Fortune Brands Home & Security (FBHS) Christopher J. Klein on Q2 2016 Results - Earnings Call Transcript

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Fortune Brands Home & Security, Inc. (NYSE:FBHS)

Q2 2016 Earnings Call

July 27, 2016 4:30 pm ET

Executives

Brian C. Lantz - Vice President, Investor Relations & Corporate Communications

Christopher J. Klein - Chief Executive Officer & Director

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

Analysts

Philip Ng - Jefferies LLC

Robert Wetenhall - RBC Capital Markets LLC

Michael Jason Rehaut - JPMorgan Securities LLC

Samuel H. Eisner - Goldman Sachs & Co.

Michael G. Dahl - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Kenneth R. Zener - KeyBanc Capital Markets, Inc.

Scott Rednor - Zelman & Associates

Nicholas Andrew Coppola - Thompson Research Group LLC

Josh K. Chan - Robert W. Baird & Co., Inc. (Broker)

Operator

Good afternoon. My name is Mariyama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' Second Quarter 2016 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. Thank you.

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

Brian C. Lantz - Vice President, Investor Relations & Corporate Communications

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 second quarter of 2016. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and on market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC, such as our Annual Report on 10-K.

The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Any references to operating profit, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis for continuing operations with the exception of cash flow unless otherwise specified.

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 some time to address questions that you may have.

I will now turn the call over to Chris.

Christopher J. Klein - Chief Executive Officer & Director

Thank you, Brian, and thanks to everyone for joining us today. Our teams drove strong sales and profit gains across all segments in the second quarter, as the home products market continued to grow at the positive pace that we expected. Our businesses remain focused on driving profitable growth targeting the most attractive segments of our markets.

Based on the solid second quarter performance, the momentum we have inside of our businesses for the remainder of the year and a lower projected tax rate, we're increasing our full year EPS outlook.

Let me first spend some time on our view of the U.S. home products market, next I'll provide my perspective on our business performance in the second quarter. Lee will then provide more details on our second quarter performance and increased 2016 outlook.

Starting with our view of the U.S. home products market. In second quarter, the market for our home products continued to grow at the pace that we expect it would. We estimate that repair and remodel activity grew at roughly 5% to 5.5% and new construction grew low double-digits. Repair and remodel activity continued to reflect consumers' demonstrated appetite for more on-trend styling, product differentiation and project complexity. This consumer demand continues to drive an improving mix across our categories.

As expected, new construction demand continues to grow at a low double-digit rate with single-family growing faster than multi-family and single-family entry-level activity continues to improve.

Looking forward, our overall assumption remains that the U.S. home products market which impacts 70% of our sales grows at a combined 6% to 7% rate for the full year 2016. Our basket of near-term indicators for home products remains pointed to stronger underlying demand, significant levels of construction activity and progress and continued market momentum as we head into the second half of the year.

Now, let me provide some perspective on our business performance. In the second quarter our teams delivered strong sales and profit performance across all operating segments. Sales increased 11% in total and 12% for our U.S. home products businesses and total company operating margin increased to 14.8%.

Starting with our Cabinet segment, we continue to follow a disciplined strategy focused on profitable growth. Our consistent pace of product innovation and our high levels of reliable service to our channel partners continued to drive strong performance.

In the second quarter, our overall Cabinet sales were up 17% over the prior year, an increase of 7% excluding Norcraft, and operating margins expanded to 12.9%, specifically, sales in our largest channel, dealers, 30% and 11% excluding Norcraft.

Our share gains are coming from our new construction product lines in this channel and deeper multi-line relationships with existing customers. We're cross-selling one of our product lines across our recently expanded dealer network.

Our in-stock cabinets and vanities which are sold through home centers, grew sales mid single-digits when adjusted for the comparison to last year second quarter where we had a major new vanity program launch which required an inventory load throughout last summer. The sell-through of the new programs and product upgrades that we launched last year are performing well. Our cabinet team has been focused on partnering with our customers to consistently balance inventory levels with production to further enhance service and manufacturing efficiency in our stock cabinets and vanity programs.

The remaining 27% of our cabinet business which includes home center semi-custom, builder direct in targeted markets in Canada grew mid-teens. We're disciplined in our approach to these segments as we focus on where we can partner with customers to capture profitable growth.

With our focused approach, we grew share in these segments and drove strong margin improvement. We are especially pleased with our home center special order business where our partnership approach is working well and driving growth at above market rates.

Overall, for Cabinets, we continued to execute and deliver strong sales and profit results. We're building shares in the most attractive segments of the market by deepening our partnerships with dealers, home centers and builders and our plants are increasingly more efficient.

Our new product introductions and program wins are helping us drive a richer mix across a number of price points in the market. The impact of our consistent execution can be seen in our share gains, our stronger mix, and our improving margins.

For our Plumbing segment, sales were up 6% for the quarter, driven primarily by strength in the U.S. wholesale channel and China with solid mix and strong operating margin. Across our markets, we continued to see consumers trade up and our mix improve as innovation and design, finish and function attract consumers who trust our brand.

As we look out to the second half of the year, our growth should benefit from incremental marketing spend as well as more focus on recently launched products, including additional Magnetix, easy-docking, easy-releasing showerheads, NuGlide, Via (7:22) and Dartmoor bath suites, our new bathroom faucets with micro-band, antimicrobial finish in our Hensley line.

Organic sales in Canada were up high single-digits to the prior year. China sales increased high single-digits versus the prior year, but were up double digits in local currency driven by our direct to builder efforts, our Moen branded retail stores, and a rapidly expanding e-commerce marketplace. Chinese growth in new construction is picking up again, and we're also encouraged by the level of R&R activity that we are seeing.

Doors reported sales were up 9% for the quarter, Door products again saw sales growth with gains in both wholesale, which was up double digits and at retail, which was up mid single-digits. Therma-Tru continued to benefit from the rollout our of our refreshed retail strategy that includes an enhanced product lineup, simpler and more intuitive displays and better sales support for our customers' associates. And in wholesale, we continued to benefit from strong new construction placements and our enhanced distribution in the Southern and Western U.S.

In the Security segment, sales increased 6% from the prior-year quarter and were up approximately 8% excluding the negative impact of currency and the planned exit of some less profitable Sentry Safe product lines as part of the broader Sentry integration.

Growth was driven by increases in Master Lock U.S. retail and U.S. commercial, and strong growth in international, particularly in Asia.

Integration of Sentry Safe into Master Lock is now behind us, with only a few logistics changes left. We can now begin to ramp our Sentry sales efforts as our new production comes online. We continue to be excited about the opportunities we see between our Master Lock and Sentry businesses over the next few years.

So to recap the quarter, our results were strong and broad across all segments. We again executed well in the U.S. home products market that is continuing to grow as we expected. Our teams are consistently leveraging that market momentum to deliver profitable growth.

Before I wrap up, let me comment on our efforts to drive long-term growth. We continue to believe that we can create meaningful incremental shareholder value by using our strong cash flow and balance sheet to make strategic acquisitions, repurchase our shares and increase our dividend.

Right now we're busy evaluating a healthy pipeline of potential acquisitions. We are assessing a number of opportunities and while we cannot guarantee success in any one situation, we believe we will complete some transactions over the next six to 12 months. Over the next three years, we continue to believe that we have the potential to deploy more than $2 billion to drive incremental growth and shareholder value.

To sum up, the demand for our home products remains strong, as we expected. And we continue to grow faster than our market. Importantly, our strong brands, management teams and capital structure provide flexibility to both focus on profitable organic growth and drive incremental shareholder value with our balance sheet and strong free cash flow.

Now I would like to turn the call over to Lee, who will review our financial performance and provide detail on our increased EPS outlook for 2016.

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

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gains from continuing operations.

Let me start with our second quarter results. Sales were $1.3 billion, up 11% from a year ago, with organic growth of 6% across both segments. Consolidated operating income for the quarter was $192 million, up 27%, or $41 million, compared to the same quarter last year.

Earnings per share were $0.82 for the quarter versus $0.59 the same quarter last year, increasing 39%, or $0.23, with $0.18 driven by continued stronger operating performance and $0.05 from a lower tax rate.

Now let me provide more color on segment results. Our Cabinet sales were $645 million, up $94 million, or 17% versus the prior year quarter. Norcraft added $60 million of the sales growth. Dealer sales were $326 million, and increased 30% from the prior year. In-stock Cabinets and vanity sales of $130 million decreased 4%. However, last year's major vanity program win drove 25% sales growth in the second quarter of 2015. Excluding this prior year impact, in-stock cabinets and vanity sales increased 4%.

Remaining sales for home center, semi-custom, builder-direct and Canada increased 14%. Operating income for the Cabinet segment increased $27 million over the prior year quarter with Norcraft adding $10 million of the increase.

Operating margin for the quarter increased 260 basis points to 12.9%. Operating leverage excluding Norcraft was around 50%, as our recently added capacity continues to become more efficient, and product and channel mix improved. For the full year, we expect an operating margin of around 11% compared to 9% in 2015.

Turning to Plumbing, sales for the second quarter were $378 million, up $20 million, or 6% led by U.S. wholesale and China. Excluding the negative impact of currency, total Plumbing sales increased approximately 7%, with organic Canadian sales increasing 7%, and China sales increasing 14%.

Operating income increased $13 million to $88 million, up 17%. Operating margin for the segment was 23.2%. For the full year 2016, operating margin is expected to be 20% to 21%, including incremental spending on marketing and product initiatives in the third quarter.

Door sales were $128 million, up $10 million, or 9% from the prior year quarter. Operating income increased 29% with an operating margin of 15.3%. Full year operating margin for this segment is expected to be 11% to 12%.

Security sales were $147 million in the second quarter, up 6% to the prior year, and up approximately 8% excluding the negative impact of currency and the planned exit of less profitable Sentry Safe product lines as part of the broader Sentry integration. Segment operating income was $20 million, and the segment operating margin was 13.4%. We expect to exit 2016 at an operating margin run rate of 15%.

To sum up consolidated second quarter performance, sales increased 11%, and EPS were ahead of plan at $0.82. Our total company operating margin was 14.8%, up 190 basis points from the prior-year with an incremental margin excluding acquisitions of over 50%; we're squarely on track to reach our goal of approaching 15% operating margin when the housing market returns to steady state levels.

Before turning to the balance sheet, let me comment on the cumulative impact of currency. The strengthening U.S. dollar reduced our total second quarter sales by approximately 1%, with Canada being the primary source.

The EPS impact was around $0.01. Also, the lower tax rate of 28% in the quarter was due to the adoption of a new accounting standard that requires companies to reflect the tax benefit from stock-based compensation transactions in their tax rate and EPS.

Turning to the balance sheet. In the second quarter we amended our credit agreement. The duration of the credit facility has been extended to 2021. The revolver has been expanded to $1.25 billion and the terminal has been eliminated.

With the increased flexibility of this new credit facility, we're now better positioned to drive incremental growth with our balance sheet and cash flow. Our June 30 balance sheet remained solid with cash of $279 million, debt of $1.6 billion, and our net debt-to-EBITDA leverage is 1.8 times.

By year end we expect leverage to be about 1.4 times excluding any additional capital transactions. We currently have $540 million available under our new $1.25 billion revolver.

Turning last to the details of our outlook for 2016. Our market and sales assumptions for 2016 are unchanged. We continue to assume 6% to 7% U.S. home products market growth, and total global market growth of 5% to 6%. Accordingly, we continue to expect full year 2016 sales to increase 10% to 12% compared to 2015.

However, we've increased our full year EPS outlook based on continuing our strong operating margin performance and a lower annual tax rate. Our outlook for 2016 EPS is now in the range of $2.70 to $2.78 with the midpoint reflecting a 32% increase over the prior year. The $2.74 midpoint of our EPS outlook represents an increase of $0.19 over our pervious midpoint of $2.55.

Stronger than previously expected performance for the second quarter drove $0.02 and expected stronger performance primarily in the fourth quarter drove $0.04 of the increase. Stronger than previously expected performance in the third quarter will be offset by increased marketing and product spending to drive future growth.

The lower tax rate drove $0.13 of the increase, $0.05 in the second quarter, $0.09 in the first half and $0.04 in the second half. We expect 2016 free cash flow to be around $400 million with a conversion rate of over 90%.

The annual EPS outlook includes the following assumptions. Interest expense of around $50 million, a tax rate of approximately 31% in the second half of the year, average fully diluted shares of approximately 158 million.

In summary, we are set up for a strong 2016. Second quarter market growth was as expected, and we delivered strong sales and profit growth. Due to continuing stronger growth in operating margins and a lower tax rate we again increased our EPS outlook for the year and we remain focused on using our balance sheet and cash flow to drive incremental shareholder value through acquisitions and share repurchases.

I'll now pass the call back to Brian.

Brian C. Lantz - Vice President, Investor Relations & Corporate Communications

Thanks, Lee. That concludes our prepared remarks on the second quarter of 2016. We will now begin taking questions. Since there may be a number of you who would like to ask a question, I will ask that you limit your initial questions to two and then reenter the queue to ask additional questions.

I'll now turn the call back over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from the line of Phil Ng with Jefferies. Your line is open.

Philip Ng - Jefferies LLC

Hey guys. Congrats on the solid quarter. Can you provide little more color on the brand spending you called out for the back half? How much are you planning to spend? How do you expect that to kind of break out in 3Q, 4Q, and just the segments overall?

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

Yes, we will spend – and it's primarily third quarter. So in the third quarter we will spend an incremental $0.03 on this spend. And it's broken out between media campaigns, some Internet marketing, some product initiatives. So it will all be in the third quarter; it will be $0.03.

Christopher J. Klein - Chief Executive Officer & Director

And it's basically Moen.

Philip Ng - Jefferies LLC

Okay, that's great. And then switching gears to Plumbing, margins were quite impressive, very high incrementals. Do you expect that to be sustainable in the back half with metal prices ticking up? And what were some of the key drivers for the stronger margins in 2Q? Thanks.

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

So we think about the margins for the full-year in Moen somewhere between 20% and 21% for the full year. Included in that guidance is the fact that we think overall for our company commodities will be fairly flat in the second half. We had some benefits in the first half, but basically flat in the second half; and FX will be basically flat. So second half looks very different from a commodity perspective for us, but that's built into our guidance.

I think what's driving Moen, the operating margins, we had very nice channel mix with the wholesale business segment up 9% to 10%. We're getting some nice continuous improvements in our business model there as we continue to get more efficient. And there was a little expense timing that will move from the second quarter to the third quarter. A little bit of that is part of the $0.03 in terms of the media campaign and the spending.

But very strong margins, consistently strong, we can now afford in the second half to spend some of that back, still maintain 20% to 21% margins and be positioned well for driving growth in the first half of next year through that ad spend.

Operator

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

Robert Wetenhall - RBC Capital Markets LLC

Hey, Chris, congratulations on a nice quarter. I just wanted to ask you, in terms of – away from the updated guidance you've revised, what are you seeing day-to-day trend-wise from the consumer? You obviously had a positive outlook for housing. What are the indicators you're looking at today that give you confidence to raise? And do you have any preliminary thoughts on the strength of the recovery?

Christopher J. Klein - Chief Executive Officer & Director

I guess, we're seeing pretty widespread improvement. On the R&R side of the market, I'd say that the mix is probably the best indicator that we're seeing across all product categories, as consumers are spending more per project. So the mix continues to improve across. It's been pretty consistent, really.

I mean, first quarter, we saw some surge because of weather improvement, et cetera, but that continued through the second quarter, and really we feel like the second half is going to be a continuation of what we saw in the second quarter on R&R. So that's pretty widespread strength, keeping in mind we have enormous dealer network in Cabinets that we're seeing, big wholesale channels in Plumbing that we're seeing this kind of growth come through.

Then on the new construction side, I think we're optimistic about second half and 2017, just given overall order rates, starts rates. And I'm not talking month-to-month; I'm talking, kind of, what does the first-half total activity look like? We hear through all of our builder relationships that everybody is busy. They're still looking for talent. They're still out acquiring land. And so there's just a good, steady drumbeat, which gives us the confidence in the business overall, and we're performing well against that. So our mix coming through really has to do with the channels that we're positioned against. We're positioned at the most attractive parts of the market with our channels. And then within those channels we're really positioned against the product categories that offer the strongest growth in margins. So it's all of that together feels like a good, strong continuation of what was a good start to the year.

Robert Wetenhall - RBC Capital Markets LLC

I think you have dedicated resources right now evaluating M&A opportunities. Obviously, the equity markets have done really well recently and valuations are high. I was trying to understand if any of the adjustments to the credit agreement are intended to give you incremental flexibility to perform M&A by leveraging the balance sheet. And perhaps you could give us a view on what you see in terms of the landscape valuation-wise, in terms of opportunities? And how much leverage you'd be comfortable taking on to finance something in the next couple quarters. Thanks and good luck.

Christopher J. Klein - Chief Executive Officer & Director

Thanks, Bob. Obviously, the new bank deal gives us a little more flexibility. I think we had good flexibility before that. We still have that flexibility. I think we can do the things that we'd like to. Our credit rating is strong. Our cash flow is very strong. So I don't feel like we're really that constrained on that front.

In terms of valuations in the market, I think they're a bit, on a couple ends of the spectrum, I think where you see strong positions in the market there's healthy expectations on value. But I think given what those franchises can deliver, it's probably warranted and you can see where things can get done at that level. On the other end of the spectrum you see companies that are in more commodity parts of the market, I think, with maybe higher expectations than might be warranted. So our framework has always been looking at categories where consumers are heavily involved, extending off of our existing platforms while continuing to grow inside of our attractive positions, and we're busy on a number of things right now that we think can contribute to that. So I don't think valuations have gotten beyond where we feel comfortable.

On the leverage side, Lee, you can chime in here, but yes, I think we're more comfortable at this point in the cycle taking a little more leverage on and then working that down but within I'd say reasonable parameters.

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

Yes. I think that's right. Long-term especially as we get closer to steady-state, we talk about 2x to 2.5x net debt to EBITDA, but in this cycle especially with the housing market, the recovery getting elongated here, gives us a little longer timeline. So we're comfortable going above that 2.5x in the interim as long as within a year we're paying it back down and being in that same range. So we've got a lot of flexibility. We generate a lot of cash. We've got a lot of room on our balance sheet. We just have a lot of flexibility.

Christopher J. Klein - Chief Executive Officer & Director

We're in a good spot.

Robert Wetenhall - RBC Capital Markets LLC

Understood. Good luck and thanks very much.

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

Thanks, Bob.

Operator

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

Michael Jason Rehaut - JPMorgan Securities LLC

Thanks. Good afternoon, and thanks for taking my question. Just wanted to focus in on the first question and then I have a follow-up. But just on the $0.06 of raised performance or operating performance you expect this year – and obviously congrats on that – it seems like it's being driven by slightly raised margins or margin outlook for the full-year for both kitchen and bath, Plumbing and Doors it appears. Just wanted to get a sense of what's behind that. If it's you'd point to more just general manufacturing efficiencies? If mix is playing a greater role than expected, or commodities? And does that impact the incremental margin outlook at all?

Christopher J. Klein - Chief Executive Officer & Director

It's a terrific question. I think it starts with where we were going back two or three years ago where we were really focused on profitable growth. We had come through the downturn and restructured, started seeing volumes coming over our fixed cost base, and within each of the businesses strategically directed where we were going to focus in areas where we could see more profitable growth.

And so what you're seeing in the second quarter really is an extension of that. So on mix, stronger mix because we're focusing on the channels. Where you get stronger mix within those channels, we're focused on product categories that are delivering stronger mix. That played out in a strong way in the second quarter.

Operating efficiencies, we've got very good leverage coming over our fixed cost base. We put some capacity in a couple years ago. That capacity is operating very efficiently right now. And so we're just seeing that leverage come through. And then input costs, stable to a bit improved for the quarter, and that we expect to continue throughout the year. So I guess we're just at a level where we're seeing that strong mix coming through, leveraging our fixed cost base in a consistent way. Our teams are operating very well in terms of efficiency and continuous improvement, and then input costs look good. So across all of that we have the confidence to raise based on where we saw those margins going out through the second half of the year.

Michael Jason Rehaut - JPMorgan Securities LLC

That's helpful. Thank you, Chris. And just circling back to the M&A comments you said you expect, I believe your words were several – potentially several to be completed over the next 6 months to 12 months. Any thoughts – obviously if you're talking more than one, even one can move from a timing standpoint, so this might be hard to answer. But any thoughts around sales per acquisition here, the type of size? Obviously in the last two years, three years you've done more of that, let's say, small to mid-sized type of bolt-on pretty consistently, with WoodCrafters, with SentrySafe, Norcraft. Are we to think that what you have closer in on the pipeline could be of a similar type of size, plus or minus? Or would there be any differences there?

Christopher J. Klein - Chief Executive Officer & Director

So I'd say, a good probability of some small and mid-sized. We've just got a number of things that are progressing. The comment was really just intended to say we're making good progress. And I think, yes, kind of consistent with the type of things we've done. You could see us doing some of those.

There may be some other things out there that are more significant. Harder to predict on those, but those are also in the evaluation or discussion phase as well. So I think higher probability on small and mid-sized, but there are some other things out there that we're working too.

They obviously have to make sense. Everybody's values have to be reasonable, but I guess there is enough going on right now that we just thought it's worth mentioning that likelihood over the next 6 months, 9 months, 12 months of us doing some things is probably a little bit better than maybe it was a quarter or two ago.

Michael Jason Rehaut - JPMorgan Securities LLC

Thanks. And, Lee, tax rate for next year, any thoughts?

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

Yes. As we put our plan together for next year and then issue guidance in the first quarter, we'll let you know about that. It's a little too early to predict that at this point. We've given you the second half of this year around 31% for the second half. So that will get us to about 30% for the year, but we'll let you know as we get into next quarter and start thinking about guidance what it might look like.

Operator

Your next question comes from the line of Sam Eisner with Goldman Sachs. Your line is open.

Samuel H. Eisner - Goldman Sachs & Co.

Yes. Good morning, everyone. So on the Plumbing segment, I just want to make sure I understand this correctly. You guys are guiding to 20% to 21%. At the midpoint of that, that implies roughly a 200 basis-point decline in the second half of the year. You said about $0.03 of spending. That's roughly $7 million, and I think that's about 50 bps. So I was wondering if you could help bridge what else is happening in the Plumbing segment in the back half of the year aside from investment spending that gets to that roughly 200 basis-point decline on the second half margins.

Christopher J. Klein - Chief Executive Officer & Director

Yes. I don't think that math is exactly right. I think our sales will be better in the second half of this year than last year, even though we had strong comps. And I think our operating margin will be better in dollars than last year. So we can check the math in the after-call with you, but I don't think there is a margin drop like that.

Samuel H. Eisner - Goldman Sachs & Co.

All right. Maybe, I'm missing something there. I thought the math was right. Maybe, secondarily, you can – sorry, I lost my train of thought a little bit here.

Christopher J. Klein - Chief Executive Officer & Director

Maybe just an overall point. There is nothing going on in the business in the second half of the year that is unusual other than we're going to increase spending on marketing and product introduction because we see a lot of strong trends coming at us, so we want to capture volume, not just for this year but going into next year. So we're launching some new advertising and we're aggressively pushing some new products that we've got in the market.

That's the only thing extraordinary, and those are good things. And I think Lee quantified the cost of those. Otherwise the business is performing very well, and so I don't want anybody to walk away with the impression that we're calling out some problem in the Plumbing business in the second half of the year. That would be exactly the opposite of what's going on in that business right now. That business is doing really well.

Samuel H. Eisner - Goldman Sachs & Co.

Got it. And then on the revenue, I'd have to nitpick here. From an organic standpoint I think you guys said you did about 6%. We were expecting something a little bit higher. Again, still 6% very good. But curious if there is something in there that we should be paying attention to? Is there something at the low end where maybe we're not selling as much? Are you substituting volume for price here? Just want to better understand, again, recognizing 6% is a good number, but it's a little bit light of expectations?

Christopher J. Klein - Chief Executive Officer & Director

No, the comp – so, on the wholesale side of the business were up high-single digits, 9% plus; very strong mix coming through there. On the retail side of the business we were up against a mid-teens comp from last year. We had rolled new products out and there was some big load-in. So the second quarter of last year was up really strong. So you're running against that, and so it's low-single digits in the retail side this year. So that's the math that averages that down.

But if I look across wholesale for Moen, again, up strong single digits. China a very strong market right now. It's come back. Government's actually made some changes policy wise to reignite the construction market and we're seeing on the R&R side in China a lot of activity, which is a bit more stable relative to the government policy and everything else. And then Canada is holding up well. So I think across Moen, the one thing that, as you look at the aggregate numbers, that you'd say, gee, that's a little lighter than what we might have thought is the comp in retail against a very strong second quarter last year, which is good business on the shelf, SKUs in the store today. So those things happen from time to time as you get wins and placements and you load them in.

Samuel H. Eisner - Goldman Sachs & Co.

Got it. Thanks, Chris.

Operator

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

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Hi. Thanks for taking my questions.

Christopher J. Klein - Chief Executive Officer & Director

Hi, Mike.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Just wanted to ask a two-part question about Norcraft. The first is it seems like from a sales perspective there is still not really any traction on growing that part of the business. And so first is just especially as it becomes part of the organic as we roll out to second half, just how you're thinking about the growth for Norcraft and what some of the initiatives are? And the second part is just a clarification. I think you said the profit impact was an incremental $10 million year-on-year in 2Q. Or was that what the absolute number was for the 2Q profits, because I'm just trying to reconcile the incrementals you gave ex-Norcraft.

Christopher J. Klein - Chief Executive Officer & Director

I'll just address the first question. So Norcraft is performing well. They are performing as well as our overall dealer business, and in that same market margins are the same. So I don't know how you're interpreting it as negative, but Norcraft is performing well. We're cross-selling product out of their portfolio into MCI and vice versa. And the cost synergies are ahead of plan. So I'm not sure where that impression was created, but Lee, if you want to tie up the financial side.

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

Sure. So second quarter Norcraft sales $106 million. Operating income $15 million. It's the $10 million of incremental to $5 million last year. So we've got really strong, double-digit operating margin in the quarter. And I would tell you in the operating margin for the full year, we'll be double digits also performing well. And that's in spite of having a pretty significant charge of amortization, purchase price amortization in there. So we feel really good about where Norcraft is. Their profitability is very strong and their growth is fine.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Got it. Maybe I just have the wrong 2Q comparison. What was the 2Q 2015 sales number for Norcraft? I know it only impacted half your quarter, but just what's the clean comp?

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

Yes, it's a partial quarter to partial quarter, so that might be the overlap.

Christopher J. Klein - Chief Executive Officer & Director

So last year in the second quarter we had, remember partial, it was $46 million of revenue. This year it's $106 million, so it's up $60 million in revenue.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Right, but I guess what was the standalone? What would standalone Norcraft be for the full second quarter of 2015?

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

I think if you compared our second quarter this year to combining when the part we owned them in the second quarter and the part they were independent, it's double-digit growth in the second quarter.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Okay, got it. The second question on security. Also wanted to just understand, I think you made a couple comments around full-year expectations for margins on Cabinets, on Plumbing, on Doors. And then Security the comment was basically the exit rate. So if we think about that 15% exit rate, is that your way of framing what the 2017 opportunity is from a full-year standpoint? And then how much of that is a function of getting SentrySafe operating out of the new assets versus some underlying improvement in Master Lock?

Christopher J. Klein - Chief Executive Officer & Director

Overall in the second quarter we wound down one facility in Rochester and then brought up the other facility in Nogales. So you basically had two cost bases that were running through, which depressed the margin for the second quarter. That Rochester facility is now a complete shutdown, so you've only got the new standalone site, which is why we're making reference to where the margins will head to. And yes, it's fair to say – extrapolate that into 2017, that's where the margins will be as we're running a more efficient plant around the whole safe operation.

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

Yes, just the hard data, so the exit rate is for the – that 15% fourth quarter rate is for the whole business, so that's a starting point for next year. That does reflect taking the SentrySafe business from about a 7% annual operating margin to 14% to 15%, so very strong there. Last year in 2015 our full-year margin total Security was 12.5%. This year it will be about 100 basis points higher in spite of the fact that we were in the midst in the first half of integration. So we feel really good about where the margins are going.

Operator

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

Kenneth R. Zener - KeyBanc Capital Markets, Inc.

Afternoon, gentlemen. Lee, Chris, you guys have talked about mix here. Obviously it's a good thing; it's very profitable. For example, in the dealer cabinet, you talked about up 11%. Not an explicit percentage but could you talk about is that half-and-half? I mean, how much of a mix shift are we seeing? And if you could talk about how your long-term incrementals play out in the volume side versus the mix side?

Christopher J. Klein - Chief Executive Officer & Director

Yes, if you look at our Cabinet business, we think about it in three parts. We've got the dealer part of the market, which is about half of the business, very strong margins, and we're playing in the attractive parts of the dealer business. So as that business grows, that part of the business grows faster than total category and faster than the rest of our business, improves the mix.

We've then got our in-stock cabinets and vanities, another attractive part of the market. That segment of the market probably not growing as fast but the margins are strong there. So it's a good mix part of the business.

Then we've got the third part of the market that we're very specific about where we're playing. So that's special order in the home centers; that's builder direct and that's our Canadian business. So there we're just looking at what are the best places to play. So good mix there, and as we've reoriented our self especially on builder direct, we're seeing some nice growth come through there. So when I say it's channel mix, it's really driving toward where we're seeing the more attractive opportunities within those channels. And if over time we continue to grow dealer faster than other parts of the market, that's going to drive that mix more profitable overall for the Cabinet business.

That's what we've been driving through over the last three to five years. We're seeing Norcraft help that as well, as those margins are as strong for Norcraft as they are for the rest of the dealer business.

Kenneth R. Zener - KeyBanc Capital Markets, Inc.

Thank you. And then my second question, there was obviously a lot of concern after very strong 1Q around weather; there was concern around consumer trends as they related to how the quarter ended out. If you could comment on perhaps that run rate, obviously, of your full year but if there was any momentum. And more specifically, obviously the country is divided up into many regions. We're noticing very strong new construction in many parts of the country; Midwest, mid-Atlantic, Tennessee, that didn't always have that. Can you talk about, in a way that you feel comfortable, regional trends? I mean, there's Texas. I know you guys have said it's not a huge part. But just in general, Northeast, Southeast, West, could you break down a little difference in the business cadence there, since we're seeing very different kind of housing trends? Thank you.

Christopher J. Klein - Chief Executive Officer & Director

Yeah. We feel good about the market overall. I think first quarter was stronger than we thought it would be. Second quarter was what we thought it would be. So as we came into the year, both new construction and R&R in the second quarter is running at what we thought the whole year would run at, and that's where we're projecting the second half. First quarter was stronger than we and I think most thought it would be. So I think second quarter moved into an expected range. In terms of regional differences, I'd say Midwest is strong. The South is strong. South Florida is probably weaker than the rest of the South, especially at the high end of that market.

The West still looks strong. And then the East is good, but not as strong as Midwest, South excluding Florida, and West. I'd say in Texas, Houston is probably the market that's weaker than the rest. Rest of Texas we're actually doing okay in, because it's reasonably diverse and where our business is positioned there, and we've picked up some distribution. The rest of Texas is actually performing pretty well.

So there's a few weaker spots in the market. And again this is comp and some cases, like South Florida was up very strong last year; so to the extent that it's a little weaker this year it's because it's coming off of a very strong 2015. So I feel good about the consistency of the growth in general both on R&R and new construction. And, obviously, some markets are a little hotter than others.

Kenneth R. Zener - KeyBanc Capital Markets, Inc.

Thank you.

Operator

Your next question comes from the line of Scott Rednor from Zelman & Associates. Your line is open.

Scott Rednor - Zelman & Associates

Hey, good afternoon.

Christopher J. Klein - Chief Executive Officer & Director

Hello.

Scott Rednor - Zelman & Associates

Chris, a question for you. R&R spending for your home products and broadly for the overall market has been incredibly resilient through all the macro volatility. And that clearly wasn't the case earlier in the downturn. So I was just curious as to your view as to why, and what's allowing the consumer to continue to spend in the home where they're not spending to the same degree elsewhere?

Christopher J. Klein - Chief Executive Officer & Director

I'd start with I think it's – if you look, since we started recovering from the downturn kind of 2011, we've been recovering at a gradual, but consistent pace. There was a long period of time where people weren't putting anything into their homes. So if you look from 2008, 2009, 2010, and then they just started in 2011, that created some significant pent-up demand.

As you're seeing – now you're starting to see the turnover in existing housing stock. That prompts spending both before the home is sold and more so after the home is sold. And we're certainly seeing acceleration there.

Home values are rising, and as home values are rising people get more confident putting money into the home. We're finally seeing refinancing, cash out refinancing and home equity lines coming back. We really started to see that in a meaningful way in 2015. It's continuing into 2016. Low interest rates, so to the extent people are investing now in their home and borrowing to do that, it's pretty affordable.

So, I'd say you roll all that together, you see a picture of a lot of dated kitchens and bathrooms, which is where – that's the bread and butter of where we live, and people doing everything from a quick bathroom remodel to a wholesale kitchen and bathroom and everything in between.

And so, I think our own view is that carries on for a while, especially as new construction is trying to catch up but not quite there on entry-level housing. So people are looking for existing housing to move into out of rental properties. And as they move in, they're investing in those properties.

And we just got to see that as the consumer is kind of moving through an aging housing stock and updating the look as they move in. So I'd say across the board the trends we're looking at on R&R look good. And I like kind of running at 5%, 5.5%. I hope that's the pace that we continue over the next three years to five years, because I think compared to historic that's a good, stable pace. And for us, given our size and scale, that's a good way for us to continue to ramp over a period of time.

Scott Rednor - Zelman & Associates

And shifting gears to some of your larger customers, I think their efforts to reduce in-stock inventories has been very well publicized. I'm curious if you guys have felt any impact, and/or how do you navigate that horizon?

Christopher J. Klein - Chief Executive Officer & Director

Yeah. I think they've moved through – all the home centers have moved through different categories, and have been more careful in their management of inventory. And we work with them kind of as they move down. So that impacts in-stock Cabinets, vanities. That impacts Plumbing. It impacts Doors. But through all that we have continued to have some very good wins. And so new business has come in; POS is strong.

So it's, I guess, some headwind as you move through it, but you get to a new base level. And as long as we're winning with the consumer, our new products are coming into the market and there's good drop through on POS; we'll call out when the headwinds occur on inventory drawdowns, and then help you tie it back out again. But I'd say it hasn't hurt the business. I think they're being careful not to run stock too low so that it's not there.

And our response times are good and getting better, so that to the extent that we have to rally because we've got some hot sellers and got to get inventory back in there, we're able to rise to it. So that combination – I think you work through it. But I think we'll both come out in a very healthy place.

Scott Rednor - Zelman & Associates

Okay, great. And then just one last one for Lee. Within the guidance was the 1Q EPS restated to include the lower tax rate?

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

No, it's not. The way – what the pronouncement requires is basically you run the second quarter EPS straight up, so that's $0.05 benefit in the second. There was $0.04 benefit related to the first quarter, but since we didn't elect at that point, that just goes into year-to-date EPS. So everybody will have to adjust their model to say $0.05 ran through second quarter, but year-to-date is $0.09 of benefit. So we'll just have to adjust the model that way.

Scott Rednor - Zelman & Associates

Okay. Thank you.

Operator

Your next question comes from the line of Nick Coppola with Thompson Research. Your line is open.

Nicholas Andrew Coppola - Thompson Research Group LLC

Hey, good afternoon, guys.

Christopher J. Klein - Chief Executive Officer & Director

Hello.

Nicholas Andrew Coppola - Thompson Research Group LLC

Wanted to ask you a question on Doors here. It had currently some nice operating margin performance and flow-through. Can you talk a little bit about the performance that you're seeing there? I think you talked about growth in wholesale and retail. In that margin what's kind of mix versus price and I guess what are you seeing in that segment there?

Christopher J. Klein - Chief Executive Officer & Director

Sure. Another very strong quarter for the Door business; we've got a terrific position there. What we're seeing, wholesale growing faster than retail; retail kind of mid single; wholesale up kind of mid-teens. The mix is shifting heavy fiberglass. So our margin structure in fiberglass is very, very good. And so our new products heavily focused in fiberglass is driving that; we still have some steel to support our distribution and our customers. But definitely consumers drawing on fiberglass. We're supporting that and that mix continues to shift very strong.

We expanded some distribution on the wholesale side, so we talked about out West; a little bit more distribution in Texas, down in Florida. So all of that, that channel mix, the product mix really is what's driving the growth as well as the margin structure overall.

Nicholas Andrew Coppola - Thompson Research Group LLC

Okay. That's helpful. And then I guess my last question here, I wanted to ask you about China as well. So you're seeing growth in the Plumbing segment there; what kind of trends are you seeing? How much of that you think is end market versus market share gains? Any commentary there would be helpful.

Christopher J. Klein - Chief Executive Officer & Director

Yeah. China came back strong for us. I think it's both. I think the market is back on the new construction side; we did well in that part of the market. But we also – we were strong within retail and e-commerce, and so I think we're growing at least a little faster than the market. Market there is always hard to gauge, but there is a lot more activity now. On the new construction side, the government reduced mortgage, down payment requirements, lowered mortgage rates, really trying to prompt some activity and that's generated some activity. But the other part of that market for us is, as they build these units, they haven't finished out the bathrooms and the kitchens.

And so consumers, as they're moving in, so as they're buying existing housing that's when they're fitting out those kitchens and bathrooms. So year-to-date home sales in China is up like 30%, so that market, just as sales are complete, there's been a cycle of kind of six-plus months where they are shopping for – to fit out their kitchens and bathrooms, and so we benefit from that. And then we're seeing more R&R activity as well. It's also concentrated more in Tier 1 and Tier 2, which is where we put our bets more heavily than Tier 3, Tier 4 markets. Where we are seeing that market evolve is retail continues to be important in Tier 1 and Tier 2; e-commerce is important there. But Tier 3 and Tier 4 are more shifting to e-commerce and light retail, and so that's where our mix goes.

We continue to upgrade our stores in our Tier 1, Tier 2 and try to get that mix right. So I'm happy with the way China has evolved. Last year the market was soft, but we continued to perform and do all the things we're doing in terms of upgrading the stores, upgrading the mix. And I think some of that is what we're seeing play through now. It's a little bit like what we did with our whole business through the downturn. You never stop bringing on new products, you never stop changing the mix even if the market gets a little sideways. And that's what we saw in China last year, and now as the markets picked back up again, consumers are showing up, and we've got a good array of product there. We've got I think the right locations in terms of retail properties, and our focus is strong on the e-commerce side of the market.

So I think all those things are working together. I like China long-term. It's going to have surges in growth and then a more plateau. But there's a huge R&R cycle that is going to come through China over the next five years to seven years as all these properties they added over the last 15 years, start to enter into a cycle of R&R. And we're in a really good spot to pick that up, so that's a market I like.

Nicholas Andrew Coppola - Thompson Research Group LLC

All right. That makes a lot of sense. Thanks for taking my questions.

Operator

Your next question comes from the line of Laura Champine (56:23) from Roe Equity Research. Your line is open.

Unknown Speaker

Good afternoon. My question is on Europe. So to the extent – I appreciate the comments on Canada and on Asia. But to the extent that Europe is material for your business segments, how is that that geography performing? And how do you think about your growth opportunities there, whether it's organic or through acquisition?

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

Yeah, so I would say that the Europe market is not material to our business. We do have a business there in our Security business, which is actually growing very nicely because we're taking a lot of share. But overall it's a small part of our overall portfolio of business. So, no real concerns there. Our business is doing fine there.

Unknown Speaker

And is there any opportunity to grow there, given some of the market dynamics in that region?

Christopher J. Klein - Chief Executive Officer & Director

We've looked at it from time to time the European home product market is not as attractive just in terms of overall R&R activity, overall new housing. There may be specific market segments that look good if we get it as part of a broader portfolio. So if we do something that really helps us in North America and really helps us in China, but there's an opportunity in that part of the market in Europe, I think that's the way we'll come at it, and we'll take specific parts of the market. But I wouldn't say, if equity values are down in Europe and it's a time to come in as kind of at the bottom of the market, we're not really looking at that as an opportunity today.

Unknown Speaker

Got it. Thank you.

Operator

Your final question comes from the line of Josh Chan with Baird. Your line is open.

Josh K. Chan - Robert W. Baird & Co., Inc. (Broker)

Hey, good afternoon. Just wonder if you could ballpark for us any benefit that you had from raw materials maybe in the quarter or the first half. And does that just kind a fall off, like you said, in the second half? Is that how you're thinking about it?

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

Yes. So, in pure commodities we had $0.02 to $0.03 benefit in the quarter. But we gave $0.01 of that back through FX. And then if you look at other just kind of overall input costs, healthcare, labor, those things, it kind of wipes that out.

So, we did have some benefit in the first half and the first two quarters were fairly similar in amount. The second half, our guidance includes pretty flat commodities, no real benefit, and really no real impact from FX either. So, second half very different model than the first half.

Josh K. Chan - Robert W. Baird & Co., Inc. (Broker)

Okay, great. And then on Cabinets, how do you think about the growth trajectory for the balance of the year, given I think you have some tougher comps with load-ins and things like that in the second half of last year? Is the current growth rate sustainable?

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

So when you look at the second – our comps for the total business in the second half of 2015, sales grew at 17% in the second half, pretty evenly by quarter 17%. So we do have tougher comps. I would say our Cabinet business in the second half the way – mid-part of our guidance will grow at market, which will be mid to high single-digits.

So we feel good about that. Some of the other businesses, Moen and probably Doors will go slightly above market, more in the high single-digit. So yes; tough comps, but our business is growing and our profitability is very substantial across our segments. So we feel good about the second half.

Josh K. Chan - Robert W. Baird & Co., Inc. (Broker)

Great. Thanks for the color, and congrats on the quarter.

Christopher J. Klein - Chief Executive Officer & Director

Yeah.

Operator

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

Brian C. Lantz - Vice President, Investor Relations & Corporate Communications

Thank you. We'd like to thank everybody for attending the call today and look forward to speaking with many of you again very soon. Thank you again.

Operator

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

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