Fortune Brands Home & Security, Inc.
Q3 2012 Earnings Call Transcript

Published: 24 Oct 2012

[Operator:]

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 Home & Security Third Quarter 2012 Earnings Conference Call. (Operator Instructions) At this time, I would like to turn the call over to Mr. Brian Lantz, Vice President, Investor Relations.

[Brian Lantz:]

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security quarterly investor conference call and webcast. We're pleased to be here today to provide an update on our progress during the third quarter of 2012. Hopefully, everyone has had a chance to review the news release we issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and on market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our 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. Also, any references to operating profit, earnings per share or cash flow on today's call will focus on results on a before charges and gains basis as described in today's news release unless otherwise specified. With me on the call today are Chris Klein, our Chief Executive Officer; and Lee Wyatt, our Chief Financial Officer. Following our prepared remarks, we've allowed ample time to address any questions that you may have. I'll now turn the call over to Chris.

[Christopher Klein:]

Thank you, Brian, and thanks to everyone for joining us today. We had a very good third quarter which marks our first anniversary as an independent public company. Our quarter performance was driven by strong growth in sales and profits and was brought across our businesses. We continue to drive profitable growth in a market which continues to recover at an uneven pace. Let me first spent some time on the third quarter highlights and then I will discuss our current thoughts on the full year. First with regards to the market. The overall home products market and the market for our products again grew mid-single digits in the quarter in line with our assumptions. New construction was strong again in both single family and multifamily starts and the pace of repair and remodel spending increased in the quarter as we expected, with continued consumer caution for big ticket purchases like cabinets. Importantly, we continue to feel confident about our performance in this market and the execution of our strategies as we enter the final quarter of 2012. Turning to our performance in the quarter. Sales were up 7% and profits were up 34% from a year ago with all segments performing well. Cabinet sales grew 6% ahead of our estimates for cabinet market growth which we think improved to roughly 3% in the third quarter. Importantly, our profits from cabinets were up over 60% in the quarter. Moen continued its strong performance with sales growth of 12% consistent with the prior quarter. Windows and doors sales were up 7% and as expected the segment generated strong profit gains. Security and storage grew 2% and within the segment, security sales were up 6%. Now let me give you some top line highlights by segment. Sales for our Cabinet business were up around 6% for the quarter and met our expectations. We continue to perform well as the market leader in cabinets. The pace of new construction was the key driver as we again saw strength wit dealers and builders in our construction lines. In the dealer channel, where we are the clear market leader, we continue to grow by leveraging our portfolio brands and our strong products and service reputation. We also achieved solid growth in home centers by focusing on more sustainable long-term growth opportunity such as our recently introduced value price point door style for the Thomasville line at The Home Depot and the expansion of our vanities line at Lowe's. We believe innovation and our designer services continue to be competitive advantages in this channel. Importantly, we grew our Cabinet profits over 60% in the quarter. This performance reflects our ability to successfully target growth in channels, markets and product segments that are not as promotionally driven, while continuing to enhance our supply chain efficiencies to improve profitability. We continue to believe that our market leadership combined with our world class operating platform and service levels, provides us strategic flexibility to drive profitable growth today and into the future as the cabinet market recovers. Plumbing sales were up 12% in the third quarter moving against our gains in both the U.S. and in our international businesses, particularly China. Gains were strongest in our U.S. wholesale business where we saw continued volume increases driven largely by the pace of new construction. Our efforts over the past few years to build on a leading market share with the top builders and wholesalers, expand into multifamily segment, and upgrade many of our showroom displays have yielded strong results all year and continued to drive sales and profits in the third quarter. Moen also continues to see strength from our steady pace of consumer driven innovations. Spot-resistant finishes are rolling out to more and more styles. Our successful Reflex technology for pull-down faucets will soon be launched in pull-out versions. And Moen's latest innovation, MotionSense, a unique hands-free electronic kitchen faucet, has recently begun shipping into both retail and wholesale accounts. Internationally, sales in China where there are now nearly 700 Moen branded stores, were again up strong double-digits over the prior year driven by new construction growth and our continued expansion into tier three and tier four markets. The team in China continues to expand our brand with a wider range of price points and with products suitable to the Chinese market. Window and door sales were up 7% for the quarter. Door products which are heavily driven by new construction, saw double-digit sales gains. We also benefitted from the recently launched relationship with a major window and door company and growth in our wholesale distribution. Windows sales were up modestly driven by new products and growth in targeted channels as the overall window market remained sluggish. Importantly, for our three housing related segments, we saw total sales increase of 8% for the third quarter. In security and storage, our sales were up 2% in the quarter. Security again saw broad gains, up mid-single digits driven by three factors. Continued solid growth in global safety solutions, innovative new products and broader placement in retailers especially for the back-to-school season, and strong commercial lock sales. The Master Lock brand is strong and our innovation continues to hit the mark with products like our new electronic combination lock Dial Speed. So to sum up the third quarter, the market continues to be led by significantly stronger new construction and repair and remodel market that while growing, is not yet as strong as a new construction market. I remain very pleased with our performance across the portfolio for both the quarter and year-to-date. With a successful full year as an independent company now behind us, we continue to execute on our strategies, innovate and invest to capture profitable growth opportunities and leverage our market leading positions. Now let me turn briefly to our current top line outlook for the remainder of 2012, starting with our assumptions for our market. Lee will then take you through our specific full year outlook in a few moments. From a market perspective we can certainly see signs of improvement relative to a year ago and a firming of the overall market as we enter the fourth quarter. Our consumer related challenges in the housing market remain. New construction was strong in the third quarter as demand for new homes outstripped supply in many markets. Repair and remodel growth continued their modest rate as we expected, showed less strength than new construction. Concerns about the general health of the economy and the pace of the recovery are still weighing on consumers’ confidence and their willingness to embrace larger ticket purchases. Our updated full year plans remain built on an assumption that the total market for our home products grows at a mid-single rate. Within that assumption, we continue to expect repair and remodel growth rate of our own 3% to 4% and a new construction growth rate of over 20%. Given our exposure to the slower growth cabinet market, our plans assume that the market for our products goes a bit slower than the overall market but still within the mid-single digit range. So consistent with my comments last quarter based on that market assumption, we continue to expect our 2012 full year sales to increase at a high single-digit pace over 2011, although at the lower end of that range. Our market share gains of the past few years are now beginning to deliver growth and we believe these share gains position us to continue to outperform the market for our products as it strengthens. Importantly, with our only quarter remaining we are narrowing and raising our 2012 EPS guidance range to $0.86 to $0.88 for the full year. Now I would like to briefly update you on a couple of exciting recent organizational enhancements. Although a recovery appears to be underway and our performance is strong, we remain keenly focused on staying a chapter ahead of the competition to capture profitable growth, both during and beyond the recovery. Therefore, as part of our talent management processes we have recently made key strategic refinements to our organization which we believe position us even stronger for our next chapter. First we believe the windows and door businesses are now positioned to leverage common growth opportunities managed together. So the windows and door segment will now be on under the leadership of one operating President, Mark Savan, who will lead the team as they pursue some common growth opportunities. Mark has been with Fortune Brands for over ten years and he was with our (inaudible) and window business through the downturn and previously led our accessories business at Moen. The second move we have made was to match one of our most seasoned executives with our largest business in the early stages of recovery. David Randich will now head our industry leading cabinet business. Our cabinet business has performed very well through the early stages of the recovery but with Dave’s experience we believe we can now maximize the potential of all of our share gains through this next phase of industry’s recovery. Dave, most recently led our Therma-Tru door business through the downturn and has nearly 30 years of experience in managing within the building and residential products industry, including 24 years at Armstrong. Both of these moves reflect our culture of continuous improvement built on our commitment to have the best management team in the industry and to better position these businesses to optimize opportunities both now and beyond recovery. So to sum up. Driven mostly by new construction, the overall market remains firm. We have had strong year-to-date results kept off by another strong quarter and we are confident in our ability to deliver on our full year guidance. We continue to execute our strategies and remain focused on outperforming the market. We strive to create value by capturing market share, expanding into adjacent markets and improving our operating platforms. We believe our strong brands, management teams and capital structure to provide key flexibilities to focus on profitable growth and should therefore position us to create value at any phase of recovery as we prepare to enter 2013. Now I would like to turn the call over to Lee who will review our financial performance and provide more details on our outlook.

[Lee Wyatt:]

Thank, Chris. As Brian mentioned, the majority of my comments will focus on income before charges and gains which best reflects ongoing business performance. Let me start with our third quarter results. Sales were $909 million, up 7% from a year ago. Consolidated operating income for the quarter was $73 million, up $19 million or 34% compared to the same quarter last year. EPS were $0.29 for the third quarter, up $0.09 or 45% versus the same quarter last year. Let me provide a little more color on segment results. Our cabinet sales were $330 million, up $19 million or 6% over the prior year quarter. Operating income for the segment was $13 million versus $8 million in the prior year, up 64% as we benefitted from leverage on higher sales volume to our continually improving supply chain. Year-to-date operating income for the segment was $28 million, pacing well ahead of the prior year. Our strategy is working as planned, and as I mentioned on our last quarterly call, we believe that we will continue to exceed the overall cabinet market growth in the second half by introducing new products and expanding existing programs. Plumbing sales for the third quarter were $278 million, up $29 million or 12% versus the prior year quarter. Operating income was $48 million, up $10 million or 25%. Both the U.S. whole sale and China businesses experienced strong double-digit sales growth that drove the overall growth in both segment sales and operating profits. Windows and doors sales were $158 million, up $10 million or 7% from the prior year quarter. Within the segment, the door business experienced double-digit growth while the windows business only increased slightly. Operating income for this segment was $6 million, $4 million more than last year as we achieved strong operating leverage on the incremental volume. We continue to expect our windows and doors segment to be profitable for the full year and meaningfully ahead of 2011. Third quarter’s storage and security sales were $143 million, up $3 million or 2% versus the prior year quarter. Operating income was $21 million, up $1 million or 4%. Within the segment, security sales increased $6 million or 6% on the strength of U.S. retail and commercial padlocks and global safety, while storage sales declined due to changes in the retail promotional cadence. During the quarter we recognized net charges of $8 million or $0.05, primarily related to the previously announced closing of the cabinet plant in Virginia. Turning to the balance sheet. Our September 30 balance sheet ended with cash of $216 million. Debt was reduced to $345 million and net debt to EBITDA leverage is now less than 1 at around 0.4 times. We have nothing drawn on our $650 million revolving credit facility and are entering the last quarter of the year where we traditionally generate strong free cash flow. Free cash flow was $167 million year-to-date, including approximately $80 million from option proceeds. Let me now provide my thoughts and further detail on our outlook for 2012. As we have said, our approach to planning and providing the annual outlook is three elements, which are market assumption, continued share gains, and business investments. First, with the continuing firming we saw through the third quarter, our market assumption remains the same as we continue to project the market for our markets to lag the overall market in this early stage of a recovery, due to our mix of larger ticket items such as cabinets. Second, our plan still includes continued share gains in addition to overall market growth. And third, while we are pleased with our 2012 performance, we expect significant growth in the out years and want to invest ahead of the opportunity. Therefore, we continue to expect to complete approximately $20 million of incremental investments during 2012. So turning to our outlook details. As Chris mentioned, for the full year our planning assumption remains the same, calling for the market for our products to be up mid-single digits. Based on this market assumption and continued share gains, we continue to expect our full year 2012 sales to increase high-single digits compared to 2011, with all segments increasing. However, as stated before, the sales increase will likely be at the low end of the range. Based on our market and sales growth assumption and with only one quarter remaining in the year, we are raising and tightening the range of our 2012 EPS before charges and gains. Our expectations for EPS are now in the range of $0.86 to $0.88. The new mid-point of $0.87 is higher than previous guidance and represents an increase of 45% over 2011 EPS of $0.60. We expect 2012 free cash flow to exceed $275 million after CapEx of between $70 million and $80 million, pension contributions of $20 million and over $80 million in proceeds from option exercises. In summary, our business model continues to perform well and we are pleased with our third quarter and year-to-date results. We have raised the midpoint of our EPS outlook for the year, and while the pace and steadiness of market growth is not certain, year-to-date performance further indicates that we should be well positioned to continue to outperform the market at any pace of recovery by leveraging our foundation of leading brands, efficient supply chains, proven management team and strong capital structure. I will now turn the call back to Brian.

[Brian Lantz:]

Thanks, Lee. That concludes our prepared remarks for the third quarter. We will now began taking your questions and we will continue as time allows. So as there may be a number of you who would like to ask a question I will ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Mike?

[Operator:]

(Operator Instructions) Gentlemen, your first question is from the line of Bod Wetenhall from RBC. Your line is open.

[Robert Wetenhall:]

Fantastic quarter. You are obviously doing a great job of outpacing the category like you have been talking about and thanks as well for all the detail. I just wanted to ask Lee, in your press release, you really have no leverage. You are 0.4 times. You are on track to generate $270 million of free cash flow. What's the plan given very very low leverage, investment grade quality balance sheet and all the free cash flow? What's the purpose, what you are going to do with the extra money?

[Lee Wyatt:]

Yet let me, I will answer and then I will turn it to Chris and let him talk about our long-term prospects. But we are generating a lot of cash right now. Still only $200 million on the balance sheet at the end of the third quarter. But we are going to be patient. We do have an authorization for a share repurchase out there. It’s a three-year authorization for $150 million. But I would tell you that we are starting to see the pace on some M&A type calls come in a little bit faster. So there might be some signs that over the next period of time we will see a little bit more of that. So it causes us to be patient and not rush. We have one goal and that is to drive shareholder value to how we use this cash and we are going to be patient and thoughtful to do that. And Chris, I can turn it over to you for....

[Christopher Klein:]

Yeah, I have always said, Bob, in the past is we are going to look for some combination of acquisitions, share purchase and eventually instituting a dividend. So that remains our long-term plan and the timing will really be dictated by the pace of recovery and the pace of cash accumulation. But you are right, we are starting to accumulate and we will just be prudent on how we deploy it.

[Robert Wetenhall:]

You guys have done a very aggressive job of disciplined cost management in terms of SG&A and I was just curious do you think there is further opportunities to drive SG&A lower as a percentage of sales. And if there is, how much is still available to get from that?

[Lee Wyatt:]

Yeah, Bob. On the SG&A side, we have been very aggressive on taking costs out here and we continue to have continuous improvement programs that continue to take some out. But I think the big leverage on SG&A going forward will be on the top line. I think as we drive sales and as we drive better margins out of that, we will see the leverage on the SG&A. I don’t think you will see broad SG&A reductions as such, although you always get some from us. But the bigger issue on SG&A is just leveraging the top line growth as this market recovers and as we continue to take share.

[Operator:]

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

[Daniel Oppenheim:]

You are talking about, in cabinets, introducing in Thomasville line a value area. And I was just wondering as you about sort of the remodeling activity picking up where it’s going to be essentially a bit less value focused as you think of ahead of to, call it 2013 or ’14, how is the product offering that you are thinking about for that in terms of margin rich areas to help margins of business there?

[Christopher Klein:]

Dan, as we play across 80% of the price points in the market. All the way from custom at the top end down to stock-in stock at the bottom. So we are really set up to take whatever the consumer demand is and convert it. And we have a very strong semi-custom offering in the dealer network as well as at all three home centers. We have done a little bit of this drop down with value brands and I think that is appropriate, for certain part of the population it will always be appropriate. For certain consumer out there looking for a good quality yet at a very reasonable price. We would rather do that and invest in those kinds of products than simply continue to promote and discount, and basically give our product away. We would rather match the quality of the product to the price point and deliver it such. That’s our preference there. But you are right, over time I think you will see consumers starting to spend a little bit more. They can really get good value all the way up the continuum. So as they move up into a higher quality product, there is good value in that as well, and then normally up in the custom. So I just like the way we are positioned by channel and by price segment to really take the market however it comes back.

[Operator:]

Your next question comes from the line of Peter Lisnic from Robert W. Baird. Your line is open.

[Peter Lisnic:]

Chris, just on that last question. Can you give us a sense as to whether or not you are seeing a consumer at all, from a willingness perspective, go up the price point chain and/or whether or not dollar projects are increasing at all?

[Christopher Klein:]

I haven’t seen anything notable yet. I think there is still -- it’s not getting worse. So that’s good. Correct. So (inaudible) the average price won't go down. So I think the overall therma market is reasonably stable. We are still the least aggressive among the three in the promotional cadence. And we have seen consumers respond to the kind of quality and new products that we are putting in there without heavy promotion. So that’s a good sign too. But we haven’t seen them aggressively start to move up that continuum. I think we are still waiting for a little bit more confidence in the market overall.

[Peter Lisnic:]

Got it. Okay. And then you have done a very nice job obviously with share gains here in ’12. As you look to 2013, how do those share gains kind of layer in when you think about 2013 growth? And what sorts of key growth opportunities from a share perspective might you have in 2013?

[Christopher Klein:]

You know I think it really depends on how the market comes back. What you are seeing right now is a byproduct of three to five years of activity across all of our product lines to gain share positions. We certainly see enough volume flowing through them to convert it to revenue and profits. So you are starting to see that and you will continue to see that. So on the new construction side, we will continue to see faster growth for us than for our competitors because we have got good, strong share position. So as you see that new construction flowing through faucets, entry doors and cabinetry, you are going to see some of that drive through. And then across all other channels similarly. So it will really depend, one, on when the volume comes back, we could bring a new products and drive-in for new accounts every day. But I think the bigger leverage comes off of the volume coming into the share positions that we have got established.

[Operator:]

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

[Dennis McGill:]

First question on the cabinets market. I think the incremental margins for this year may have been closer to 20% and I think historically or as you look out over the cycle, you would hope or tie that to be something closer to 30. So can you maybe just talk through the puts and takes so far this year on what's limited that and how you guys think about that margin recovery in that business.

[Lee Wyatt:]

Yeah. The expectation that we have over time on leverage -- and cabinets is part of the overall mix of 25% to 30% incremental margin. And I think what's happening is we see the sales growth, the volume growth, on the base we are going to see nice leverage where -- so we will get a volume component but there is also a plant efficiency component that you are seeing this year. We have over the past several years as we have restructured that footprint, we become much more efficient and every day we work on efficiencies. We closed the plants in the third quarter just because we thought we could do that because the efficiencies were growing to a point where we wouldn’t hurt long-term capacity but we could become more efficient. I think you are seeing some of those benefits. So I think as sales grow we are at that point right now, we are about $1.3 billion in revenue run rate basis. And that’s kind of that point where you start -- you are really getting nice leverage over that footprint as it grows and as the market recovers. So I think that’s what you are seeing now.

[Dennis McGill:]

Okay. And then separately with the guidance, correct me if I am wrong, but it sounded like you kind of bumped down sales guidance a little bit but bumped up the EPS range. So can you just talk to the puts and takes there on what changed relative to last quarter?

[Lee Wyatt:]

You know year-to-date, two-three quarters a row about 7.8%. We think 7% revenue guidance is a good number. You could be a 7% for the year and still have fourth quarter in that 5% to 7% range. So we think that’s reasonable given that all in all it still remains uncertain. We think as we have always told you at least for the last two quarters that our growth would be 3% to 4% annually. But still choppy. And so we are a little cautious there. I think the real story is on the EPS side because two things are driving this ability to take EPS growth up on sales in roughly the same range. And that’s an improving mix of our business and our supply chain efficiencies across our business. Let met talk about each of those. So the mix is improving. That’s a reflection of our disciplined approach and our leadership across all of our business segments. We are growing and going after those businesses that have the high margin and those are the ones that you will see growing. You are seeing Moen grow 12%, Master Lock 6%, doors double-digits. You are seeing the cabinet growth at 6% being in the higher margin pieces because we are not chasing the promotional stuff. The things you are not seeing grow as much right now would be that high promotion cabinet things because we are just not going to chase that. Windows, lower margins. We are not going to chase incrementally low margin stuff there. Still have strong business in windows but just not going to change that incremental low margin sale. And storage, which is low margin, is actually down a little bit in the third quarter. So I think that mix is reflecting our discipline and our leadership in being able to grow those parts of the business that are going to drive the most profit and that’s a big part of our strategy going forward in this recovery. The other thing is the supply chain efficiency and you are seeing that across all of our businesses. It’s the things we have done in the past and that we continue to do from a continuous improvement and some modest restructuring now that allows us to drive that efficiency. So the volumes grow from a recovery and we continue to take share. You are going to see nice leverage. That’s why we think 25% to 30% over the long-term is a nice leverage ratio. And by the way in the third quarter we levered it 31% even with some modest investments. So we feel good about where we are.

[Dennis McGill:]

Can I just push on the 5% to 7% top line? What would be the driver either by segment or end channel for the deceleration? That would seem like you would have a tailwind and acceleration in new construction. And you are describing a remodeling market that’s holding pretty steady.

[Christopher Klein:]

But I think if you look at the third quarter, you would see home business was up 8% and then our security and storage was up about 2%. And there is two pieces in that, the security and storage. Master Lock grew nicely but the storage piece was a little lower. Same thing with windows, windows only grew slightly in the business. So I think if you think the fourth quarter looked something like the third quarter in terms of sales, you could see that 7% number could be a little lower than that just because security and storage stays down about 2% and windows, given the R&R market being choppy right now. You could see being on 6% or 5% or something. But our business is strong, our business remains on strong. We feel good about that. We are just -- with the lumpiness of the R&R, we are just a little cautious on the top line.

[Operator:]

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

[Kenneth Zener:]

Given the rising demand, are you guys -- this is a price question -- what was kind of pricing in the quarter and are you able to realize pricing increases in any categories? And if so, is it more tied to demand or innovation?

[Lee Wyatt:]

Our pricing comes in two flavors. The first is to the extent commodities, there is commodity inflation, we are able to price and it’s pretty much dollar for dollar, if you look at the last three or five year period. Now pricing always lags the inflation increase but it’s a little sticky on the backend. So we tend to be able to price through that. And that’s what we saw coming into this year. I think as we have told you the last two quarters and that pricing has stopped. The other way we get pricing is just through all the innovation that we do. And that’s just embedded in that. So we feel good about our brand strength, our channel strength. That what allows us to price the way we do. But we also want to be thoughtful about it. But we feel good about our ability to get prices.

[Kenneth Zener:]

Okay. I guess my follow-ups kind of -- it’s related to that. But the pricing, to the extent you are talking about dollar for dollar. Given what commodity pricing has done to -- are you kind of set to have actually somewhat of a tailwind next year? And then second, if you could expand on comments, perhaps with the channel wholesalers or others. Kind of talk to about in terms of how they are carrying the inventory? Are the pre-buying, are they still running very thin -- that would be good. Thank you.

[Lee Wyatt:]

I will take commodity and pricing and let Chris do the last piece. We came into this year saying that we would have a tailwind from pricing last year, from ’11. And we thought we would have a pricing of about $30 million tailwind coming into the year. And I think we said at the beginning of the year, we would have new commodity costs of about $20 million with probably -- our new pricing of about $20 million, additional new commodity inflation of about $35 million. So we take that $30 million tailwind coming into the year, we would give back probably $15 million and we would then have about $15 of a tailwind this year. And that’s kind of how it’s played out. It’s been very close to that. We may have picked up a couple of million dollars on some commodities that are a little better but we have got other commodities that aren’t. Hardwoods have not come down, resins and paints have not come down. Diesel fuel is still $3.90 or so. For us, labor cost in China is the other piece that has not come down, actually increased. So we are kind of where we thought we would be for the year. I don’t think we will have a tailwind going into next year. I think we could have kind of a flat to maybe a slight headwind, but it will be very manageable.

[Christopher Klein:]

In terms of inventory, if we look across kind of wholesale channels and home center accounts, I would say folks have been pretty disciplined about inventory out there. We are mostly replenishing the POS. It’s not perfect but that’s kind of how they are wearing in. I think that’s healthy. I also think they are relying on our ability to respond. We have kind of surged and then cut off many times here over the last three, four years and so unfortunately we have gotten pretty good at that. And we are pretty reliable in being able to meet demands. And so I think folks out there are just being prudent and not carrying too much excess inventory?

[Kenneth Zener:]

Have you picked up any business due to other competitors fill rates not being able to be as flexible?

[Christopher Klein:]

Even there it’s interesting. I think it’s just starting. I think that will continue. But we have seen in a little bit because -- and I am not sure they are all as flexible as we have become. And so we have gotten a little bit and we are watching it. That just started to kind of happen over the last 6-8 weeks.

[Operator:]

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

[Michael Rehaut:]

Thanks. Good afternoon. Nice quarter everyone. First question on the cabinet segment. Look like the industry is growing 2%, 3%. Last quarter you were just 0.5% of growth as you kind of walked away from some of the more promotional type product. You have been able to get back with the 6% rate and I think saying that you are still trying to stay away from the promotional side of the spectrum. So what -- I guess the first question really the long winded is, is the growth consistent from a market side? 2%, 3%, is that kind of surprising you maybe on the downside and any kind of color in term of perhaps level of promotional activity as you have now gone, had a much better growth number in the third quarter. Has the promotional activity eased it all or what allowed you to have that better rate?

[Christopher Klein:]

So a couple of questions in there, I guess. First off, in terms of the marketplace I would say we are not at all just pointed on the new construction side. I think there is strong demand there and well, we are being selective there too. There is plain demand to go around. On the R&R side, you know it is just slowed to recover and I think you are seeing it across other big ticket categories, applying to cabinets. And I think places where it’s thousands of dollars, consumers are still being cautious. So it’s improving. It’s better than it was a year ago. I think it’s more sustained. It’s less up and down. It’s more consistent. I think the fact that we were more disciplined over the last couple of quarters on promotion and yet really held our share positions in there, speaks to the new product, the service and a number of other things. Which is all good signs because it means that consumers are discriminating, going with higher quality, better service, designers are following. So I think those are all good signs of a healthy recovering R&R model. It is just going to take a little while to gather momentum. And that’s just kind of the realty of where we are in. So I think it’s in an emerging healthy category. It’s going in kind of the right ways at the right pace and I would rather have it do this and year-over-year build a little bit momentum as opposed to we have kind of shot in the arm then fall back down again. I kind of feel like this is -- we are on a good sustained track but it just can take a little while. New construction, I think is going to be a continued catalyst for some growth across cabinets and frankly across a lot of the categories.

[Michael Rehaut:]

And then in terms of the pace of promotional activity from 2Q to 3Q, has that changed at all?

[Christopher Klein:]

I think it’s about the same. I mean for us we are flat to the prior year, others are promoting on a higher level than we are, but they have been promoting than we have for a while. So I think they are probably cycling flat but at a higher level is the way I describe it. So that’s kind of what we are seeing. We are pretty consistent, others tend to cycle then and now but if I try to average it through, I think they are just -- if you total it all up they are just consistent there at a little bit higher level but it’s not getting worse.

[Michael Rehaut:]

How would also characterize the plumbing markets growth relative to your growth. I mean I think if you perhaps strip out, let's say and just look domestically maybe you would take a point or two off the growth rate to adjust for China. But how are you looking at that pipe of growth rate relative to your own?

[Lee Wyatt:]

You know there are no published indices for the plumbing space. I can tell you this, we have been very consistent. And the way I think you look at that is you look at the first three quarters of this year. In the first quarter, Moen grew 20%. We called out 7% of that being wholesale inventory fill where they were just building some inventory. We said China grew 3% and the core grew around 10%. So it’s your 20% growth in the first quarter. Second quarter, China grew 3%, core grew 9%. 12% growth. Third quarter, China grew 3% in terms of the points and the core grew 9%. So 12% again. So what we have done is settled into a very nice yet very strong cadence here of our growth and we don’t think anybody is going faster than that.

[Operator:]

Your next question comes from the line of Zahid Siddique from Gabelli & Company. Your line is open.

[Zahid Siddique:]

Just a couple of questions. The first one on the poison pill. I just wanted to confirm that it has expired, I believe it was supposed to expire in early October?

[Christopher Klein:]

Yes, it has.

[Zahid Siddique:]

Okay. So there is no poison pill currently. The second question I have is, you mentioned that you are getting some calls on the M&A front. Could you comment on what areas are those calls coming from?

[Christopher Klein:]

Yeah, I won't go into any specifics, but I would say it was kind of quiet up until the summer and I expected that it would start to wake up over a 12-18 month time period and I think it has. I think there is a number of different sectors where things are getting busy again and I think that’s surprising given any business that’s touching new construction is feeling the effects of a pretty good six to nine months here. And so you have got folks who have been waiting to maybe start a business for quite some time. A little bit of momentum builds a case for better forward look. So I think that pace will pick-up and we are just starting to see it. So that’s an encouraging sign. I don’t think it’s rushing ahead. But there is a little bit more discussion and chatters than there was certainly six months ago.

[Operator:]

And your final question comes from the line of Stephen East from ISI Group. Your line is open.

[Stephen East:]

Chris, could you just talk -- you talked that R&R is getting better and I was interested in what type of trends you are seeing through the quarter with R&R? And then really your channel performances also. You talked about new construction being strong but was there an acceleration through the quarter that type of thing. And why you are really seeing at the home centers?

[Christopher Klein:]

Sure. I think R&R was -- it has been in interesting year. Things started off strong, decelerated a bit as we kind of moved into May-June, little quiet and then woke up again kind of August-September and into the first couple of weeks of October we are seeing kind of order patterns consistent with what we saw in September. So I think that 3% to 4% feels pretty good rolling through. I like the consistency across the businesses. I also like the geographic consistency. So that just says, it’s more tied to overall economic recovery albeit at a pretty small pace if you look at GDP, look at credit availability and consumer confidence. You know it’s a very slow walk. So it’s picking up. It is picking up consistently and it is pretty wide spread across a number of categories. And the one category we keep on a little bit weaker is the window marketplace, it’s a little bit weaker, and big ticket. But I think it’s kind of moving across that direction. In terms of channels, we have got wholesale channels, we have got dealer channels in cabinet, we have got two step distribution in doors. And I think they are kind of responding to where the demand is coming back. So those that are heavily influenced by new construction are doing very well. I think we see that the channel is much more R&R related. They are certainly better than they were a year ago but they have got a long ways to go. So they have started to pickup but it isn’t kind of great charging growth.

[Stephen East:]

And then you talked about how you would grow and you mentioned expanding into related platforms. Could you talk about what you are doing now? I know you don’t want to talk about what may come down the road but what you are doing now and looking at?

[Christopher Klein:]

Yeah, we have got a number of adjacent market places that we have expended organically into over the years and those are great opportunities to look at continued investment organically, whether it’s potential acquisitions or joint ventures. So if you look across our businesses and our plumbing business with Moen, it’s just such a terrific brand. Great distribution both in North America as well as in China and some other international markets. And so there are a number of things we can extend into under that brand that leverages the distribution, leveraged the supply chain. So there is expansion opportunities there. We look across our security market. Similarly with Master Lock, very very strong brand. Strong supply chain, great distribution. So where else can we extend into security products. And you are going to see a lot more of these things at least organically coming out in terms of new products or introductions over the next few quarters. In security we are investing more and more into electronics and you will see more electronic products that we are just getting ready to introduce right now. So that cadence will build up. That naturally leads to areas where you might expand through acquisitions because you could expand geographically or you could expand into some of these adjacencies and then you get there a little bit faster. But I kind of like to stay near the core of the start and be able to extend some distribution, some brand or some supply chain and then expand out from there.

[Operator:]

There are no further questions at this time, I would turn the call back over to Mr. Brian Lantz for closing remarks.

[Brian Lantz:]

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

[Operator:]

Today's call was recorded. A replay of this call will be available this evening through midnight, November 6 by dialing 1-855-859-2056 and using the conference ID no. 37877566. This concludes today's conference call. Thank you for your participation. You may now disconnect.