Fortune Brands Home & Security, Inc.
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[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 First Quarter 2013 Earnings Call. [Operator Instructions] Thank you. Mr. Brian Lantz, Vice President of Investor Relations, you may begin your conference call.

[Brian Lantz:]

Thank you, Mike. 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 first quarter of 2013. 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 the market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC, such as our annual report 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 have allowed ample time to address any questions that you may have. I will now turn the call over to Chris.

[Christopher J. Klein:]

Thank you, Brian, and thanks to everyone for joining us today. We are off to a great start to 2013. We delivered solid first quarter performance driven by both strong sales and profit growth, and we're increasing our annual outlook. As volume is returning to the market, the competitive advantages that we have built over time are now generating meaningful results. Our strong results reflect our disciplined focus on profitable growth and our aggressive moves over the last several years to grow share, introduce new products and restructure our operating platforms, all of which position us to leverage the recovering market. We also believe we are now in a position to drive incremental shareholder value. Let me first spend some time on the first quarter highlights, and then I'll discuss our revised annual outlook, our dividend and our strategic acquisition. For the quarter, sales were up 11%, and EPS was $0.24, up from $0.08 a year ago. Cabinet sales grew 11% as we gained share in all channels and benefited from new construction. Importantly, our focus on profitable growth allowed us to grow cabinet profits by $19 million in the quarter. Moen continued its strong performance with sales growth of 26%, with share gains across the business and profit growth of 52%. Windows & Doors sales were up 10%, and as expected, the segment operating profit improved. Security & Storage sales were down 14% as planned due primarily to lower sales of tool storage products while profit for the overall segment was up 4%. Now let me give you some top line highlights by segment. Sales for our cabinet business was up 11% for the quarter and exceeded our expectations. We continued to perform well as the market leader in cabinets with strong results across all channels within the business. The pace of new construction continued to be a key driver as we again saw strength with dealers and builders in our new construction lines. We're also starting to see more growth in our semi-custom lines as R&R spending improved over last year, while the high end of the market remains challenged. In the dealer channel, where we're the clear market leader. We're leveraging our portfolio of brands and our strong product and service reputation. We also achieved solid growth in home centers where we focus on sustainable long-term growth opportunities and where we saw particular strength in our in-stock cabinet programs and our expanded bath vanity programs. Notably, we grew our cabinet profits by $19 million in the quarter. This performance again reflects our ability to successfully target growth in channels, markets and product segments that aren't as promotionally driven, while leveraging our efficient operating platform to improve profitability. Plumbing sales were up 26% in the first quarter. Moen saw broad sales gains in the U.S. and in our international businesses, particularly China. Gains were strongest in the U.S. in our wholesale business where we achieved volume increases driven largely by the pace of new construction. Our leading market share with top builders and wholesalers, expansion into the multifamily segment and upgraded showroom displays is yielding strong sales and improved mix and solid profits. Moen is also seeing strength at retail, with our steady pace of consumer-driven innovations like MotionSense, a unique hands-free electronic kitchen faucet. Our Microban antimicrobial finishes and new styles like our Ashville, Banbury, Boardwalk and Wetherly bath lines. Internationally, sales in China, where there are now approximately 800 Moen-branded stores, were again up strong double digits over the prior year driven by new construction and our continued retail expansion. The team in China continues to build our business with a wider range of price points and with products uniquely tailored to the Chinese market, and the Chinese consumer continues to spend in our category. Window & Door sales were up 10% for the quarter. Four products saw double-digit sales gains, driven by -- heavily by gains in new construction, partially offset by the exit of less profitable retail programs. Window sales increased more modestly as softness continued in the Repair & Remodel side of the window market, and cool weather in many parts of the country negatively impacted exterior projects. Importantly, for our 3 housing-related segments, we saw total sales increase 16% for the quarter, well ahead of the overall market for our products, as we continue to gain share in our categories. In the Security & Storage segment, our sales were down 14% in the quarter and profit increased 4%. Sales declined primarily due to the expected challenging comparison for our tool storage products, as our largest customer did not repeat a unique post-holiday promotion in the category as they did in the first quarter of 2012. However, we have a number of exciting product initiatives rolling out over the balance of the year and expect full year store sales to be at least even with 2012. Security sales were down slightly to the prior-year quarter. Strength in global safety was offset by softness in Europe. Master Lock innovation continues to hit the mark in both retail and commercial with new updated versions of well-established product lines and exciting new line extensions. We also began to roll out our new line of commercial electronic access control solutions designed to secure high-value sites such as cellular telephone towers and other storage facilities. So to sum up the first quarter, I'm excited about our performance versus a market which continues to be led by significantly stronger new construction and a Repair & Remodel market that looks like it's showing some signs of improved growth. This performance demonstrates the strength of our operating model and our ability to generate profitable growth as volume returns and we continue to gain share. Now let me return -- now let me turn to our revised outlook for 2013. We will then take you through our outlook in more detail in a few moments. From a market perspective, we now see an overall market for our U.S. home products that could be better than our initial assumptions for 2013. New construction remains strong as demand for new homes continues to outstrip supply in many markets across the country. And notably, the pace of Repair & Remodel growth has picked up somewhat even though spending on larger ticket items like cabinets and windows continues to lag, especially at the high end of that market. Importantly, given our businesses are predominately driven by Repair & Remodel activities, small changes in the pace of R&R, up or down, can meaningfully impact our outlook and results. Therefore, our revised 2013 outlook is built on an assumption that the U.S. home products market grows at a combined 8% to 10% rate with new construction growing in the mid-20s and Repair & Remodel growing 4% to 5%, with some lag for purchases of higher-end big-ticket items. Based on that market assumption and our ability to consistently outperform, we expect our 2013 full year sales to increase 9% to 11% rate over 2012, with our home products businesses growing faster than that rate and our Security & Storage businesses growing slower than that rate. We expect our 2013 EPS before charges and gains to be in the range of $1.23 to $1.33. Now let me turn to our discussion of how we're beginning to use our strategic initiatives to drive incremental shareholder value. First, this week, our board approved the initiation of a quarterly cash dividend to shareholders. This is an important step as it reflects the board's confidence in our performance, long-term cash flow and strategy for using our strong cash flow to drive incremental shareholder value beyond the recovery. Second, today, we announced that we have signed an agreement to acquire WoodCrafters Home Products, a leading privately owned manufacturer of bathroom vanities and vanity sink tops. WoodCrafters will become a part of our cabinet business, where we have historically been strong in the kitchen and will greatly increase our product offerings in the bathroom. WoodCrafters' strength with vanities provides us with both additional innovative products and an expanded lower cost North American supply chain, including more capacity in Mexico. Also important, WoodCrafters comes with a strong seasoned management team and an execution-driven culture that will fit perfectly with ours. They will operate as a distinct unit of our Cabinets segment with its current management team, staffing, operations and locations. The unit will report to Dave Randich, President of our Cabinets business. And we are thrilled to warmly welcome the 2,000 WoodCrafters associates to our Fortune Brands Home & Security family. This is a very strategic acquisition that allows us to build on our competitive advantage in cabinets. With the market in the early stages of a recovery and particularly as the Repair & Remodel market begins to gain momentum, it's a great time to build on our leading position in cabinets and further strengthen our efficient and responsive North American supply chain. As I mentioned before, we intend to be efficient with our cash by investing in our businesses, pursuing accretive acquisitions that meet our strategic criteria and returning cash to shareholders through dividends and share repurchases. So to sum up, we had another quarter of strong results. We are confident in our ability to continue to outperform our market, which has improved, and we've raised our outlook for 2013. As volume is returning, the competitive advantages that we have built over time are generating meaningful results. We are also now positioned to drive incremental shareholder value and therefore, initiated a dividend and announced an acquisition. Our strong brands, management teams and capital structure provide flexibility to both focus on profitable organic growth and drive incremental shareholder value with our strong free cash flow. Now I'd like to turn the call over to Lee, who will review our financial performance and provide more details on our revised 2013 outlook.

[E. Lee Wyatt:]

Thanks, Chris. As Brian mentioned, the majority of my comments will focus on income before charges and gains, which best reflects ongoing business performance. Let me start with our first quarter results. Sales were $890 million, up 11% from a year ago, with our home product sales growing 16%. Consolidated operating income for the quarter was $62 million, up $42 million compared to the same quarter last year. EPS were $0.24 for the first quarter, up $0.16 or triple the same quarter last year. Now let me provide more color on segment results. Our cabinet sales were $345 million, up $34 million or 11% over the prior-year quarter with growth in all channels. Operating income for the segment was $15 million versus a $4 million loss in the prior year, up $19 million as we benefited from higher sales volume running through our improved supply chain. Our strategy of disciplined sales growth is working as planned, as we continue to exceed the overall cabinet market growth, while improving profitability. We're seeing a bit more growth in our semi-custom cabinet lines as R&R spending improved over last year. But higher-end products remain challenged. Plumbing sales for the first quarter were $309 million, up $64 million or 26% versus the prior-year quarter. All channels performed well with U.S. wholesale, U.S. retail and China businesses all experiencing double-digit sales growth. Operating income was $55 million, up 52% even as we made incremental brand investments. And importantly, operating margin was 17.8%, 300 basis points higher than the same quarter last year. Windows & Doors sales were $124 million, up $11 million or 10% from the prior-year quarter. Within the segment, the door business experienced double-digit growth, while the window business grew low-single digits. The operating loss for this segment was $8 million, around $2.5 million better than last year. And for the full year, we see significant improvement over last year's profit. First quarter Security & Storage sales were $112 million, down $18 million or 14% versus the prior-year quarter. The sales decline was primarily due to challenging comparisons caused by an incremental prior-year promotion for tool storage products at our largest customer. This promotion drove storage sales gains of more than 40% in the first quarter of last year. Because this decline was expected, the results were in line with internal plans. Security products saw strength in global safety, offset by softness in Europe. Segment operating income increased 4% to $12 million, which included $3 million of income realized from changes to our benefit structure as we align all of our benefit programs ahead of implementation of the new health care law less other charges and investments in the business to support new product launches. Turning to the balance sheet. Our March 31 balance sheet ended with cash at $259 million. Debt remained at $326 million. Our net debt-to-EBITDA leverage is 0.2x, and we have nothing drawn on our $650 million revolving credit facility. Let me now provide our thoughts in further detail on our revised outlook for 2013. As discussed previously, our approach to the 2013 planning and annual outlook begins with a market assumption. Our approach also includes continued share gains in addition to overall market growth. So turning to our outlook details. For the full year 2013, our planning assumption calls for the market for our U.S. home product to be up 8% to 10% with new construction growing in the mid-20% range, and Repair & Remodel growing 4% to 5% with purchases of higher-end big-ticket items continuing to lag. Based on this market assumption and continued share gains, we expect our full year 2013 sales to increase 9% to 11% compared to 2012 with our home product segments growing double digit. We should again outperform our market with all segments increasing. Based on our market and sales growth assumptions, our expectations for EPS are in the range of $1.23 to $1.33. The midpoint of our guidance represents an increase of 44% over 2012 EPS of $0.89. 2013 free cash flow should be over $200 million after CapEx of approximately $100 million. Let me now comment on recent actions to use cash to drive incremental returns to shareholders. As we previously stated, over an assumed 5-year time horizon that began in 2012 for the housing market to return to a steady state, this strong free cash flow, combined with our flexible balance sheet, could provide over $2 billion of cash to drive incremental shareholder value. Accordingly, the initiation of a quarterly cash dividend of $0.10 per share was announced earlier this week. At this dividend level, we're providing shareholders with a reasonable yield, while maintaining a manageable payout ratio of around 30%. The dividend will utilize approximately $50 million of cash in 2013 and $66 million on an annual basis. Importantly, this rate of cash usage will provide the potential to the increase the dividend in the future and should not materially impact our ability to, either, invest in the business or make strategic acquisitions. Turning to our agreement to acquire WoodCrafters. WoodCrafters is a leading provider of bathroom vanities and vanity sink tops to the U.S. home market with current year sales of approximately $230 million. The purchase price of $300 million should be equivalent to 7.5x annual EBITDA. However, over the next couple of years, potential synergies resulting from the acquisition could reduce the purchase multiple to closer to 6x EBITDA. Before future synergies for the year 2014, WoodCrafters could add an incremental $0.11 to $0.13 of EPS to our overall performance. There could also be incremental EPS benefit in 2013, depending on when the acquisition closes. I'd like to point out that while the transaction is planned to close in 2013, the exact timing of the closing remains uncertain due to regulatory approval. Since the incremental sales and EPS impact to our overall 2013 results cannot yet be fully determined, we have not included any impact from the acquisition in our 2013 guidance at this point. In summary, our business model is performing well, and we're pleased with our first quarter. You are now seeing the benefits of our structural competitive advantages that should continue as the market recovery generates additional growth. Importantly, we now see sustainable momentum in both the housing market and our business performance that allows us to begin to create incremental shareholder value, by initiating a quarterly cash dividend and making a strategic acquisition. I'll now pass the call back to Brian.

[Brian Lantz:]

Thanks, Lee. That concludes our prepared remarks for the first quarter. We will now begin taking your questions and will continue as time allows. [Operator Instructions] I will now turn the call back over to the operator to begin the question-and-answer session. Mike?

[Operator:]

[Operator Instructions] Your first question comes from the line of Stephen East from the ISI Group.

[Stephen F. East:]

Chris and Lee, if we look at WoodCrafters, I mean, if I quickly ran through the numbers there, it looked like an EBITDA margin of 17.4%, which is well beyond what's going on right now with you all. What's -- why -- how are they generating the large margin? And how do you get synergy across the platform for you?

[Christopher J. Klein:]

They're in a category that we're in today in bath vanities, and the structure of that category has got pretty good margins in it. They've got a very cost-effective supply chain and that's one of the things that makes it attractive to us. Going forward, the synergies come, in part, from that cost-effective supply chain. Most of the manufacturing is done in Mexico, high-quality manufacturing at a very good cost to us. So that's really what makes this attractive. It also offers us some product capabilities that we can expand off of. So there's really a lot that makes sense. It's an extension of really an existing strategy. And it's really consistent with what we've talked about since we spun off over 1.5 year ago, which is we are going to look for acquisitions that dovetail into strategies that we're already pursuing, and this one accelerates in a category that we're performing well in today. So there's lot to like about it. It's a terrific team that have been running the business today.

[Stephen F. East:]

Okay. That's helpful. And then plumbing sales were off the charts today. Could you just talk about what's going on there?

[Christopher J. Klein:]

We've got strong positions across all channels there. So on the wholesale side, we've got very strong position with the top builders. So as you all have seen the builder results, that volume is flowing through that side of our business. We've also got strength in retail. We've rolled out a lot of new product and that's performing well. And then internationally, we've got strength in China. So it was pretty well across the board pretty consistent. It's really a byproduct of a couple of years of work here as we've built share positions and continue to roll out new products. You get a little bit of volume, a little bit of wind in our sales and man, we take off, and that's what you saw.

[Operator:]

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

[Dennis McGill:]

Chris, just on that last point where you talked about being able to see that margin acceleration. From the first quarter level, where do you see kind of the year ending up? If you see the channels unfolding as you expect new construction at 20% plus, and then mid-single-digit-type home improvement, can you see the same type of leverage as you move through the year that you saw in the first quarter?

[Christopher J. Klein:]

No, I think we're a little bit ahead of where we say we'd be, if you kind of run the numbers out on our guidance on revenue and then look at the EPS guidance. I think that's in part off the first quarter. Some of investments that we make in the business, launching programs, media spend, other things is a little bit lighter in the first quarter and so that kind of evens out over the year. But I think from a kind of overall business momentum standpoint, I'd see us growing through the balance of the year with continued strong momentum.

[Dennis McGill:]

My question was just specific to plumbing. Is that what you were referring to?

[Christopher J. Klein:]

Yes, yes, we've got programs. We've got additional brand spend coming through the business. So you see quite a bit of -- we'll have good leverage throughout the year, no doubt about it, but maybe a little bit stronger the first quarter because of that spending.

[Dennis McGill:]

Okay. And then, Lee, I think you made a comment within the Windows & Doors segment, that for the full year you expected substantial improvement. Can you maybe just talk to that a little bit more and then anything that might be different the rest of the year versus what you saw in the first year from the cost side.

[E. Lee Wyatt:]

Yes, I think we'll see -- and you saw very strong sales in the door side and that'll continue on with our expectations around new construction. So I think you'll see nice growth there. We wanted to make sure that when we look at the first quarter and you see a loss, that you understand that that's consistent with what we expected. And as we move through the year and you get more volume, especially Windows [ph] & Doors, that you'll do much better than the $4 million to $5 million we made last year in operating profit.

[Operator:]

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

[Freda Zhuo:]

This is actually Freda Zhuo on for Steve. So my first question is just looking at WoodCrafters, after the acquisition and the dividend, you're at still pretty healthy leverage. So could you sort of give us an update on what the acquisition pipeline could look like throughout the year? And what kind of transaction multiples are you looking for, for future acquisitions?

[Christopher J. Klein:]

Yes, so I think things are slowly picking up on the acquisition side. I don't think it is where it will be. I think it, in the case of WoodCrafters, this is really a relationship that we had with a company for a while. And so it maybe wasn't an indicative of a return to an active -- or as active an M&A marketplace. We maintain these kinds of dialogues throughout each of our businesses and so we're looking for places where we can grow that way. I'd say from just an overall marketplace standpoint, there are a few things out there but I don't think it's picking up to the pace that it will get to. And I think it will pick up over the next 12, 24 months, and I think we will have other opportunities. As Lee pointed out -- as you highlighted, we're still pretty kind of still low leverage, so we still have strong cash flows and strong ability to do some things. And so I think we'll be able to take advantage of those opportunities as they come forward.

[Freda Zhuo:]

Okay. Great. And just turning the attention to Moen and China. What is the market opportunity that you see in that region now that you're at 800 stores? Do you have kind of a terminal kind of size in mind? And is there a margin differential between the plumbing products you sell through Moen in the U.S. and the products you sell in China?

[Christopher J. Klein:]

Yes, so China continues to be a good market for us. We're growing on the ground by opening up more retail, which is really working with local wholesale distributors. That market, while the overall growth rate in housing has slowed, is still building about 6.3 million units a year and a lot of those units don't have fixtures in them so they need to fit them out after the fact. So there's a big backlog of demand there. So we look at it and say this is a good long-term growth market. We assess the growth rate in terms of the pace of putting up new stores and expansion really on a quarterly, semiannual basis. And so we put a plan together beginning of the year but then we assess that based on kind of where penetration is going and same-store sales and those sorts of things. And so I don't have a number in mind for where is the kind of the endpoint in terms of number of locations. We really look more at the productivity of the locations and try to make sure that we're growing and that the stores we're putting out there are productive stores. In terms of margin, today, we're investing. So while we don't own the stores, we've put a little bit of capital in as we're opening. And so as we slow the pace of investment, the market will become more profitable. We have distinct products for that market, so we're selling products that are designed for that market at good, better, best price points. And so it's a profitable market. It's as strong as where the U.S. market is today and now it's not. I think over time, it'll get there.

[Operator:]

Your next question comes from the line of Desi DiPierro from RBC Capital Markets.

[Desi DiPierro:]

Just filling in for Bob. On the -- in the cabinet segment, now that you start to see some pretty solid sales growth, what are you seeing in terms of the promotional activity that started to subside from your competitors?

[Christopher J. Klein:]

Yes, I think the reality is capacity is getting used up. So the need to be as promotionally driven starts to back away when everybody gets busy and I think that is the real underlying driver. We started probably 16, 18 months ago backing off and really, it was to focus on growing in channels and in places where it wasn't as promotionally driven. And I think as a rest of the market has gotten busy, the competitive environment has kind of followed suit. So I think we're in a good place there. Is it back to where we'd like to see it long term? No, it's still got a little ways to go, but I think it has improved and now we're seeing some good growth across retail, across dealer and across direct to builder. So we're pleased with kind of the pace across all the channels. And so I think it's -- we're in a much better place now than we were even 6 months ago.

[Desi DiPierro:]

Okay. Just staying on that topic with the strong incrementals about 55% -- incremental operating margin about 55%. Some of that you would characterize maybe as a better pricing or less promotional activity in addition to the operating leverage?

[Christopher J. Klein:]

Yes, I think it's -- we're getting good productivity out of the plants. And I think our mix is improving as well, so we're seeing average sales price per cabinet improving. And so there's a combination of things going on, promotion backing off a little bit, some new products which carry better prices and then the mix. Both new construction mix, as well as the R&R mix are starting to improve a little bit. It's not back to where it will get to because of the high end of the R&R market is still pretty weak, but kind of bottom to mid is improving and that's encouraging.

[Operator:]

Your next question comes from the line of Dan Oppenheimer from Credit Suisse.

[Daniel Oppenheim:]

I was wondering -- I heard some -- different things in terms of Repair & Remodel model activity as we sort of moved through the first quarter into the second. I guess wondering if you can talk about that maybe in terms of the cabinet business at all. And then also the way that you talked about, so the higher end is still lagging, and before, you were talking about sort of the cabinets overall lagging now to the high end. What sort of timing -- or as you're looking at it, what do you think about in terms of timing and any metrics that you're seeing there?

[Christopher J. Klein:]

So we're seeing the bottom end of the market, which can be both in stock, as well as the bottom end of semi-custom. There is an improved cadence there, which means folks are doing smaller projects. We're starting to see some pickup in the middle of that kind of semi-custom marketplace, which is encouraging, that may be some turn in existing housing sales. You've got houses that turn over and folks are coming in and renovating their kitchen. The higher-end R&R, which is that really big project where they're ripping down the studs and bringing in some of our higher price point products. That piece is still lagging. I don't think that's surprising. I think you'll start to see sequential improvements in home values. You build confidence, you build more value in the house. Credit becomes more available. I think as that market comes back, it's just going to take a while. So we're seeing progress against it. I think it's actually unfolding much the way what we thought it would.

[Daniel Oppenheim:]

Okay. In terms of April trends relative to what you're seeing in the first quarter?

[Christopher J. Klein:]

April trends, I'd say are consistent with the guidance we gave for the full year. So -- and I think it's following on the momentum and just -- it would feel like it's going to drive the top line and earnings the way we guided for the full year.

[Operator:]

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

[Michael Jason Rehaut:]

I guess I just want to go back to plumbing for a moment. Obviously, tremendous top line results there, as well as a nice margin expansion. But on the top line, you pointed to improvement across all 3 of your major channels. What does that mean in terms of share gains? I mean, I would assume -- certainly, you're gaining share but if you could kind of maybe give a little bit more granularity, are there sort of big wins that perhaps you've had on the homebuilder side or on the retail side with some of the new programs? Do you feel that's really where you've been really outpacing the market because, obviously, about the delta is -- the difference in your growth versus some of your peers is pretty material?

[Christopher J. Klein:]

Yes, I would say it wouldn't be surprising to you that it's a combination of a lot of things, kind of given the size of that growth. So if I look at the wholesale and new construction side of the market, yes, I'd say it's steady cadence over the last 3, 4 years. That team working with the bigger builders and positioning ourselves to be able to expand when the market picked up. So it really was kind of one account at a time through that whole period of time, and now we're seeing the volume flow through that. So it feels like it must have happened recently, but it's the cumulative impact of a lot of hard work by a lot of terrific people over a 3- to 4-year period and that's really it. On the wholesale side, you're also seeing a little bit of improvement in mix. So both consumers and builders are trading up a little bit within the line, so they're going from first upgrade, second upgrade. They're adding a little bit more and that's a good sign as well. On the retail side, it typically is a cadence of new products. So it's -- if we keep the line fresh, we're going to keep getting more SKUs in. And then those SKUs are going to move because you got the right product for the consumer's taste and we're getting better at that, getting on-trend products in there. And it's -- and they are, too, getting a little bit of mix improvement so trading up a bit. The other -- we've talked a little bit about China already as well. So you kind of roll all those things together and you say it really is some of the market volume coming through and then our share positions, which have really been gained over the last couple of years, realizing the results.

[Michael Jason Rehaut:]

Right. I appreciate that. I guess the second question on WoodCrafters, you said that potential synergies could yield the multiple going down to 6x, which implies about another $10 million of incremental EBIT, I guess, with -- is that something that you'd expect to occur within the first year? Or is that something more gradual, if you're kind of utilizing, let's say, some of their distribution or manufacturing, which you mentioned, or other elements because that -- you did at the same time say that you were going to be retaining their management team and a lot of their infrastructure?

[Christopher J. Klein:]

Yes, it's a great business. So, we start with a great business. We're in the midst of looking at them and their execution of programs. They've got some programs there rolling out. So as we would step in once the transaction closes, it would really be focused on continuing the business momentum that they've got, so if it's not broke it doesn't need to be fixed. Over time, we see opportunities there. So I'd say it's really kind of beyond year 1 that we'd start to see a lot of those synergies flow through. It'll be a combination of things. It'll be us utilizing that lower cost structure, that capacity for some of our existing business. It'll be some logistics improvements. And then there'll be some revenue opportunities as well. So it's a question of things that we think are going to -- we're going to be able to take advantage of over time. And really, it's a good time for that because there's capacity there, good low-cost capacity that we can continue to expand as the market -- as the home product market expands. So that's the nature of the synergies. And so it's -- we like are starting spot with it and then we think there's more to add over time.

[Operator:]

Your next question comes from the line of David MacGregor from Longbow Research.

[David S. MacGregor:]

I wondered if you -- within plumbing, can you just maybe talk to us about how many points of growth actually came from the Chinese business?

[E. Lee Wyatt:]

Yes, it's very similar to what we've had in the past year, in 2012. We were, on average, growing -- getting 2 to 3 points of growth out of that China market and it's been very consistent in the first quarter. So it's in that 2 to 3 point range.

[David S. MacGregor:]

Okay. Good. And then you had talked earlier about the stock versus semi-custom versus custom segments within the cabinet business. Can you perhaps give us a sense of how your market share differs amongst these market segments?

[Christopher J. Klein:]

We haven't broken it up. I guess I'd give you a broad sense, I think, overall, our share is probably in the 18%, 19% range. And I think we'd probably track evenly across kind of the in-stock side and kind of the bottom end of the semi-custom side in the marketplace. And I'd put in that stock category that builder product as well and then we'd probably trend a little bit weaker at the very high end of the marketplace. So that's about as much as we broke it out.

[David S. MacGregor:]

What's achievable in terms of growth at the high end once the cycle moves further through its recovery?

[Christopher J. Klein:]

Yes, it's -- the nice thing is that you get some pretty good margins at the higher end of the market. So I think it's really -- I think you could see some growth there that could outpace, let's say, a normal 5% to 6% growth rate once that high end kicks in because those are bigger projects, higher margins. So you're making more money per box as we talk about it and say you've got the opportunity to grow stronger with stronger margins. But it's -- that's a later in the cycle phenomenon. If I look back over 2001 through 2007, it was really 2005, 2006 that we saw that growing -- that segment of the market growing just proportionate to the overall market.

[Operator:]

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

[Peter Lisnic:]

I guess on the -- just on WoodCrafters to kind of close the loop there. Can you give us a little bit more color there on the vanity market, just kind of where they fit market share, whether there's any sort of customer concentration? Those points would be helpful.

[Christopher J. Klein:]

Yes, I don't -- we're not breaking out the market share overall. There's -- they're one of the leaders in that category. It's the vanity and the vanity top and they've got a terrific capability in those tops, both from a cost position, as well as from a design product portfolio. So I think they're one of the stronger players in that marketplace. We certainly said before, if we're going to acquire a business, we want to acquire somebody who's a leader in the segment, and these guys fit that definition. So yes, I'd rather not speak to customer concentration or customer base, but safe to say they're a leader and we think we can continue to grow them and into even a bigger position.

[Peter Lisnic:]

Okay. All right. Understand. And then if I could just switch gears back to plumbing in China. Is there a way that maybe you gave us a little bit of color on how much it's adding to the top line growth? I'm just wondering if you can give us a little feel for what the same-store sales number is? If there's any sort of indicator that, that would kind of match that description that would be helpful. But more importantly, just what you're seeing in terms of return on capital for the investments that you're making in that business in China would be helpful.

[E. Lee Wyatt:]

Yes, it's a positive return on capital. The segment -- that business is profitable. Not quite as profitable as Moen because, as Chris said -- Moen, you asked, because, as Chris said, we're investing in stores. We're growing 200-plus stores a year. So -- but it's a very good investment as we look at the stores that are open more than a year. We see very strong returns. And so as we're moving through that cycle, I mean, they get very profitable and they're very focused. So it's a very good investment with very good, not only top line, but bottom line leverage potential.

[Christopher J. Klein:]

Same-store sales would be better than, I guess, what the published macro GDP numbers are. So if you look at -- there's a lot of interesting figures published, but 7% to 8%, I think, is where they typically are going right now and so I'd say same-store sales are doing at least that good or better. So that's good indicator that we're getting -- to my comment earlier, the consumer in China is spending on our category, which is encouraging, and they're increasingly spending on a better mix as well. So that's another good sign.

[Operator:]

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

[Nicholas A. Coppola:]

If I heard correctly, I think we talked about cabinet sales being strong across dealers versus retailers versus home builders. Can you point us to any kind of relative performance there?

[Christopher J. Klein:]

Yes, I'll give you some color, but I can't give you exact numbers. I'll give you some color. The builder's market is strong as you'd expect. So there, I think, that wouldn't surprise you. If you look at -- we called out the overall new construction market, mid-20s, I'd say, and the builder market doing at least as good as that, if not a little bit better. Dealer market is a combination of R&R and we do get some new construction business there. So that would be kind of blended down. And then home center is probably somewhere in the middle of there and that's both in-stock vanities and special order business. So that's about as far as I can go.

[Nicholas A. Coppola:]

Okay. That's helpful. And then any way to quantify the negative impact from weather on windows?

[Christopher J. Klein:]

No. The only thing we've looked at is regionally, kind of what's been the pace of growth. And so we did much better out west and so kind of look at that and say, all right, there's intrinsic demand for doing some R&R window projects. These are bigger-ticket projects, but at least in places where it was a little bit better weather, the performance was better. We didn't do very well up north and in the Midwest where it was kind of a lousy winter, spring. So that's really the only anecdotal stuff that says it was probably playing some factor into the business performance. So we'll see how it unfolds in the second quarter. I think that will tell us a lot more about kind of the health of the category.

[Operator:]

Your next question comes from the line of David MacGregor from Longbow Research.

[David S. MacGregor:]

Just a couple of quick ones. The door business, can you break that down for us between new and multifamily?

[Christopher J. Klein:]

It's mostly -- or a majority new. There is some multifamily, but that's going to be more of kind of lower-rise multifamily where they're going to use the type of entry doors that we make. So maybe townhouse-type units and that sort of thing versus high rise. So there's a strong single-family component to that, but that business did well in the quarter and it's performing strongly.

[David S. MacGregor:]

Second question, just on the plumbing suppliers, plumbing supply houses. How do their inventories look at this point? My guess is that there's a seasonal pattern there. But is it a more aggressive seasonal pattern than was last year given what we've seen in new construction? And if so, how do you think that influenced your sales in the quarter?

[Christopher J. Klein:]

Yes, they really haven't been building inventory up. I think it's a byproduct of our -- our service levels are pretty high. So from order to delivery, we were pretty reliable and we get the stuff in there. So we have not seen inventories building there. I'd say you're right, seasonally, it's always a little bit ahead of demand, but it's nothing in anticipation of a lot stronger need. I think they're actually ordering to where the demand is and their demand is pretty good. So we're getting it in there and it's going out. And so that cadence has been pretty strong and is continuing.

[Operator:]

And your last question comes from the line of Keith Hughes from SunTrust.

[Unknown Analyst:]

This is actually Judy in for Keith. In your outlook for 2013 for Repair & Remodel spending to be up 4% to 5%, is this based on what you've seen in the cabinets or are you seeing any other areas where you've kind of seen the pattern where you're more encouraged about the Repair & Remodel spending? The best that you can tell, what's -- or is it just people trading up to better pricing and mix?

[Christopher J. Klein:]

Yes. I'd say it's improving more broadly than it had been. So I think with plumbing, it had been running at a pretty good clip and so it's going to continue right there. There is some trade up in plumbing. Within cabinets, it's improving and so that's encouraging. It's not back up to where it will be in terms of laying right on top of the overall R&R market, but it is improving. So that's encouraging. We still see some weakness on the window side. So those are probably the best indicators we've got.

[Operator:]

I'll now turn the call back over to Mr. Brian Lantz for closing remarks.

[Brian Lantz:]

Thanks, Mike. We'd like to thank everyone for attending our quarterly call today and look forward to seeing or speaking with many of you again very soon. Thank you.

[Operator:]

Thank you for participating in today's Fortune Brands Home & Security First Quarter 2013 Earnings Call. This call will be available for replay beginning at 7