Fortune Brands Home & Security Management Discusses Q1 2014 Results - Earnings Call Transcript

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Fortune Brands Home & Security (NYSE:FBHS)

Q1 2014 Earnings Call

April 30, 2014 4:30 pm ET

Executives

Brian Lantz - Vice President of Investor Relations

Christopher J. Klein - Chief Executive Officer, President, Director and Member of Executive Committee

E. Lee Wyatt - Chief Financial Officer and Senior Vice President

Analysts

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Michael Dahl - Crédit Suisse AG, Research Division

Stephen S. Kim - Barclays Capital, Research Division

Dennis McGill - Zelman & Associates, LLC

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Stephen F. East - ISI Group Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Garik S. Shmois - Longbow Research LLC

Eric Bosshard - Cleveland Research Company

Operator

Good afternoon. My name is Jeremy, 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 earnings conference call. [Operator Instructions]

I would now like to turn the call over Mr. Brian Lantz, Vice President of Investor Relations and Corporate Communications. You may begin your conference.

Brian Lantz

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 2014. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the 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 in 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 our 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 will now turn the call over to Chris.

Christopher J. Klein

Thank you, Brian. And thanks to everyone for joining us today. Our teams executed well in the first quarter, as we handled the challenges of extreme weather and anticipated lower level of new construction. We remain well positioned to deliver strong growth this year and offset some of the first quarter weather impact, as the pace of demand reaccelerates. Our 2014 annual outlook has been updated to reflect the impact of first quarter weather on our business and calls for profitable growth based on our continued share gains and recovering markets for new construction, and repair and remodel activities for the balance of 2014.

Let me first take you through our view of current market conditions and provide some insights on the impacts of weather. Then I will cover some of the first quarter highlights. And finally, I'll wrap up with our updated 2014 annual outlook. Our view on the fundamental market for our products over the next several years is very much the same as when we entered 2014, as we continued to see signs of strength in the overall home products market, despite the near-term disruptions from weather.

The demand for new construction is outstripping supply in many markets across the country. And developers are preparing for significant growth in 2014 and beyond. While last summer's increase in mortgage rates, combined with higher home prices, continues to impact the pace of new construction, the market for new homes is still expected to show double-digit growth in 2014. Housing inventory remains low, mortgage rates have remained stable over the past 9 months and single-family homes are at historically affordable levels.

More importantly, in the repair and remodel market, which is around 65% for our home business, we have seen a continuation of the strong growth that we saw in the fall season. Now to break the regions not impacted by severe weather, we saw double-digit sales growth for bigger ticket semi-custom and custom cabinets. We also saw increased project size and stronger demand for more premium faucets in our Moen wholesale showrooms. Despite the strength we see in the long-term home products market, the first quarter was significantly impacted by severe winter weather. In our businesses, we have done detailed work to estimate that this unusually severe weather negatively impacted our sales by $4 million and EPS by $0.08 in the quarter. So it's important that I take just a few moments to provide a better understanding of exactly how the weather impacted our businesses.

From a revenue prospective, overall consumer shopping behavior was clearly tempered in those areas impacted by severe weather and there are 3 important points that I'd like to make here around what happened in these parts of the country. First, the weather broke down the consumer planning and purchase process. Current homeowners' ability to design, plan, shop and start significant remodel projects was constraining in the challenging conditions. Specific to our business, large remodel projects involving kitchens, bathrooms, windows and doors require significant activity around the home and are not easy to undertake in extreme weather. And new homebuyers were not out ordering or buying new homes at the rate they otherwise would have been. Second, approximately 50% of our revenues come from the Midwest and Northeast regions, which were the areas heavily affected by the severe weather. And third, our sales in these regions were down 3%, when compared to the milder winter of 2013. This was substantially weaker than the double-digit increases we experienced in the remainder of the U.S, which had a more normal winter and continued on a pace consistent with the second half of last year.

From an operating perspective, our ability to efficiently make and deliver product was significantly restricted in the region affected by severe weather. For example, not only were there challenges of getting trucks in and out of markets on certain days, but production was disrupted by less than full shifts or even complete closures. Some locations dealt with frozen pipes and some of our cabinet facilities struggled with the impact of low humidity levels, as the buildings were being constantly heated, which caused some hardwood to split and increased scrap. In the Midwest and Northeast, consumer traffic is now increasing and consumers have begun to plan and design remodel projects, as evidenced by the number of quotes being generated and activity reported in our dealer network. So we remain focused on gaining share, as demand begins to reaccelerate this spring. We are also encouraged by the strong performance in those areas of the country not impacted by severe weather, where we have seen continued momentum.

Turning to the quarter. Total reported sales were up 9%, but we estimate sales would have increased 13%, excluding the impact of weather. Let me give you some highlights by segment. Sales for our cabinets business were up 19% for the quarter. Cabinet sales growth was driven by WoodCrafters and the dealer channel, where big ticket remodeling activity remains strong. We again gained share in the dealer channel, where we saw strong double-digit increases in the regions not impacted by severe weather and continued to see growth across a full range of semi-custom and custom product lines, resulting in a better mix with higher price points. We're also launching several new products this year, including our refreshed Diamond line, new bath [indiscernible] offerings in home centers and a new Omega framework [ph] custom line for dealers. We continue to leverage our proven structural competitive advantages to generate sustainable momentum.

If we exclude the sales from WoodCrafters, the impact from the planned exit of low-margin builder-direct business in the west and the impact from weather, underlying cabinet sales were estimated to be up 13%. Plumbing reported sales that were even with the prior-year quarter, led by Europe's wholesale in China. In the first quarter of 2014, Moen faced a challenging sales comparison to last year's first quarter, where we posted a 26% gain for the total business. More specifically, the wholesale business was comping against a 40%-plus increase in the first quarter 2013, which was driven by emerging demand for new homes and wholesalers building inventory throughout the quarter in anticipation of strong demand in the first half of last year.

In the first quarter of this year, our U.S. wholesale channel was buying only based on current new construction product orders and had not yet started to build inventory to meet future demand. As a result, our sales in the channel grew only 5%. However, we are encouraged to see the continued improvement in the product mix, as consumers continue to select new faucet packages for their new homes, with our more premium products, including our MotionSense hands-free faucet, which continues to be introduced in additional styles, contemporary kitchen pull-down styles in the align and still [ph] collections. Our Aris [ph] modern suite and our new Brookshire traditional kitchen pull up. Moen retail also faced strong double-digit 2013 comps and extreme weather, but continued to benefit from consumer-driven innovations rolled out in Q4, including our new Walden and [indiscernible] pull-out faucets, with reflex self-retraction and faucets with our Microban finishes.

Internationally, sales in China, where there are more than 900 Moen-branded stores, were again up double digits over the prior year, driven by the improved performance of the existing Moen stores in our direct-to-builder efforts. We estimate that total plumbing sales increased 3%, excluding the impact of weather. Windows and doors reported sales were up 5% for the quarter. Door products saw healthy sales growth of 8%, driven by gains in new construction and our ongoing distribution expansion. We continue to see an increasing benefit from our distribution improvement and expansion in the Western region that we put in place over the last couple of years.

Mix also improved, especially with consumers selecting our new decorative glass designs and new door styles, like our recently launched Pulse line of modern entry door styles. Door sales growth is estimated at 14%, excluding the impact of weather. Window sales were even with the prior year. Window sales growth was estimated at 6%, excluding weather, and we saw a continued progress in this market in the west.

In the security and storage segment, our reported sales increased 3% to the prior-year quarter. Security sales were up 4% from the prior-year quarter, led by increases in U.S. retail, international and safety, while storage increased 2%. Master Lock U.S. retail sales continued to grow, with program expansions at retailers. And Master Lock's rollout of new commercial electronic access control solutions designed to secure high-value sites, such as cellular telephone towers and other storage facilities, again contributed to our sales gains.

So to sum up our results, our teams executed well in a challenging quarter. With the first quarter behind us, we remained positioned to continue our share gains and deliver a strong full year of sales and profit growth. So now, let me turn to our updated full year outlook for 2014, starting with our assumption for the market. We will then take you through our specific full year 2014 guidance in more detail in a few moments. Our updated 2014 annual outlook is built for revised assumption that the U.S. home products market grows at a combined 9% to 10% annual rate.

In the first quarter, consumer traffic remained robust in regions not impacted by weather. Importantly, traffic, quotes and orders are now beginning to increase in the Midwest and Northeast, where consumers are now able to focus on planning and designing their large remodel projects. New-home construction, where our products are installed in later stages, is also expected to reaccelerate. So as we begin to build momentum through the second quarter, we believe that we are positioned to have an even stronger second half of the year than initially planned.

Based on that U.S. housing market projection, the assumptions are made for our other markets and continued share gains. We continue to expect solid top line growth for 2014, with our full year sales increasing at a 10% to 12% rate over 2013, and our home products businesses growing faster, and again outperforming the market for our products. Based on this market sales growth, our teams are focused on delivering full year EPS of $1.90 to $1.99.

So to sum up, we remain confident in our ability to continue to outperform the recovering home products market and intend to deliver strong profitable growth in 2014. We believe that our strong brands, management teams and capital structure provide flexibility to both focus on profitable organic growth and drive incremental shareholder value with our strong free cash flow: by investing in our businesses, pursuing accretive strategic acquisitions and returning cash to shareholders.

Now I'd like to turn the call over to Lee, who will review our financial performance and provide more details on our 2014 outlook.

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. Before I describe our first quarter results and revised full year outlook, let me summarize some factors that impacted our results in the quarter. First, our 2013 first quarter performance provided a challenging time [ph], as our home segment sales grew 16% in that quarter and EPS tripled to $0.24. Second, extreme weather negatively impacted our results. The magnitude of the impact required that we quantify this to better understand both the first quarter run rate of our business, as well as forecast performance for the balance of 2014. So in early February, each of our businesses began preparing detailed bottoms up reviews of performance by region. The resulting estimates were relatively consistent, with the Northeast and Midwest regions performing substantially below other regions.

As Chris mentioned, in these 2 regions, sales declined 3% in the quarter, while the other regions experienced double-digit growth. The total impact for these 2 regions was estimated at $40 million in sales and $0.08 in EPS, $0.06 from lower sales and $0.02 from production inefficiency. And third, given our continued confidence in the longer-term growth and the demand for housing, we need to begin to invest in capacity as we said last quarter.

Now for our first quarter reported results. Sales were $966 million, up 9% from a year ago. Consolidated operating income in the quarter was $65 million, up 4%, or $3 million compared to the same quarter last year. EPS were $0.25 for the quarter, versus $0.24 the same quarter last year. Importantly, excluding the estimated impact of weather, total company net sales would have increased by 13%, operating income by $22 million or 35% and EPS by $0.09 or 38% compared to last year.

Now let me provide more color on segment results. Our cabinet sales were $411 million, up $66 million or 19% over the prior-year quarter, led by WoodCrafters and growth in dealers. Operating income for this segment increased to $20 million, up $5 million, as we benefited from higher sales volume, WoodCrafters and on improving mix from repair and remodel growth. Excluding the estimated impact of weather, operating income would have been $30 million, or roughly double the prior-year quarter, and operating margin around 7%, over 200 basis points higher than the same quarter last year. For the full year 2014, our cabinet team has the potential to generate operating margin approaching 10% after investments.

Turning to plumbing, sales for the first quarter were $310 million and operating income was $55 million, both relatively even with the prior-year quarter. Operating margin was 17.9%. Excluding the estimated impact of weather, operating income would have been $60 million, up 10%, and operating margin approaching 19%, over 100 basis points higher than the same quarter last year. For the full year 2014, Moen has the potential to generate low double-digit sales growth with operating margin expanding 100 basis points from 2013 after investments. Windows and door sales were $130 million, up $6 million or 5% from the prior year quarter. Operating loss for this segment, which is normally the first quarter, was $8 million, an improvement from the first quarter last year. Excluding the estimated impact of weather, operating loss was $3 million better than the same quarter last year. For the full year 2014, windows and doors has the potential to generate low double-digit sales growth and expand operating margin.

Security & Storage sales were $115 million in the first quarter, up 3% to the prior-year quarter. Segment operating income was relatively even at $12 million, with security increasing $2.6 million. So to sum up the first quarter performance, we continue to leverage our structural competitive advantages to drive share gains and are continuing to see better mix, driven by the improving R&R market.

Before I turn to the balance sheet, I want to point that out we also made significant investments in the quarter to begin building incremental capacity. As mentioned on our last call, these investments should enable us to expand capacity and infrastructure to support sales growth to around $6 billion, and EPS to over $3 over the next 3-plus years. We will begin to realize the benefits of these investments later next year, but we needed to take steps now and begin implementation, so that we're positioned to capture the potential growth. These capacity investments in the first quarter will equal to $0.04 of EPS and mainly for expenses related to planning, designing and the early stages of implementing incremental capacity for the cabinet and plumbing segments. Beginning in the second quarter, we will pace additional investments with the pace of the recovering market. Approximately $0.08 of incremental investments pending is reflected in our EPS guidance for the full year, including the $0.04 we spent in the first quarter.

Turning to the balance sheet. Our March 31 balance sheet remains solid, with cash of $124 million, debt of $485 million and our net debt-to-EBITDA leverage is 0.7x. It's normal to use the revolver early in the year, so we have $125 million drawn on our $650 million revolving credit facility. During the quarter, we repurchased $69 million of our shares.

Turning last to the details of our outlook for 2014. As Chris mentioned, based on our projected 9% to 10% U.S. Home product market growth, the assumptions we make for other markets and continued share gains, we now expect our full year 2014 sales to increase 10% to 12% compared to 2013. Our resulting expectations for full year 2014 EPS are now in the range of $1.90 to $1.99. The midpoint of our guidance represents an increase of 30% over 2013 EPS of $1.50. We expect 2014 free cash flow to be at least $250 million for the full year, after CapEx of approximately $130 million to $140 million, as we begin to invest in incremental capacity to support long-term growth potential. Additionally, our quarterly dividend payment was increased to $0.12 per share beginning with our March payment. And the board has now authorized a June dividend of $0.12.

In summary, after considering the impact of challenging 2013 comps and the extreme weather, our first quarter performance and the expected continued market recovery give us confidence for 2014 growth, but also for potential growth beyond 2014, as we continue to benefit from our structural competitive advantages. Importantly, this sustainable momentum in both the housing market and in our business performance should allow us to create incremental shareholder value by making select acquisitions and returning cash to shareholders through our dividend and share repurchase. I'll now pass the call back to Brian.

Brian Lantz

Thanks, Lee. That concludes our prepared remarks in the first quarter of 2014. We will now begin taking your questions and we'll continue as time allows. [Operator Instructions] I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Bob Wetenhall from RBC Capital Markets.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Could you just give us a little sense, since the end of the quarter, on a regional basis, what you're seeing from demand? And on a regional basis and how you're thinking about the consumer demand trends unfolding in R&R purchases during the balance of the year?

E. Lee Wyatt

Sure. We're actually encouraged that in the parts of the country that were frozen in the first couple of months of the year, we are seeing more activity there. I'd actually bifurcate it a little bit and say that through our dealer network, we're actually seeing good orders coming through, a lot of activity. On the retail side, we're seeing a lot of activity and a lot of bids, but we're still kind of watching for those to get converted into orders. So I'd say the general pace is good. And what we're watching for is that to continue through the quarter and that will build into the balance of the year. So it was encouraging because we saw that kind of activity in the non-snow belt regions. And it very much felt like a continuation of last year in most parts of the country. And yet we started to observe in late January or early February, wow, this is going to be significant. And we started to really dig in. And now we're pleased to see that there's kind of a return back. Big question will be, how much do you get this year? But we're optimistic we'll pick up quite a bit of it this year. It just means we're going to have a stronger second half of the year. We'd already thought we'd have a strong second half. And this will be even stronger.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Got it. Got it. And if I could ask Lee. Lee, could you expand a little bit on your comments about reinvesting in the business. You had mentioned that there's tighter capacity, which sounds like utilization is up across your business lines. Can you just give us an idea of how much is real CapEx and what's going to flow through the P&L and kind of where utilization is? Just to frame it, so we know how to think about it for the rest of the year?

E. Lee Wyatt

Yes, utilization right now, of course, it's seasonal, but that's fine, that's fine for '14 and it's fine for majority of '15. This capacity is really for 24 to 36 to 48 months from now. As we've always said, as we approach $5 billion in revenue, we'd need to increase capacity. If you kind of take the midpoint of our guidance this year, it gets you to $4.6 billion to $4.7 billion, so we're there. And you always need to improve, when you're talking about manufacturing capacity, you really need to start that 18 to 24 months in advance. So that's what we're doing. What you're seeing in the first quarter was primarily P&L-related expenses. Those are planning, those are designing, and some very early stages of shifting some capacity around just for planning purposes. So you didn't see a lot of CapEx. The CapEx will start flowing a little bit later in the year. From a P&L perspective, on the last call we talked about $0.08 and it's primarily Moen and cabinets. And so we saw $0.04 of that. We just wanted to get ahead of the planning and the design and some very early stages of moving, because we needed to get that started. We can pace the balance of the year, the additional $0.04, because we have $0.08 in our guidance, that additional $0.04 now we can start pacing, and the CapEx will get paced as we move through the year.

Operator

Your next question comes from the line of Michael Dahl from Credit Suisse.

Michael Dahl - Crédit Suisse AG, Research Division

Maybe just a quick follow-on to Bob's question and also appreciate all the color that you've provided on the weather impact. But maybe if we think about, back to the fourth quarter of last year, do you have a quantification of the sales trends in those regions, relative to the overall increase? Just so we can have even more confidence that it really is just a weather impact here?

Christopher J. Klein

Yes, we didn't see any impact in the fourth quarter, regionally, that was different. And I think we normally see more concentration in R&R in the Midwest and Northeast because of the housing stock's a little bit older so you do see a different pace there. But what we're doing is comparing 2 normal trends. This is a sequential quarter-to-quarter. This was for a normal seasonal trend and where our expectation was for the macro market, how were we performing relative to that expectation. And in the non-snow belt areas, we performed to our expectation, to our market projection and delivered as we would have thought in that season. In the areas that were impacted, it was significant. We're talking difference between down 3% versus in the other areas of the country, up low-teens. So you've got a material impact. We also built it account-by-account, region-by-region to validate it. So we did it bottoms up and then we stepped back and looked at it against a formula, if you will, of our market assumptions relative to the seasonal demand that should have been driving through there and it tied it out. So we started monitoring this in late January, as it started unfolding, and started trying to react appropriately and so we've been tracking it now for kind of through. And we actually saw it then start to improve and that gave us confidence as well. Okay, now we're starting to move back to trend line, back to what we would have expected in those areas. And so you have confidence that you've measured the cause and effect.

Michael Dahl - Crédit Suisse AG, Research Division

Got it. I guess what I was looking at was just the 16% year-over-year growth in the fourth quarter for the total business. Would it have been fairly even across regions? Or has there been a -- are we just seeing lower growth generally in the Northeast and Midwest?

E. Lee Wyatt

You really have to look at R&R versus new construction. So as Chris said in his comments, over 50% of our sales in the first quarter of last year were in those 2 regions, the Midwest and the Northeast, and a lot of that is R&R-related, the age of the housing stock much greater in the Northeast, much more concentrated. So we didn't really see any change in general direction, like for R&R, we saw a strong second half of last year. We saw that continue into the first quarter in those areas that weren't impacted by the weather. But when the Northeast is impacted by weather and it impacts R&R in such a big deal, I think that's what generates a lot of the profit impact. So kind of normal when you look at it.

Michael Dahl - Crédit Suisse AG, Research Division

That's helpful. And then just as a follow-up. On the cabinets exits in the builder business, could you just remind us how we should think about that for the next couple of quarters before -- or as you're getting closer to lapping that? And maybe what was the specific impact of that in this quarter?

E. Lee Wyatt

Yes. The exit of the direct-to-builder was basically in the Southwest area. That's low margin new construction cabinetry for us. And it follows our kind of our general approach to business is we're going to be disciplined, we don't need to chase low margin business, so we made the proper notices last fall, fourth quarter, exited it starting this year. In the quarter, first quarter, it was about $10 million impact on cabinets, negative impact.

Christopher J. Klein

On revenue.

E. Lee Wyatt

On revenue. And then for the balance of the -- for the full year, it's probably going to be $50 million to $60 million. We're assuming that offset by share gains though, that are really going to help offset some of those pieces.

Christopher J. Klein

Part of that is that capacity is then freed up to be used either in more profitable parts of the country, direct-to-builder, or is being utilized through the dealer channel. So the P&L impact is quite modest. That was not attractive business.

Operator

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

Stephen S. Kim - Barclays Capital, Research Division

I just wanted to be clear, how much of this lost $0.08 are you actually incorporating in your guidance to be gained back? And maybe the 2Q specifically. I mean, are we talking pretty much all of it to be regained?

E. Lee Wyatt

Well you really have to break the $0.08 down. $0.06 was sales related and $0.02 was actually production inefficiencies. So we won't get that $0.02 back, basically. So when we think about that, we took our guidance, we narrowed that guidance from $1.91 EPS to $2.01, now to $1.90 to $1.99. So slightly narrow, basically around those things. We took our sales guidance from originally 11% to 13% growth for the year down to 10% to 12%. So we'll get most of that back either through a combination based on our market assumptions for the year, based on sales and some cost controls as we move to, we tried to hit our guidance. And so we'll work hard either from a cost control or from a sales.

Christopher J. Klein

We're also assuming a significant part of that isn't flowing back in the second quarter. It's flowing back through the balance of the year, and especially into the second half. What we're seeing in the business right now is a gradual improvement and a ramping up and literally week-to-week. This week is better than last week was better than the week before. So it's starting to catch and I think that's going to flow through. We're assuming we're just going to have a busier second half. Typically you'd see July would be kind of quiet. December would be kind of quiet, as the market's absorbing some of this demand, we think you could just have a busy 6 months the whole second half of the year. So that's the way we've kind of played it through the business and that's the expectation we've got, as we're running the business.

Stephen S. Kim - Barclays Capital, Research Division

Great, that's very helpful. And then as a sort of a follow-on to that, relates to the way in which the business is returning. One of the things that we've been hearing from several other places is that the recovery is -- the rebound from the depressed weather effect is being regained, but it does seem to be somewhat gradual, doesn't seem to be like all at once. And I'm curious as to whether or not you think that there could be another factor also at work, for example, the housing market did sort of slow for reasons that appear to be maybe other than just weather. And I was curious as to whether you see any evidence that there has been some slowness or deterioration in the rate of growth, due to simply the housing market sort of recovering from the massive price increases that went through and maybe even some of the lagging effect of interest rates last year?

Christopher J. Klein

I think that is still the case and that was what we had expected would be the case coming through and in our plans for the first and second quarter, there is a lag in our business. So the slowdown you would have seen in the fall would be playing through right now. And that's what we expected. So that was an issue and I think that is impacting businesses like Moen on the wholesale side, where we expected we would see a slower first quarter and rolling through. We expect that the housing market will be growing this year. Our expectation is that we'll be up on new construction kind of in the low- to mid-teens type range and therefore there is going to be strong demand in that part of the market. We have very strong share with Moen on the builder side of the market, with NBCI and some parts of the direct-to-builder business, as well as through dealers. So certainly, furniture [ph] as well. So we will see that contributing to a stronger second half and that will gradually be comping against what will be weaker numbers as well. So that is definitely flowing through and -- is but that was expected. We would have been talking about that. In any case, we would have been discussing that right now.

Operator

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

Dennis McGill - Zelman & Associates, LLC

I guess the first question would be along the lines of the cabinet business, where you are walking away from builder business. You mentioned you're essentially picking up business elsewhere and it's essentially a capacity decision. But can you maybe just walk through in a little bit more detail what you're seeing with respect to price in the builder channel? It seems like it's maybe more competitive than other areas that are getting price and maybe your outlook, Chris, on what that might be over the next year or 2 as more competitors work into a tougher capacity situation?

Christopher J. Klein

Sure. The decision we made in the West on the builder-direct business was not a kind of a short-term decision. It was something we've been looking at for a long time. The builder-direct business requires certain of our cost structure that we've got to support that business. And in other regions in the country, the product mix supports that. There's slightly higher price point cabinets. There's more margin there to support that cost structure. In the Southwest, the product going in was just at a price point that had trouble supporting the cost in that market and we struggle with it, others struggle with it as well. It was a part of some of the competitors -- there was a competitor that went out of the business down there. Others have reduced their exposure to those markets. And so it was really a market price point in that part of the market discussion. That's not the case with all the houses being built in those markets. We've got a very strong dealer business in those markets, where we're selling higher price-point product, with the kind of appropriate level of support. And so, it really was -- it was something we had been working through for a while. And to the extent that, that market didn't support that. I'd say, your broader question around does the builder market -- attractive for us to be serving? I'd say absolutely. There are places especially in the kind of East, Midwest, Southeast, where we have very strong direct-to-builder business, terrific relationships, profitable for us, good partner for them. And so no issues there. And certainly then, through our dealer network, we're supporting smaller builders. And those builders building more -- more upscale houses, very attractive product mix. So I'd say the builder business is a good business, it was just this piece was something that we just looked at and said longer term it's not a price point which will support the level of service that we feel. We need to be an NBCI company. I'd say, that's part of our proposition, is the level of service we provide. Others may not need to do that, others may feel comfortable not providing everything we do. And so then maybe that price point works for them. But that just doesn't work for us, in the way we support that business.

Dennis McGill - Zelman & Associates, LLC

So would you say within the cabinets business, if you were to compare that against some of your other products that are particularly new construction focused, do we have more or less pricing power within cabinets versus others?

Christopher J. Klein

I'd say we do fine where the markets are healthy and that I'd say the balance of the country is pretty healthy. So everything going through the dealer channel looks good and in fact, a lot of the strength that we're seeing has come through that. And then the direct-to-builder business in the other parts of the country, I'd say we do just fine. A lot of that we roll through as new products, new finishes and so I think it's appropriate, it's good balance.

Operator

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

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

The first question I just had was going back to guidance for a second. I think we kind of summed it up in that it appears that the primary change in the EPS is that $0.02 of the extra costs that you parsed out of the $0.08 hit. But also you had, I guess, sales to your home products' markets down by 1 point, which would imply maybe another incremental small hit. So is there anything going on that's maybe offsetting that, as you think about that and maybe we're getting a little too granular, but it seems like there was maybe a couple of little minor negatives and -- but EPS really didn't come down as much as you would think perhaps?

E. Lee Wyatt

Yes, I think those are small pennies here or there. But it's primarily -- we'll get better leverage as we grow 10% to 12% our sales, we'll get some leverage around that. And we'll also -- if we will continue as the market comes back to pace our cost. Now we'll still make our investments for capacity over the next 2 to 4 years. But there are other places we'll be thoughtful if the sales aren't quite as good, where we can control some cost in that equation. So our goal is to hit our guidance.

Christopher J. Klein

And the mix was a little bit better. That was one of the positives coming out of the quarter, as we continue to see some good mix trends that we saw coming out of the fourth quarter into the first quarter, even on the volume that was there.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. And that's helpful, Chris. Just, I guess, flowing into the second question. On cabinets, I guess you mentioned that you expect the lost builder-direct business to be about $50 million, $60 million for the year. But I just want to make sure I heard correctly that you expect that to be offset by share gains and being a lower margin business that's kind of baked into your full year outlook of approaching 10%?

Christopher J. Klein

Yes. Yes, the exited business is definitely lower margin business. And yet the core business continues to grow, I'd say in a very solid way and is taking share, so that offset.

E. Lee Wyatt

And yes, you can see that into the -- in just the growth of, as we said we could approach 10% operating margin in cabinets this year. We were at 7.3% last year. So it's that mix, as we continue to be disciplined in that mix, and still get good sales growth. You'll see those operating margins come back. And our long-term goal, as we've said, is 14%, which was kind of prerecession levels for our operating margins in cabinets.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Just one last quick one, if I could. A competitor mentioned last week -- your large other public competitor, that they saw a little bit of increase in commercial activity in cabinets. Did you see that as well during the quarter? And any thoughts around that? Or that perhaps -- was that more temporary in your view? Or any thoughts around that?

Christopher J. Klein

I think in retail, there was a little bit. I don't think it is sticky or at a higher level. We kind of held where we were. And I think that channel on the retail side in general is pretty healthy right now. So didn't really concern us. On the dealer side, didn't see the same thing. So I think the market is obviously despite the quarter we just had with the weather impact. Market overall is pretty healthy on that regard. And we're kind of all off running and bringing better stuff into the market.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay. So a little more temporary, then, in your view?

Christopher J. Klein

Yes, that was our take on it.

Operator

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

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Cabinets. There's more companies out there today than there were several quarters ago commenting on the trends. And if you wouldn't mind, I mean, there's a lot of numbers today. And I appreciate the extra work you guys did there. But could you answer just on like the cabinet side, for example, could you start or comment on your ability to start commenting on volume and price/mix within that category? So we could understand how revenue is being impacted, if it's largely by price/mix, or in fact if it's end-market volumes?

Christopher J. Klein

Sure, I'll give you a broader look at it, and then maybe Lee will follow-up with some specifics. But I'd say, in general, it's volume. We are getting improved mix. As the volume is coming through our dealer channel, that does have a higher price point, better mix coming through. So the performance that we saw, especially in this quarter, through that channel, was really quite strong. And so our strength in the channel is being led by that and so that will have volume share gain, as well as mix included in that as it translates into revenue. Lee, I don't know if you want to give...

E. Lee Wyatt

Yes. We've always talked about getting back to operating margins of 14%, the prerecession targets and levels. And a big part of that is leveraging cabinets and the R&R growth, because we've said, over a recession-recovery period, you'll always get R&R big ticket that lags in the early stages, and then actually accelerates on a dollar basis beyond normal growth at some point in the market. And it's that kind of acceleration in big ticket R&R that really helps us improve from the 9.3% operating margin that we had last year to getting back to that 14%, when we hit kind of a normal run rate market. And if you take the midpoint of our guidance, you start approaching in '14, 11% operating margin. And a good piece of that is what Chris described, it's the better mix coming through bigger ticket items, so which is very helpful and that's why that dealer base in cabinets is so strong to us.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Okay. If you could maybe, Lee, going -- just sticking with cabinets here. I think in the prior quarter you kind of talked about the contribution that's WoodCrafters, and how it's kind of -- how that was. Would that be something you could update us on? Or it doesn't matter because WoodCrafters is kind of past that [indiscernible]?

E. Lee Wyatt

WoodCrafters -- yes, I would tell you generally about WoodCrafters when we made the acquisition last June, we basically said it was a $230 million revenue company. And in '14 would generate incremental EPS of 11% to 13%. And it's spot on that. We're very pleased with that, those are really good estimates and it's performing well. It is getting harder and harder to break that out, as they now start becoming more integrated and actually providing componentry into the broader cabinet business. So we're going to struggle to have that happen. I would tell you this, if you take, kind of -- if our cabinet business for the full year approaches 10% operating margin, which is what their target is, you'll see incremental margins even with WoodCrafters in there between that 25% and 30%. So we're really not worried about it. It's -- they have very good leverage in that business, especially as R&R comes back and with their great strength in that dealer channel, so it was good.

Operator

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

Stephen F. East - ISI Group Inc., Research Division

That's extremely helpful on this call to see where the weather impacted you. You can't go without a capital allocation question, and what you're seeing on that front with M&A, with your share repurchase and you've talked about your CapEx. But if you all can just elaborate on, one, what you're seeing, how optimistic you feel about it on the M&A? And if it's not going to come through this year, sort of how do you think about your capital allocation from there?

Christopher J. Klein

Sure. Yes, I'd start with -- and I hate to sound like a broken record, but we're going to be very efficient with our cash and capital allocation and really leverage it as well. So I'd say, first off on the M&A side, the market is getting busier, so we are seeing more opportunities. I can't predict or project when those things will materialize into something that we end up closing on, but I would just say market feels stronger over the last 90 days than it had as we were in third and fourth quarter last year. So we're just looking at a number of different things. Our teams are busy, and so I think that's encouraging. Expect that to continue. So I think it's the start of what I would expect to be the next couple of years of an increasing pace on there. So as we talk about it, the more opportunities we have to look at and folks to talk to, the more likelihood it is that we'll be able to actually get some things done. So hopeful on that. But that's a good sign that is emerging as we are kind of 4 months into '14. On the dividend side, we obviously increased our dividend late last year and declared that just recently. So we're on that trajectory. And then the share repurchase, Lee can comment for a minute on kind of our activities so far.

E. Lee Wyatt

Yes, as we've always said, we don't need to accumulate cash. And so as we began planning for 2014, we basically said, let's make sure we avoid any share dilution. So let's use cash early in the year to just systematically buy back shares. So we've -- in the first quarter, spent about $69 million to buy back shares, just to kind of avoid any dilution as we use cash. We'll do that and we'll pay the dividend each quarter, and we'll still, by year end, have net debt-to-EBITDA basically around 0. So we're just using the cash efficiently, and using it where we can. And as M&A develops, then we'll figure that out and we've got a lot of leverage potential on our balance sheet, as Chris said.

Stephen F. East - ISI Group Inc., Research Division

Okay, that's great. Helpful. And then just 2 odds and ends question. One, on the cabinets side, we've heard different stories on wood inflation and are you seeing it and can you pass it through? And then the other thing, China, you talked about it, it remains strong. They've seen a lot of slowdown there, why do you think -- are you just such, so early in the process that you're just growing through it, or what do you think is driving that?

Christopher J. Klein

I'll talk about China and then Lee can touch on the wood. I was just out there with our team a few weeks ago and I'd say a lot of discussion about where the growth is, or where it's not. Our business is concentrated in Tier 1, Tier 2 markets, and they're performing better than the Tier 3, Tier 4 right now. And so I think that we're well-positioned there. Obviously a broad network of stores, really working with the stores to improve the flow there. Over time, I mean, we've been a heavy new construction market in China. Over time, we're starting to see some R&R activity come through there. I think that will build over time, so we remain optimistic. All that being said, I wouldn't rule out that there is a slower new construction market flowing through China in the next year or 2, it's pretty well documented and we talked a lot about it. But I'd say, I was encouraged that our own performance was pretty good and I think we're being quite prudent in terms of our expansion into the markets that are showing good growth and paying attention to the velocity within those stores and so not getting out ahead of the development in the Tier 3, Tier 4 markets with the absorption out there and might not be kind of keeping up. So that's just our take on it now. The other thing I'd say is, we're going to continue to watch it closely because it is evolving and the situation's [indiscernible] than it was 6 months or 9 months ago.

Stephen F. East - ISI Group Inc., Research Division

Yes, I got you. What type of store growth are you expecting this year?

Christopher J. Klein

We look at that every quarter. So typically, we might target 50, 70, I think it's 100 stores, but that will depend on where we see the opportunities. If we don't see the opportunities, we'll be more modest in the store growth this year. So I think we'll evaluate it quarter-over-quarter. The other part of our focus is direct-to-builder business, which is growing over there and increasing the velocity within the existing stores. So it's really that mix that we're trying to optimize to get the growth.

E. Lee Wyatt

And, Stephen, on the inflation. The first quarter was very much a repeat of the fourth quarter, where we saw total inflation across the company as in the low single-digit range. We did see wood at the higher wood, plywood, particle board at the higher end kind of the mid-single digits. We do get pricing, we continually get pricing to offset inflation, so we've seen that. So inflation was not an issue, pricing more than offset it. But overall, for the quarter, pretty minimal impact on either when we net them.

Operator

Your next question comes from the line of Keith Hughes from SunTrust.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Looking specifically at April, I know you talked about acceleration. But based on some of your comments, are you still not quite at this 10% kind of run rate we're expecting for the year?

Christopher J. Klein

I'd say we're building towards that. We're not there yet. So January, February was hard, negative, down. March started to improve. I'd say April improved a little bit better than March, but still not kind of up to that ramp. The activity that we're seeing more recently, as we look into activity in orders that we expect and then are going to convert into revenue in May are picking up. So I view the second quarter very much as a kind of the on ramp into the second half of the year. So I'm encouraged by the activity we're seeing. I think there's real strength. It's pretty widespread. It's both in the recovery in the Midwest, Northeast. There continues to be good activity around the whole country. So -- but it's just pacing. It's just -- basically, I think getting the consumer back that into the flow in those parts of the market where they were quiet for the first part of the year.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then second question on the cabinet acquisition last year, it looks like that may have added about $30 million of revenue. Is that number roughly correct?

E. Lee Wyatt

It's -- for the quarter, a little higher than that. It was a $230 million revenue estimate. So probably closer to $50 million in the quarter.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

$50 million in the quarter, okay.

Operator

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

Garik S. Shmois - Longbow Research LLC

I just have a question. You talked about the potential sales and margins by segment. Just wondering if we should think about that in relation to your guidance. Is this a framework by segment that should take us towards the midpoint of the guidance? Is this the best case scenario? I'm just wondering if you can provide a little bit more color around the language.

E. Lee Wyatt

Yes. What we tried to do in the first quarter, whenever you -- when we have weather that really confuses the performance. So we try to add the weather back so you could see it. But then we still try to give you just a sense. Not as much guidance by segment, but just kind of the potential and some of the things we're working towards. But I think if you would look at those generally and say it's probably moving towards the midpoint of the guidance.

Garik S. Shmois - Longbow Research LLC

Okay. And just a follow-up is, a competitor had indicated they're seeing some extended lead times between new housing starts and when their products are signed to be shipped in, whether it's a bigger mix of multifamily construction or whether it's supply constraints. Are you seeing any evidence on your end that, as housing, if and when it does come back, there might be delays in timing from when a start occurs and when your products actually get shipped?

Christopher J. Klein

No, we don't really see that. I think, on the -- if you go across our portfolio, with cabinets, you're kind of shipping when they're ready for that. And I don't see that changing in the sequencing of how they're building the home. And so we're producing to be delivered into when they're ready for that install. Within faucets, the inventory is flowing into wholesale and the wholesalers are holding that inventory and shipping it in and the builders [ph] are installing when they need it. And on entry doors, we're shipping out into the market. Our distributors are holding and they're assembling to be installed on-site. So I haven't seen any of that impacting our businesses at this point, as I'm sitting here. I, certainly, through the last couple of quarters haven't seen that change.

Operator

And your last question comes from the line of Eric Bosshard from Cleveland Research.

Eric Bosshard - Cleveland Research Company

I'm wondering if you could talk a little bit about in the cabinet business how the home centers grew or what you saw in terms of growth rate in home centers relative to what you saw in dealers.

Christopher J. Klein

I'd say it's different. Dealer market certainly in the non-snow belt regions were very strong. I mean very strong kind of in the over 30% growth type very strong. So and so we certainly didn't see that kind of volume flowing through or that kind of activity flowing through the home centers. In the areas where the weather was impacting, we were down in dealer. And I'd say it's probably more consistent with what we're seeing coming out of the home centers. So that's where the big change was. As we're sitting here in April coming into May, I'd say dealer activity is translating into orders and there's a good pace on that side of the business. In the home centers, there's a lot of activity and we're working closely with them, but there's probably not as fast a conversion from a lot of the quotes that we're seeing and all the work that we're doing and it's kind of again ramping up toward firmer orders. So there's a pace issue is what we're seeing. And so I'm encouraged that there is consumers in -- out there shopping and that we're helping and working them through quotes. But the conversion then from the quote to the order is just kind of -- isn't coming up to pace yet of where the dealers are. So that's the biggest difference I'd say right now.

Eric Bosshard - Cleveland Research Company

And then in terms of the builder-direct business, the $50 million, I think you quantified the impact of walking away from that in the quarter. In terms of when you will offset that with other share gains or basically re-purposing that capacity. I just want to make sure I understood, when will that happen? Or when will those 2 -- when will that loss be zeroed out? Is that a 2014 event, first half, second half? How should we think about that?

E. Lee Wyatt

Yes, it's $50 million -- roughly $50 million for the year 2014 and we exited right at the beginning of the year. We gave notice in the fourth quarter. So it will take all year. But it'll just -- it will flow through. It was $10 million in the quarter, the first quarter, and $50 million for the year. So it'll just flow through the year. I think we have such a good position and a good service proposition in that dealer channel that we're gaining share there. So it'll offset it. And it will be much more profitable.

Eric Bosshard - Cleveland Research Company

So the gross impact of the $50 million have a net offset with the success of your strength in the dealer channel, how much of that will be offset is what I'm trying to figure out?

E. Lee Wyatt

You know hard to tell. I'd tell you, the profit impact will be minimized. The sales you could still get a little slippage, but by the end of the year, I think we'll make that up with the way we're gaining share in the dealer channel. So by the end of the year, I wouldn't think it's going to be an issue. But we will see that each quarter that we're walking away from roughly 1/4 of $50 million.

Operator

And this concludes our Q&A session for today. I would now like to turn the call back over to Mr. Lantz.

Brian Lantz

Thank you, Jeremy. I'd like to thank everybody for attending the call today. And we look forward to getting out and working with all of you very soon. Thank you.

Operator

And thank you for participating on today's Fortune Brands conference call. This call will be available for replay beginning this evening and continuing through May 14, 2014. The conference ID number for the replay is 26420646. The number to dial for the replay is (855) 859-2056. And this concludes today's conference call. You may now disconnect.

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