Fortune Brands Innovations, Inc. (FBIN) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' Second Quarter 2017 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 session. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin your conference 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're pleased to be here today to provide an update on our progress during the second 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 an associated question-and-answer session, are based on current expectations and 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 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 Pat Hallinan, our new 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 grew total company sales and increased profits across all segments in the second quarter. The home products market continued to grow, with strong demand in new construction and continued growth in R&R. Importantly, our businesses remain focused on driving profitable growth, which has resulted in second quarter and year-to-date margin expansion across all of our businesses. We remain on track for another terrific year. Based on our solid first half performance and our outlook for the remainder of the year, we are raising the bottom end of our full year EPS outlook by $0.04. First, I'd like to spend some time in our view of the U.S. home products market. Next, I will provide my perspectives on our business performance in the second quarter. Pat will then provide more details on our second quarter performance and our 2017 outlook. Starting with our view of the U.S. home products market. In the second quarter, the market for our home products continued to grow about at the pace that we expected. New construction grew high-single digits with strength in single-family, while R&R grew at roughly 5% with solid growth in the core and some softness at the higher end. As expected, new construction continues to grow at a high-single digit rate, with single-family growing faster than multi-family. Single-family entry-level activity continues to be robust as builders are working against strong order books and permits coming out of the winter and spring selling seasons. This demand helped us in the second quarter and given the lag in our categories should set up a good second half as well. Repair and remodel demand also posted solid growth, especially for products at the entry level and mid-price points. Big remodel project activity was a little slower in the quarter versus strong activity in the second quarter of last year, as installation trade labors tightened money markets. The backlog in this project work could push some volume into the second half. Looking forward, our overall assumption remains that the U.S. home products market, which impacts over 70% of our sales, grows at a 6% to 7% rate for the full year. Our basket of near-term indicators for home products continues to point towards strong demand. And builders and contractors are continuing to acquire labor. Now let me provide some perspective on our business performance. In the second quarter, our teams delivered solid sales overall and exceptional profit performance across our operating segments. Sales increased 5% in total and 6% from our home products businesses. Excluding FX, sales were up 6% in total and 7% in home products. Total company operating margin increased 100 basis points to 15.8%. Starting with our Plumbing segment, sales were up 15% for the quarter with growth in all channels. Organic sales growth was above market in the high single-digits. Across all of our channels, we saw strong sell through and our new and refreshed product lines continued to attract consumers who trust our brands. Our Global Plumbing Group delivered as planned in the second quarter, achieving organic growth above the market rate and our recently acquired brands ROHL, Riobel, Perrin & Rowe and Shaws accelerating our growth. We're winning new business with this product portfolio of brands and price points and are in the early stages of realizing all the growth potential that we have identified. As we couple this brand line up with our new high impact marketing team, we see some exciting opportunities in the balance of 2017 and in the years to come. Our operating margin improved in the quarter on strong mix and is tracking to our target of 21% for the year. Overall, the North American Plumbing business picked up momentum throughout the quarter and channel inventory levels are stable to down slightly, which should help us as we enter the second half of the year. Our growth in the balance of the year should continue to benefit from strong new construction demand as well as new products and placements. Some of these include the roll-out of new Propel showerheads and additional magnetic styles, new Hamden bath suite in retail and black matte-finish product line extensions in wholesale and the U by Moen, our Wi-Fi connected smart shower system. China sales increased double-digits in local currency, driven by share gains and strong demand in direct-to-builder, as homes under construction are pushed to completion. The R&R business in China also continues to emerge, as properties built over the last 15 years to 20 years enter remodel cycles. We continue to monitor the China housing market closely as the government modifies its policies. We have flexibility as demand fluctuates and have successfully navigated through a number of cycles in this market over the past decade. Turning to our Cabinets segment, we continue to follow a disciplined strategy focused on profitable growth. Sales grew against a tough prior-year comp and we continued to deliver on margin growth. In the second quarter, our Cabinets sales were up 1% over the prior year or 2% excluding FX as we faced a difficult comp of 17% in last year's second quarter. Operating margin expanded by 70 basis points to 13.6%, despite modest commodity pressure as we achieved targeted share gains in attractive parts of the market. Dealer sales were flat for the prior year where we were up 11%. We continued to see strong demand for our new construction in core semi-custom product lines offset by some softness in our higher end product lines sold into more complex projects. We continue to feel good about our performance in the dealer channel even as we were flat in the second quarter against a tough 11% comp. We are working with the strongest dealers and every MSA across the country and are selling more brands into these dealerships. Our focus on profitable growth is working in this higher margin channel, where our dedication to high levels of service is a sustainable competitive advantage. Sales of our in-stock cabinets and vanities, which are sold through home centers grew high-single digits. New product introductions lifted ASPs and new programs with our retail partners are performing well. This is a clear area of strength in our Cabinets business and growth should continue to be solid going forward as we leverage our product innovation and our logistics expertise. The remaining part of our Cabinets business which includes home centers, semi-custom, builder-direct in targeted markets in Canada was down slightly. Our builder-direct business grew strong double digits and our disciplined approach to growth in targeted markets resulted in share gains and continued margin improvement. Sales growth in this area was offset by Canada, which declined double digits. Canada has now had five quarters of negative growth due to soft new construction market in the central provinces, our exit of some low margin retail product lines and the impact of currency. At the beginning of the year, we began refocusing this business and accelerated the exit from some product lines. This will result in a cleaner, more focused business going forward and we project mid-single digit growth in the second half of 2017 with a stabilizing market backdrop. In summary, our core Cabinets business excluding Canada and premium was up 4%. Given our strong execution and the easier comps in the second half of the year, we expect full year Cabinets sales to be in the mid-single digit range with a significant pick up in the second half. Importantly, we continued to grow our operating margins as planned. We remain on track for the year end guidance. And our focus on profitable growth has us growing share in the most attractive parts of the market and continuing to de-emphasize other areas with less attractive margins. Doors reported sales were up 4.5% for the quarter. Door products again saw sales growth with gains in wholesale and at retail, which both benefited from new product introductions. Therma-Tru wholesale saw strong growth in new construction markets and excitement around our new initiatives such as new Shaker, hybrid and composite edge door styles focused on the heart of the market. And improved finish selections in glass mix as the trend toward clear and privacy glass expands. Additionally, big builder customers remain optimistic regarding the second half and we finished the quarter with good momentum and balanced channel inventory. In retail, we continued to benefit from our enhanced merchandising and new product launches including new Shaker, (10:52) and two-panel designs. We continue to expect mid to high-single digit full-year growth for the Door business with strong operating margin improvement. In the Security segment, sales decreased 2% from the prior-year quarter and were primarily impacted by timing as the first quarter saw an unusually high 7% growth rate and some shipments and programs were pushed from the second quarter into the second half. We expect to grow full-year sales around 4%. New product introductions and marketing initiatives will help drive second half growth as we load new stainless steel products into retail and pursue new initiatives in safety products. Importantly, margin continues to expand in this business. We are well on track to achieve our margin target for the year of 15% or better. The integration of SentrySafe into Master Lock continues to enhance our margin and our continuous improvement activities offset a modest increase in the price of steel. So to recap the quarter, the markets for our products remained strong with a new construction market that continues to build momentum and an R&R market that is characterized by healthy demand, but a bit of a backup on more complex projects due to some trade labor constraints. Our businesses continue to execute against our disciplined growth strategies. Across the company, we're on track to deliver against our sales growth and margin targets. Before I wrap up, let me comment on our efforts to drive long-term growth. We continue to believe that we can create meaningful incremental shareholder value by using our strong cash flow and balance sheet to make strategic acquisitions, repurchase our shares and increase our dividend. Right now, we're very busy working on a number of acquisition opportunities across all segments of our business. While we cannot guarantee success in any one situation, our pipeline is robust and I would expect that we can close on some of these tuck-in acquisitions over the next 12 months given the overall level of activity. As a reminder, over the next three years, we're continuing to believe that we have the potential to deploy more than $2 billion to drive incremental growth in shareholder value. While acquisitions are our priority, we will also selectively buy-back shares and are committed to a consistent dividend policy. Being efficient with our capital in shareholder-friendly ways has been a hallmark of our nearly six years as a public company. So to sum up, the demand for our home products remained strong, particularly in new construction. We're continuing to take share and grow faster than the market in the parts of the market that we target. Importantly, our strong brands, management teams and capital structure provide flexibility to both focus on profitable organic growth and drive incremental shareholder value with our balance sheet and strong free cash flow. Now, I would like to turn the call over to Pat who will review our financial performance and provide detail on our outlook for the second half of 2017. Patrick Hallinan - Fortune Brands Home & Security, Inc.: Thanks, Chris. As Brian mentioned, to best reflect the ongoing business performance, the majority of my comments will focus on income before charges and gains from continuing operations. Starting with our second quarter results, sales were $1.4 billion, up 5% from a year ago, 6% excluding foreign currency. Organic growth was 3%, 4% excluding foreign currency. Consolidated operating income for the quarter was $216 million, up 12% or $24 million compared to the same period a year ago. EPS were $0.92 for the quarter versus $0.82 the same quarter last year, increasing 12% or $0.10 driven by sales growth and margin improvement. Now, let me provide more color on segment results. Plumbing sales during the second quarter were $435 million, up $57 million or 15% with growth in all channel. Excluding the negative impact of foreign currency, sales increased 16% with Canadian sales increasing 3% and China sales increasing 21%. Operating income increased $16 million to $103 million, up 18%. Operating margin for this segment was 23.8%, an increase of 60 basis points. For the full year, operating margin is expected to be 21% with full-year sales expected to increase low-double digits. Turning to Cabinets, sales were $653 million, up $8 million or 1% versus the prior-year quarter. Dealer sales were $326 million and were flat against the strong 11% comp Chris mentioned. Excluding premium, dealer sales grew low-single digits. Sales of in-stock cabinets and vanities were $140 million, up 9%. Remaining sales to our home center semi-custom, builder-direct and Canada decreased 1%. Builder-direct was up mid-teens offset by Canada, which was down mid-teens. We expect full-year Cabinets sales to increase mid-single digits in 2017. Additionally, our second half comps are much easier. Second half comps are roughly flat versus the first half comp of 24%. Operating income for the Cabinets segment increased $5 million over the prior-year quarter. Operating margin for the quarter was strong, increasing 70 basis points to 13.6%. Operating leverage was strong at 63% as CI offset (16:44) inflation and we made strategic margin gains in a number of our channels including builder and Canada. For the full year, we continue to expect Cabinet operating margin to increase 100 basis points versus the 10.8% delivered in 2016. Doors sales were $134 million, up $6 million or 4.5% from the prior-year quarter. Operating income increased 15% with an operating margin of 16.9%, 160 basis points higher than the prior-year quarter. We now believe full-year operating margin for this segment could be in excess of 14%. And our full-year sales outlook in Doors remains unchanged at 6% to 8%. Security sales were $144 million in the second quarter, down 2% to the prior year. Sales timing caused a 4 percentage point swing in this quarter with two points moved into the first quarter where we grew over 7% and two points shifting into the third and fourth quarters. Excluding timing, FX and a non-repeating promo from last year, second quarter sales were up 4%. As a reminder, our Security business should grow at roughly GDP plus an additional point for price, an additional point from innovation, or roughly at 4%. This continues to be what we expect for the full year for Security sales to grow around 4% in 2017. Segment operating income grew 10% to $22 million and operating margin grew 160 basis points to 15%. Full year operating margin has the potential to be a little higher than we initially expected and could be in excess of 15% in 2017. To sum up consolidated second quarter performance: sales increased 5%, 6% excluding foreign currency; EPS were ahead of plan at $0.92; our total company operating margin was 15.8%, up 100 basis points from the prior year with an incremental margin, excluding acquisitions of 50%. We are squarely on track to achieve our 2017 and long-term goal for operating margin. Turning to the balance sheet, our June 30 balance sheet remains solid with cash of $253 million, debt of $1.4 billion and a net debt-to-EBITDA leverage ratio of 1.4 times. By yearend, we expect leverage to be around 1.1 times excluding any additional capital transactions. We currently have $750 million available under our $1.25 billion revolver. As of July 28, we have repurchased approximately 1.2 million shares this year for about $71 million. We have approximately $450 million remaining under our share repurchase authorization, which together with our balance sheet continues to provide ample capacity for acquisitions, additional share repurchases and dividend. Turning last to the details of our outlook for 2017, our market and sales assumptions for 2017 are unchanged. We continue to assume 6% to 7% U.S. home products market growth and total global market growth of 5% to 6%. Accordingly, we continue to expect our full year 2017 sales to increase 6% to 8%. We have raised the bottom end of our full year EPS outlook by $0.04 based on our continued strong operating margin performance. Our outlook for 2017 EPS is now in the range of $3.04 to $3.12 with the midpoint reflecting a 12% increase over the prior year. I want to pause briefly to make an important point regarding 2016 EPS comps and the implications for the third and fourth quarters of 2017. Using the midpoint of our 2017 outlook, we expect to earn approximately $1.63 in the second half of 2017, or about $0.12 improvement over the second half of 2016. We assume no tax benefit related to equity compensation in the third or fourth quarters of 2017. The third quarter presents a unique comp dynamic. In the third quarter of 2016, we had one-time benefits worth roughly $0.10; $0.07 of tax benefit from equity comp and $0.03 of expense timing due primarily to healthcare. These two one-time items will not repeat in the third quarter of 2017. However, we do expect our fourth quarter EPS performance in 2017 to be substantially better than that of 2016. Free cash flow is expected to be around $450 million in 2017 with a 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 31%; and average fully diluted shares of approximately 157 million. In summary, we are set up for a strong 2017. Second quarter market growth was largely as expected and we delivered sales and strong profit growth. Our focus remains on profitable growth and to grow sales while expanding our operating margin. Due to continuing strong growth in our operating margin, we've raised the midpoint of our EPS outlook for the year and we remain focused on using our balance sheet and cash flow to drive incremental shareholder value through acquisitions and share repurchases. I will now pass the call back to Brian. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Thanks, Pat. That concludes our prepared remarks on the second quarter of 2017. We will now begin taking questions. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Thank you. Your first question comes from Scott Rednor with Zelman & Associates. Your line is open. Scott Rednor - Zelman & Associates: Hi. Good morning or good afternoon. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hey, Scott. Scott Rednor - Zelman & Associates: Chris, I wanted to ask first on Cabinets. On the dealer side, obviously, some of the growth is going up against tough comps. So, I was just curious what are you hearing specifically from your customers that supports the optimism that you laid out for the balance of the year? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. First of all, we've got some pretty favorable comps in the second half. Last year, second half Cabinets was relatively weak. So, I think if you kind of do the math and look at kind of where we are seeing orders trending and the demand we see in the market, we're pretty comfortable with second half growing to the point where overall Cabinets are going to be in mid-single digits. So, I think there is stability all the way across. The only thing that we are seeing backing up and we saw some of this in the second quarter was as we talked to our customers, designers are very busy and there's kind of a queue waiting to get time with the designer and then installers, carpenters, trade labor are pretty booked up right now too. So, some of that is pushing some of the activity into the second half. There's good underlying demand. It's just getting more sequenced. So, that's the only hesitation we saw in the second quarter coming through. I talked a little bit about premium. We've been talking about premium through second half of last year, it's improving. So, especially fourth quarter last year, premium was very soft. Came into the first quarter, it got a little bit better and right now, it's trending kind of – it was off a little bit, just down low-single digits. So, that's kind of correcting back and as we look into the second half versus comps, we should be pretty good. So, as I look into the second half, it feels like we've got some pretty good momentum rolling through the business. Locally, market-by-market, the strength of our position, the cross-sell that we've got off the Norcraft brands into the core MBCI dealers, all that's going really well. And there is a strong underlying growth on new construction, which just feeds into dealers so that local dealers are doing those small and midsized builders and that continues to run at a pace. So overall, we feel pretty good about the second half. Scott Rednor - Zelman & Associates: That's really helpful. And then just on Plumbing, there seems to be, externally looking in, obviously some choppiness depending on what quarter it looks at and you guys have been talking pretty consistently that the margin structure there is well intact. Can you just talk about trading sales versus margin in that business to arrive at, what's the optimal way that you guys are thinking about that because this quarter clearly lined up in reverse from kind of a softer 1Q and you guys remain very confident there. So, just curious how you're thinking of the trade-off between share growth and expanding margins there, Chris? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. It will run on the business for the year. We really run the business for multi-years, and so a lot of it comes down to the pacing of spending that we're making around growth. The strategy there is to execute to grow above market and hold the margin at about 21%, and so we're spending into growth. We're leveraging the portfolio of brands, the new acquired brands into the channels. We're targeting project business, we're rolling in new product, we're investing in marketing capabilities, and that's paying off. So, you're seeing that in the growth. If you look at – we formed the Global Plumbing Group last summer. If you look at where we're sitting now a year later, you're seeing some pretty good growth numbers and we're targeting that 21%. So, I think, yeah, it is going to have a little bit of the effect of some choppiness quarter-to-quarter around pacing, but it's always in plan. And so when we were talking about the first quarter, I said relax, we'll come near around 21%. Now in second quarter, the only caution is don't get out ahead because we are still targeting 21%, but obviously pretty good quarter, second quarter. And you just see us in the balance of the year spending against the growth, we got great momentum in that business and in some really attractive parts of the business. So we are feeling good about what our new marketing activities are doing, our new marketing team, and so yeah, I'd say target on the 21% for the year, if you look at the first half, you're going to come in around 21% for first half, second half will look a little bit like that. Scott Rednor - Zelman & Associates: Okay. Really helpful as always, thanks so much. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Okay.

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

Hey, good afternoon. Congrats on a very strong quarter and increase to the low end of the guidance range. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thanks, Bob.

As I'm looking at the quarterly results, it looks like this is about material margin expansion across the portfolio. And I noticed that GPG is growing ahead of the 12% target rate and it looks like you're on track to do $450 million in free cash flow. So kind of given the current trajectory you outlined in your prepared remarks, what's the thinking behind the free cash flow you have and use of balance sheet at this cycle? What's the M&A pipeline look like? You did a great job of outlining what the runway is in the second half of the year, and I'm just trying to think on a multi-year basis, what are you trying to get to kind of by the end of 2018 or 2019, how does M&A play into that? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. We've got a number of things underway on the M&A side, and I can never predict the timing because there is obviously, it takes two to tango, so there is somebody on the other side of everything we're doing. And I'd say it's a fairly deliberate effort across all four parts of our business in addition to looking at whether there is a fifth category that we might go into. But as we've done everything since we've been a public company six years ago, fairly deliberate, straight-forward, disciplined in our approach. But I'd say, we're looking at we've got over $2 billion to deploy. And if I looked out over the next three-plus years, I'd say that's going to go into a combination of acquisitions and some share repurchase as well as supporting the dividend. I'd say there is a balance or a bias toward acquisition because if it's the right one, it's going to be accretive, it's going to add into kind of the businesses that we've got. And it might create a fifth leg of the company overall. So that's where the bias is. But we'll never force anything, we're comfortable buying back shares, if that's the derivative effect of it as well. I'd say if you look at what we did over the previous five years, and project that over the next three to four years, you're going to get a pretty good mix of the bias toward acquisitions. Acquisition market is pretty good. I mean, we're seeing a lot of things. I think expectations are high on the other side. So we feel comfortable we're going to come together around a number of things over the next 12 months and it's just comforted by the fact that there is a lot of activity that we're working on. Our folks are very busy both here in the Corporate group, as well as within each of the businesses. And so it's a good environment to be in. I think it's – because you've got healthy underlying characteristic on the market, you've got healthy growth. It's easier for both sides to kind of stare at the market and say, we agree on where the market is going over the next three-plus years, with the positive buys and then it's about coming together around how it's going to work. So I feel good about it.

Good. It sounds like you're encouraged and maybe, closer to completing some M&A. The other question, Chris, I wanted to ask is, you're getting great margin expansion and Patrick outlined some pretty clean targets for the end of 2017 where you want the businesses to be in terms of profitability. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah.

Do you see into 2018 and 2019 if the current volume environment persists getting additional margin expansion through most of the portfolio? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. I think if you look at total company, you're going to see us – our target over the next three years would be mid-teens. So 2015, 2016 across. You look at Plumbing and we're going to grow above market there and target 21%. If there is a little bit of upside I'm not going to be troubled by that, we're growing above the market. Within Cabinets, we're targeting mid-teens, 15%. We're on a good path there. We're growing in the attractive parts of the market. We're taking share in the attractive parts of the market, other parts of the market which might be more heavily promoted or what have you. We're not troubled by the growth in that part of the market. So we think we're going to be growing at the market about 15% share. Doors will be mid-teens, maybe a little bit bias up there. We continue to get a great mix coming through that business. In Security's we're not going to be mid-teens and I think really as we expand that through acquisition and through some internal product development, that mix will determine whether it runs a little bit higher than that. So again, we're pretty disciplined around looking at profitable growth not just grabbing share or grabbing growth wherever it is. And so if we're sitting here three years with some strong underlying market growth, we're going to see a really attractive margin structure around the total business.

The plan seems to be working. Good luck in the balance of the year. Thank you. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

Your next question comes from Phil Ng with Jefferies. Your line is open.

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

Growth in your Plumbing business was really strong, really nice pick-up on the organic side. Can you talk about where you're seeing the share gains? Is it some of the acquisitions you've made? Is it driven by some of the investments you've made? Just give a little more color and how should we think about that trajectory in the next few quarters? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. It's always the case that when we deliver strong quarter top-line, it's usually a number of things that has been going on behind the scenes for a couple of quarters before. So it's a byproduct of investments that we've been making and accelerating product development. So we've got a lot of new products coming into the market that's innovative new products. It's also new finishes, it's some new showering. So there is strong pick-up on the new products side and some placements in the market. It's investments in the marketing that we've got, we've really upgraded the team there, brought in some great new talent and we're getting more sophisticated just in a way we're marketing a lot more digital marketing, data analytics, those sorts of things, that's why you're seeing those pay off in the market overall. So it's good execution on product, on marketing efforts, and targeting both on the retail, wholesale side. And then if you look at the acquisitions, we've got the new portfolio of brands and those groups are working really well together. So you've got kind of that crossover of taking these acquired brands and acquired products and bringing them into distribution opportunities that we've got coming out of the historic Moen franchise, and then vice-versa taking some product innovation that you could move into a product line in a Riobel or ROHL and expand where their opportunities are and we've also come together around some joint projects. So, some bigger hospitality opportunities, those sorts of things. So all that's coming together and I think you're starting to see why we put this together a year ago and I'd say there is pretty good upside over the next few years. This is a growth team, highly energized team. They're having success. They're kind of feeding on each other and we've got good margin discipline in the business with money to invest. So, it's coming together and as I answered the earlier question, I can't predict the exact pace of that spend so the margin bounce around. But look at 21% for the year, look at above market growth, project that out over the next couple of years and that's what our plans look like. And then by the way we're also looking at some acquisitions to further expand what that portfolio can look like in terms of product set and brands. So, I really like where that team is going right now.

That sounds great. And then, I guess, switching gears to your Cabinets business, with the high end of that market still little soft and faster growth coming from first time-home buyers, are you kind of re-shifting your new product portfolio to better capture that market where growth could be a little faster in the next few years? And just one last thing, curious on your view on the competitive activity in the market – you previously called out pick up in promotional activity just broadly in Cabs? Thanks. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. In Cabs, this is not dramatic. It shows up in terms of kind of the styles and the finishes that really go into new construction and I'd say it's not just entry level, but it is more significant across kind of on this construction. A lot of opaques which is painted, a lot of whites and grays, and so as we look at how we're managing capacity, we're managing capacity and we work towards those products. We've got – remember, we've got a quarter of the Cabinet business. So, we're participating in virtually every price point, every product category. And so as we look at it, it's about shifting where that capacity is, where we're making capacity investments and finishing, where we're emphasizing products that we've got and expanding it into brands and into dealers where there is that demand. So, it's kind of drawing it in, we're not necessarily having to push it. It's going to where that draw is – is where we're responding to it around capacity. In terms of promotion, it continues to be more of a kind of a retail phenomena than it is dealer phenomena and among the big guys we continue to be the least aggressive of those. We've held share there so our approach is working. I'd say, it's kind of more of the same, little bit elevated second quarter, but we held on to the share we've got and didn't chase after it. Clearly, as you saw in the margin expansion, we're not chasing after a lot of promo sale. Yeah, I mean, it is where it is as the capacity in the market gets absorbed, the bias for more promotion goes down because others will start to behave as we have which is needed to fillip your plans and we felt for a while that we remain disciplined and focus on those personal market that we see attractive margins that we'll be doing just fine and I think that's what is playing out.

Sounds good. Thanks a lot for the color. Thank you. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

Your next question comes from Susan Maklari with Credit Suisse. Your line is open. Susan Maklari - Credit Suisse Securities (USA) LLC: Hello, good afternoon. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi. Susan Maklari - Credit Suisse Securities (USA) LLC: I wanted to go back to some of the share gains in Cabinets that you've seen. Can you just give us a bit more color on perhaps who you think you're taking that share from and how sustainable is that especially as we think about maybe some of the shift that's coming in terms of price points? Christopher J. Klein - Fortune Brands Home & Security, Inc.: So, it's really – our Cabinet business right now is about a quarter of the market and you can really look at a number of different segments within that business. So within in-stock, cabinets and vanities, we're a really big participant in that part of the market now. There is a couple of private companies out there that are also participants in that part of the market and there're some import product, but we've consistently taken share in that market going back to the acquisition of WoodCrafters and then building off of that platform and expending our own internal capabilities. So, where you've seen us gain share in that vanities and in stock, we've got great product; we've got great service, we've got great logistics support into retail, which is managing all that inventory at the store level with them in a great partnership and across all the big retailers. And so that's really sustainable and those are kind of just doing a lot of the fundamentals and intrinsics, and a lot of complicated business process really, really well. When you look at new construction, we targeted going back two years, three years now, probably more like three years, more the East than the West and in the East, just focused on those places where we thought we would be quite competitive and we've been growing faster than the market with those targeted builders and in those targeted markets. So, I'd say, you kind of look at that as geographically where we're targeting. We're having success because it works for us in that part of the market. Within dealer, it's just about that breadth of our dealer coverage and the number of dealers that we've got across North America and cross-selling more and more brands into them across price points and so that's quite sustainable because we haven't penetrated that whole dealer base yet to the maximum extent that we can. And then within Canada, Canada has kind of been a soft market for us. We took some steps earlier this year, second quarter included to restructure part of the market, so that market will start growing again. It was up mid-teens, but there isn't – the competitive intensity isn't the issue, it's more about the market has been soft especially in the single-family side of the market, and we were a bit too diffused in all the products that we were supporting up there. So, we try to tighten that up a bit. So, I'd say, overall, we obviously compete against a couple of the other public cabinet manufacturer but you look at across the board it's those plus still some private companies be it either in the in-stock or the cabinets or vanities side where there is a especially one big private company and then on the dealer side you still have a fragmented market with a lot of local guys who are still supporting their local market dealers. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. Great, that's very helpful. And then I know, in your comments you motioned some higher steel prices that you faced in your Security segment. Can you just perhaps talk broadly across the business. How you are thinking about commodity prices and inflation as we think about the second half? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. And it starts with – we budgeted for the year, that you'd see some commodity expansion. We had been two years, three years, with very favorable commodity environment. So, we assumed coming into the year that we would – all of our big commodities would see some inflation. I'd say it's tracking in aggregate at or a little bit better, more beneficial to us. But then if you break it into each segment you're seeing some pressure in certain parts of the market. What we're able to do is leverage our scale in terms of trying to offset some of that, and the way we buy some of those commodities. And then in some places we have to take price to offset some of that pressure. And so, it's a fairly deliberate effort kind of across each of the four businesses has all of a different pressure point. But so far, we've been pretty successful in countering that in our operations, and then where we had to take some limited price to offset it. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay, great. Very helpful, thanks.

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

Hey, guys. Thanks for taking my questions. The first question is, it seems like margins across your segments were either above your full-year targets or I think in the case of Security was in line with your full-year target but it seems like you're largely keeping the full-year targets the same. So I mean I'm just curious are there some timing-related expenses that got pushed that kind of boosted margins in the quarter and – or are you expecting somewhat of a slowdown in the second half, I'm just trying to understand, trying to reconcile that. Patrick Hallinan - Fortune Brands Home & Security, Inc.: So, John, this is Pat. You're right a number of things were above, most notably Plumbing, right, and as Chris mentioned, our long-term target in plumbing is 21%. It can be choppy from quarter-to-quarter. That's more about investment, and investment choices we make throughout the years. So if you look at the first half, for example, in Plumbing, it's about 21.5% for the first half and it's going to be 21% for the year. So that's an area where you're not seeing any slowdown on the year. And the other large business, we have Cabinets, the margin was 13.6%, up 70 basis point. What we see in Cabinet is seasonality, as you do in Doors. These are leveraged fixed cost manufacturing facility. So Q1, the early part of Q1 coming out of the holidays and the latter part of Q4 going into the holidays, you see those margins go down that's not because there is an issue with the business, that's just because of the seasonality of the use of fixed cost base. And then Security; Security is performing really nicely, up 160 basis points, yes, it was at 15% which is, as you point out, it's full-year guidance, nothing happening that will dilute that in the back half of the year in Security, it's just that by the latter third of the year in Security, they will start lapping their SentrySafe integration. So I think you look at Cabinets and Doors with normal seasonality. Plumbing is on track for the year and it'll slow down and in Security they'll lap the seasonality of the SentrySafe integration.

Okay. Thanks for that, Pat. And then I think you guys mentioned $0.03 of healthcare costs in the third quarter of last year or is that healthcare cost that were deferred from the second quarter of 2017 into the third quarter of 2017? Christopher J. Klein - Fortune Brands Home & Security, Inc.: It was a catch-up, a true-up of the performance of our healthcare plans in 2016. What we did in 2016 and we've continued in 2017 was, we introduced the option for our associates to elect some high deductible plans and that's typically younger folks who are quite healthy, but are compelled by health insurance, opted for high deductible plans. We're pretty conservative in our estimation of how that would play out and by the third quarter last year, we actually had to true it up and take some more income in because the expense was performing better than what we thought it would. Since then, we've got a better beat on how those perform within our overall healthcare plans and so now, it's just running at what is the projected level, so that was a one-time catch-up and now we kind of know how those plans perform.

Which segment was that in? Christopher J. Klein - Fortune Brands Home & Security, Inc.: That was across the board. So it was all U.S. employees, so we introduced higher deductible healthcare plans, all four of our businesses have got pretty healthy U.S. employee base, we're 70% U.S. employees and so that was kind of across the board. Some of those people historically might not have taken healthcare. But, so often we've got them on the healthcare rolls and we got a high deductible plan. And we don't know, okay, they got high deductible, but once the deductible goes away, they're going to be spending at some higher level above that. It turned out now it's actually more predictable than we thought.

Okay. Thanks very much.

Your next question comes from Tim Wojs with Baird. Your line is open. Timothy Ronald Wojs - Robert W. Baird & Co., Inc.: Hey, guys. Good afternoon. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Tim. Timothy Ronald Wojs - Robert W. Baird & Co., Inc.: Hey, just maybe back on the cadence in the back half of the year. Just to maybe be more clear. Should we be thinking maybe something up single-digits in the third quarter from an EPS growth perspective and then maybe back to double-digits in the fourth quarter? Is that kind of the set up you guys envision? Patrick Hallinan - Fortune Brands Home & Security, Inc.: Yeah, Tim, this is Pat. We should be expecting a strong second half in general. Sales will be up towards the higher end of our guidance. The leverage will be over 25%. There will be that dichotomy in third quarter versus fourth quarter EPS, but the midpoint of our guidance, we have $0.12 in the back half and you'll see that predominantly be in the fourth quarter. So yeah, low EPS growth in the third quarter around a few cents and then the predominance of it in the fourth quarter, driven predominantly by a tax difference. Timothy Ronald Wojs - Robert W. Baird & Co., Inc.: Right. Right. Patrick Hallinan - Fortune Brands Home & Security, Inc.: Not by an operating income growth difference. Timothy Ronald Wojs - Robert W. Baird & Co., Inc.: Okay. Okay. Great. And then Chris, maybe just on capital deployment, it sounds like you feel pretty good about the pipeline, maybe closing some things over the next 12 months? If there would be some acquisition activity that would maybe move into 2018, will you guys internally maybe be a little bit more active to buy back stock as a replacement? Christopher J. Klein - Fortune Brands Home & Security, Inc.: We could. We're in the market and as you saw, we bought some back this year, and continuing to be both opportunistic, as well as just kind of managing through, we don't want to delever to an extraordinary extent. As we said, really starting six years ago, we're going to be efficient with the cash flow. We've got a great set of operators in our business and when we need to address market turns, we can address them by managing our cost base, we don't need to stockpile cash. So we're not inclined to stockpile cash. The release valve will be a little bit more buyback. So we're trying to manage that. I think we've got a lot of flexibility just because we've got debt capacity, we've got open revolver, and we just in general obviously, earnings EBITDA continues to grow, cash flow continues to grow. So you've got a lot of borrowing fire power to handle things even if a couple of the things we're working on at once, we think we can still kind of flex-up on leverage to take those on. So that's the dynamic, is if it ends up (50:16), yeah, you'd probably see us buying a little bit more. Timothy Ronald Wojs - Robert W. Baird & Co., Inc.: Okay. Great. Good luck on the second half. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

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

Great. Thanks for taking my question. First, I just wanted to drill down a little bit in terms of the components of the guidance range. I noticed in the prepared remarks that part of the assumption set now calls for a tax rate of 31%, I think previously you were at 31.5% and I think that's roughly about $0.03 a share. So when you take the raising of the midpoint of only $0.02, but at the same time you kind of talked about the raise being driven by continued strong operating margin performance and I think you even pointed to some upside in Security more than you expected, I was just trying to reconcile that because it seems again that if that tax rate change might account for slightly more of the raise by mid-points? Patrick Hallinan - Fortune Brands Home & Security, Inc.: Yeah. We raised after the first quarter and captured $0.01 to $0.02 of the tax benefit, because we came out of the first quarter with $0.06 of tax benefit versus $0.03 prior year. So you're correct, it's just that we did a chunk of that when we raised guidance in the first quarter and the raise that we're taking this quarter is based more on the operating margin.

Okay. I guess, maybe we could talk about that offline, I'm still a little confused there, but maybe just shifting to the second question. You kind of talked before about M&A and obviously that's a big part of the strategy, in particular the Plumbing segment. At the same time, you just mentioned that you have the ability to continue to buy back stock and perhaps do both, share buyback and M&A and flex-up in the near-term if you need to. So with that being said, I was kind of surprised that we didn't see a little bit more of share repurchase. This quarter you've done some year-to-date, but still perhaps, at least from a run rate perspective, this year a bit less than prior few years. So just kind of wondering about the rationale there and if this doesn't, perhaps speculating, but perhaps part of the reason is that, I'm just wondering if the M&A pipeline is something that you feel perhaps is heating up, so to speak, and you just want to have that much more flexibility over the next quarter or two? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. I think it's a combination of those factors. I think we do feel good about kind of looking over the next 12 months that we think we'll be able to deploy capital into M&A. So, we're not going to be overly aggressive on share repurchase, but we'll be in the market and we'll be buying back shares at a reasonable pace. I think what we've shown is that we can do both. And so, at some point, if it extends out and it looks like, okay, we're going to get more done in the acquisition side in 2018, you'll probably see us be a little bit more aggressive in repurchase. If it looks like, yeah, things were moving forward, coming at us, especially couple things at once, then you might see us be a little less active. So, we're on it. We're focused on being efficient with our cash and our balance sheet. We're trying to be as both prudent and appropriately aggressive. We're big holders of our shares and are focused on shareholder value and so that's where we start every discussion with is how do we create more shareholder value. So, we're not trying to be conservative in stockpiling cash or paying down debt. We're looking for opportunities to deploy capital. So, I guess you can read into that what you make of it, so sorry, I can't go any farther than that.

Okay. And just to clarify, I appreciate, going back to the first question a second where Pat, you said that really the raising of guidance this quarter is by stronger operating margin performance. Again, can we just make sure which segments are we really talking about here, again you kind of alluded to Security being a little bit better and driving that I guess $0.02 up at the midpoint? Patrick Hallinan - Fortune Brands Home & Security, Inc.: I would say it's across our businesses, everybody is on or above their operating margin target. And so, certainly in Doors and Security it's probably where the highest potential beating both the targets we set for this year and getting to their longer term averages faster. But we expect everybody at this point to be delivering on or above their operating margin targets.

Great, thanks. Patrick Hallinan - Fortune Brands Home & Security, Inc.: Thank you.

That concludes all the time that we have allotted for the Q&A session today. With that, I'll turn the call back over to Brian Lantz for closing remarks. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Thanks, Jessie. We'd like to thank everybody for attending our quarterly call today and look forward to speaking with many of you very soon. Thanks a lot.

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