. We have put in some new product placements and those are selling through quite well. Wholesale continues to grow slightly above where market is so that's good especially in the mix side; we are selling richer mix through on the wholesale and the plumbing side in general. So that picks some and then our entry towards, we expanding some distribution on last couple of years especially out west and there is quite a bit of activity out there and as we brought in new products, new glass style, again our mix is improving so our new accounts improving out there so all sets up strong and then comes to back kind of as the market grows, we should continue that momentum coming through the system. So I am really happy with where the business sit here, I think we've done a lot specially over the last year and half and we are seeing that flow through second half of 2015 and really into 2016.

And with respect to cabinet and dealer channel, now you have Norcraft for five moths or so, are you seeing anything along the lines of either cannibalization or opportunity on the cross sale side and the dealer side?

Yes. Its multiyear effort on the sale side so when we talk about the acquisition we said on the cross side we get off to real quick we have and that looks good. And on the sale side, it is a multiyear effort to bring some of their products into our existing dealers and bring some of our products into that dealership network. That has started but it is really a ramp up in 2016 and 2017. So tend to a lot of work together so no cannibalization I think just the early stuff is going to be dealers who frankly want the products that's out there and like the product and they take them into the market right now around frameless, and now we've got multiple lines, multiple brand, lot of innovation going on there across both the Norcraft portfolio and our organic portfolio. So we are taking kind of proper low hanging fruit first where there is real demand and we are doing lot planning to figure out where we are going to drive the hard in 2016 and so it is all going according to plan I did probably going better just because collaboration is really terrific, great culture, great people on both sides and coming together well, so that's kind of easy to say but you are just going to see working well together, we get pretty excited about that everything we thought would have just going to happen in early returns of it.

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

Good afternoon, gentlemen. Cabinet, very good at 10% organic and not to take away from the success you had there. But I was looking back at Norcraft sales last year and if I take I think 23% acquisition growth that you had. This quarter it kind of implied a 4% growth rate for Norcraft, Lee and if you could help me with those numbers, that's how I calculated it. Is there some reason that if that's accurate there was slower growth there, was there -- was there something going on there because you obviously grew nicely overall.

Yes, I know. The calculation is different because we changed the number of weeks in months from what they had so there is a math problem. So they actually grew the same as the cabinet business organically so they were good. But it's just when we put them into our system, we use a different number of months in a quarter so in any given number weeks in a months so it's just the math difference but they grew well.

Okay, just wanted to clarify that. Plumbing, commodity costs are down. Can you talk about beyond the incremental volume leverage? What we are seeing in terms of lower input costs; give us some context for that if you would and how that can be tailwind above and beyond the volume?

Yes. So commodity cost and commodity inflation for us, first half of the year was generally flat and in places like cabinets the kind of wood we use we actually saw little inflation in the first half. There is other place we've seen inflation like glass, so third quarter was the first quarter where we actually saw a benefit net versus prior year and that was between $3 million and $4 million. We think that -- and we have planned in our guidance as we gave guidance last quarter. We assumed there is going to be similar benefits in the fourth quarter. So we build that in to our guidance. As we think about 2016, we will go through those calculations, we will see where the market is for commodities at that point and we will build that into our guidance for 2016, we will give you that, to you that in early February when we give our full year guidance but it has been positive this quarter.

And does this focus -- I mean obviously if you are facing inflation on cabinet, I assume you are facing a lot of cost input deflation in plumbing given the commodity inputs there the metals. Could you -- when you look forward I mean it seem like it is disproportionately benefiting plumbing, would that be an accurate? And how is that impacting perhaps in the overall market? Thank you very much.

Yes. So when you look at plumbing operating margin 19.5% last year, we think it will be around 20% this year. It is getting marginal benefit, it is a few million dollars in the quarter from Moen, it is a few million dollars for the second half of Moen, and Moen's operating margins are so strong that's not driven by commodity benefit. It is a small piece of it. It is just they are positioning the market in their competitive advantages that are driving those kind of operating margin so --

And the mix is frankly a bigger part of that. We started improving that mix over the last two years. And we have seen an increasing pace of mix improvement which is consumer trading up within the category to higher price points which had better margin so that's specially prevalent in wholesale where we are trading up and we can see it just in every sales price per unit.

Your next question comes from Mike Wood with Macquarie Security Group. Your line is open.

Hi, thanks for take my question. You talked about richer mix in plumbing. Are you giving any higher ASP in cabinets from your new products and is the cabinets industry seeing any like to like price increases given how the demand has been strengthening?

Yes. We are. On the mix side seeing good mix coming through on the dealer side, semi-custom to the higher end custom, I talked a little bit about frameless, and how strong that's been selling through, the new products that we bring in are selling strong so mix overall is continue to improve in cabinets especially in the dealer side of the business. And to certain extent on special order and home services as well. So it is all positive. In terms of pricing, there is actually a reasonably healthy pricing environment and has been for last couple of years on the cabinet side and expect that could likely continue.

Thanks. And then just an administrative question, I may have missed this, the one time charges from the capacity expansion and plumbing in the quarter, can you remind me what that was and if you're expecting the same thing for fourth quarter?

Yes. So just to recap the year, we basically said we have about $0.06 to $0.07 of EPS cost this year for investments in that. We said Moen would be about $0.04 of the $0.06 to $0.07. We got a couple of cents in the first half; we get a couple of cents in the second half from Moen. I think we had a penny or so in the third quarter, so that's built into our guidance. It has been consistent all year and really hasn't changed. So it is built-in.

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

Thank you very much. We would like to thank everyone for attending our quarterly call today. And look forward to speaking with all of you again very soon.

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