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Fortune Brands Home & Security (NYSE:FBHS)

Q2 2014 Earnings Call

July 30, 2014 4:30 pm ET

Executives

Brian Lantz - Vice President of Investor Relations

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

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

Analysts

Dennis McGill - Zelman & Associates, LLC

Stephen S. Kim - Barclays Capital, Research Division

Michael Dahl - Crédit Suisse AG, Research Division

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

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

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

Adam Baumgarten - Macquarie Research

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Garik S. Shmois - Longbow Research LLC

Eli Hackel - Goldman Sachs Group Inc., Research Division

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

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

Thomas Mahoney

Operator

Good afternoon. My name is Lianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security 2014 Second Quarter Earnings and Results. [Operator Instructions] 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're pleased to be here today to provide an update on our progress during the second 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 Investor 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 our 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 and delivered a solid second quarter as the pace of new construction and consumer spending have gradually improved. We continue to gain share and we remain well positioned to deliver strong growth this year.

Our 2014 annual outlook has been updated to reflect the U.S. home products market that we now expect to grow at a slower pace in the second half than our assumptions earlier in the year. However, our revised company outlook calls for continued profitable growth based on our share gains and the improving markets for new construction and repair and remodel activity through the balance of 2014.

Let me first take you through some of the second quarter highlights, then I will discuss our recent actions to drive incremental growth, and finally, I'll tie it all together with our view of the current U.S. home products market and our updated 2014 annual outlook.

Turning to the quarter. Sales were up 10% and EPS was $0.55, up 34% from a year ago. Let me give you some highlights by segment. Sales for our cabinets business were up 19% for the quarter. Cabinet sales growth was led by mid-teens growth in the dealer channel, where big ticket remodeling activity remains strong, as well as nearly 10% growth in home center sales for our brands. We again gained share in the dealer channel, where we continue to see growth across a full range of semi-custom and custom product lines, resulting in a better mix with higher price points. Our share gains are coming from deeper relationships with existing customers, as well as new dealerships. Regionally, the South and the West continue to outpace the North and Midwest, which are improving versus the first quarter but at a more modest pace.

We've launched several new products this year, including our refreshed Diamond line, new bath vanity offerings in home centers and the new Omega frameless custom line for dealers. These new products are selling well. Our home center business continues to benefit and gain share from the innovation we are bringing into the category.

We continue to leverage our proven structural competitive advantages to generate sustainable momentum. This is a complex business, but our teams execute flawlessly against a business model that is tough to replicate. Our share gains across channels with improving margins reflect the tangible impact of these advantages. If we exclude the sales from WoodCrafters and the impact from last year's planned exit of low-margin builder direct business in the West, underlying cabinet sales were estimated to be up 10%. Plumbing reported sales that were up 5% for the quarter, led by growth in U.S. wholesale and international.

In the second quarter of 2014, Moen faced challenging sales comparisons in the wholesale channel versus the second quarter 2013, that saw wholesalers bring inventory and to support projected second half demand. This year is different as wholesalers drew down inventories to some extent, but mix was better and we were able to support some price.

Even with these dynamics, our sales grew mid-single digits and margins were strong. Across both retail and wholesale, we are encouraged to see consumers continue to select our innovative new faucet products for their new homes in repair and remodel projects, including new pullout faucets with reflex self-retraction in our Walden, Kinzel and Berkshire lines. Our MotionSense hands-free faucet, which continues to be introduced in additional styles and faucets with our Microban finishes. Overall, we see continued strength in the more premium end of the market, supporting bigger remodel and renovation projects. Moen international sales were led by Canada wholesale and retail sales, which increased high-single digits and improved from the weak first quarter. China sales were up modestly over the prior year as new construction activity was weaker and direct to builder sales softer but our 920 Moen stores continued to generate solid growth. Windows & Doors reported sales were up 9% for the quarter, drove product's healthy sales growth of 11% driven by gains in new construction and ongoing distribution additions. 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 consumer selecting our new decorative glass designs and the door styles like our new recently launched Pulse line of modern entry doors. The Therma-Tru brand continues to perform strongly across all channels.

Window sales were up 7% in the prior year with continued double-digit growth in the west and improved growth across the remainder of the country as the northern markets rebounded from the slower first quarter. In the Security & Storage segment, sales declined 5% from the prior-year quarter. Security sales were up 1%, led by increases in U.S. retail and safety, offset by some weakness in international. Store sales decreased by $9 million as we exited some lower margin accounts and the Father's Day promotional season was weaker. Master Lock U.S. retail sales continue to grow with program expansion at retailers. And Master Lock's roll out 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 modestly improving quarter. As we move into the balance of the year, we remain positioned to continue our share gains and deliver a stronger full year of sales and profit growth. I would now like to turn to our recent actions to drive incremental shareholder value with our cash flow and balance sheet. First, given the pullback in housing-related equities through the second quarter, we have continued to opportunistically repurchase our shares. As a result, we have now repurchased approximately $375 million of our shares year-to-date. These repurchases, along with our quarterly dividend, reflect confidence in our performance and our ability to drive long-term shareholder value. Second, today, we announced that we have acquired Sentry Safe, a leading producer of personal saves and protective security containers. Sentry will become part of Master Lock. We are thrilled to welcome nearly 500 Sentry associates to the Master Lock family. Sentry Safe's global brand strength in the adjacent safes market enables Master Lock company to broaden its market product offerings and leverage both iconic brands domestically and internationally. Both companies hold similar competitive advantages and produce products that protect people's most valuable assets. I'm excited about the growth opportunities we will now have together to drive innovation and leverage global distribution and manufacturing. These actions reinforce our commitment to create incremental shareholder value by investing in our businesses, pursuing accretive acquisitions that meet our strategic criteria and returning cash to shareholders through dividends and share repurchases. I'm excited that we were able to identify opportunities and execute against our strategic priorities to drive this incremental value.

Now let me tie this all together with our updated full year outlook for 2014, starting with our assumptions for the market. The demand for new construction continues to outstrip supply in many markets across the country. Housing inventory remains low. Mortgage rates have remained stable over the past year and single-family homes are at historically affordable levels. We continue to believe that new construction will return to historic levels and that the R&R market will grow at 5% to 6% in a steady-state. In repair and remodel market, which is around 65% of our home products business, we see the continuation of the growth for bigger-ticket semi-custom and custom cabinets, as well as increased project size and stronger demand for more premium of faucets in our Moen wholesale showrooms. However, in the near term, the pace of repair and remodel demand has been recovering more gradually than we expected in half of the country impacted by weather early in the year even as demand has been solid for the remainder of the country. New home construction, where our products are installed in the later stages, has also been slower to reaccelerate since last fall. So while demand for both new construction and repair and remodel should show solid growth for the balance of the year, we expect the overall U.S. home products market growth for the second half will be somewhat lower than we assumed on our last call. Therefore, our updated 2014 annual outlook is built on a revised assumption that the U.S. home products market grows at a combined 6% to 8% annual rate. Based on that U.S. housing market projection, the assumptions we make for our other markets and continued share gains plus the Sentry Safe acquisition, we continue to expect solid top line growth for 2014 with our full year sales increasing at a 9% to 11% rate over 2013 and our home products business is growing faster and again, outperforming the market for our products. Based on this market and sales growth, and the benefit of share repurchases, our teams are focused on delivering full year EPS of $1.88 to $1.96.

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 provides 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 2014 outlook and on our recent capital allocation actions.

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 second quarter results. Sales were $1.14 billion, up 10% from a year ago. Consolidated operating income for the quarter was $137 million, up 28% or $30 million compared to the same quarter last year. EPS were $0.55 for the quarter versus $0.41 for the same quarter last year, an increase of 34%.

Now let me provide more color on segment results. Our cabinet sales were $468 million, up $76 million or 19% over the prior-year quarter, led by growth in dealers and improvement in home centers. As Chris mentioned, excluding the sales of $50 million from WoodCrafters and the impact of $13 million from the planned exit of low-margin builder-direct business in the west, underlying cabinet sales were estimated to be up 10%. Operating income for the cabinet segment increased to $46 million, up $11 million or 31% as we benefited from higher sales volume, WoodCrafters and our improving mix from repair and remodel growth. Operating margin for the segment increased to 9.9%.

Turning to plumbing. Sales for the second quarter were $340 million, up 5%, led by U.S. wholesale and international. Operating income increased $15 million to $70 million, up 26%. Operating margin for the segment was 20.6%. The increase above the anticipated annual operating margin of 19% was due primarily to consumers purchasing upgraded faucet packages and the timing of expenses. Windows & Doors sales were $193 million, up $16 million or 9% from the prior-year quarter. Operating income for this segment was $15 million, a $5 million improvement from the second quarter last year. Operating margin for the segment increased to 7.8%. Security & Storage sales were $141 million in the second quarter, down 5% to the prior-year quarter. Security sales increased 1%, while sales of storage products decreased by $9 million. Segment operating income was only $20 million, due to the lower tool storage sales and investments in security growth initiatives. Operating margin for the segment was 14%.

So to sum up the second quarter performance, we continue to leverage our structural competitive advantages to drive share gains and we're continuing to see better mix, driven by the improving R&R market. Before I turn to the balance sheet, I want to reiterate that we're continuing to make investments 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 as the housing market returns to steady-state levels over the next 3-plus years. We need to make these investments this year so that we're positioned to capture the potential growth and should begin to realize the benefits of these investments later next year.

In the second quarter, these capacity investments were equal to approximately $0.02 of EPS and were mainly for incremental capacity for the cabinet and plumbing segments. For the full year, approximately $0.08 of incremental investment spending is reflected in our 2014 EPS guidance, including the $0.06 that we've now invested year-to-date. We will pace additional investments with the pace of the recovering market.

Turning to the balance sheet. Our June 30 balance sheet remains solid with cash of $145 million, debt of $605 million and our net debt-to-EBITDA leverage is 0.9x. We have $245 million drawn on our $650 million revolving credit facility. Our balance sheet reflects the impact of share repurchases and year-to-date capital expenditures of approximately $47 million.

Turning to our recently announced actions to drive incremental shareholder value. These actions confirm that our cash flow and balance sheet provide additional levers to generate incremental growth and navigate through any unevenness in the near-term home products market. First, we've continued to opportunistically repurchase our shares. As of today, we repurchased around $9.5 million of our shares year-to-date for approximately $375 million, with $112 million remaining on our current authorization. These repurchases represent nearly 6% of our outstanding shares. And given our view on our potential performance over the next few years, should represent a significant return. The positive impact to earnings per share from share repurchases should be approximately $0.10, with $0.05 benefiting the second half of 2014, and an incremental $0.05 in 2015. Second, our acquisition of Sentry Safe into Master Lock is a natural fit, providing annual revenue of approximately $150 million. The purchase price of $117 million should be equivalent to 8x 2014 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 synergies, Sentry could add $0.02 of EPS to our 2014 second half performance and an incremental $0.02 to $0.03 in 2015. Turning last to the details of our outlook for 2014. As Chris mentioned, based on our projected 6% to 8% U.S. home products market growth, the assumptions we make for other markets and continued share gains, plus the Sentry Safe acquisition, we now expect our full year 2014 sales to increase 9% to 11% compared to 2013. Actions taken this year should position us for above-market sales growth in 2015 and '16. Our resulting expectations for full year 2014 EPS are now in the range of $1.88 to $1.96. The midpoint of our guidance was revised down only $0.02 and represents an increase of 28% over 2013 EPS of $1.50. The impact from share repurchases and our recent Sentry Safe acquisition nearly offset the impact of our lower market assumption. More importantly, these 2 value enhancing moves position us for above-market EPS growth in 2015 and '16.

Let me make a couple additional points regarding our 2014 annual outlook for sales and EPS in the second half. First, in the third quarter. We're faced with a challenging sales comparison against the 2013 performance that delivered robust 24% growth. Second, both our recently announced acquisition of Sentry Safe and our share repurchase actions will have more impact on the fourth quarter than the third quarter. Therefore, the fourth quarter will experience higher sales and EPS growth than the third quarter. We expect 2014 free cash flow to be $225 million to $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, the board has authorized a September dividend of $0.12 per share.

In summary, our solid performance and the expected continuing market recovery not only give us confidence for the balance of 2014, 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 markets and in our business performance is allowing us to make selected acquisitions and return cash to shareholders through our dividend and share repurchase. These actions position us well for incremental growth in 2015 and beyond as we focus on maximizing shareholder value. I will now pass the call back to Brian.

Brian Lantz

Thanks, Lee. That concludes our prepared remarks on the second 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] And your first question comes from the line of Dennis McGill from Zelman & Associates.

Dennis McGill - Zelman & Associates, LLC

The Midwest and Northeast regions not bouncing back as much as maybe you would have thought particularly on the remodel side. Can you just give order of magnitude what you did see in the quarter relative to the first quarter? And then offer any thoughts you might have as to why that might be either from your internal data or from customers?

Christopher J. Klein

This is Chris. We lost the first part of your question, I think your mute button might have cut off the first couple of words of your question.

Dennis McGill - Zelman & Associates, LLC

Sorry. The first part was just if you were to look at the Midwest and Northeast in the second quarter, how did that performance -- or the year-over-year growth compared to the first quarter? And then second part of it was any thoughts as to why it didn't accelerate more.

Christopher J. Klein

Yes, so it came back -- I'd say, Midwest came back faster. Northeast a bit slower, both in the positive range. We thought they'd comeback a little bit faster than they did. So I'd say it was fine, but it did set up a second half, which might be a little slower as well. So that was kind of our sense of looking at the balance of the year, the market assumptions that we are making, and that's both kind of new construction activity in those regions, as well as the R&R activity.

Dennis McGill - Zelman & Associates, LLC

I guess specifically on the R&R. Any thoughts as to whether it's more of a kick out or reasons why it didn't come back more?

Christopher J. Klein

No, it just -- it built back but it's slower. I think -- we talked a little bit in the first quarter about the fact that especially big project, big kitchen and bath remodel project takes a while to engage the designer to do the work to come to the point where you're making the order. And so there's a timeline around that, which -- it's taking a little while longer. But we're seeing plenty of activity in the showrooms. I think we have reason to believe second half is going to be busy and we're prepared for that. But I think we expected a little bit more momentum just coming in. In the other parts of the country, West, Southwest, South, it was really kind of just a continuation of what we were seeing. So that pattern looked pretty good.

Dennis McGill - Zelman & Associates, LLC

Okay. And then the second question. Just -- you talked about the dealer business being very strong and even excluding share gains, it seems like a strong number. And then mix and the plumbing segment, both of those things would seemingly be R&R related. So as you look at the change in the outlook in the second half of the year, can you may be split how much of that was driven by the pace of what you're seeing in new construction versus remodeling?

Christopher J. Klein

No, I think it was more on the new construction side. So that was the bigger impact. Maybe it was half a point on the R&R to really cover kind of the regional slowness Northeast. Well, I think the thing that we're excited about is the mix continues to hold up strong. These aren't just kind of value-type purchases, but we're seeing good mix across not just cabinets but faucets and entry doors and we've got some pricing power. So it feels pretty good actually and coming into the second half, really setting up '15 and '16. So I mean, we're excited about kind of what's coming at us over the next 2 or 3 years and I think we look for those kinds of stable points in the market, which mix is a good indicator of people got a willingness. Once they're in a project, once they're willing to take something on, they're spending money. So that's good sign. That's certainly a lot better than we were a couple of years back.

Operator

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

Stephen S. Kim - Barclays Capital, Research Division

So I had 2 questions. Let me follow-up on Dennis' question regarding the big-ticket. It just want to clarify one thing because in your prepared remarks, it sounded like you were talking about continued strength in bigger-ticket, but you kind of co-mingled that with a statement about how you were seeing kind of more custom, higher price points. And I just want to make sure that what I'm hearing from you is not just that you've seen the benefit of some higher-end SKU. But also that just in general, larger kitchen remodel type works or bath remodel type work, irrespective of whatever how much luxury or entity level it may be. Just that you're continuing to see more demand for larger projects up or down the price spectrum.

Christopher J. Klein

Yes. I'd say it is up and down the price spectrum. I think the mix shift on the higher end is encouraging. But we also saw, especially within the home center, some good kind of heart of market type volume. Some of that would be some new products we've brought in, so that might be share gain as well that we picked up in that segment of the market. But I'd say there is still some appetite on the value end of the market and certainly seeing demand for that and then we're seeing that mix on the higher-end. So I'd say we're encouraged, I think kind of coming off of a weak first quarter into the second quarter seeing that kind of mix come through. And on a base level, looking at the cabinet business being up 10% over what wasn't a bad second quarter last year. There's a lot of things that are going right to have that happen.

Stephen S. Kim - Barclays Capital, Research Division

Yes. No, that's never encouraging and certainly better than what we've heard from some others. I want to ask about plumbing, if I could, next. You made the commentary that margins in the quarter were higher than your expected annual 19% rate. It sounds like you're still holding to due to better mix and deferred expenses. But by virtue of the fact that you are not changing your 19% outlook for the year, I assume that a hefty dose of this was the deferred expenses, which will then hit in later quarter. I was wondering if you could sort of talk about how much was the deferred expenses? How much is the better mix? And why you are not raising your outlook for the year?

E. Lee Wyatt

Yes, it starts with our operating margin last year at 17.8% and then on our first quarter call this year, we said that we could pick up, we thought given the way we saw the business, another 100 basis points, which approach -- starts approaching 19%. So that was, we thought, a good estimate then and we think it's a good estimate now. And a lot of the expenses just within Moen was just purely timing. A large portion of that 20.6% difference between the 19% and the 20.6% was just timing of expenses. And those will come back in the second half. So we still think 19% is a good percent. Still lets us invest in the business, do what we need to do from a marketing and other investment perspective. So we think 19% will be a great operating margin for the year.

Operator

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

Michael Dahl - Crédit Suisse AG, Research Division

I wanted to ask a couple of questions on the Sentry business. I think you talked about kind of current snapshot of what the business is and from a topline perspective and the EBITDA multiple. But could you talk to -- maybe some color around as a stand-alone business what the trajectory has been for sales and margins in that business? And what you think about as a good growth rate going forward?

E. Lee Wyatt

Yes. So we look at 2014 and we basically said, just to frame it, sales of around $150 million. It's got operating margins around 8% right now. EBITDA margins, closer to maybe a little under 10%. Good sales growth in the past. What we're really excited about is the opportunities that we have with Master Lock and the growth that, that can come from with brand stratification. Sentry Safe is a great brand. Coupled with Master Lock, it will give us a lot of opportunities. So we paid $117 million at about a $14 million EBITDA, that's about 8x. We think over the next 2 years, and probably in the second year more than next year because a lot of these are revenue synergies, we think we get that backup to Master Lock kind of operating margins of 13%, 14%, 15%. So pretty excited about what we can do with it and get it down to -- in a couple of years an -- a purchase price multiple around 6x. So it's -- we're very, very fortunate to find this one.

Michael Dahl - Crédit Suisse AG, Research Division

That's great. And then, I guess, for modeling purposes. Since this was in your quarter, is there any guidance around what the top line impact should be for 3Q, 4Q?

E. Lee Wyatt

Sure. When you -- in our guidance, we said for the full year, sales up 9% to 11%, about 180 basis points of that is Sentry Safe, about $75 million in the second half. Now you'll get more just from a quarterly standpoint. The seasonality of their business there will be substantially more sales in the fourth quarter than the third, but we'll get a benefit total of about $75 million. That's about $0.02 after some amortization from the acquisition. We'll get about $0.02 this year in the second half. Next year, we'll get an incremental $0.02 or $0.03, so net of $0.05 before any synergies next year.

Operator

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets.

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

A question for Lee. In your updated guidance, what should we assume in terms of share buyback?

E. Lee Wyatt

At this point, I think we would not assume any share buybacks. We will, from a practical manner, be very opportunistic, but we bought 9.5 million back shares year-to-date. So we wouldn't put anything in there for share repurchases in the future. The benefits will roll out nicely though. We'll get $0.05 for this year and because of the averaging under a fully diluted methodology, you'll get another $0.05 next year. So it will still -- it will continue to give even through '15, so well-positioned. But don't plan on anymore this year. It doesn't say we won't do it. We'll always be opportunistic and we'll balance share repurchases, and we'll balance the M&A pipeline and those things.

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

Okay. And just kind of taking with that share repo question, Lee. in your new guidance, it looks like you're about to have free cash flow of $225 million to $250 million. You already got a really clean balance sheet. What's the acquisition outlook from an M&A standpoint going forward? What should we expect, like which categories of product should we be looking for you guys to make purchases? And kind of what's the -- how should we think about magnitude and timing?

Christopher J. Klein

Yes, I think we're encouraged. It's becoming a busier market. And beginning of the year, I said I thought that over the next 12, 18 months, things will start to pick up. And as we sit here in July, we've got a pretty good flow coming through. We're really excited about the Sentry Safe acquisition. It's a terrific complement to the Master Lock business. But there's other things we're looking at. I can never forecast how many of those will come to fruition. I can just say that there's more activity now than there has been. And so we're encouraged by that. And so I think we're pleased that we have the opportunity to buy back some shares. But now we're saying that there could be some M&A opportunity, so maybe focus there a little bit and see how all that plays out over the next 6, 9 months. So kind of encouraged that maybe -- that market has fallen a little bit and there's a number of things that could come in. I'd say where we're looking is really kind of across the businesses and there's various opportunities across -- might not do anything in Master Lock right now given we've just done something but I think the other categories could be fair game and certainly looking at various opportunities within each of them.

Operator

Your next question comes from the line of Kenneth Zener from KeyBanc.

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

I wonder if you could expand a little bit on your cabinet comments. The 10% organic, what was kind of the relative split there between these weather-impacted areas and between the dealer and the big box or retailer however, you feel comfortable describe -- just give us different rates of growth in those 3 different kind of categories, including new.

Christopher J. Klein

Sure. I'd just say, I think we saw good growth across the country, better growth in the West, Southwest, South that become the fastest-growth area, Midwest in the middle and Northeast a bit slower. But all seeing positive signs. In terms of channel, I'd say kind of mid-teens on the dealer side. Roughly 9 -- 10% on the home center side and direct-to-builder, probably a little bit less than that. So pretty good spread across the whole piece. I think the strongest momentum was on the dealer side but the home center business was actually pretty reasonable as well. So hope that helps in terms of break out.

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

Yes. No, that's very good. And related to the walkaway business that you described at $13 million, is there a way that we can kind of think about that headwind given the organic baseline kind of tapering off? And would you mind describing that 10% revenue growth? If you could kind of split that or give us a sense of price and mix as opposed to volume.

[Technical Difficulty]

Operator

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

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

My first question, just around the cabinet margins. I believe previously you had guided for the full year to a 10% number or approaching 10%. I just wanted to know if that's still the case. And perhaps as part of the answer to that, if you could describe the -- what you see in terms of the promotional environment at retail? If that continues to be stable or how do you characterize the trends there.

E. Lee Wyatt

Sure. For our cabinet business, the quarter was -- operating margin, 9.9%. We said on the last call, we thought we could approach 10% for the year. I think we're still in that range, somewhere 9% to 10%. So we have not fundamentally changed that look.

Christopher J. Klein

On the promotional side within the home center market, it's actually quite stable, maybe even surprisingly so. We haven't really, for ourselves, moved over the last, really, 2 years relative to where we are today, kind took it down early and then we've held. We're really competing more on product, on service, on the time we spend with the designers to help them kind of work in our products. And so we're not as reliant on promotion. So I think, for us at least, it hasn't change materially.

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

Okay. And then just secondly, switching to the Security & Storage margins, and I apologize if missed this earlier, but if you could just describe if you had kind of touched on it, maybe a little more granularity, the driver of the margin decline on a year-over-year basis for Security & Storage? And maybe what was the biggest driver to that? And if you'd expect that to continue in the back half of the year?

E. Lee Wyatt

Yes. On Security & Storage, our longer-term margins have been 14% to 15%. We dropped down to 14% in the second quarter, driven by 2 things. One was the volume decline in our tool storage business. We lost some leverage there. And while Master Lock margins continue to be good, we started investing some -- in some growth initiatives, part of it on top of thinking about this acquisition and some other things. So we wanted to build a little more infrastructure. That put a little pressure on the Master Lock segment margins, but they're still very good. So we're -- the 14% operating margins in the quarter is very good. There's no real messages there in that.

Operator

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

Adam Baumgarten - Macquarie Research

This is Adam in for Mike. Can you just talk us through how sort of the sales trended month by month throughout the quarter and sort of what you're seeing now in July?

Christopher J. Klein

Sure. March -- I'm sorry, April started out a little bit improved from March and then gradually built throughout the month of June, finished up pretty good. July is traditionally a quiet month and we're comping against a quarter here where we were up 24% last year. So I'd say July is fine, but it's kind of early to read the whole quarter. Traditionally, the third quarter starts to come in kind of August and then really build momentum towards the end of August into September. It's a heavy R&R season. And so that -- I'd say it's early to say, certainly no warning signs. I think it's tracking as we would expect it, but it's kind of too early to get a solid read until we get into August and September.

Operator

Your next question comes from the line of Tim Wojs from Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

I guess just 2 housekeeping questions. On the corporate expense line, I think it's been about $30 million year-to-date there. What should expect the pace of that in the back half of the year to be? And then secondly, as we look at the $0.08 of investments in 2014, how should we think of those investment levels as we get into 2015?

E. Lee Wyatt

I'd say -- I'd said start with -- on the corporate side, the, I think, a run rate of assuming no one-time charges per M&A transactions, we think we're in the $62 million range. We're lower this year than last year because we had some one-time items around WoodCrafters' acquisition and some other consulting around that. So I'd say if you think about a $62 million annual run rate with no one-time items, that kind of gets you there. And then the $0.08, we've talked about it at the beginning of the year, things that would hit the P&L, not depreciation but things that hit the P&L directly, the planning and the design things around the capacity expansion would be $0.08 this year. We spent $0.04 in the first quarter, $0.02 in the second. We think we'll have a couple of cents left this year. Next year, haven't really done those -- that math yet. I think the heavy spending was probably this year, but we may still have some next year.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. So incrementally, some of that might go away a little bit but some of it might stick around.

Christopher J. Klein

Yes, and we'll talk about that when we give annual guidance next year.

Operator

Your next question comes from the line of Kenneth Zener from KeyBanc.

Christopher J. Klein

Ken, I'm sorry we got cut off. Would you just repeat those questions for me?

E. Lee Wyatt

We weren't ignoring you.

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

It never is. I think I asked about the 10% organic rate that you referenced and I appreciate your channel commentary. But if you could, A, kind of give us a detailed feel around volume, price/mix since that's something you're talking about so we can understand the underlying volume. And then the $13 million headwind from walked away business, could you kind of give us a sense of when or the magnitude of that headwind deceleration as we look into the back half?

E. Lee Wyatt

Sure. So on the price mix, volume question, price, net of inflation, was less than 1% in the quarter. So we got some price to offset inflation. We are seeing some modest inflation. So we did get some price but the bigger driver here is always for us is mix and volume. So I'd say price is the smallest, volume and mix would be the 2 larger items. In terms of the business, the cabinet business, builder direct in the West that we walked away from. I think about -- you can think about it for the full year to be in the $55 million to $60 million range. We had about $10 million reflected in the first quarter results. We had about $13 million reflected in this second quarter. The balance will be spread in the second half and then will be finished at the end of the year generally.

Operator

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

Garik S. Shmois - Longbow Research LLC

Just wondering if you could talk a little bit about how you're thinking about the capacity program and -- that you've outlined the $0.08 this year that was set in place for future growth. Does the slowdown in building product's opportunity this year, it all changed your thoughts on how quickly you're going to have to add back the capacity moving forward?

Christopher J. Klein

Yes. I'd say it's a question of pacing at the individual segment level. So we talked about this a little bit beginning of the year. These are discrete expansions around individual facilities. So it's maybe adding a line, expanding out the size of a footprint. So I think certainly there's a pacing issue in there. The other work that we're doing this year was making sure that we're understanding exactly where and how we're going to be building out. And we started to put some capital in, but certainly the pacing of our capital is a little bit slower. So I think we're still on track and I still would highlight that we still believe we're headed toward a longer-term steady-state new construction at the 1.4 million, 1.5 million level, 5% to 6% R&R. If that's 6 months pushed out or trending a little bit longer, we still want to be prepared with the capacity. We're certainly able to handle the business that's coming out today but as we look out through now you'd say second half of '15 into '16, we want to make sure that we continue to service the business. That's one of the reasons why we're able to growth in these kind of markets. You look at our cabinet business and how it's able to continue to service business. Lead time is short, those things is -- we don't want to be chasing. We're not putting in capacity so far ahead when we'd use it but we certainly don't want to be chasing it on the back end. The same would be true for Moen and Therma-Tru. We just want to make sure that we're prepared as it's coming in because one of our hallmarks is our service and our ability to stay on top of this stuff. So that's the eye, but certainly, pacing, yes. I mean, we're kind of looking at it month-to-month, quarter-to-quarter, making sure we're not getting too far ahead.

Garik S. Shmois - Longbow Research LLC

Okay. And I guess just a follow-up question to the Sentry Safe acquisition. Just if you could talk a little bit about the opportunity cost of the timing around the deal. You said the deal pipeline for other opportunities, is this starting to pick up? Just wondering with respect to the timing and the business that you picked up, obviously, it is accretive, but how did you weigh this opportunity versus others?

Christopher J. Klein

We've got a pipeline of things that we're looking at all the time and really, it's a question of when we're able to come to an agreement when the company is wanting to sell. So something like Sentry Safe, we've been aware of, looking at, hoping for, for a while. And it was really -- the time was now for it to be ready, but it isn't -- it doesn't preclude other things and in fact, we're -- we've got a team that's working things in parallel across a number of different sectors. And so I wouldn't say there's an opportunity cost of this versus that. I'd say, when it's ready, we'll do it and we're able to handle more than one thing at a time. So we're excited. I mean, Sentry Safe is really a terrific adjacency to the Master Lock. They're both market-leading brands and they've got some complementary product applications. We think there's places that we can take the Master Lock product that Sentry is in and vice versa. So it's really one of those adjacencies is a quite natural thing for Master Lock and we've got a very strong team at Master Lock that's able to take this on and really bring it into the Master Lock family. So I'd say in terms of trading off other things, I think it is all complementary and we truly handle multiple things at the same time.

Operator

Your next question comes from the line of Eli Hackel from Goldman Sachs.

Eli Hackel - Goldman Sachs Group Inc., Research Division

First question just going back to, I guess, more of a broad question, talking about who's spending money. Do you think you're seeing broad -- the broad spectrum of consumers increasingly spend money or how would you weigh more of the high-end versus the middle-end versus the low-end, how they're coming back in this recovery so far? I mean, it sounds like you're seeing nice trade up and you're making it sound like it's sort of across the board, but I just maybe if you're reiterating or -- clarify that, that would be helpful.

Christopher J. Klein

Sure. The probably -- on balance, it's probably skewed towards the higher end right now. We're encouraged that we're seeing more of that kind of value side continue to be in the market. The one piece that's probably missing the more credit dependent consumer who traditionally would finance, I think that's improving relative to where it was. If you look at the statistics on home equity lending, they are improving. There's more home-equity lines out there and people are drawing on those home-equity lines. There's in-store credit, there's dealer-sponsored credit. So there is credit coming back into the market, and that's helping support that level of the younger household. By younger, it's kind of the mid-30s to mid-40s which traditionally does need credit to do a big remodel project. So that's the piece, I think, is still coming and we still have more ahead of us on that. People who've got the means, either through savings or through trading out of the equity market are spending. And when they're spending, they're putting the money they want to into the project and so that's kind of getting lift on the higher end. So I'd say it's not too bad in that middle segment, but there's probably more to come as you get more lending into those households and consumers are getting more comfortable borrowing against the equity that's starting to build in the homes, as values improve across the country. So the ingredients are there. You always hope it'd be coming along a little bit faster but were not discouraged by the pace. We're all making good progress here kind of over our reasonable timeline.

Eli Hackel - Goldman Sachs Group Inc., Research Division

Got it. And then just a second question just on Moen in China. You mentioned it's still positive. Are you seeing trends there continue to decelerate, have they stabilized or are they trying to reaccelerate?

Christopher J. Klein

Sure. So small business, you kind of got 2 parts of that business. We've got our retail stores, over 900 of those. And those service, both new construction and repair and remodel market. But in the quarter, we still saw good growth coming there, so we knew that's the combination of people coming in and doing some R&R work where they're fitting out units that they had bought that was constructed years before. And now they're -- finally people and moving into them so they're having to fit them out. On the direct-to-builder side, so we just sell some business directly to the big builders there. That's the piece that was down and that's where we do see weakness given the slowdown in construction markets in a lot of the markets around China, so kind of balance those 2 together, we were up a little bit. I think my outlook for the rest of the year would be, I think we'll continue to see some good growth on the corporate retail side of the business and direct-to-builder piece will be just more tied to the general construction pace in China.

Operator

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

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

Chris, if you look at the cabinet business and plumbing business, your 2 big businesses, could you talk about what you think was going on with market share in each of those? On the cabinet side, both the dealer and retail, do you think you were picking up market share pretty usefully? Or are you starting to see an acceleration of that business? And then on the plumbing, the reverse. I know you said you saw some inventory drawdown, but how long do think that plays out and were you giving up any share there?

Christopher J. Klein

I'll start with the Moen side. I do think it is tied to inventory. So as we look at POS data, we're certainly seeing much stronger performance there than what we'd see in the sales for the quarter, which says that we're doing pretty well especially in showrooms and -- on the retail side of the market. I think inventory was down a little bit, which I don't tend to get too worried about it, it tends to then come back to us down the road as they kind of bring it back in for the subsequent quarter. So I'm encouraged. We think we still picked up some pretty good share at Moen, both wholesale and retail. We're bringing in new products, they're selling well and we continue to execute well. Strong showroom business. So yes, I think they're -- we're positive. On the cabinet side, it's probably more so. We're still very encouraged, both on the dealer side and on the home centers. In dealers, we've talked before about the fact this is a ground game. It's one dealer at a time. It's working within that dealer, one sale at a time. And we're just so good at being in the market and with our sales and service teams bringing products and adjust executing every day, day in and day out. The cumulative impact is we're just picking up share and we just have a great reputation in the market. On the home center side, it's more of there's kind of 3 big guys there. And again, you have to keep executing. We have brought in some new products, refreshed some things and just been consistently executing there and we're picking up share there, too. So I think -- that, I think, if you look at kind of a steady-state 10% growth kind of taking the noise out. We think that's stronger than the market was overall. And so that would reflect those share gains.

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

Okay. And then you talked in the past about you would be comfortable taking your net debt to total cap around 40% or so. And as you look at where you are in the cycle now, some of the acquisitions you made, some of the share repurchase you made, any changes in how you view that particular level?

E. Lee Wyatt

No. We feel good about our cash flow generation and our business model. So longer-term, through the cycle, 2x debt is -- we're very comfortable with. For the right acquisitions, for the compelling acquisitions or group of acquisitions, kind of mid -- in this mid cycle now, we can lever up with the knowledge that we can always lever back down, as we generate so much cash. So I think run rate, you'd say long-term 2x debt-to-EBITDA but clearly, for the right acquisition, could go higher.

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

Okay. And what would you feel comfortable with on that metric?

E. Lee Wyatt

I think you can clearly go to 3x, you could approach 4x for the right acquisition in the right time of the cycle.

Operator

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

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

Two questions. One, you referred in the release and your expectations for the home improvement market for the year. Can you kind of split that up, what you think it grew in the first half of the year that can be actually tough to nail down in this industry? And number two, what was the ending share count in the second quarter?

E. Lee Wyatt

Let me take the share count. At the end of the second quarter was 161 million shares. We started the year around 167 million, first day of the year. So second quarter, 161 million. By the end of July, though, we did quite a few acquisition -- share repurchases in July. We were down about 158 million.

Christopher J. Klein

And then in terms of market growth. First half, you're right. It's tough to pin down. A lot of the data gets revised almost on a weekly basis, so it's hard to know. I think overall market between R&R and new construction may have been around 3% in the second quarter. That's kind of what we thought. It could have been 5%, 6% first quarter, not sure. It's -- we're still kind of sorting that through but those are the kind of working data and then it was -- we kind of project that out. We got to tie out to that 6% to 8% for the full year, which implies second half 6%, 7% third quarter, 10%, 11% fourth-quarter type growth. So that's kind of the net basis of getting to kind of 6% to 8% overall.

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

And then the big acceleration in the fourth quarter, is that just more remodeling coming back in the market, is that a question of starts? Which one would be the driver on that pickup?

Christopher J. Klein

I think the market itself was slow in the fourth quarter. So this is relative to that growth in fourth quarter last year. And so you saw actually a pretty strong third quarter market and then the fourth quarter was when you started to see the impact of the slowdown on new construction that started in the summer kind of hit it in the fourth quarter. So it's just relative to where we were in '13. And so I'd say on an aggregate basis, you could see momentum building in the third quarter and carry into the fourth quarter and I actually think we will see some better business for ourselves in the fourth quarter.

Operator

Our last call comes from Eric Bosshard from Cleveland Research.

Thomas Mahoney

This is Tom on for Eric. I just wanted to ask about the cabinet incremental margin in the quarter, below the levels you guys have seen. In the first half, it seems to be below the levels you guys had seen over the last couple of years. You talked about getting some price there and strong mix there. What are the other moving pieces on that margin line that we need to be considering?

E. Lee Wyatt

Yes. I would say for the cabinet business, the first half, the incremental margins were lower, but we then started making the investment. This is where some of the investments that we talked about in terms of the $0.08 for the and year-to-date $0.06. And we're starting to -- there's a little bit of an inefficiency as you start moving these around but this is where the investments are. I think when you look at cabinets for the full year, we've seen incremental margin that's right in our sweet spot, the 25% to 30% will be kind of where we'll be for the year. We really don't have an issue there, it's more the timing of the investment.

Operator

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

Brian Lantz

Thank you, Lianne. We'd like to thank everybody for attending our quarterly call today and very much look forward to spending time with you in the coming weeks. Thank you.

Operator

And this concludes today's call. This call will be available for replay in approximately 2 hours. Thank you. You may now disconnect.

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Source: Fortune Brands Home & Security's (FBHS) CEO Christopher Klein on Q2 2014 Results - Earnings Call Transcript
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