Good afternoon. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands First Quarter 2017 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin your conference 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 2017. 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 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 make. 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 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 sometime to address questions that you may have. I will now turn the call over to Chris.

Thank you, Brian, and thanks to everyone for joining us today. Our team’s delivered strong sales and profit gains in the first quarter as the home products market continued to expand. Our core businesses performed well across all segments and we remained focused on driving profitable growth. Based on our solid first quarter performance and momentum we have inside of our businesses and the favorability on our tax rate, we’re increasing our full-year EPS outlook. Let me first spend some time on our view of the U.S. home products market. Next, I will provide my perspective on our business performance in the first quarter. Lee, will then provide more details on our first quarter performance and 2017 outlook. Starting with the review of the U.S. home products market. In the first quarter, the market for our home products continued to grow with clear strength in new construction, and the repair and remodel market growing at the pace we planned. We estimate that repair and remodel activity grew below the full-year rate as expected, due to the unusually high growth in the first quarter of 2016. Single family new construction grew high single-digits. Repair and remodel activity remains steady overall with consumers continuing to pursue on-trend styling and upgrades. Like we saw in the second half of 2016, the first quarter had some softness at the very high-end after two years of strong growth, but all-in-all overall, is tracking well and product mix continued to improve across our categories. The construction demand came in a little ahead of our expectations in the first quarter. Single family activity continued to outpace multifamily, a relative benefit to our Company with sales more into single family homes and entry level demand continuing to accelerate. Importantly, the basket of our forward-looking indicators continues to support…

Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gains. Let me start with our first quarter results. Sales were $1.2 billion, up 7% from a year ago. Consolidated operating income for the quarter was $122 million, up 17% or $17 million compared to the same quarter last year. Total Company operating margin increased 80 basis points to 10.3%, and we remain on track to achieve our goal of around 14% operating margin for the year. EPS were $0.53 for the quarter versus $0.42 in the same quarter last year. Increasing 26%, and we’re ahead of plan due to stronger than expected operating performance and a favorable tax rate. Now, let me provide more color on segment results. Our cabinet sales were sales were $574 million, up $24 million or 4% versus the prior year quarter. Dealer sales were flat at $273 million and increased 2% from the prior year excluding premium. Our prior year comp was challenging for dealer as sales grew 16% in the first quarter of 2016. In-stock cabinets and vanity sales of $129 million increased 19%. The remaining sales for home centers semi-custom, builder direct and Canada increased 2% led by a double-digit increase in builder direct. After nearly tripling operating income in the first quarter of 2016, operating income for the cabinet segment increased 25% or $10 million over the prior year quarter. Operating margin for the quarter was up 140 basis points to 8.2%. For the full year, we continue to expect an operating margin approaching 12% compared to 10.8% in 2016 with sales growing at market and at the lower end of our total company guidance of 6% to 8% as we target profitable sales and remain committed to…

Thanks, Lee. That concludes our prepared remarks on the first quarter of 2017. We will now begin taking a limited number of 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. [Operator Instructions] The first question is from Tim Wojs from Baird. Your line is open.

Hey, guys. Nice start to the year. I guess, my first question, just thinking about the market outlook. I know you said it was too early to raise it. But, I guess my question is, what would you need to see in the market place to get you comfortable with raising that guidance, especially with easier comps in the back half for the year? And then, I guess secondary, is there anything that you’re seeing in the marketplace that is giving you any sort of pause or any sort of hesitation?

I think it’s somewhat like give me another month and I could have made a better call. We saw increased momentum coming out of March into April. April orders were strong across the board. So, I’d say, things are lining up for some upside down the road. And you’re right, second half comp’s much easier. The thing I know here the first quarter comp was pretty heavy as you can see and how well we did last year. And so, we’re sitting here today feeling good about backing [ph] those and doing really well in the first quarter, momentum coming out and into the kind of second half. The infrastructure side, everything looks pretty good. I guess, to the extent that labor free up that they can actually build what looks like a very strong pipeline coming out around orders permits, converting that into starts and building out. And for us, there is a quarter to two quarter lag off all that activity but that’s lining up pretty nicely kind of deeper into the second quarter and then the second half. So, that piece I’m pretty comfortable with. On R&R, the quarter looks very good. We’re starting to see some improvement on the premium, and I talked about little bit that we saw again some weakness in the first quarter, but it was getting better versus the second half. I’m also encouraged, if you look at the recent existing housing turnover that the high-end of that existing housing turnover sales in the market picked up, and that’s good for us again with some lag, looking to the second half, maybe September, October or November you can see a pick there too. So, I think it’s wind up good; it’s kind of just a little bit more just because the start of the spring season for us really started to kind of mid February and then picks up scene as it goes. So, I don’t see anything in terms of headwinds. Interest rate is actually -- again, back to where we here at the beginning of the year, feel a lot more stable, a bit improved for the start of the year. I should say that you couldn’t see some increases over time but not concerned there. So, I would say, everything we are looking at looks pretty good right now.

Okay. That’s great. And then maybe just on the plumbing investments, is there any way to frame how much those investments were maybe in the first quarter and how we should think about it in the first half year, and then maybe what -- how you expect price, cost specifically in the plumbing business to play out through the year?

I’ll give you an overview. It’s very much our strategy. We’ve talked about last year, we’ve formed a global plumbing group, we talked about holding margins at kind of 21% range and investing in growth. First quarter is always soft in terms of margin. Last year, we underinvested in the first quarter because we were waiting for some marketing activity to kick in. So, really, it’s around kind of generally following our strategy of investment, more spend, more focus on digital. We’re ramping up the pace of new product introductions; we’ve brought in some talent around it. So, kind of roll that out together, 19 is about what we planned, right on where we plan and we’re still looking at 21% for the full-year cumulative by the end of the year. Lee can go in a little more detail if he likes.

Just to quantify slightly. As Chris said, remember, last year we spent light in the first half of the year and then we doubled down in the second half with media spend for example $6 million incremental each of the last two quarters. So, this is just kind of normal, we’re moving back to normal timing in the first quarters. So, I would say there is probably around $7 million of spend, the largest portion of that is around the things Chris defined around media, digital and those kind of things. This is more normal spend rate for us. So, for the full-year, it’s not very much increased incremental, it’s just more timing. So, we will hit 21%. If you go back to a normal year like 2015, you would have seen us in the first quarter hit about a 19.5% operating margin for plumbing and then finish the year little under 21, 20.7. So, we’re just back to normal timing; this is -- it’s right on plan.

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

I just wanted to ask you outside of the plumbing business when you are looking at the margin expansion you had especially in doors over 300 basis points and 200 basis points in security, was this tracking in line with your expectations and was execution better than you expected?

I think it was a little better. As I said, it came in the first quarter, and we were just about -- the comps were running against, and we had had some pretty good margin expansion in the first quarter of last year. So, it was a little bit better, kind of roughly in line. I would say, the overall theme is disciplined growth. So, we’re looking at parts of the market, be it in doors, plumbing, cabinets that can give us some good growth with margin. And that’s really what was in our plan. But I think we were maybe a little bit better than what we started with.

What could drive more margin expansion or are you where you think you should be given the growth rate and the pace of the business?

So, it depends by business. I think you can go across -- you go around the whole -- as I just talked about plumbing, we really want to try 21% margin with above market growth and that’s a strategy and that’s where we are investing and that’s where we are growing, and that’s where our shareholder value. In cabinets, we’re going to move up margin this year. And that’s really focused on the more profitable segments of the market and so a heavy focus on the dealer segment, heavy focus on in-stock. We’re still participating in builder direct and special order and home centers but we’re being disciplined there. And so, we’re looking at where is the market healthy. If you look at doors, similar approach. We made some investments in distribution on the wholesale side. Retail, we’ve made some good investment. So, it’s really -- I would just say, as you’re sitting here, looking at the markets where are there more attractive segments driving new products into those segments, driving our activity towards that and not chasing every little piece of business that is dilutive. That’s kind of the broad brush. In security, we talk about the fact that margin’s rising because of the conversation of the security business or the Sentry Safe business and folding that into Master Lock business. So, that’s driving planned margin expansion.

The execution is great. Just switching over to the balance sheet and then I will pass it on. Net debt sitting at 1.6 times, you have over $200 million of cash on the balance sheet at the end of the quarter. Can you talk about the M&A pipeline? It sounds like there is pretty healthy valuations now, at least we see it in the public market. What’s the opportunity set, and how do you figure out the right bolt-on. Obviously GPG is a focus point for the company but would you look in other areas like Sentry Safe the way you did with security? Thanks and good luck. Great quarter.

So, I guess I’d say, we’re working on it. There is lot underway. We’re focused in plumbing, we’re at looking number of different opportunities. We’re looking in our security segment, we’re looking in some adjacencies. I’d say, valuations are higher but we’ve shown in the past we’ll pay a fair value for very well-run business where the margin is strong kind on the growth and typically, we can take that kind of business and create value here by combining with some things we do. I’d say, we’re getting hung up on value, would be average type businesses that want to command or more premium type valuations. And so those numbers don’t come again. But, as I’ve always said, I’m encouraged when there is lot of activity because we refer to it as quality, and when you get more quality effects, -- and I think that’s the way we feel like right now and that level of activity can support some, get something done into this year.

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

First question, I guess, you made an interesting comment on builders and contractors making some progress and attracting new labor into the market. I was wondering, if you could may be just expand on that a bit. And are you seeing that in particular regions and in particular trades, and what do you think is driving this?

So, I guess I’d say that -- I’d start with overall noise level where we were just hearing through a lot of channels this time last year or even back in the 2015 that there really was a crunch in that -- the building cycle was elongated. I think it’s still an issue, but I think they have proactively addressed it, bringing more labor into the pipeline and bringing more training into areas where they can actually train, not skill trades like plumbers and electricians but more in [indiscernible] and other labor. So, I think it’s still a concern but it feels like less of a concern now. I know they’ve worked on it and I also know, they’re working on land and bringing more land in the pipeline. So, I have a bit more confidence. And as you look at the reported numbers around orders in the spring and selling season and you look at the recorded permitting that we can convert that for our business kind of look at how long it takes to convert that into revenue for us. But that should convert into second half revenue for us kind of in that September, November, December real busy time for us. So, that’s why I’m encouraged where in prior years I might have been little bit more concerned, just I think with the pace of that building, it is stretched out kind of deep into next year.

Okay. That’s really helpful. And then, I guess just do you guys have any softwood lumber exposure in the door business?

Not really, a little bit on trim but nothing that -- it’s not going to really hit us. I mean, as we look at number, it’s really hardwoods for us. And hardwoods have been pretty stable. We anticipated a little bit of inflation and we put that into our guidance year-over-year and it’s tracking to what we’ve assumed, so softwood hasn’t really impacted us.

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

Quick question on plumbing. I mean, Chris, sales trends that we see have been pretty volatile the past few quarters. I was just hoping maybe you could identify anything that’s unusual on a quarterly basis and maybe just talk to what you are seeing and demand level. It seems like when you some out some of the noise that you guys are seeing on shipments that sell through is a lot more positive unlike we interpreted?

I guess the way I’ve observed it is the core of the business which is the core wholesale, the core retail has kind of been tracking mid single-digits for a while now. And so, there is not much volatility and that is kind of moving around a mid-point in mid single digits. I think where you see some surge is, we may have had from new product introductions or some promotional activity or some other things that could have contributed some of that or if there was some pull ahead of pricing increase. So, I think that’s where I’ve seen some volatility. The core has been reasonably stable. And the investments we are making are to kind of move that middle point up and to invest to drive on a regular cadence through more product introductions, through stronger marketing, advertising efforts to drive that middle core up. So that’s really where the focus really is.

And just realizing that faucet is one of the categories that was earliest to recover. I think during the depths of the downturn, the argument was the faucet breaks, you are going to fix it because it’s smaller ticket. Do you think that category growth is going to be slower going forward just as the cycle matures?

I don’t think so. I think that there is a part of that market that is incredibly stable, which is kind of grows at 1% or 2%, which is the piece you’re talking about. On top of that there is R&R and new construction. And so obviously, our investments over the last 12 months in expanding global plumbing group, acquiring role parent role ROHL, Perrin & Rowe Riobel and then some other things we’re look at are really expanding our presence on that R&R side. And in new construction, we remain very strong, so especially with the top 80 builders, we have a very strong market share position there and continue to participate as that market grows. So no, I don’t -- I see some strong growth in that sector, just frankly why we are looking at making more investments there, organic investments as well as looking at anything from the acquisition standpoint. We like plumbing. I think it’s a strong sector; you look at this market overall continue to perform well. So, yes, I think it’s in great shape.

Okay, great. And then, just finally, obviously a lot of inflation across your categories whether it’s plumbing, the plywood tariff on cabinets, skill elsewhere. Just relative to the commentary that inflation is tracking expectation, maybe just talk about your ability to kind of navigate what’s been a pretty benign cost environment? And this year, it seems like even over the past three months some of the commodities have continued to tick up.

Overall it is one of -- we plan for it and we plan commodity increases and it is in the guidance. But over time, we’re able to get both through cost take outs as well as some pricing. Historically, if you look back over one year, three-year, five-year we recover rises in commodities, which is really environment we’ve been living in for eight, nine years we’ve had these cycles. So, while we have some compression in commodities from 18 months, what is more normal is a rising commodity environment and us having to react to that and we’ve shown our ability for that.

Yes. Just as you think about kind of the numbers around inflation, we said last year, we actually had a net benefit $0.10 to $0.12 in our EPS. This year in our guidance, we built around $0.12 of inflation;, we built that in being fairly modest in the first quarter and then building through the year. The first quarter was kind of right on what we thought. We hadn’t really had to change that guidance because it still looks like it’s on that path. We have a lot of ways to offset inflation as well beyond just pricing. And we have our size and our scale and our sourcing and our supply chain. We’ve got a lot of ways to use material substitution, alternate sources. There is many ways beyond the pricing and we look at those other ways first to offset that inflation before we kind to go to price. We booked around $0.12 in and I think we’re on track so far and we think we can manage it.

Your next question comes from Stephen Kim from Evercore ISI. Your line is open.

I wanted to just follow-up. I thought I heard you mention something about added personnel in plumbing. And when you were talking about your accelerated investment spending, you also sort talked about the creating the GPG group. But I just want to make sure, was there a degree to which added personnel costs factored into some of the accelerated spending in the quarter or did I just kind of miss here that?

It is more around upgrading that team. As you know, we changed leadership there and in turn we brought in some stronger talent across marketing and sales. And so, what describe it is additive as much it is upgrading. And so, you got that upfront cost in terms of what it takes to draw on more [ph] people but from a run rate standpoint, we’re not increasing the personnel cost basis of the business. But, we’re upgrading the talent there. And you kind of look at that in conjunction with the focused investments in digital marketing, in advertising, increasing the cadence of product introductions, which does cost for to turn the products faster, go down on the strong ones, for pull out the other ones quicker and roll in more innovation. And just ramping that pipeline generates higher pace of sales [indiscernible].

Got it, okay. And then in the cabinets business, you had mentioned that I believe luxury was a drag. And so I think that -- I assume based on the numbers that luxury was down. And I want to get a sense for how much it was down, what you think of the significance of that is, and did you see any mirroring of that kind of trend in any of your other product segments outside of cabinets?

So, it was down, I mean last year, if you look at the first quarter last year in the premium segment, we were up low double-digits. And then this year, you look at where that segment is today and we’re down slightly. Relative to where that was in the second half, it was down much more significantly. So, against a strong comp, on the premium side, getting better. I still say, there is some weakness overall in the high level R&R market. And I expect that will improve this year as we’ve got more reasonable comps and as well as we start to see some turnover in the existing housing stock at the higher price points. those things should drive it. This is typical of -- these are pretty high-end market. So, think about Florida, think pockets of the East Coast, think about San Francisco, Los Angeles, so these are really cities where you’ve got very high-end remodeling going on. This is above and beyond kind of the core of the marketplace. And this is isolated to some very premium brands. And so, we like that market long-term but it has been a cyclical market over time. When we saw initially a lot of R&R activity coming back in the market, think back in 2013, 2014, a lot of the wealthier households who were participating in the recovery of the stock market were taking cash out and they were remodeling and these markets were performing quite well. And that really rode us through 2015. And so we started to see some weakness emerge here in 2016, but it’s I think going to come back and should be okay, certainly tax relief could help.

Got it, but not so much -- you are not really seeing that so much outside of cabinets, maybe by virtue of the fact that in your cabinet segment that premium segment is just so -- it’s so particularly high-end and maybe above what you are targeting in plumbing for example or doors.

Yes. And I think it’s -- there is -- I’d say, there is some of it that we saw over into some other parts of the market. We can’t really see it as well. So, we think cabinets is isolated to specific brands, and so brands tied to dealers that are doing very high-end work. And so that’s where you can isolate it to say that’s where it looks. Is it a piece of some other parts of the business, well, sure, if they’re remodeling less, $1 million or $2 million houses, then the doors that they are putting in aren’t as frequently being upgraded and [indiscernible] upgraded but you see it more strictly on the cabinets side.

Your next question comes from Philip Ng from Jefferies. Your line is open.

Hey, guys, nice to see cabinets growth and actually operating leverage really accelerate from soft back half of last year. What’s driving that momentum and how you are thinking about growth of the overall market?

So, I think it’s really our focus -- it’s focusing on the parts of the market where we’re good and where there is good margin there. So the core of the semi-custom market, especially in the value side of that, our in-stock cabinets and vanities, some of the builder business that are dealers serve that’s all been very strong. And we’re being very disciplined in terms of how we might participate in the promotional activity. And so, you can see that in our margins. You can compare that to other cabinet guys out there and see where our margins are expanding and there as may not be expanding. And there is a correlation between how heavily you’re promoting and what’s happening to your margin. So, we talk a lot and we do talk about it lot but I’d say, the performance is in the numbers and you’ve seen the expansions on the cabinet margin year-over-year. And we set it up well in the first quarter. And I’m really proud of those, guys. I mean the first quarter comp from last year and the expansion we saw on that margin last year and then it expanded again to extent that they did this year with some growth, that is not easy but it’s focus on execution and all the little stuff and what they do and they are executing really well. So, I think the market in cabinets, if you look out over the balance for that year, certainly new construction’s going to help. I do see improvement coming that’s on the core of the semi-custom special order market. Our comps in the second half are definitely going to be easier than what we saw in the first five months or so of 2016 where they were quite strong. So, feeling good about where we’re at. I think we got through the toughest sequence of the year on cabinets, [ph] which was the first four months. And so I see some good momentum coming out for the balance of the year.

And just sticking with that theme, you kind emphasized disciplined growth or profitable growth. I think what you said was you’re expecting cabinet growth attract more in line that broader market through. Are you seeing more pricing competition, more promotional activity that’s going to continue throughout the year or -- and is this kind of more like a something that where you think you going to reaccelerate and track, outpace the broader market again going into next year?

We’re being thoughtful about that assumption. So, what I’m counting on is that we are going to be able to participate in the parts of the market that we’re really wining strong right now and driving margin expansion and not participating in heavily in those markets that are more promotional driven. If those parts of the market are little bit more stable, then you can see a little bit more growth. But we’re not going to be chasing the volume down there if others are promoting down there and we don’t have to. We’re showing really nice top line growth and strong margin expansion. It’s the strategy, it’s working, it’s a lot of hard work and it’s 5,500 dealers across the country, it’s a broad portfolio brand and it’s getting all the stuff right. So, that’s what’s driving the core of the business and what we’re driving as our guidance for the year. If you saw some firming up on promotions and that’s may be for us, I mean others might need that to actually make the year but for us that’s sustaining [ph].

That’s really helpful. I mean that’s where the upper leverage is shown through that strategy that you’re taking on. Thanks.

Your last question comes from Michael Rehaut from JPMorgan. Your line is open.

First question, just trying to drill down a little bit on the guidance and the raise and talking about the enthusiasm also in terms of potentially some upside to your market outlook. So, just so I understand, when you talk about the $0.06 raise of guidance, 2 from the strong first quarter performance. I believe you had said that the sales growth numbers in the market kind of grew in line with expectations, if I heard that right. And so, where did the upside come from? I noticed you said that security sales was little better than expected. I don’t know if that translated a better margin as well.

Yes. So, our guidance for the year on sales was 6% to 8% and we have got in the first quarter, we would be at the low end of that and actually in the first half of the low end and the last half of the year, we would be at the upper end of that 68%. Actually, we came in around 7% of sales in the first quarter. So, actually did a little bit better kind of across the board than we thought. Remember, we had just brutal comps last year, and so we were little cautious. And this came in better than we thought about it, almost opposite. So that drove a lot of the performance and then obviously the operating margin continued to improve nicely as we planned. So, I think it’s that combination that drove it.

And so that upside was kind of across your different segments in terms of the little better than expected sales, not just security?

Yes. I mean, I would say, we came in -- looking back, it’s something we’d be little cautious but coming into the quarter, the first quarter were sitting here in January looking at some pretty extraordinary comps, the first quarter of 2016 was very, very strong. And so, we came in with what we thought was some pretty realistic assumptions. And as the quarter unfolded when we hit March, it started to do accelerate. And so it was a stronger feeling across the portfolio that has taken up, and that’s what we showed in the numbers. It really kind of kicked across portfolio.

I mean absolutely, Chris, without a doubt I mean when we were on the road, in the fourth quarter, I mean the tough comp, and that’s something that we were looking at last conference call as well. So, certainly understand that and very strong performance there. I guess just looking also at shifting to the plumbing margins, I appreciate the explanation around the 19% and makes sense in terms of the investments that you reiterated your full-year. So, just mathematically, if you are still thinking about that 21% margin for the full-year in that segment, I presume that for 2Q and I know you don’t want to get too detailed in the out quarter, but it would seem to me that you would expect to hit, if not exceed that 21% for the full-year in the quarter, just from a mathematical standpoint?

Yes. I think it might build a little bit the, second half comps are -- margins would be a little bit better but the second quarter comp should be strong as well. So I think it will build a little bit but I think the second quarter comp margin will be much higher than 19% for sure.

That is the end of the question-and-answer session. I will now turn the call back over to the presenters for closing remarks.

Thank you. We would like to thank everyone for attending the call today and look forward to speaking with all of you again very soon. Thank you.

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