Good afternoon, my name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone for the Fortune Brands’ 2015 First Quarter Earnings 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 period. [Operator Instructions] I would now like to turn the call over to Mr. Brian Lantz, Vice President of Investor Relations and Corporate Communications. Mr. Lantz, you may begin your call.

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 2015. 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 a 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. Quarterly results for 2013 and 2014 on a continuing operations basis are posted on our website. 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.

Thank you, Brian, and thanks everyone for joining us today. In the first quarter, our teams delivered profit growth that was right on plan despite home products market that is, as we expected, off to a slow start. Importantly, our mix continues to improve, our core businesses are performing well and we’re building momentum in the market. In the second quarter, our plan anticipates some marketing improvement and we are watching closely as the quarter unfolds in this important spring selling season. We also continue to anticipate improving new construction activity in the second half of the year. Therefore, based on that market assumption and solid execution of our plan in the first quarter, we are maintaining our full year outlook for existing business. We also recently announced an agreement to acquire Norcraft, a leading cabinet producer. This should contribute additional growth this year and into the future as we expect our markets to continue to improve well beyond 2015. Let me first spend some time on our outlook for the home products market, then, I’ll provide my perspective on our underlying business performance, and last, I’ll update you on our strategy to drive incremental growth with our cash and balance sheet. Starting with our view on the US home products market. In the fourth quarter of 2014, we began to see signs of accelerating strength across many aspects of the market that pointed to a stronger 2015. From a facing [ph] perspective, it was clear that due primarily to the timing of housing starts, the market for our products would likely build momentum through the year, particularly in the second half as our products go into homes in the later stages of the construction. Importantly, the first quarter market for our home products grew as we expected it would.…

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, a majority of my comments will focus on income before charges and gains from continuing operations. Let me start with our first quarter results. Sales were $951 million, up 7% from a year ago. Excluding the impact of currency, sales increased 8%. As we discussed in February, when providing 2015 annual guidance, the first quarter was expected to have modest growth with increasing growth in the second quarter and the highest growth in the second half of 2015. Consolidated operating income for the quarter was $73.2 million, up 4% or $3 million compared to the same quarter last year. EPS were $0.28 for the quarter versus $0.27 the same quarter last year. Our EPS was on plan and supports the full year guidance provided in February. Now, let me provide more color on segment results. Our cabinet sales were $411 million, flat to the prior year quarter. Dealer sales were $168 million, an increase of 8% from the prior year. Home center in-stock cabinets and vanity sales of $104 million declined 9%, due to the timing shift of shipments to support incremental product placements as Chris described. Home center semi-custom sales were $79 million, builder-direct shipments of $22 million and Canadian sales of $37 million were relatively flat in the quarter. Currency reduced Canadian sales by $4 million in the quarter. Excluding the impact of the shift in timing of in-stock cabinets and vanities from the first quarter to the second quarter and currency, cabinet sales increased 4%. Operating income for the cabinet segment decreased 6% or $6 million over the prior year quarter, due primarily to inefficiencies related to 2014 capacity expansion actions. As we discussed on our February call, these inefficiencies should now be behind us. We…

Thanks, Lee. That concludes our prepared remarks on the first quarter 2015. We will now begin taking your questions and will continue as time allows. As there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then re-enter the queue to ask if there are no questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Your first question, gentlemen, comes from the line of Mike Dahl from Credit Suisse. Mike Dahl, your line is open.

Hi and thanks for taking my questions. I wanted to dig in on cabinets a bit more because I think, from a top line perspective, that seems to be the one thing that's still missing from hitting the type of high single-digit growth that you guys continue to expect. So just if you think about the timing of some of the in-stock shipments, can you help us understand maybe what April has looked like or over what period of time should we expect that business to recover? And maybe any snapshot you can give on overall cabinets and then the in-stock specifically post-quarter?

Sure. I think if you start and deconstruct the category a little bit for us, today, we've got about 40% of that business in the dealer market, which by the way will increase to over 50% after we complete Norcraft. So dealer business grew high single digits and we expect will continue to perform quite well. The in-stock business, which is now 20%, 25% of the business is a very attractive category for us. We won some significant business in fourth quarter of last year to transition that business in the first quarter. Our retail partner brought down inventory which they typically do ahead of the shipments that’s sort of rolling in early part of April and that's rolling hard right now, the guys are working to ship all that in. It will come in primarily in the second quarter and then into the third and then we will have repeat business off the back of that. So it’s a very positive thing but obviously it makes the first quarter look a little soft. On the semi-custom special order side of the business which is really kind of high teens for us, we talked a little bit about promotional activity, really as a result of some significant wins we've had over the last 18 plus months there, we've made some pretty good moves in the home centers and we’ve see this happen before, we take share and our competitors seem to rely upon promotions, kind of promoting same old stuff as we are rolling new stuff in. And so we are in a good place there, if you look year-over-year, we gained share in the home centers. If you looked at it versus the fourth quarter, we gave up a little in the first quarter on some promo activity. But that's really not sustainable for them to continue to just promote the old stuff. We are bringing in new stuff that's getting the consumer excited. So if you look at the overall category, obviously first quarter is the softest quarter for the whole industry. But we are pretty excited about where we are going and that's even without Norcraft. You bring Norcraft in on top of this, it's now over half of our business. On the dealer side, you look at the vanity and in-stock business, another 20% plus, you've got over 70% of our business that's in very attractive sustainable parts of that market, which we like a lot. So I think you will see, back to your original question, you will see that high-single-digit growth, that's some very strong margins which frankly is insulated against whatever competitors want to do on the promotional side and get knock themselves out and we are going to stand tall.

Thank you. That's very helpful. And then, my second question is then on the profit side. How much did those timing issues impact the profits in cabinets this quarter?

That was a few million dollars. The other thing, though, that -- and we have talked about this in February was when we made the investments in capacity in the second half of '14, we created some inefficiencies around material usage, labor and efficiencies and those things and we have said in our February call there would be $5 million to $6 million of those inefficiencies flowing through in the first quarter. And that's exactly what happened. And as we also said in February, those should be behind us at the end of the first quarter and we think that's what's happening now. So about $6 million was inefficiency carryover that we've estimated and discussed. There are a few million just on the kind of the timing of the in-stock business and then the first quarter is always very seasonally very low sales. So you don't get very much leverage on your fixed cost and we actually added a little fixed cost in the quarter just ahead of what we think is going be the market growing in the second quarter and even more in the second half. So we didn't get much leverage there. So we are fine with our cabinet profitability. This is a business that we think by -- if you look at the mid-point of our guidance, we think that the operating margin will grow at least 100 basis points this year. It will leverage incremental sales by around 25%, which is our target. And again, I think it's just skewed a little in the first quarter because that's just a little sales and leverage period for us. So we feel fine about our cabinet profitability.

Okay. So that implies that then your -- if it's 25% for the full year still, then you are going to get up above 30% on the flow-through potentially starting in 2Q?

Yeah, it could be above 25% for sure for the year.

Okay, thank you.

Gentlemen, your next question comes from the line of Tim Wise with Baird. Tim, your line is open.

Hey, good morning, everybody or good afternoon, actually.

It's a long day.

Yeah, it's been a long week. So just maybe touching on the last question with the cabinet’s profitability, how should we think of the year-over-year margin expansion? Should it be modest in the second quarter and then bigger in the second half? Just a little bit of clarity around that would be helpful.

Yeah. When you look at our business, cabinets and other pieces of our business, you really have to look at the market growth. You start with the market growth assumption that we have. And as we said in February, we thought the first quarter would be the lowest. It would improve some in the second quarter, but most of the -- the largest improvement would be the second half. And I think that's how you will see the profitability as well, because we will start leveraging. I think you will see better leverage in the second quarter than in the first obviously, especially as we make up the sales on that in-stock cabinets and vanity business. But we will also just leverage higher sales. So I think it will be higher in the second, but I think the second half will be much higher.

Okay, perfect. Thanks. And then, I guess just looking -- with Norcraft, could you maybe talk a little bit about just how you guys think about just the internal capacity for incremental acquisitions? And then maybe just describe a little bit of the process how the Norcraft deal came together and kind of how you guys agreed on that.

Sure. Norcraft is a terrific company first off, very high quality, very strong in the dealer side of the market, great reputation. And we've known them for a long time. Actually Mark Bullard, who is the CEO and his father ran a business that we bought as a company back in the early 2000s. And so as typical, in our categories, we know kind of what our quality business is and we are always impressed with them and just reached out to Mark and started a dialog. And these things take time. But they kind of unfolded in a way that made sense for both of us and we came together and it made sense for them, and it made sense for us. We are excited because I think what we can do is very much what we’ve done already with our cabinet business. We've got this master partner program where we've taken single product dealer relationships and turned them into multiproduct relationships. It's really been over the last five, six year, a lot of hard work, but we know exactly how to do that. We are going to take that same approach to their roughly 2,000 dealer network. There is only about 25% overlap on those accounts today. So we've got a lot of room to take our products into those relationships and by the same token, they have some absolute terrific products, Mid Con, StarMark, UltraCraft, that we can take into our existing relationship. So it will unfold where there will be cost synergies early on as there always are. And then the revenue synergies will come over time as we bring all that together, but it is a great example of kind of harder the market, terrific integration into existing business, good degree of synergies and some strong accretion. In terms of further capacity and things looking at -- cabinet guys are going to be busy with Norcraft a while, so we've continued to focus in the plumbing sector, we continue to focus in the security sector and Nick Fink is joining us who has been a long time -- somebody I've known for quite a while and he is a strong operator as well as strategy M&A guy. So that combination is just terrific. So he is going to be able to help us and we will have capacity to do something. So we will be focused on the cabinet side, but we have plenty of room to go ahead and do some other things as well.

Let me put some numbers around what Chris is talking about and actually what he said in his remarks. So you assume the housing market recovers over the next three to four years to a 1.4 million, 1.5 million starts and we have 5% to 6% R&R during that period, free cash flow cumulatively could be in the $1 billion range that we could generate in that, say, four-year period. Depending on the level of debt, if we wanted to go 2 times or 2.5 times, you create another $1 billion to $1.5 billion. So cumulatively, during that roughly, say, four-year period, you would have $2 billion to $2.5 billion to spend. We just committed 600 of it, so we substantial amount left. So we feel very good about the opportunities and we've got some really good momentum and just a lot of flexibility to drive that incremental value with that spending.

Great. Thanks.

Gentlemen, your next question comes from the line of Stephen Kim from Barclays. Stephen, your line is open.

Thanks very much guys. Wanted to ask about the Cabinet business. I think you mentioned dealer was up 8%. I wanted to know if you felt like that was a pretty good underlying demand run rate. Is that kind of where you think the market overall is looking for cabinet growth? And do you think that, therefore, we might think that that's what you might have gotten in your home centers or in your in-stock and vanities business that it just got pushed out into 2Q?

Yeah, I would say it’s high single digits, feel like it’s probably about where it is right now. If you deconstruct that a little bit on the dealer side, interestingly the higher price point more custom middle market was stronger than that. And kind of the value part of the market was stronger, the middle part, kind of the mid-price points were a little bit weaker. So if you blend it altogether, we kind of get up to that kind of high-single-digits. And I think that's probably that the market overall is probably running more like 6-ish percent, then we are picking up some share. I think that's kind of where the market is sitting right now. I think you could see some stronger performance on the R&R side of that market, especially if we see some existing housing stock turn. You could see that pickup into the second half of the year and certainly new construction helps cabinet business. It won't impact the in-stock business that much, but it will help the overall numbers on that side as well. So yeah, probably a reasonable proxy.

Great. And, Lee, I think you mentioned that the home center, semi-custom, build-to-direct in Canada sort of combined were flat. What was the home center, semi-custom and the build-to-direct sort of individually in terms of year-over-year change?

They were all in that flat to 1% either side.

Got it. Okay, perfect. And then lastly, on the cabinets, when you talk about the inefficiencies, I think you mentioned $6 million was directly related to the expansion investments. And then I think you mentioned a few million more for some other things and you mentioned fixed costs also for future growth. Was the fixed-cost sort of comment -- was that the few extra million or just I just wanted to be really precise about what the incremental spend was this quarter related to expansion investments and inefficiencies and that kind of thing.

Yes, we end the year 2014, we look at our growth prospects for '15 in the space and we decide how much investment of fixed cost that we can support. So what we saw in the first quarter and so we make those and it could go in in the second half of '14, so you have an annualized until you get through the first half of '15. So from a fixed cost in the quarter which could be people and other things, probably saw between $1 million and $2 million increase and you notice it in the first quarter, because it's the lowest seasonal sales period, so you don't get to leverage on it. So it kind of stands out. As we go into the second quarter on, it gets totally absorbed to the sales as a sales increase seasonally. So that was $1 million to $2 million. We had a few just little bit higher costs, $1 million or so just in some one-time items that will now wash out through the year and you won't have that same impact. So probably about $3 million there.

Got it. Okay, great. Thanks very much guys. I appreciate it.

Gentlemen, your next question comes from the line of Stephen East from Evercore ISI. Stephen your line is open.

Thank you. Good afternoon, guys.

Good afternoon.

Chris, if you look at your plumbing, tremendous results there, both top line and your op margin, of course, pushing 20%. I guess the question there is, one, what do you think was driving it? Are you seeing some raw material benefits, et cetera? And what do you think the sustainability is as you move forward and sort of what do you think is driving the top line as well?

The business is very healthy. The strongest parts, the wholesale side of that market where we're serving the new construction side actually that we think is going to build momentum throughout the year. We like the growth we saw there, high high-single digits. Inventory also is down in the wholesale channel. So there's some pretty significant upside for that business from the sales side throughout the year. I think you will see a stronger second half as some new construction comes in there. When we sell product into new construction, on the plumbing, that's actually a more attractive product mix there. It's a stronger product set and the consumers are buying up. They are trading up, so they are buying the more expensive product going into their new homes. Retail side, results were good, but again the inventories are down at the retail. So POS was actually stronger than what our results were. So I would say, strong POS, new products coming in, selling through strong and we think inventory will probably tick up through the balance of the year. So that should continue momentum. Commodity is pretty stable, so that’s helping on the profitability side. And I commented a little about China, the direct-to-builder side of that market as you would expect is down a bit, but our retail stores are growing high-single digits and we think there is some pretty good remodel activity flowing through there. And we’ve also worked hard to increase those stores productivity, call out the bottom performers and really focused on the stronger ones. So there is a lot of good things moving through and helping on the Moen side.

Okay. All right. So if I hear you, then, it sounds like this type of op margin is probably sustainable as we go through the year?

Yeah, Stephen, this is Lee. If you look back to 2014, we were in the 19% plus range then. This is just to carryover of what we really did last year.

All right. And then, Chris, if you look at Norcraft, and I'm going to also drag in SentrySafe here, just sort of your acquisitions, are these primarily, when you look at the synergy that you're getting, are they primarily driven by the topline or would you expect a lot of cost synergy coming through Norcraft? It sounded like when you were talking it was primarily topline.

You know, on the Norcraft side, there is a lot of topline. There is some cost that will come out because you’re taking a public company and taking the public company costs out it. So there is – that infrastructure in any public company that you don’t need to replicate, because you’re going to take them kind of within our systems. There will be some purchasing synergies on the cost side as well, so we are buying – we are a pretty big cabinet company and we are buying a lot of those components and we are going to have more leverage. And of course we have got some manufacturing capability down in Mexico now on the component side. So we have got some good cost savings through that. That step will come earlier, and that should be balance of ’15 and into ’16. Sales side, that is significant. It will just come kind of ’16, ’17 and keep going and that’s been our experience as we looked at our core business and our ability to sell multiple lines into dealers. It’s just a continuing process that helps you continue that pace of growth. I don’t know if you had a specific question on Sentry.

Yeah, just sort of, is that fully integrated now? And I assume that was all topline driven? And also, any update on Waterloo, if you have it?

Sure. Sentry side, there is actually quite a bit cost synergies and that’s still ongoing and that’s what we expected. It’s running ahead of schedule, but that will continue. We will get the Sentry operating margins up to the Master Lock margins, which have been pretty good kind of at low-teen, mid-teen type margins, and we will get Sentry to that level. So that will be quite significant. And then there will be some revenue synergies there as well. On the Waterloo side, we announced that was in discontinued operations as of the end of the year. We have done work to consolidate operations there and we are exploring kind of what the right ownership should be long-term there, and anybody else is interested in that. But it’s – we’ve got it to kind of a tighter operation to really reflect the revenue side of that business, which as we discussed before heavily dependent Sears and so it is what it is.

All right. Thank you.

But that’s moving along as we had hoped and probably even ahead of where we thought we would be right now on that process.

Okay, thanks.

Gentlemen, your next question comes from the line of Dennis McGill from Zelman & Associates. Dennis, your line is open.

Hi, thank you guys.

Hey, Dennis.

Chris, I imagine this is kind of a blend when you formed your outlook using resources from the Street and macro-wise and so forth. But when you’re forecasting the acceleration of businesses through the year, and I imagine 4Q is sort of the best of the year, what do you focus on most within your business? What do you focus on most today to give you confidence in that ramp?

I guess, it’s – you kind of break it down between new construction and repair and remodel market and our assumption this year was R&R little bit softer in the first quarter and then picked up a little bit, but kind of reasonable -- kind of maybe 4, 4.5 first quarter, rolling through to 5, maybe 5.5 in the better part of the year. So nothing dramatic there. On the new construction side, we lag a quarter to almost two quarters depending on the products. So the products that we build to inventory, so especially on the faucet side, our channels anticipate a little bit, so there is about a quarter lag. Cabinets will be built more closer to when they are actually installed, so that may lag a quarter and a half, even more so. So we are looking at new construction numbers and starts. Any activity that you would see -- fourth quarter, which show up in our business, late first quarter, second quarter, any activity we are seeing right now is going to show up on our business over the summer and into the fall. If you look at 2013, it’s a great example. So 2013’s strong first half, everything kind of stopped in the summer, but there are plenty of houses they were still building on a lot of activity. We had some really big quarters, third and fourth quarter, both in plumbing and in cabinets. And everybody is looking at us like, what are you doing. And the rest of the markets kind of contracting while we are just finishing up what was started in the first half. So that kind of a lag flows through the business. So when we look at 2015 and we say, okay, we think building activity pick up late March, into April through the second quarter into the summer that will drive the second half of the year. So that’s kind of the macro factor driving the market overall that we just kind of look at based on what happened last year and then we model our businesses after that. And we have picked up share gains throughout and so that keeps rolling through and you layer that on top.

So, Chris, is it fair to say then if you've got a visibility that what's happening now is going to be end of the year, that you're seeing sort of 15%, 20% growth among your new construction customers on the start side?

No, that’s what we’re seeing and hearing and talking to. I mean, there is a lot of – there is lot of positive discussion that we are having with the people that we are selling to, both on the builders’ side as well as the dealers and the showrooms. And some of that’s translating into orders that we are starting to see right now, flowing through in April. Too soon to call the order flow for the whole spring, because it’s kind of a funny first quarter, January was okay, February was soft, early March was soft and then all of a sudden, kind of later in the March, things picked up, again in April, things picked up, so it’s just starting to build momentum, and our channels are positive. So I would say, yeah, I mean, I think that would support the kind of growth that we are looking for in the second half of the year. Nothing that happened in the first quarter scared us, it was a bit to plan and our EPS was right on plan, we came in right where we thought would be.

Okay. Great. If I could sneak another one in just on the Norcraft side, you mentioned, I think, that of their dealers -- I don't know how this would look on your side, but 75% of their dealers you don't do business with? Can you just maybe educate us a little bit on why there would be that much of a gap in your overlap with your breadth in the market and the different price points and brands that you have and maybe that kind of leads into the opportunities as you see it?

Yeah, I mean, that was, frankly, what made it too attractive, I mean, it’s – you’re right, I mean, we are bigger of any [ph] dealer. But what they brought first on the product side, you’ve got Mid Continent, which is very strong in that $150 to $300 cabinet category, where we’ve got a presence, but we are not as big as we are in kind of full-on semi-customer. And so that product is a great addition to kind of from a price point where we are. As well as UltraCraft, which is on the frameless side. I mean, we’ve got some frameless products, but we don’t have as much frameless product as where the market is. So you’ve got that product set that kind of would lend itself to set of dealers. And then geographically they are stronger in the west, really west of the Mississippi, so kind of through the Middle West, all the way out to West Coast, they have got a better representation. So it was kind of a product and price point on the one hand, and then geographic expansion. And so in kind of one fell swoop, it helped us expand in some places that we weren’t. And we feel really good about where this sets us up and then the ability to kind of cross-pollinate with some product that we've got, be it kind of a stock builder product with Aristokraft into some of these dealers, or might be an Omega Dynasty type product launch. So there is a lot of places we think we can take it into their dealers. And then we are excited about their product, bringing Mid Cont at that price point into some of our dealers, as well as UltraCraft, StarMark, two terrific brands and products at kind of the right price points into our dealers. So if you’re going to sketch one out, this one kind of checked a lot of those boxes, which is why we try to get it done.

All right. Good luck with it.

Thank you.

Gentlemen, your next question comes from the line Michael Rehaut from JPMorgan. Michael, your line is open.

Thanks. Good afternoon, everyone.

Hi.

First question I had was on plumbing. You had some nice improvement there and I think – but if you can kind of look at the margins, last year, you thought that excluding some of the harsh impacts from weather could have been closer to like a 19% margin. So here you have 19.5% off of a 7.5% topline growth. So just curious, actually, despite the good -- some improvement, what were the factors that perhaps prevented maybe a more normalized, let's say, dropdown in margin expansion that you would get from the solid topline growth?

Yeah, this is Lee. When we look at 2014 margins for plumbing, we were at – we averaged 19.5% for the year last year, so I think we got there last year and I think that’s pretty set at this point that we are pretty comfortable with it and that is a run rate that should be fairly sustainable unless we do something significantly on the sales line. So having a first quarter margin of 19.5% was pretty reasonable to us. There were a couple of quarters, in the middle of two quarters, last year in ’14 for Moen, where they had a 20% operating margin. So 19.5% in the first quarter feels pretty reasonable. And if we maintain something in the 19% range for this year, we will be very happy. Our strategic issue with Moen is how do you drive more volume through with those kind of margins because it’s very profitable, very successful.

And that’s really where our focus is, we are continuing to invest in the brand, we are investing in new products, we invest in showrooms and continue to invest in showrooms and displays. So all of that, we would rather be driving growth at these margins than slowing that investing down to just take the margins up high, so -- even higher than that. And a lot of those things are what's on the docket for the year is to try to drive that growth at those margins, and I expect that's what will happen.

Okay. So, in other words, I think you are kind of referencing some of the incremental investment that you're doing in that business today?

Yes, these are just ongoing normal investments that we'll make. Now we've said, that we will make more investments in the second half of this year around our supply chain, as you recall, last year we talked about $0.12 EPS in investments, mostly skewed to the cabinet business. This year, we've talked about on our guidance, previous guidance in February; we talked about around $0.08 with more of that skewed to Moen and a little more in the second half than the first half. So we will continue to make investments to drive that business and we're still hopeful that we could have 19% operating margins even with those investments. So, it's a great brand, it is strong, it has great structural advantages that just don't go away and it just keeps performing, so we'll invest all day in that business.

Okay. Fair enough. And then, just on the cabinet margins, you referenced some of the inefficiencies from 4Q continuing into 1Q and that was something that you highlighted in the last call. Is that behind you at this point? Or would there be any marginal lingering into the second quarter?

We think that's behind us, and really it's a byproduct of putting the capacity in and in the cabinet industry, putting capacity in is -- it comes in in chunks and there is no avoiding it, you put capital in and then you create the room in the plants and then you reorient the workflow and it screws up the workflow for a period of time, there is no other way do it and so, we did at a time in 2014, ahead of what we think is going to be a very strong next three years, because we saw the share gains that we've gotten. So, yes, we feel good that's it behind us, it's something that you got to tackle from time to time. Every major cabinet company has got to take on, if you're going to put capacity in and you're going to do inside of an existing facility and not build a new plant, you're going to create some inefficiencies. It's not inefficiencies that are created because now the workforce somehow loses its way or we somehow stop being as efficient as we were before, it's really reorienting around, putting in new lines, manufacturing lines, finishing lines, docking and everything gets rearranged in a plant. So, yes, we've got that; we worked hard at that last year, it kind of carried over just on the flow that's coming through right now but we're in a very good place to take on the demand that we see coming in the balance of this year and as well as going into the following year. Norcraft is in a pretty good place as well, they've got capacity that should take us through kind of 2018 and beyond, or maybe some things we add to those plants on the margin, but we're buying a pretty healthy operating system, strong management team, everything else there. So we think we're going to be in a very good place to take the volume that's coming out over the next few years.

Great. Thank you.

Gentlemen, your next question comes from the line of Mike Wood from Macquarie. Mike, your line is open.

Hi. Thanks for providing all the color and taking my question. I just wanted to follow-up on the kind of 5% to 6% compounded growth that you are forecasting for Norcraft in the numbers you provided. Can I just confirm that -- are any sale synergies actually in those numbers in that horizon? It seems relatively consistent with what you’re reporting in your legacy cabinets business already?

I think we made reference to the fact that it could grow 450 [ph] beyond, I don't think, we're not pegging it at that number, so it was more of a parameter that it could grow. We would expect it would grow greater than that, beyond 450 [ph], so I won't do a linear calculation around that. It should grow as well as its growing today Norcraft and then add to it the revenue synergies to take it up beyond that. So I think if it was going to grow high-single digits then, you could assume it should be growing in the low teens.

Okay. And then you also gave the capacity in your pipeline, just in terms of the dollar amount you could spend. I'm curious if you can comment on whether or not you have larger deals in that pipeline and if you think there's any reasonable chance, near-term or over the next several years, you could actually bridge those valuation expectations and bring them over the finish line?

Yes, it's hard to predict, there are a number of things in the pipeline, there is number of things we're actively working right now. I can never predict the probability of us successfully completing. I would say Norcraft is a great example, something that we were working on for a while and in parallel with a number of other things and that's one that came together in the right way and so, we got it done. I'd say the same is true with other things we're working on, if you're working on enough things simultaneously, your chances of having something come through or a couple of those things, it doesn't have to be one big thing, it could be a couple of mid-sized things if they're the right fit. And so, we've got a number of those things in the flow, we've got a great team that's working hard on all this, and it's the combination of our -- at our business unit level as well as our corporate teams here. And so, I think probabilities are pretty good over the few years that we'll be doing some more things. We'll stay disciplined and that will be governor around kind of our ability to get things done or not get the things done.

Great, thank you.

Gentlemen, your next question comes from the line of Ken Zener with KeyBanc. Ken, your line is open.

Thank you, good afternoon. Your comment around in-stock cabinets seems to be -- or I am assuming it refers specifically to WoodCrafters. Could you give us a sense, because that was a higher margin business when you -- a very high-margin business when you acquired it. Could you comment on kind of what your experience having owned that company, should appear you have relates to how inventory at the core channels were and what impact that had, so what percent, first-quarter sales, it tends to be light or heavy? And then the impact that it actually had on your cabinet business? Because I assume if you missed sales there, that was actually somewhat of a margin drag as well? Thank you very much.

The in-stock cabinets and vanities business is actually composed of a number of pieces, so we had a pretty healthy business already providing in-stock kitchen cabinets into retail, into retail, into the home centers, quite a sizable business and we did some vanities. We bought WoodCrafters and that brought some additional capabilities and then together through our distributor assembly network plus North America, we've been able to extend that out. I referred earlier we've had some significant wins within the home center channel and so this year, in the first quarter, the issue was managing through taking inventory down as we’re preparing to bring the new products in, and so there are multiple products and I wouldn't reference it directly to WoodCrafters. Our experience with WoodCrafters has actually been quite good and it's both on the front-end side of the market as well as the back-end of the market in terms of manufacturing. We talked about last year, we've actually expanded a major facility, built a second plant right next door to one we had down in Mexico and that's going to feed a number of parts of our business both cabinetry, vanities, across all North America and that's -- instead of expanding our supply chain through China, we'll maintain China as part of supply chain but having a low cost manufacturing capability on components down in Mexico, with the lead times that we've got and the cost proportion is pretty exciting. So it's really at this point pretty well integrated, and so the acquisitions played out as we thought it would but it's kind of integrated now into kind of the overall stock side of the business. I don't know if there's any more color you want to give.

Just, Ken, on the operating margin, you're correct in we acquired WoodCrafters, it was 13% to 14% operating margin but -- and that's a business that is, the manufacturing process can be much more straightforward than say semi-custom cabinets. So what we've done here is, when we talk about in-stock as Chris said, its vanities and that's in home centers, its in-stock cabinets where we have exclusivity in one of the large home centers. So we brought all together, because it has similar manufacturing structure, it has similar product structure, and its in-stock versus make to order. So we bring that together and right now it's 25% of our business and that's the place where we have advantages. So we're going to run all that together, and as we put it all together and as we integrate the manufacturing as Chris talked about for example WoodCrafters, we will have very strong margins, that's why we like that channel and that's why we're going to call all that out together. And then coupled with dealer, which obviously you’ve seen Norcraft's kind of margin potential. Now, when you got -- with them out there, when you've got 70% of your cabinet business in those two channels, which both have not only unique strengths and profitability profile, but very defendable leadership positions that's why we'll focus on that. So very good margin structures over time as we get it all integrated together.

Thank you.

Gentlemen, your last question comes from the line of Garik Shmois from Longbow Research. Garik, your line is open.

Thank you. Just a quick follow-up to the last question. I just wondered if you could maybe provide a little bit more color, just as the install business ramps here in the second quarter, it sounds like it could potentially be mix positive to margins? Just wondering if you could confirm that thought and maybe just provide a little bit more color on how you would expect the margins in the cabinet business to progress.

You start with the long-term prospective for cabinets, where we talk about getting, we were little under 8% last year, getting back to 14% plus as the housing market returns. So we like 100 basis points to 150 basis points on an annual basis to kind of get us on that run rate by three or four years to get back to that 14% plus. What you'll see in in-stock over time, it will have high margins and it will lead us there and it will be in that range. I think what you find this time when we're ramping up new product line wins, it will drive volume, it will help margins, but there is still other cost of getting in and other cost of ramping up in the short run that will probably depress it, although it will favorable versus the first quarter. So it's a good investment, it's a good thing, and you'll see as the year progresses, just as the market improves, I think you'll see our profile in that in-stock category improve as well. So we feel very good about it, that's why we're focused on it.

Okay, great thank you so much.

This concludes our question-and-answer period. Gentlemen, I'd turn the call back over to you.

Thank you Amy, I just want to thank everybody for attending the call today and we look forward to speaking with all of you again very soon.