Fortune Brands Innovations, Inc. (FBIN) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' Third Quarter 2016 Earnings and Results Conference Call. Thank you. I would like to turn the call over to Mr. Brian Lantz, Vice President of Investor Relations & Corporate Communications. You may begin your call. Brian C. Lantz - Fortune Brands Home & Security, Inc.: 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 third 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 - Fortune Brands Home & Security, Inc.: Thank you, Brian, and thanks to everyone for joining us today. Our teams delivered profitable growth in the third quarter in the face of challenging comps, select channel inventory reductions and slower than anticipated repair and remodel activity. Importantly, our businesses remained focused on targeting the most attractive segments of our markets and we delivered strong profit performance across all four segments. Since late September and through the month of October, we've seen the pace of orders across our business strengthen, returning to levels that we would expect. So, based on our solid third quarter performance, consistent execution and our current assumption for market growth, we're revising our full year outlook for sales growth to 9% to 10%, while confirming our previous EPS outlook. Let me first spend some time on our view of the U.S. home products market, followed by my thoughts on our business performance in the third quarter. Then I would like to discuss the recent creation of our Global Plumbing Group and why we view this platform is the first step to further accelerating growth for the Plumbing segment. And finally, since we've just celebrated our five year anniversary as an independent company, I'll provide my perspectives on the company that we have built and how we have positioned ourselves to maximize growth and value for the years ahead. Lee will then provide more details on our third quarter performance and our 2016 outlook. Starting with our view of the U.S. home products market. In the third quarter, the market for our home products grew at the lower end of the pace that we expected. We estimate that repair and remodel activity grew at around 4%, and new construction grew generally as expected. Our businesses experienced repair and remodel activity that began to slow in July and was clearly slower throughout August and the first half of September. While demand was slower over this period, our channels also reported a tighter labor market at available contractors and trades people to take on incrementally more projects over the summer months after a fast start to the year. Notably over the past five weeks, we've seen R&R activity and order patterns improve and more consistent with what we would expect starting in mid-September and continuing through October and consumers continuing to drive an improving mix within our categories. New construction demand continues to grow as expected with single family growing faster than multi-family and single family entry-level activity continuing to improve. Looking at the full-year 2016, our overall assumption is that the U.S. home products market, which impacts 70% of our sales grows at a combined rate of around 6%. Within the year, we saw upside in the first quarter driven by better weather. The second quarter was pretty much as we expected. The third quarter saw a slower repair and remodel activity partially due to labor constraints. And with our current visibility into order patterns, the fourth quarter is shaping up to be on plan. Taken together, 2016 will be a good year. Looking forward, our basket of new term indicators for the home products market remains pointed to strong underlying demand, some constraints in skilled labor, significant levels of single-family new construction activity, and continued market momentum as we head into 2017. Now, let me provide some perspective on our business performance. For the third quarter, our teams delivered strong performance across all operating segments. Sales increased 3% and total company operating margin increased to 14.8%. Starting with our Cabinet segment, we continue to follow 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 performance. In the third quarter, our overall Cabinet sales were flat to the prior year and operating margins driven by an increasingly efficient operations and an improving mix expanded to 12.4%. Excluding last year's third quarter load-in to support a major new vanity program launch and promotional timing, our total Cabinet sales increased mid single-digits in the quarter. And the dealer channel sales grew both single-digits overall. However, sales grew solid mid-single-digits in all of our core semi-custom product lines, and we continued to see mix improve. In our luxury lines, which make up a little more than 25% of our dealer channel volume sales were lower. Overall, dealers are seeing strong growth from our new construction products, we're benefiting from deeper relationships with existing customers, and we're beginning to see some cross-sell benefits from our Norcraft acquisition. Sales for our in-stock cabinets and vanities which are sold through home centers were down, but grew high single-digits when adjusted for the comparison to last year's load-in and promotional timing in the third quarter. The sell-through of the new program and product upgrades that we launched last year are performing very well and we're planning for the launch of additional new programs in 2017. Our Cabinet team has been focused on partnering with our customers to continue to deliver on consumer trends and drive growth in our in-stock cabinet and vanity programs. The remaining 25% to 30% of our Cabinets business, which includes home center special order, semi-custom, builder direct and targeted markets and Canada, grew mid-single-digits. We're disciplined in our approach to these segments as we focus on where we can partner with our customers to capture profitable growth. With our focused approach we grew share in these segments and drove strong margin improvement. We're especially pleased with our home center special order business, where our partnership approach is working well and driving growth at above market rates with an improving mix. In summary, I feel good about our industry leading cabinet business. We continue to execute well and deliver strong results even in a quarter where the market was not as strong as we planned. We're building share in the most attractive segments of the market. Our plants are increasingly more efficient and our new product introductions and program wins are helping us drive a richer mix across a number of price points in the market. For our Plumbing segment, sales were up 7% for the quarter, with solid mix and strong operating margin. Excluding select channel inventory reductions and sales from the recent acquisitions, sales increased to 6% driven by strength in U.S. wholesale, China and Canada. Across our markets, we continue to see consumers trade up and our mix improve as innovation and design, finish and function attracts consumers who trust our brand. As we look at the remainder of the year, our growth should benefit from incremental marketing spend, a healthy new construction market, and more focus on recently launched products. Sales in Canada were up high single digits to the prior year where we were gaining share. Notably we continued to see strong growth in the urban markets with our home center partners. China sales increased double digits versus the prior year. Sales gains were brought across the China business particularly in our Moen branded stores where we continue to drive increased productivity. Doors reported sales were up 4% for the quarter. Door products again saw sales growth in both wholesale and retail. Therma-Tru continues to benefit from the rollout of a refreshed retail strategy that includes an enhanced product line, simpler, more intuitive displays, and better sales support for our customers' associates. And in wholesale, we continue 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 the planned exit of some less profitable Sentry Safe product lines. The growth came from multiple channels and geographies and we were beginning to see profit improvement from the integration of Sentry Safe into Master Lock. We're also ramping up our Sentry sales efforts as 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 teams are consistently leveraging our competitive advantages to deliver profitable growth. We executed well in a U.S. home products market that is continuing to expand despite periodic labor constraints among installers and tradesmen and we are gaining momentum in our Security business with Sentry integration behind us. Now let me turn to the newly formed Global Plumbing Group, which is a key strategic step to enable accelerated organic and incremental long-term growth. The approach to the GPG is much like the evolution of our Cabinets business into a platform that can support multiple brands across multiple price points sold into leading channel positions supported by dedicated supply chains. The new GPG platform structure should allow us to accelerate growth while leveraging our global supply chain and strong distribution. It paves the way for additional acquisitions, joint ventures and supply agreements and allows for a seamless integration and continued growth. While only an initial step, we've recently made our first two acquisitions as part of this new platform. Riobel is a premium Canadian showroom brand which brings strong innovation and best-in-class service. We've also recently purchased ROHL, which includes both the ROHL and Perrin & Rowe brands, which bring a design-centric artisanal approach to luxury products. Under the GPG, these additions now have even greater potential for profitable growth. The new Global Plumbing Group enhances the potential for future growth as we look to grow our Plumbing sales to $2.5 billion by 2020. We're excited about the opportunity to transform our business, enter new markets, develop new products, manage our channels and customers more holistically and accelerate both organic and incremental growth. Finally, before I turn the call over to Lee, we're proud that we've just celebrated our five year anniversary as an independent company. And we're excited about our accomplishments over a relatively short period of time. Our teams have executed extremely well and delivered outstanding results. But I'm even more excited about the foundation that we've built to drive both organic and incremental growth over the next five years. Notably in our first five years, this team has nearly doubled our sales and more than doubled our operating margin. We've increased our EPS almost five fold. We've deployed capital in value creating ways which include making five acquisitions for $1.4 billion, repurchasing over $900 million of our shares, and initiating and consistently increasing a dividend. And we've delivered exceptional returns for our shareholders. At the same time, we've evolved and positioned our businesses for future growth by building on our structural competitive advantages and our leading market share positions, creating stronger operating capabilities and platforms, driving new products, new programs and new distribution, investing in capacity and productivity and by strengthening our management team and aligning incentives to focus on driving shareholder value. The favorable demographics driven by housing demand from the longer-living Baby Boomers and increasingly the Millennials, we've seen elongated new construction cycle and pent-up R&R demand being realized. These demand drivers, coupled with the stronger business model we have created, position us extremely well not only for 2017, but for the next several years. Additionally, 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 through strategic acquisitions, share repurchases and increasing our dividend. To sum up, R&R demand was softer in the summer, but after accounting for inventory impacts and some market labor constraints, the core of our business continued to perform well and we're maintaining share. So, I am quite comfortable with the top-line performance as we head into the balance of the year, as we're picking up sales in the better parts of the market which drive profitable growth. With respect to the bottom-line, I am very pleased. Margins in the quarter were again strong and we're pacing ahead of our planned long-term profit targets. And lastly, I am encouraged by what we've seen in terms of our orders over the last five weeks. It's exciting to me that fundamental demand is still healthy, even if there was some softness this summer. Now, I'd like to turn the call over to Lee, who'll review our third quarter financial performance and provide detail on our outlook for 2016. E. Lee Wyatt - Fortune Brands Home & Security, Inc.: 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 third quarter results. Sales were $1.28 billion, up 3% from a year ago. However, simply adjusting for the major program launch and promo event in Cabinets last year, company sales would be up 5%. Consolidated operating income for the quarter was $189 million, up 13% or $21 million compared to the same quarter last year. EPS were $0.80 for the quarter versus $0.64 for the same quarter last year, increasing 25% or $0.16. Earnings were strong and ahead of expectations driven by continued stronger operating performance and a lower tax rate. Now let me provide more color on segment results. Our third quarter Cabinet sales reflect the combination of very challenging comps and a softer R&R market. Sales were $602 million, approximately flat from the prior year, but increased mid-single-digits excluding the major program launch and promotional event for in-stock vanities in the third quarter of 2015. Dealer sales increased low single-digits from the prior year, core semi-custom sales at dealers increased mid-single-digits while luxury products were lower this quarter. Sales from in-stock cabinets and vanities decreased due to the prior year product launch and promotional event. Excluding the prior year activity which was $23 million of the total $38 million increase last year, in-stock cabinets and vanities sales increased around 7%. Remaining sales for home center semi-custom, builder direct and Canada increased 6%. Within those remaining sales, Canada declined largely due to the areas impacted by the downturn in the energy industry. In spite of flat sales, our Cabinet segment continued to increase its leading operating margin. Operating income for the Cabinet segment increased $11 million or 17% over the prior year. Operating margin for the quarter increased 180 basis points to 12.4%. For the full year, we expect an operating margin of around 11% compared to 9% in 2015. Turning to Plumbing, the GPG generated solid sales growth in the third quarter. Sales were $391 million, up $27 million or 7%. Excluding select channel inventory reductions and sales from acquisitions, sales increased 6%. Sales in Canada increased 8%, and China sales increased 11%. In spite of around $7 million in additional brand spending, the GPG maintained its leading operating margin. Operating income increased $3 million to $85 million, up 4% from the prior-year quarter. Operating margin for the segment was 21.7%. For the full year 2016, operating margin is expected to be over 21%, including incremental brand spending of $6 million in the fourth quarter. Door sales were $129 million, up $5 million or 4% from the prior year quarter. Operating income increased 34% with an operating margin of 17.3%, which benefited by around a 100 basis points due to expense timing. Full year operating margin for this segment is expected to be around 12.5%. Security sales were $157 million in the third quarter, up 6% to the prior year. Segment operating income was $27 million and the segment operating margin was 17%, which also benefited by nearly a 100 basis points due to expense timing. For the full year 2016, operating margin is expected to be around 14% with an expected fourth quarter margin of over 15%. To sum up consolidated third quarter performance, sales increased 3% and EPS were ahead of plan at $0.80. Our total company operating margin was 14.8%, up 130 basis points from the prior-year with an incremental margin of more than 50%. We are ahead of plan on our operating margin growth and 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 impact of lower tax rate. Our effective tax rate in the quarter is down from the prior year due to the previous adoption of the new accounting standard that requires companies to reflect the excess tax benefit from stock-based compensation transactions in their tax rate and EPS. While our previous guidance assume some benefit in both the third quarter and fourth quarters, our current guidance assumes all benefit was realized in the third quarter. Let me now turn to the balance sheet. Our September 30, balance sheet remains solid with cash of $279 million, debt of $1.59 billion, and our net debt-to-EBITDA leverage declined to 1.7 times. By year-end, we expect leverage to decline another 10 basis points to 20 basis points, excluding any additional capital transactions. Turning last to the details of our outlook for 2016. Our market and sales assumption for 2016 now call for U.S. home products market growth of 6%, down from 6% to 7%, due to softer summer repair and remodel activity that Chris discussed earlier. Accordingly, we now assume total global market growth of 5% down from our 5% to 6% expectation earlier in the year. Based on that market assumption, we now expect our full year 2016 sales to increase 9% to 10% compared to 2015. We have narrowed the range on our outlook for 2016 EPS to $2.72 to $2.76. The midpoint of our full year EPS outlook remains unchanged at $2.74, based on our continuing strong operating margin performance and the lower annual tax rate. The midpoint reflects a 32% increase over prior year EPS of $2.07. The guidance reflects the fourth quarter EPS range, which is unchanged of $0.67 to $0.71 to achieve the annual EPS outlook of $2.72 to $2.76. Note that our year-to-date, EPS through the third quarter are $2.05, which includes the benefit of a lower tax rate due to the adoption of the new accounting standard. Although, we adopted this new standard in this year's second quarter, our year-to-date EPS of $2.05 also reflects a benefit of $0.04 attributable to the first quarter. This first quarter benefit will begin to be reflected in quarterly comparisons in 2017. We expect 2016 free cash flow to be around $400 million with our conversion rate of over 90%. The annual EPS outlook includes the following assumptions: interest expense of around $50 million; a full-year tax rate of approximately 29.5% with no benefit in the fourth quarter from the previously mentioned new accounting standard; the average fully diluted shares of approximately $158 million. In summary, we're pleased with our performance so far this year and are set up for a strong 2017. The R&R market growth was softer than expected in the third quarter. But, recent trends and long-term fundamentals continue to point to solid demand and an elongated cycle. Our disciplined focus on profitable growth is working well. As we are ahead of plan, and on track to hit our long-term operating margin goal of 15%, as the housing market reaches its long-term average. We remain focused on using our balance sheet and cash flow to drive incremental shareholder value through acquisitions and share repurchases. I will now pass the call back to Brian. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Thanks, Lee. That concludes our prepared remarks on the third 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?

Thank you. Your first question comes from the line of Bob Wetenhall of RBC Capital Markets. Your line is open.

Hey. Good afternoon and congratulations on the five year milestone. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you, Bob.

Chris, I think, you referenced to soft patch in demands, and I think, Lee provided some context about Canada being weak in Cabinets specifically. I was hoping you could spend a little bit more time talking about kind of the length of this soft patch and the duration of it? And it sounds like it was a transitory phenomena and you've seen demand pick up, so I was just trying to tie that in as we move towards year-end, what's giving you the confidence in the new guidance range based on the trends you've seen since the end of the quarter? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. As we entered the third quarter, July is always quiet month, and so it was quiet, but in the past, we've had quiet Julys and things have picked up in August and September. This year as we kind of moved through August, it continued to be pretty flat. I'd say there was activity in pockets, but there were other places where it was kind of quiet. Finally, as we got into second, third week of September, things started picking up, so in many ways, order patterns picked up and it was kind of too late to really drive third quarter. But since mid-September and through October, we're right back on our plans for where we thought the market would be, really across all of our businesses. And so you kind of look at it and you say, from what might have been kind of looking back mid-June through early part of September, we had a quiet R&R market. New constructions in this whole period kept rolling through. As we look at the data, I think builders put a lot of attention into completing the houses that were under construction. We come in, in the later stages of those homes, so to the extent we're delivering product into those homes, cabinet business, direct-to-builder, faucet business going in, doors business going in, that kept at a good pace. It was just this R&R market was quiet. I can give you a little color, just in the channel feedback that we got, even for those who were out looking, they were getting feedback that to start a project now, there really wasn't the installation labor, carpenters, plumbers available until later in the fall. And so I don't know how much that ended up having to do with underlying activity. I'm sure some of it was the more basic drivers, consumer confidence, et cetera, but there was this feedback loop inside of our distribution that it was kind of telling folks that the activity that most of the contractors were booked up from the strong spring and so installers weren't really available. That's freed up a bit. I'd still say there's some labor constraints out the market, but it's freed up a bit, and so I think that's passing through in some of the order activity that we see. I'd say that pretty consistent activity now through late September, October across all the businesses. So, that gives us the confidence to say we're going to come in where we thought we would in the fourth quarter. I've been calling this the Goldilocks year, first quarter a little bit hot, a little bit too hot, second quarter was kind of just right. Third quarter was a little bit cool, and it looks like fourth quarter is going to be kind of like second quarter, which is basically back on plan. So altogether a good year. It's just kind of cycling up and down. Not unusual. This is my eighth year of running this business, our fifth year of being public and this whole recovery has had these kind of surges, flat spots, dips, and then kind of back up. So as a company, we're used to this. We staff accordingly. We kind of take the rolling view of it all. And so that gives us pretty good confidence coming into the end of the year, and frankly setting up 2017.

That makes a lot of sense. And, it's very encouraging looking into 2017. Just to Lee's comments about generating $400 million in free cash flow with the clean balance sheet. How do you make the decision internally between share buybacks and M&A? And what are you seeing on the M&A front in the current marketplace? Are you going on offense? What kind of opportunities are out there for GPG? Thanks and good luck. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thanks. Yeah. We remain focused on acquisitions. We are active and looking at a number of things. Obviously, we completed a couple of acquisitions on the luxury side of the plumbing market and we're excited about that fitting into the GPG. We continue to be busy looking at a number of other things in Plumbing, some things in Security, and then our other segments, and even looking at additional segments. To the extent that the market is soft overall, we've shown that we've been opportunistic in buying back shares, summer of 2014, some weakness. And so, we took advantage of that, bought back $440 million of shares. Earlier this year, late January and February, some weakness in the market, we bought back $350 million or so shares. So to the extent there is soft spots, we'll take advantage of that but I still see some good opportunities in acquisition, so we'll balance those two between. We've said from the start, for the last five years, we're going to be efficient with our cash flow. We're not stockpiling cash. We're trying to be efficient for our shareholders to create value. And so that's kind of our mindset as we lean into this whole thing.

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

Hi, thank you, guys. Chris just to push a little further on this because it is pretty relevant to how people are thinking about the cycle and I think you put some good context around it. But if I back out the acquisition benefit, it looks like the guidance in the fourth quarter is basically sales growth of call it 4% to 7% versus 3% in third quarter. So can we interpret your comments to say that the quarter to date is essentially sort of in the midpoint of that 4% to 7% range? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, yeah, that's good math.

Okay. Perfect. And then the other thing that's kind of out there and just I don't think you touched on it, but sorry if I missed it. But promotions at retail on the cabinet side. What are you seeing and how are you guys behaving both at the home center channel and then the dealer channel? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So, we've been more disciplined than the other larger guys who are in the retail channel. It's a smaller part of our business. It's only about 14% of our cabinet business. And so we've been measured. I think, we're third most aggressive of the three. So we have seen elevated promotions, but we've kind of picked our spots. I'd say, we were careful because we've got such a big dealer business, our in-stock business in vanities and in-stock kitchens. Those aren't promotional driven. So we don't really have to use promotions to drive volume. Maybe some others are more reliant upon it. And to the extent you're more active on the promotion side, it's going to deteriorate margins. So, that's how we balance that. We're targeted, but as you can see from our margin improvements, we're not going that far into it, because we're driving that margin improvement across Cabinets. And, we're getting good utilization across our business coming out of dealer and coming out of in-stock. So, and direct-to-builder, where that business we've obviously readjusted that over time here, but that's a really attractive business. So, the context for it is, we're participating, but we're participating to a lesser extent. I guess, if the other guys want to go knock themselves out, they can. And for us, there is some business there that we like and that we're partnering with home centers around. But, we have a certain point that we're not comfortable going past.

And then, on the dealer side, are you seeing elevated promotions versus a year ago there? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Much less so. That tends to be more targeted, I mean, really it gets down to almost the individual dealer and going after a single project. So, it's not programmatic as much as in the home centers, you kind of go nationally, you have to. But, within the dealer market, you can go very local and to the extent you see some attractive business chase it. So, no, that's not the same environment that we've seen on the home center side.

Okay. Appreciate, Chris. Thanks, guys. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thanks.

And your next question comes from the line of John Lovallo of Bank of America. Your line is open.

Hey, guys. Thanks for taking the call. First question is I guess, last quarter you had outlined your expectation for relatively benign commodity costs year-over-year in the second half of 2016. Any update on how you're thinking about the fourth quarter and perhaps into 2017? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yes, it's happening much as we outlined on the last call. We had said the first half would be more of a benefit, when you net commodity deflation or inflation against FX. So in the third quarter, we probably net picked up about a $0.01 from commodity less in FX impact. So – and in the fourth quarter probably a $0.01 or less, so much less of an impact in the second half, little more impact in the first half. 2017 if you look at commodities right now, it – they have not started to spike up, there are certain pockets, steel is little higher, glass has actually been higher all year, wood has been kind of breakeven right now, at this point. So not sure the pace right now, don't anticipate huge spikes right now, but we would assume that it would move up commodities – inflation would move up during the year.

Okay, that's helpful. And then in terms of the $2.5 billion Plumbing target for 2020, I guess, or curious, are you thinking that – are you targeting getting there organically or is there any way to dimension what percentage of that do you think would be attributable to acquisitions and would the acquisitions to the best of your view right now, include getting into other parts of kind of the value chain or other products in Plumbing? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. It's a combination, and it really strikes to the core of why we formed the Global Plumbing Group is, we think it's a combination of both organic and acquisitions, and there is a little loop in there where acquisitions then feed into faster organic growth. So our real strategy within Plumbing is to become more multi-branded, multi-product, a wider spectrum of price points. We've got really strong channel strength in our geographies across North America and China and we can put more through those channels, more brands, more volume, I'm more looking at other geographies. So, I'd say in terms of dimensioning it, you could say half of it through acquisition, half of it through organic. But, I'd say that's rough estimate, and certainly it's not anticipated to be all organic. And there could be even more upside if we're more aggressive on the acquisitions side. So, it's all – in terms of putting that number out there, we're just trying to create an understanding, how we're looking at it, and frankly how significant it could be, just based on some of the things we're looking at and the power we see of bringing more through the channel strength that we've got, and leveraging the brands that we've got. Moen is obviously a huge brand, we think we can do more with it. We've acquired some additional brands, we think we're going to acquire some other brands. And so, it's just to create the expectation, and internally it's the way we're talking about, what the opportunity could be.

Thanks a lot, guys. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Okay.

And your next question comes from the line of Tim Wojs with Baird. Your line is open. Timothy Ronald Wojs - Robert W. Baird & Co., Inc. (Broker): Yeah. Hey, guys. Good afternoon, nice job on the margins. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you. Timothy Ronald Wojs - Robert W. Baird & Co., Inc. (Broker): I guess just in the Cabinets business, I think that at least relative to our expectations, that the margins there have been a lot better this year versus maybe we thought initially. Could you talk about, I mean, this – just as we kind of think forward, I mean, is there – how do you feel about just capacity and the ability to kind of continue to expand margins at kind of that 25% to 30% incremental margin clip that you talked about historically? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. It's – thank you for that. And the credit goes to our team. We've got an outstanding operational team in our Cabinets business. It's an incredibly complicated business, you think about our spectrum of products that we're making from in-stock vanities through semi-custom, up to our more custom business. And these guys are really on the ball. So, if I break it down, we've got better operating efficiency going through the plants. We still have capacity, we made our big capacity investments a couple of years ago, they're just getting better at running it and we've frankly got more volume coming through, so that's part of it. Part of it is, we are getting some synergy benefit from Norcraft, you're seeing that come through, they've been aggressive in driving that and improving the operations of the acquired Norcraft businesses. And then some of it is just mix. As we've said, we target profitable growth in the market. We're not chasing every dollar of sales out there and within the relationships that we've got, we're driving a stronger mix. And that's coming through finishes, that's coming through more complicated projects and we spend a lot of time out in the field with the designers helping them really design the product into the – what the consumer is looking for and that yields a higher mix for us. So you take all those three things together and that team has really have been driving things together to improve that margin. We're headed toward mid-teens, that's what we've said, that business is capable of doing and we're well on track with that and team is focused on it and you'll continue to see improvement in 2017 and 2018 as we're moving up to that. Timothy Ronald Wojs - Robert W. Baird & Co., Inc. (Broker): Okay. No that's great. That's really helpful. I appreciate that. And then just thinking about mix, I mean, has there been – has – mix has been pretty strong over the last couple years, is there – have you seen any change in how the kind of breakdown of mix within your different businesses, has it changed at all or has it been pretty steady? Christopher J. Klein - Fortune Brands Home & Security, Inc.: It keeps improving. And I'd say, it's – I'd back to the consumer. I think, the consumer is really driving a lot of this. She is going for more painted looks, opaques, more complicated designs. And so, as we're fulfilling that need, it drives the mix up. I'd say it's that fundamental as long as we're on point with bringing out the products that she wants, then these – we're going to continue to see that mix drive through and it's within price tiers. So, if you go to vanities, the mix is improving in vanities. So, in-stock vanities which you'd say, oh, that's not a huge price point. Well, within that price point, the mix is improving up. In-stock kitchens, the mix is improving up. Value semi-custom, stronger mix in there, in our core semi-custom line, stronger mix in there. So, it's kind of throughout the price points and parts of the business. I think, we're just trying to understand what's the consumer looking for and then if we can bring that into the market, work with the designers to say, here's what we've got, this is what your customers are looking for and you can execute on that, you can continue to drive that mix. And that – it's getting into a bit of the detail, but that – that's really what's going on inside of the channels and what's driving our mix improvement. Timothy Ronald Wojs - Robert W. Baird & Co., Inc. (Broker): That's great. I appreciate the color and good luck through the rest of the year here. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

And your next question comes from the line of Philip Ng with Jefferies. Your line is open.

(42:33) from a top-line perspective the last few quarter, what's driving the strength, and just it is you're looking to put more capital to work? Christopher J. Klein - Fortune Brands Home & Security, Inc.: You cut off in the first part of the question, if you could restate the question.

Sure. The Security business has been pretty strong from a top-line perspective the last few quarters. What's driving the strength? Is this a business you're looking to put more capital to work? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. They've been growing last couple of quarters. They had a particularly good quarter across the board. So, they were strong in retail, had a very good back-to-school season. So within padlocks, that's our big season for the year, they were good there, strong commercial performance kind of across the line, strong safes performance. We integrated the safe operation into both our Milwaukee operations, as well as down in Nogales, Mexico. We completed that over the summer, so it kind of freed up some management capacity. So, yeah, good consistent growth there. And we are looking at other opportunities to bring other products in, we've got very strong distribution on the retail and commercial side. We think our brands are strong, both the Master Lock and Sentry brands, and so it's an area of focus, we're working through that. Frankly I didn't want to – we had to get the Sentry Safe integration done operationally, before I think we wanted to move too aggressively into other acquisitions than then had to be integrated. But we got through that milestone this summer, so I think we've freed up some management capacity, and we'll be excited to bring some more product in there. And so when we talk about our acquisition pipeline that's very much a part of that pipeline.

Okay. Sounds great. On margins, I mean, margins were strong across all your segments, but Doors as well that was pretty strong, what new initiatives are you putting in place to drive that improvement and is that type of margins sustainable? Thanks. Christopher J. Klein - Fortune Brands Home & Security, Inc.: I'd say that in the third quarter, the margin was 17%. We probably have a 100 basis points on that which were just some timing of expenses, which gets you down to 16%. I think the thing you're saying in net margin growth and it's been that way throughout the year is the structural advantages we have with the strength in wholesale that we establish two years to three years ago, especially on the West Coast. You also see that in the last 18 months a real thrust towards the retail and driving the retail side of the business, and that's driving those margins up. We get good leverage in that business, it's a lot like Cabinet. It's – you can really leverage those manufacturing assets well. That's what's happening. We would expect it to continue, when you think about, they finished the year last year with about a 10% operating margin, we think they'll be 12.5% this year, very much like Cabinets heading back to mid-teens margins at steady state, so them and Cabinets very similar in their margin growth and the same kind of potential to get there.

And your next question comes from the line of Nick Coppola of Thompson Research Group. Your line is open.

Hi, good afternoon. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hello.

I wanted to kind of similarly ask the macro question, but more typically to your business in Canada, and I think I heard that Cabinets were down, but Plumbing was up, which I thought was interesting, so maybe anymore color around what you're seeing in Canada? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So, that's a good question. Our Plumbing business is pretty well spread across the country, we've got real strength in the urban markets in Toronto, Vancouver, and so you're seeing continued strong activity in those markets. And we're picking up share to begin in those markets and so our Plumbing business performed quite well. On the Cabinet business, we have real strength across the planes, we're in the urban markets, we also have strength across the planes and they are down. I mean, the Calgary oil industry has been hit, and so you're seeing some weakness there, so that hit our Cabinet business more so. And I think, they will continue to track to the market, we're certainly performing well relative to market, but to the extent that that impacts overall Canada our Cabinet business would be hit by that.

Okay. That's helpful. And then hopping back over to Security here, more particularly on the margin performance, I think, you called out 100 basis points of benefit from expense timing, but even excluding that, margin performance was quite strong there. And so just wanted to see if you can help us think about the impact of the integration there, whether that is kind of running at full force at this point now and then if there were any other mix kind of considerations or the like? Christopher J. Klein - Fortune Brands Home & Security, Inc.: So, yes. It's running well. This integration is started to see the benefits of it, and Lee will give you some of the detail, but we're really excited about the fact that that's behind us and now you're starting to see it flow through the numbers. E. Lee Wyatt - Fortune Brands Home & Security, Inc.: So, you're getting sales leverage clearly on the 6% sales growth. Chris talked about product mix improvement. I think that's a big part of it. All those duplicate cost from the last two quarters when we were integrating the Sentry Safe into our Nogales, those are pretty much gone now. So, I think you're now seeing that leverage. When we, a year ago, said that we were going to integrate the manufacturing, we set a target of a 15% operating margin in the fourth quarter of 2016. We said that will be the test that we've done a good job and we've got that integration done. And so, we're at the point now where we can say we'll have a 15% operating margin in the fourth quarter. We'll have a 14% for the full year as the margins built throughout the year, but we'll exit at 15% and that's a good starting point for next year.

Got you. Thanks for taking my questions. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thanks.

And your next question comes from the line of Mike Rehaut of JPMorgan. Your line is open. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hello.

Hi. Thanks. Thanks for taking my questions, it's Mike Rehaut. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi, Mike.

Hi. How are you, guys? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Good.

First question, just on kind of revisiting the demand slowdown and obviously great to see the pick backup since mid-September. In terms of the slowdown, I think you kind of alluded to the fact that it kind of hit across most of your product categories, but were there certain end market or channel segments that you felt it more than others? I think you kind of referred to maybe some inventory adjustments. And as well as across any particular price point, as you kind of mentioned that the luxury line in your cabinets was down a little bit? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So, I'd say it was soft in general. So, I'd say that was kind of consistent across. Having said that, I think Northeast was a little softer. South Florida is a little bit softer. Our luxury lines had run pretty hard the last two or three years on the cabinets in those markets, Northeast, South Florida. So, those are a little bit softer. I think we kind of felt it really across all the businesses. I don't know that I can, beyond that I don't know that it was that much different. And then you got a solid accelerate similarly kind of across the business. So it's hard to pinpoint anything more than that. It felt like a general market. I don't know how to attribute it to underlying consumer demand, which I think was part of it. But also it felt like the whole system is a little bit backed up, that he ability for R&R activity to get started anew, when you've got a lot of project work coming in and we're fulfilling a lot of the activity coming out of the spring, the channels felt backed up. And again I can't be precise to say, well, how much was related to consumer, how much was related to the channel backed up. But it felt like it was a combination of both those things. That's why I kind of called them both out.

Right. No, no, no. That's helpful. And I guess just going back to mix for a moment as well, you kind of were very granular in saying that just it affect every product segment or product line let's say within your Cabinet business, in-stock, dealer, et cetera, et cetera, et cetera. Mix was positive. At the same time you did point out that your luxury lines were down, which would have everything else equal, a negative impact on mix. So just trying to get a sense from the top down if you just kind of, I don't know if you look at this way, but average sales price per cabinet, was that still a net positive despite? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, across the board, it was net positive. So in saying that the luxury end of the market was a little softer, it's relative to last year. But inside of that segment, we're still driving mix. So it's kind of like saying, in proportion as you say across all of these price points, if the very high end is a smaller proportion, that doesn't that hurt that mix, but with inside of those, you continue to drive mix, which is continuing to drive margin. It's really kind of fundamental. It's Cabinets. It's also inside of Faucets. It's inside of Doors. When we talk about growing a little faster than the rest of the market by driving innovation, what we're really driving at is bringing new product in that's going to drive that mix up, and then working with the channels to allow them or to help them sell that mix through. And that you can see it as I kind of go through average ASP by price point in Cabinets, it's coming through all those. If I look at the Plumbing division and look at Moen in our wholesale segment going into new construction, we're driving it from kind of spec to first upgrade, first upgrade to second upgrade. We continue to see that move up. In Doors, we're getting better attachment rates on glass, decorative glass, sidelights. And so we're driving that by bringing out new styles, so we're driving that mix up. And so when I talk generally about mix, it's kind of inside of those price points and inside of those categories, that's where all of our innovation work is going to drive that up.

No. great. Thanks. And just one little quick one on the tax rate. Lee, fourth quarter you expected to go back to, what was it 33% or so, and any thoughts around next year? E. Lee Wyatt - Fortune Brands Home & Security, Inc.: Yeah. Nothing on next year yet, we'll give you that when we finish the annual plan. But yeah, about 33.5% in the fourth quarter, just to kind of clarify, when we gave guidance last quarter the $2.74 midpoint, we had assumed tax benefits in the second half of about $0.04 or so, and we kind of spread it by quarter $0.02 in the fourth quarter and $0.02 in the third quarter. What we saw this year was just the way the price of our stock has worked, being strong in the early part of the third quarter. We picked up $0.04 to $0.05 in the quarter. We'll pick up nothing we think in the fourth quarter. So we got the same kind of tax benefit that we would've thought, we just got it in the third quarter versus the fourth quarter. So pretty much as we'd expected. Next year we'll talk to you about our base rate is 33% or so, 33.5%, so but that's a starting point, but we'll have some planning ideas for next year and we'll give you a rate then.

Thank you.

And your next question comes from the line of Garik Shmois of Longbow Research. And your line is open.

Hi, thanks. Just wanted to dig in a little bit just on channel inventories in Plumbing, I think coming out of the second quarter, if I remember correctly, inventories were pretty lean and it sounds like because you provide a lot of commentary about how the system just got backed up in the third quarter, but if you could provide a little bit more color specifically what happened in Plumbing and also just the cadence as we look into the fourth quarter, if sell-in were to match sell-through. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, I would say, it's only the third quarter inventories in the channel continued to be lean, I think, you can see on the retail side, we actually called out that there was some further destocking, so in that channel on the retail side, I'd say you're running leaner than POS. So at some point we typically catch back up to that. On the wholesale side, didn't really see any improvements, so you're still running at POS there and so to the extent that the channel is pretty lean. As you see some surge in demand typically we have to ship back into that. So on the one hand it's helping, and on the other hand, it doesn't give us any help, it's bit of a headwind in the existing quarter, but you know that that's further demand that will come about as the market calls for. We've gotten good at servicing this business, so to certain extent, they're leaning on us and that's fine. That's part of our service proposition is we're just going to work hard to fulfill the orders when they come, but to the extent they can run a little leaner on inventory, they may take advantage of that. So, Lee, I don't know, if you want to add anything else? E. Lee Wyatt - Fortune Brands Home & Security, Inc.: Yeah. I think, what we're seeing across retail and wholesale customers in Plumbing is they're all working to be leaner on inventory whether it's systems implementations, other approaches, methods that they can use. We've seen that all year and which is a good thing for them and it's a good thing for us, it can be a little erratic quarter-to-quarter, but net-net, the demand we think is out there and that's going to drive, they'll drive the POS over time.

Okay. Thanks. And just a quick one on China. It seems like it bounced back this quarter after some choppiness in 2Q, I was just wondering if you can provide a little bit more explanation as to what helped with the improvement. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, China continues to perform well this year. I think, they've seen their real estate market perform well, beginning the year, the government put in place some things to try to help that market and those things are working. For us, we really saw it across the board, so importantly our Showroom business kind of the traditional retail business up strong double-digit, and that's a good sign, because that's both R&R, as well as going into new construction, so that was up strong, direct-to-builder continues to be okay, but surely kind of across the board, just healthy growth. A lot of it Tier 1, Tier 2, so I would say, looking back versus three years ago, where it was more kind of spread across Tier 1, Tier 2, Tier 3, Tier 4, a lot of the activity we're seeing now is more concentrated in those stronger better developed markets, which is again good, because we typically see a better mix coming through there, better price points coming through those Tier 1, Tier 2 markets. So for us China right now is a healthy market, we like that market.

And this concludes today's question-and-answer session. I'd now turn the call back over to Mr. Brian Lantz. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Thank you, Susan. We'd like to thank everybody for attending our quarterly call today, and certainly look forward to speaking with all of you again very soon. Thank you again.

And this concludes today's conference call. You may now disconnect.