Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security First Quarter 2012 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Brian Lantz, Vice President, Investor Relations.

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security Quarterly Investor Conference Call and Webcast. We are pleased to be here today to provide an update on our progress during the first quarter of 2012. Hopefully, everyone has had a chance to review the news release we issued earlier today. 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 we may make forward-looking comments on the call today, either in our prepared remarks or associated question-and-answer session, and they are based on current expectations and 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 as filed with the SEC. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Also, any references to operating profit, earnings per share or cash flow on today's call will focus on results on a before charges and gains basis as described in today's news release unless otherwise specified. With me on the call today are Chris Klein, our Chief Executive Officer; and Lee Wyatt, our Chief Financial Officer. Following our prepared remarks, we have allowed ample time to address any questions that you may have. I'd now like to turn the call over to Chris.

Thank you, Brian, and thanks to everyone for joining us today. We had a very good quarter with strong growth, exceeding our plans in both sales and EPS as we continue to gain share and benefit from a better-than-expected market. Let me spend some time on the first quarter, and then I'm going to discuss our thoughts on the full year. First, with regard to the market, both the overall home products market and the market for our products were higher in the quarter and ahead of our planning assumptions. The pace of repair and remodel spending picked up albeit with continued consumer caution for big-ticket purchases like cabinets. New construction was also stronger than expected in both single-family and multifamily starts. While warmer weather likely played a role in the market performance, we saw broad strength that included many areas of the country where weather wasn't a factor. Importantly, we outperformed the market for our products in the quarter, and we feel good about our performance and the execution of our strategies as we're off to a solid start in 2012. Turning to our performance for the quarter, sales were up 12% from a year ago and ahead of the market for our home products, which we estimate was up about 4% for the quarter. We exceeded our expectations at Moen, Security & Storage and Windows & Doors, which grew sales 20%, 18% and 11%, respectively, and significantly surpassed our profit plans. Cabinet saw sales growth above their market and met our sales and profit expectations, as the market for these products lagged the overall market in the first quarter. We believe our continued ability to innovate and expand into new and adjacent categories is driving much of our growth and share gains. Now I'd like to give you…

Thanks, Chris. As Brian mentioned, the majority of my comments will focus on income before charges and gains, which best reflect ongoing business performance. Let me start with our first quarter results. Sales were $799 million, up 12% from a year ago, again outperforming the market for our home products, which was up an estimated 4%. Consolidated operating income for the quarter was $21 million, up $18 million compared to the same quarter last year. There are 3 items to note that impacted first quarter operating income. First, the market for our products was stronger than expected at an estimated 4% growth versus a previous expectation for a relatively flat market in the first quarter; second, some of our businesses saw channel partners rebuild inventory levels. Most notable was the wholesale channel for Moen where we believe an estimated $12 million to $15 million in sales increases may have come from inventory rebuild. And third, our tool storage business enjoyed an estimated $8 million to $10 million sales increase from retailer-driven promotional activity. EPS were $0.08 for the first quarter, up $0.08 versus the same quarter last year. Now let me provide a little more color on segment results. Plumbing sales for the first quarter were $244 million, up $41 million or 20% versus the prior year quarter. Operating income was $36 million, up $11 million or 41%. The increase exceeded our plans with sales gains across the business, with the largest growth of approximately $24 million coming in wholesale and China was up $6 million. These sales gains were the primary driver of the higher operating income. First quarter Security & Storage sales were $129 million, up $20 million or 18% versus the prior year quarter. Operating income was $12 million, up $6 million and well ahead of plan…

Thanks, Lee. That concludes our prepared remarks for the first quarter. We will now begin taking your questions and we'll continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to 2 and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Gentlemen, your first question comes from Dennis McGill with Zelman.

Just the first question would have to do with sort of the good problem of cash that you're generating and no real clear use for it. So if you end the year on par with your guidance, you're going to have about $325 million of cash against that $430 million of debt. And I think initially when you've talked about share repos, it's just been with the idea that you need to have some confidence that the market's turning. So if everything evolves as you've laid out, it seems like that would be in place. Can you just talk about sort of share repurchases versus debt pay down, how you would think about using that cash this year?

Sure, Dennis. As you say a high-class problem. I think we and the board will talk that through. We are contemplating either kind of share repurchase or dividend or acquisition as kind of the 3 uses of cash. And what we said is over the next 5 years, we expect that we'll do some of all the above. I think in terms of share repurchase, we'll have to see where we're valued relative to intrinsic value and consider that. We've also had some feedback from investors around dividend. So we're going to be efficient with the cash. We're not just going to accumulate and pay down debt or stockpile cash. We'll be efficient and use it to create some value.

Would you suspect that some action would be taken before the end of the year?

I would say it could. That would be the earliest. If you look at our cash usage second quarter, third quarter early part of fourth quarter, we're still using cash as the business is performing well and net user and then we release a lot of cash in the fourth quarter. So that would be the earliest.

Okay. Second question you mentioned, I think, in a couple of different product categories some inventory build at wholesale and that aligning with more the new construction market. In your opinion, do you think that's a catch-up to lean inventories or is that a statement about the future and seeing backlogs filled that people are getting ready for?

I think it's a catch-up. But they were pretty lean coming into the year and built it in a very deliberate way. And so I don't think we saw -- if I compare it to what we were looking at back in 2010, it felt like it was surging in 2010. Now I think people are just being a little bit more disciplined around the whole thing. So I looked at it and saw that it was basically not wanting to go stock out, so bring a little bit of inventory in so that they could service the expected business. So I thought it was pretty healthy in terms of the pace.

And from this point forward, do you think demand is going to match up with the actual production?

I think so. I mean unless we saw a real surge in demand, our new orders on the housing side, therefore, the expectation of product requirement. But I think if it's kind of a stable, gradual upward shift that we'll see a good kind of basically reorder to demand type pattern.

Your next question comes from the line of Dan Oppenheim from Crédit Suisse.

I was wondering if you could talk about some of the free cash flow guidance. Clearly increasing a lot more relative to the guidance in terms of the earnings. Any drivers that -- to point out there?

I think the 2 drivers of the increase of free cash flow. One would just be the operating profit and the EBITDA improvement. And the other is we're seeing the exercise of our options with the good performance in our stock price. So that's going to, we think, for the full year give us at least $50 million in free cash flow just from option exercises, which is obviously higher than normal. So that's the other piece, but the operating results are good as well.

Right. Okay, got it. And then second question, wondering just -- we talked about the Cabinet business expecting improvement there during the second half of the year. How are the trends during the quarter there? And I guess, are you seeing any signs of improvement there, given some improvement in the housing cycle?

Yes. I mean, we were pleased with the results of the quarter, and it's lagging a bit. The category is lagging a bit as you'd see kind of major appliances lagging a bit to the overall category. But we saw positive performance on our side relative to the overall market and we're navigating through the promotional environment. We kept disciplined, kept our promo level constant. And frankly, our position in the dealer channel -- being the leader in the dealer channel, we performed quite well there. So we're kind of taking the business as it's coming and looking for the spots that look attractive.

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

Can you just give us kind of a quick comment on each of the 4 businesses with respect to raw material?

Sure. We came in, David, in our last call and basically said from a raw material commodity cost perspective, we expected about $35 million in higher commodity costs in 2012 and we've generally been on plan with that in the first quarter. With probably the exception of diesel fuel. It was a little higher. We saw that up mid-single digits or actually high-single digits in the first quarter, so that's a little bit higher. We're seeing a little creep up in steel, and we're actually seeing a little bit of increase to mid-single digits or maybe in a little higher on China source components there. But generally, it's -- at this point, within our expectations of what we had coming into the year but with a little pressure on the upside.

So does that mean we're going to see more of that in the plumbing category or how does that play out across the reporting segments?

I think there's 2 places you would see it. To the extent steel is a little higher, you could see that in our Master Lock tool storage business.

And then our Therma-Tru steel entry doors.

Yes. And then to the extent it's brass and copper and zinc, you'd see that in the Moen business.

Okay, good. And then the second question. Just on the Windows business, I'm just trying to get a sense of where the breakeven revenue level might be. It looked like the business leveraged it kind of like the high 20s contribution margin this quarter. Is that how we should think about watching revenue growth before we get back to the black?

Yes, first thing I'd say is the first quarter is kind of tough because of the volume in both Cabinets and Windows & Doors seasonally is at a very low point. So you'll see better evidence kind of second quarter, third quarter of where that business goes. We'll be profitable for the year, but we're running it just kind of for the year, probably slightly over breakeven levels.

Is high 20s kind of a good contribution margin to be thinking about for that business?

Actually, we think yes. High 20s is good because it will -- it's more of a fixed cost business and it will lever well when we get -- especially at the door side of the business, it'll lever well as the recovery comes.

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

Just a couple of questions here. On the Cabinets, last quarter you talked about, I think, a $5 million impact from kind of discounting. How did that go in the quarter and kind of what are you seeing out there in the landscape?

So we held constant to last year. So for the quarter, we've kept our promo spending at what it was. I wish I could tell you the rest of the category was as disciplined. So I think the place you see it most heavily is in the home centers and special orders so that remains competitive. I'd say it's not as bad in terms of the level of increase, but there's others who are definitely still discounting above where they were last year. We're trying to manage it, as I said, as disciplined as we can. We're still doing well in the home centers but we're not chasing every last dollar there. We've got strength in the dealer market, which isn't as heavily discounting and so that's really helping us. And then the builder business, which is kind of more straight up the gut. So I think that's kind of the general environment out there. We're hopeful that it'll rationalize over time, but we're just not going to chase every revenue dollar out there.

Okay. Then I guess related to the growth as well as the margins since you're talking about a pickup in that business in the second half. How much of that is kind of, in your view, tied to the new housing? And then with Moen, the load in at $12 million to $15 million, that's about 7% of the $20 million that you had. Should we be assuming that you're growing that kind of core-to-core demand? If that was the load in, the kind of 12%, 13% growth, is that kind of the core demand you were seeing in the first quarter or might there be easy comps? I mean, you talked about China but...

Yes, I know your math -- your math is right. Moen was up 20%, about 7% was the load in. About 3% was China, and then the balance is kind of just that core growth. So that core growth if China continues to grow at this pace is probably 10% to 13%.

Yes, we have very strong market share with the builder marketplace. And so as the builders start getting busy again, wholesale has got to be there with the inventory. So those things are pretty highly correlated.

At the padlock, can you just kind of describe the volatility that, obviously, a very strong delivery. You talked about the storage. Should we expect kind of lumpy results or is that kind of something that would carry through for a couple of quarters just given that you broke the plumbing piece down nicely. Could you help a little bit on the volume or the percentage that you saw on the security storage? Sort of the core versus load in?

Yes. I think you have to break Security & Storage down into 2 pieces. So sales were up $20 million. The storage piece was about $12 million of that $20 million. So we don't think that will recur at the same pace because we saw some heavy promotions as Chris said.

Just a little background on that. That is a heavy promotion-driven product category. Typically see it around the holiday season, every promo sell in, every promo around Father's Day. This is a little bit of off cycle, and it's explained to us that they have a very strong tool selling season over the holidays, and so storage seemed to make sense and we brought a bunch of new products in. So I'd say that is -- that will be lumpy. I think that's the word you used. I think that is a bit lumpy around kind of when they're promoting and they are the ones kind of doing the promoting.

On the security side, the $20 million increase, $8 million was security and that's just pretty strong consistent U.S. Retail commercial. Global safety is strong. So that's pretty consistent business.

A lot of new products coming in, in that category and that safety business is growing globally. What's happening is that as kind of operating manufacturing environments around the world are looking to standardize around safety protocols in their factories, they're looking back to the U.S. to the ERISA regulations. And all of our products provide kind of comprehensive solutions around that, and that's what's really driving that growth.

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

The first question if I could just on the comments on the inventory load. Were there any particular product categories were you saw stronger sell-through than what you put into inventory in the channels?

Well, I'd say other than doors and faucets where we've talked about the inventory, everything else was sell-through. So there was not a lot of inventory every place else. It was really just some wholesale faucet volume, which we kind of just walked through and then some on the door side through our distribution. But otherwise, all of our sales was basically the demand that we're seeing.

Okay. So as of today, you're pretty balanced across all product categories?

Yes.

Okay. And then for Cabinets. I was just wondering if you can give us a couple of reads on Canada and what the demand trends there are like. And then on the U.S. side with the promotional environment being what it is, just wondering what the success of the Martha line might be like? Is that being slowed by the fact that you've got aggressive competitors in that channel? A little bit of color there would be helpful.

Sure. So Canada, we had a big sort of wins up there over the last 18, 24 months. We took on the Thomasville line at Home Depot, and we've also been growing another Kitchen Craft line up there through our own dealer network. And that market picked up a little bit in the first half. It had been -- kind of finished up the year kind of quiet. But it's picking up a little bit, especially in the urban markets in Toronto and Vancouver. We're seeing more activity. Early signs of a little bit of promotion up there. I don't think it's anywhere near the level we're seeing here, but a few folks are getting aggressive. But that remains a good solid cabinet market for us. Down in the U.S. in terms of promotion impacting Martha. Martha came in, the line is really priced at kind of entry-level pricing. It's great value for money. And so it's actually standing up well in the promo environment. Everything is getting some pressure because of promo and we do a little bit of promo support on that, but from a price point, it's actually a great value, great-looking designs at affordable prices. So extending out -- and we've just rolled in some new door styles into that line in the fourth quarter. Those are picking up traction as we're in the season here. So we would rather do that sort of thing in terms of spending the money on some innovation and some new styles than just kind of heavy promotion.

Okay. Got it. And then if I could sneak in one last one. Just you talked about capital allocation, but deal pipeline. Any sort of color commentary there would be great.

Yes. It's still a little slow. I think my expectation is it'll pick up here over the next 12, 18 months. I think what we saw if you go back to 2010, we had a nice 9-month run in that home product market and housing market with a new homebuyer credit, and that summer you saw some activity where some companies all of a sudden were kind of willing to sell. I think if we see the kind of year that we're talking about kind of in our outlook here by the end of the year and maybe into the RevPAR next year you could see some more activities start to flow out of there. So it's still a little quiet right now.

Your next question comes from the line of Justin Maurer with Lord, Abbett.

Just a follow-up on the incrementals. So the faucets amounts, right, 27% and hardware at 30%, is that in -- and I think you guys mentioned the windows and doors, 30%. So all kind of within that range or is it fair to say particularly in the cabinet side as the volume starts to build, could those potentially higher, you think, or is that too far off?

No. Your math is right on the quarter. And I think if you go to the full year -- and let me just frame the issue. In the first quarter, as we said on the last call, we basically -- if we weren't making any incremental investments, the whole company would lever around 27%. But because of those $20 million roughly of investments that we would make, we'd probably take the year down to about 15%, but those are very strong investments and they pay back very highly. So that's the backdrop in the quarter -- first quarter. With those investments in there of about $5 million. We levered about 21% and then backed out those investments, total company was about 27%. But you're right, we had Moen levering at 27%, and Security & Storage at 30% and so very much within our expectations. If you take our outlook and go to the midpoint of that outlook with about $20 million or so of incremental investments. To the full year we'd lever around 23%. If you back out that $20 million, we'd lever well over 30%. So we -- and that's at the midpoint of the outlook. So we feel very good. It's right in our range. It's right where we thought and things are working well.

Okay. And the big buckets of the incremental again in terms of the spend -- sorry, the $20 million are what?

Yes, it's really spread over the Security & Storage, Moen and some in Cabinets, and it's kind of pieces here and there. It's some systems work in Cabinets, it's Moen, it's in Moen, it's in China. It's a little bit of advertising increase to drive the brand, and Security & Storage at some international infrastructure, some digital security solutions. So things that really have good quick paybacks.

Your next question comes from the line of Robert Wetenhall with RBC.

This is Dezi [ph] filling in for Bob. With regards to the windows unit, you talked about -- there was some product mix that offset some of the gains, the efficiency improvements. Can you talk a little bit about that?

Yes, when you -- in that business, it was modestly the operating margins or profits were modestly pushed down, basically just because of mix. Doors would be a part of that where you're seeing consumers and it's -- I don't think it's specific to our business. Its consumers are still being very cautious. We're very early in the recovery so they're generally moving towards kind of lower price point products within the same range.

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

I really wanted to get around a comment you made about some gains and losses in the cabinets segment, specifically at the home centers. Could you talk and give a little bit more detail about that and also if you could talk about how you guys are faring in the Lowe's line review that would be very helpful.

Sure. First in the home center's cabinets. For the quarter, we're up in the home centers. A place where we see pressure is in special orders, semi-custom, which is where the heavy promo is, and we had some gains there, we had some losses there. So it kind of -- across [ph] the home centers, it kind of -- they were up some places, down some places and it was kind of week-to-week, month-to-month. Again, we held consistent so where somebody was surging on promos, they did better than we did. And where they weren't surging, we did as well or better than what they were doing. So that's kind of the dynamic across there. But it's about what we expected so we're in line with where we were planning. On the Lowe's line review, I'd say you win some, you lose some. If we look across our businesses, and Lowe's has talked a lot about the line review and kind of the accelerated process. So they took all of our businesses through that process in the quarter, and we came out ahead in some places and didn't do as well in other places. If you net it together, we about broke even. And so that impact is reflected within our guidance that we gave out. They're a very important customer to us. We work closely with them in the categories that -- we picked up some business, obviously, that we're very excited about that. Places where we lost a little bit of business, we've still got important product setups there and we're driving growth in those categories. So altogether, kind of well-run professional process that took everybody through and we're soldiering on.

Okay. And then can you talk about -- I would love -- first off, I would love it if you could give more detail on what products you gained and which one you lost and in that Lowe's review that'd be helpful. And then my real follow-up is can you talk about your trends by month sort of where your revenue growth came in by month? I'm ultimately trying to understand this. You exited the quarter at an accelerated path and any comments on how things are faring in April?

Sure. That's fine. So in terms of gains and losses, I'll just speak broadly. We picked up some business in cabinets and in security and we lost a little business in faucets and in doors. So that's about the kind of scope of how we did. In terms of trend and pace, we can give you a little bit more. But if I look at the quarter, January was a little quiet. We saw a little bit of momentum coming out of December, but nothing to write home about. February picked up and we were encouraged. March was about the same level, and April's running kind of consistent with the average of the quarter. So April's order patterns look good. I mean, I don't think it's like -- we're not jumping up and down here, but it's consistent and it's broad. And so that kind of gives us the confidence to give a little bit more of a higher outlook on the marketplace overall, is kind of how wide we're seeing it 4 months into the year already. It kind of feels pretty good. So Lee, I don't know if you want to add anything else.

Yes, I think that's -- I think Chris is right. We've built some momentum during the quarter.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

One question in terms of demand. The guidance for revenues, for the year looks like it's 3 or 4 points better. I'm just curious if you can help understand a little bit of what you're seeing if that's on the new side or the Repair & Remodel side. And then also, I think you made a little bit of a mention in the release of how you're thinking about the influence of weather helping get some houses started sooner and how you're thinking about that within what you're seeing and what you're projecting?

Yes, I think as we looked at it and we saw that -- to frame it, at the last call, we talked about market growth of 1% to 2%. Now we're talking about mid-single digits, and we're seeing that through R&R. We originally thought R&R would be at 2%. Now we think it's closer to 4%. And on new construction, we originally thought it was in the mid-single digits. Now we think it's to the mid- to high-teens. So that's what's really driving our projection. And the reason. When you think about market growth for us, that's about a 3% to 4% improvement in our outlook and market growth. That leads to about $0.12 in EPS. So if you look at the midpoint of our guidance, and the last call it was about $0.70. The midpoint of this call is $0.82 so that's basically the $0.12. It's market driven. And the other thing from the top line that we think about is we take the first quarter and you dissect it, and you say we had a 12% sales growth. But you back out the onetime items that we've talked about, the inventory build in wholesale, for example, and the tool storage and you get to a run rate of 8% to 9%. And we think that's kind of consistent to that high-single digit sales gains of growth that we talk about in the outlook.

And the second part of you question I think was weather and its contribution. I think on houses in the new construction side to the extent they can break ground. There are places in the country that could start building sooner, so that probably backed up some of the demand into the first quarter that might've been sitting in the second quarter. But the outlook for the year, I think, is at least we're looking at it, is a bit higher than where we were in January overall. And then on the R&R side, I think the biggest category were, if impacted, was in Windows where historically January, February are really quiet months, especially in the north because people don't want to open up their houses. And this year they were doing window projects, so that clearly benefited that. But that business we're still seeing pretty good order patterns into April. So it didn't just completely suck inventory or project work out of April into the earlier part of the year. There's still a decent pace of activity there.

I'm sorry to make you repeat yourself a little bit, but in terms of the 8% to 9% in 1Q that you think is sustained through the year, I guess what I'm trying to understand is what is giving you the confidence that the weather that maybe helped the 1Q, that doesn't continue to help us offset by improved underlying growth. Can you just talk a little bit more about what you're seeing in the business that's adjusted -- the weather benefit that helped 1Q will be replaced by better underlying demands so that, that 8% to 9% can be sustained through the balance of the year.

Yes. Probably one of the larger points to the second half is the Cabinets lag. We think it's going to -- it lagged in -- just normal course cabinets, larger ticket items lagged in the first quarter. We think we'll see some lag into the second. But in the second half, we would think it would start catching up. So that's a big part of the second half.

Gentlemen, your final question comes from the line of Matthew McGinley with ISI Group.

I have a question on the comments -- some of the comments you made on the retail channel. In your prepared remarks, you talked a lot about how China builders and the dealers were driving a lot of the strength in many of your channels. I assume that retail was up, but when you think about in the context of your sales were up 12%. I believe you said the market was up 4%. How much was retail up respective to this other segments that you saw?

I'd say mid- to higher-single digits in the categories that we're in that are heavily retail driven. So mid-single digits is pretty solid. There were a couple of places where we saw higher single digit growth in retail. It was reasonably healthy and it was pretty much kind of ordering into demand. So not a lot of inventory build within retail kind of across the board if I average across there's maybe a little bit of inventory in some places and it'll take off in other places. But across the board it looked pretty stable.

So on the point of sale data you would have seen from many of those retailers, you didn't see the demand higher in the first quarter versus what shipments were?

Not really, no. Not across the board if you average everything out.

Got it. And then on the Cabinets side, you had I guess a modest decline in the profit rate in terms of cabinets. What drove that? Was that a mix shift to the builders that caused that to be a less profitable segment?

Yes, there were a couple of pieces. And again, you're right at the margin here, so it's small dollars. It's a couple million dollars. But we saw a little bit higher fuel costs in the first quarter.

Transportation logistics costs -- there's a lot of logistics costs in that category, so it was a little bit of a bump there relative to plan.

There are no further questions at this time. I'll turn the call back over to Mr. Lantz.

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

Today's call was recorded. A replay of this call will be available this evening through midnight, May 10, by dialing 1 (855) 859-2056 and using the conference ID number 67488957. This concludes today's conference call. Thank you for your participation. You may now disconnect.