Fortune Brands Innovations, Inc. (FBIN) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Chantel and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' Third Quarter 2017 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 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.

Good afternoon, everyone and welcome to the Fortune Brands Home & Security quarterly investor call and webcast. We're pleased to be here today to provide an update on our progress during the third 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 our 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 Pat Hallinan, 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.

Thank you, Brian and thanks to everyone for joining us today. Our teams delivered solid sales growth in the third quarter despite powerful storms that impacted each of our businesses. Labor constraints continued to be an issue and seem to be exacerbated by the hurricane cleanup effort. Despite these challenges, we were still able to grow EPS against a strong prior year comp and included about $0.10 of one-time benefit. I'm proud of our team's performance on both sales and profit. Importantly, the home products market continued to grow at a consistent pace with strong new construction demand and continued growth from R&R. Even with the storm disruption, which began late in the third quarter and will likely linger in some areas to the fourth quarter, we remain on track for another year of solid sales and profit growth. First, let me spend some time on our view of the U.S. home products market, then I'll provide my perspective on our business performance in the third quarter, last, I will discuss our capital deployment. Pat will then provide more details on our third quarter performance and our 2017 outlook. Starting with our view of the U.S. home products market. In the third quarter, the market for our home products grew at pace similar to what we've seen earlier in the year. We estimate that new construction grew in the high single-digits, while repair and remodel activity grew at around 5%, both were in line with our expectations. Demand started strong early in the quarter, but was affected by hurricanes later this quarter and will have an impact on the fourth quarter as well. Notably, fundamental demand trends are solid. The direct impact of the storms on orders and shipments and the related impact on labor availability in Florida and Texas is important to acknowledge. Florida, in particular, is a big market for us across the company. In large parts of the state, were essentially shut down for three weeks, as fuel and electricity were in limited supply and many people evacuated. While there was not as much flooding as in Texas, wind and water damage were still widespread and crews will be busy with repair activity from some time before they're able to focus more on kitchen and bath remodel projects. The normal shop, design, order and install cycle in remodeling was thrown off a bit, and we're only now starting to see orders pick back up. Incremental additional kitchen and bath repair and remodel activity as a result of storm damage will likely come in 2018 and even early 2019, with the lag similar to what we saw in the aftermath of Hurricane Sandy. The Houston market is a little different. Although not as large in terms of sales for some of our categories as Florida, it is still the fifth largest construction market in the country, and the amount of damage is considerable. Our past experience would suggest that federal and insurance dollars could start flowing in to help fund rebuilding efforts, and it's possible we could see incremental demand across our categories next year as well as into 2019. So, these two storms are significant and are impacting the last four months of the year. We started to see some signs of orders returning to pre-storm levels, but the pace and timing of recovery in these markets through the quarter remains uncertain. Despite the disruption, the overall market continued to grow, and demand for home products remained solid. Our market assumption remains unchanged and we estimate 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. Looking forward, our basket of near-term indicators show the home products market remains pointed to strong underlying demand, with continued constraints in skilled labor impacting both new construction and repair and remodel. Now, let me provide some perspective on our business performance. For the third quarter, our teams delivered solid performance across all operating segments. Sales increased 5%, and total company operating margin increased to 14.9%. Our EPS performance was particularly strong, given the challenging comp to last year's results that included one-time benefits worth about $0.10 that did not repeat this year. Beginning with our Plumbing segment. Plumbing had another quarter of strong growth, and our Global Plumbing Group strategy is working. Sales were up 12% for the quarter with solid mix, and operating margin was strong at over 22%. Organic sales were ahead of market and up high single-digits, with growth in all channels. And our acquisitions from last year are performing as expected, with solid growth year-on-year. Given another quarter of solid GPG performance, I wanted to reiterate our strategy for the Global Plumbing Group. A little over a year ago, we outlined the strategy, which was to take a business with market growth in the mid-single-digits and accelerate its growth into the low double-digits for the next several years while maintaining roughly 20% to 21% operating margin. We took steps to upgrade our execution in a number of areas, including strengthening our leadership team, growing sales channels by finding new paths for organic growth, accelerating our product development pipeline, upgrading our digital marketing efforts, leveraging our leading supply chain and distribution capabilities, realizing the potential from well-integrated acquisitions and deepening our pool of talent and focusing them on higher-impact areas. Looking back, our strategy is working well, with each key element of our plan meeting or exceeding our initial expectations. And this is all reflected in the strong overall GPG performance. Our acquisitions from last year, Riobel, ROHL and Perrin & Rowe, have performed well inside of GPG. The early success of the platform we have created demonstrates that we can leverage future acquisitions to deliver incremental growth. And we continue to fill up the GPG brand and product portfolio. Recently, we added Victoria + Albert, a U.K. based premium brand of standalone bathtubs, sinks, tub fillers, faucets, and other accessories. Victoria + Albert provides a complementary brand in the portfolio and is known for its distinct quality, design and proprietary manufacturing techniques. We also acquired Shaws of England, a premium sink manufacturer also known for its quality and design, that will elevate our product, brand and price point offering. Today, V + A and Shaws are expected to contribute approximately $45 million in combined annual revenue. However, we should be able to accelerate their growth under the GPG platform as we leverage our existing relationships with top builders and in wholesale and hospitality. Our marketing capabilities and investments in these businesses should enable growth above the market at attractive margins. We continue to deliver organic growth ahead of the market and build on the GPG platform with additional brands and products. We are focused on other potential acquisitions that cover a range of price points, deal sizes and geographies. I'm very pleased with our team's progress thus far, and we remain solidly on track to our goal of $2.5 billion in Plumbing sales by 2020 with strong operating margins. Now turning to our Cabinets segment. In the third quarter, we're very pleased as we reversed trends in the parts of the market that were lagging for the last four quarters. All channels reflected positive sales, while we continue to follow a strategy that remains focused on disciplined profitable growth in the most attractive segments of the market. When adjusting for in-stock inventory swings, sales growth was roughly 3% and approaching mid-single-digits after further adjusting for the negative impact of the hurricanes later in the quarter. The hurricane impact was directly felt in suspended orders, sales and shipments and it indirectly magnified already present labor constraints for big R&R projects. Despite this, I'm pleased we grew sales across channels, including premium, Canada, and home center special order, and we remain on track to grow operating margin to target levels for the year. In the channels where we are most heavily focused, dealer and in-stock cabinets and vanities, sales increased low single digits. When adjusted for the inventory swings in the third quarter of last year, in-stock cabinets and vanities increased mid-single-digits. We are planning for the launch of new additional programs in 2018 and are focused on partnering with our core customers to continue to capitalize on product trends and drive profitable growth. For the remaining 25% to 30% of our Cabinets business, which includes home center special order, builder direct, and targeted markets in Canada, sales grew mid-single-digits. We remain focused on the most attractive regions and partners to drive profitable growth in these segments by being disciplined with pricing and promotional cadence of our market-leading brands, products and service levels. We were particularly pleased with the initial results from the changes we made to our Canadian business, where our refine approach worked well in driving above-market growth with an improving mix and margin profile. In summary, I feel good about our industry-leading Cabinet business. We continued to execute well and deliver solid results despite headwinds from storms, ongoing labor constraints, and home center sales promotions. October sales got off to a slow start due to the storms, but orders have picked up recently. Given our current visibility into orders and the level of quoting activity in showrooms, we currently expect mid-single-digit sales growth in the fourth quarter and continue to expect solid operating margin improvement for both the fourth quarter and full year 2017 in Cabinets. Doors' reported sales were up 7% for the quarter. Door products again saw sales growth in both wholesale, where sales were ahead of market in the high single-digits; and at retail, where sales increased mid-single-digits. Operating margin growth was strong and ahead of our expectation. Strong new construction placements in our enhanced distribution in the southern and western U.S. drove the sales growth in wholesale, despite a clear hurricane impact on order patterns in Texas and Florida, which are big markets for us in the overall door market. Retail sales were also solid even after comping against a large inventory load-in last year. Overall, performance and execution remain solid in the Door business, and we're gaining share while focusing on the most attractive parts of the market. Therma-Tru continues to benefit from the shift toward fiberglass entry doors and away from steel, a trend which drives an improving product mix within our business. We remain well on track in Doors and continue to operate with increased efficiency in an attractive market that provides our team with lots of opportunity. In the Security segment, sales increased 1%. As we have seen over the past two quarters, some sales continued their shift into the fourth quarter and we were also winding down a few select commercial product lines. Growth in our core business was solid and was up mid-single-digits in the third quarter after excluding the product line exits, which were specific to a couple of commercial applications. International and Canadian sales were particularly strong. Looking ahead to the fourth quarter, we expect overall sales growth in the mid-single-digits, which will likely land us in the low to mid-single-digit range for the full year. Operating margin continues to be very strong at 17.8%, driven by last year's integration of SentrySafe into Master Lock. While we will fully anniversary that transition by the end of the year, we continue to expect operating margin to be very strong going forward and should finish the full year with operating margin above 15% in Security. Before I turn the call over to Pat, I wanted to give some perspective on our capital deployment and our broader plans to create incremental shareholder value going forward. Since we began as a public company six years ago, we remain committed to efficiently deploying capital to maximize shareholder value. Since our October 2011 spin-off, we have deployed more than $3 billion in capital, including $1.5 billion on acquisitions, $1.2 billion on share repurchase, and approximately $400 million on dividends. Specific to our 2017 capital deployment year-to-date, as of October 20th, we spent approximately $210 million on repurchasing approximately 3.4 million shares. We will continue to be opportunistic in our approach to share repurchase as the ability to flex capital between buybacks and acquisitions should maximize the creation of incremental value. Regarding acquisitions. We spent approximately $140 million on the additions to our Plumbing business. We remain active with a variety of potential acquisition opportunities within the GPG as well as for our other business segments. Our success thus far gives us confidence that we can continue to create significant incremental value going forward through acquisitions and I'm pleased with our pipeline and activity. Lastly, we'll likely spend approximately $110 million on dividends in 2017. We have raised the dividend each year since it was introduced and it remains an important part of our plan to create incremental shareholder value. As a reminder, even after including the nearly $415 million deployed so far in 2017, with some additional deployment planed in the fourth quarter, we continue to believe, over the next three years, we still have the potential to deploy roughly $3 billion to drive incremental growth and shareholder value through the combination of strategic acquisitions, share repurchases, and dividends. So, to recap the quarter, despite some headwinds and a tough comp against the one-time benefits in our EPS last year, our teams delivered solid sales growth and increased profit. We executed well in the U.S. home products market that is continuing to grow at a healthy rate despite continued labor constraints among installers and trades people. And we're gaining momentum in our Global Plumbing Group, with impressive organic and incremental growth. As we refine our plans for 2018, our current momentum and market outlook gives us confidence that we could continue to deliver strong results. Now, I'd like to turn the call over to Pat, who will review our third quarter financial performance and provide detail on our outlook for 2017.

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 third quarter results. Sales were $1.35 billion, up 5% from a year ago. We estimate storms cause the sales headwind approaching 100 basis points in the quarter and will impact the fourth quarter as well. Also, labor constraints continue to be a headwind. Despite the hurricane disruption and labor constraints, sales grew across all of our business segments. Profit growth and margin were solid. We remain on track to deliver our near-term and long-term growth and margin targets. Consolidated operating income for the quarter was $201 million, up 7% or $12 million compared to the same quarter last year. Excluding a non-repeating benefit from prior year healthcare costs, operating income increased 12%. EPS were $0.83 for the quarter versus $0.80 for the same quarter last year, increasing $0.03. Earnings were strong and in line with expectations as we overcame $0.10 of one-time prior year favorability from healthcare expense and tax rate. Now, let me provide more color on segment results, starting with Plumbing. The GPG generated strong sales growth in the third quarter. Sales were $438 million, up $47 million or 12%. Excluding acquisitions, sales grew high single-digits. Sales in Canada and China increased low double-digits. The GPG also delivered strong operating margin in the quarter as our operating margin rose 50 basis points to 22.2%. Operating income increased $12 million to $97 million, up 15% from the prior year quarter. We increased brand investment in the third quarter. This investment was more than offset by productivity improvements and cost leverage elsewhere in the business. Turning to Cabinets, our third quarter sales were solid, given some of the inventory movement, labor constraints, and hurricane headwinds described by Chris. Our operating margin was roughly flat, excluding a one-time benefit from healthcare expense in the prior year period. Margin growth was limited in the quarter as expected commodity inflation was absorbed ahead as we fully instituted price increases. Importantly, we expect fourth quarter margin to be greater than 100 basis points above that of the prior year quarter. Sales were $614 million, up 2% from the prior year. All channels contributed to growth, including premium in Canada. In-stock inventory comps, labor, and hurricane headwinds muted growth. Dealer sales were up 1%. Sales of in-stock cabinets and vanities were up 2%; 5%, excluding the impact of hurricanes and inventory movement from last year. Remaining sales for home center semi-custom, builder direct and Canada increased 4%, with both home center semi-custom and Canada contributing to growth. We expect Cabinet sales to be mid-single-digits in the fourth quarter. Operating income for the Cabinet segment declined 7% from the prior year, but was roughly flat after adjusting for the one-time healthcare benefit. The favorable prior year healthcare expense [Indiscernible] all segments, but had the most significant impact on Cabinets, as more Cabinet employees opted for the high deductible plan option and Cabinets account for 60% of our total employee base. As anticipated, operating margin for the quarter declined 110 basis points to 11.3%. In the fourth quarter, we expect margin improvement of greater than 100 basis points over the prior year quarter. For the full year, we continue to expect to deliver operating margin improvement approaching 100 basis points. Turning to Doors, Door sales were $139 million, up $9 million or 7% from the prior year quarter. Operating income increased 13%, with an operating margin of 18.2%, which benefited from improved product mix and leverage on higher sales. For the full year, we expect Door sales to grow mid-single-digits and margins to be well above 14%. For Security, sales were $158 million in the third quarter, up 1% from the prior year. Segment operating income was $28 million and the segment operating margin was 17.8%, 80 basis points higher than last year. We expect fourth quarter sales to grow mid-single-digits as our core continues to perform well globally and the factors limiting third quarter growth have less of an impact on fourth quarter sales. For the full year, we expect sales growth at or above 3% and operating margin to increase over 100 basis points to above 15%. To sum up consolidated third quarter performance, sales increased 5% and EPS were solid at $0.83 versus the tough prior year comp. Our total company operating margin was 14.9%, up 10 basis points from the prior year. Incremental margin, excluding acquisitions of 20%, reflected our investment spending and the non-repeat benefits from the prior year. We are squarely on track to reach our goal of approaching 15% operating margin when the housing market returns to steady state. Let me now turn to the balance sheet. Our September 30th balance sheet remains solid with cash of $277 million, debt of $1.5 billion, and our net debt to EBITDA leverage remains constant of 1.4 times despite strong capital deployment. We have over $300 million of share repurchase authorization remaining as of October 20th. Turning last to the details of our 2017 outlook. Our market assumption for 2017 remains unchanged with the U.S. home products market expected to grow 6% to 7% versus the prior year. Our total global market assumption of 5% to 6% also remains unchanged, although we could be at the lower end of these ranges due to the hurricanes. Due to the impact of the hurricanes on our third and fourth quarters, we now expect our full year 2017 sales to increase 6% to 7% compared to 2016, which represents a one percentage point reduction of the top end of our prior guidance. With one quarter remaining, the range of our 2017 EPS outlook was narrowed to $3.05 to $3.10 from $3.04 to $3.12. The midpoint reflects a 12% increase over prior year EPS of $2.75. We continue to expect 2017 free cash flow to be around $450 million, 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 30.5%, and the average fully diluted shares of approximately 156 million. In summary, we're pleased with our year-to-date performance and are setting up for a strong 2018. New construction growth continues to be very strong and R&R continues to grow at a healthy pace despite labor constraints. Recent trends and long-term fundamentals continue to point to solid demand and an elongated housing recovery and our disciplined focus on profitable growth is producing the results we expect. While hurricanes negatively impacted the third and fourth quarters, we expect the impact to be transitory with 2018 benefiting from the recovery. We are 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.

Thanks Pat. That concludes our prepared remarks on the third 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. [Operator Instructions] Your first question comes from the line of Scott Rednor with Zelman & Associates. Your line is open.

Hi good afternoon. Chris, there's a lot of mixed data points out there in Cabinets from Wall Street. And I was just curious, through all the puts and takes and the various channels that you guys see it, what do you estimate the markets growing in both units and dollars?

Yes, I think in a steady state type environment, take out the hurricane and if you take out some of the noise, you're probably in the kind of 3% to 5% range, a little stronger on new construction, a little weaker on R&R, primarily because of the sequencing of projects. There's a lot of demand out there or there's a lot of quoting activity going on. After kind of the effect of the hurricane rolling through the markets that it impacted, we're seeing the orders starting to flow back in again. I think as I look out into 2018, I'd say mid-single-digits is reasonable, a little stronger than that on new construction and R&R, maybe in that kind of 4% range. So, that's probably the world we're in right now today. A little bit of variance in terms of parts of the market and the margin profile is a little different, a little stronger on the dealer side right now. But that's kind of how we're looking at it. Actually, we started the third quarter pretty strong and kind of came through, and it was really too bad September hit and the way the weather impacted in those parts of the market. I think we reflected the strength overall in our Cabinet business as the parts of the market that had been weaker, especially the premium side of the market in Canada, turn positive again. And our strategy is to look across the market and look for those segments of the market that give us strong margin improvement and then target the growth in those parts of the market.

And then one on the Plumbing acquisitions. For the three deals that you've done to-date, just curious what you've learned on both kind of the cost and revenue side of the equation that can be used for kind of the new deals and how we should think about that in applying it to the new announcements today?

Yes, we've really, over the last 15 months, been able to identify some very attractive Plumbing assets and make some acquisitions that extend out the product line, extend into some price points. And a lot of this is going to be revenue growth because they've already got pretty strong margin profiles. We'll get some benefit in terms of supply chain over time, but the real benefit here is going to be growth, running it through the GPG platform, which really means expanding distribution, leveraging the strength that we've got today in showrooms and wholesale with builders, hospitality in particular, really attractive market for us. So, these latest two, we're very excited about. The acquisitions that we've done over the last 15 months preceding them have gone extremely well. And the whole thing is coming together. The strategy we outlined last summer, as you start off on something, we felt very confident about our ability to expand the growth. But as we've made investments, as we brought new people in, as we have expanded our capabilities, it's playing out better than we thought and I think you can see that in the numbers.

Thank you.

Your next question comes from the line of Susan Maklari with Credit Suisse. Your line is open.

Thank you. Good afternoon. I just kind of wanted to expand a little bit on the recent acquisitions that you did. It sounds like these are two businesses that, perhaps, you're going to bring to the U.S. And I guess, within that, as we sort of look out there and we think about some of the valuations and the way things are playing out, do you see an opportunity to, perhaps, pursue deals in other markets and other geographies and, perhaps, use that as a way of bringing new products or new brands into this market?

Yes, we're looking kind of across things that we can bring into the North American market because we're so strong and we have such this terrific distribution leverage and these fit into that category. But also going back the other way, so these offer an opportunity to expand some distribution into Europe. China is certainly an important market for us and we continue to expand our suite in China or, really selling the entire bathroom suite now and expanding the kitchen offering in China and some of that's just bringing product in that we're sourcing or partnering with. So, I see more activity that could be cross-border. The Plumbing market really is a global market. It's the most global market that we play in. Our real strength historically has been in North America, and we're going to try to leverage that by taking things that we can bring it here and expand the growth. And certainly, the things we've done the last 15 months fall in that category. But I'm open to looking at other markets and there are things that we're working on right now that could expand this more internationally.

Okay. Thank you. And then can you talk a little bit about, perhaps, the input costs that you're seeing? Has there been any inflation there? How are you thinking about that trending over the next few quarters?

Yes, this is Pat. I'd say, for the year, commodity inflation, as it impacts our P&L, has been within the bounds of our expectation. While there's been some acceleration in this latter third of the year, again, that was within the bounds of our expectation. We've had some very robust supply chain initiatives. And as we have done over our history, we keep our brands healthy and are able to price in inflation, have altered the timing of some pricing actions. So, we think for 2017, despite the acceleration in the latter third of the year, no change. We're on target for fourth quarter, operating margin improvement approaching 100% and full year approaching 100%. Some of the metals inflation will be more of a 2018 impact for us. But again, we expect to cover it with price and keep our Plumbing margins intact.

Okay. Thank you.

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

Hey good morning. Good afternoon and congrats on a very strong quarter in a period with hurricane disruptions. I just want to ask Patrick, just for clarification, the step-down in gross margin isn't really an operational issue, but it's rather attributable to the fact that there was a tailwind in the prior year period which led to outsized margin performance. But on an apples-to-apples basis, you basically are flat margin year-over-year not down for the Cabinet segment. Is that the right way to think about it?

You're talking operating margin. If you take Cabinets and you adjust Cabinets for the one-time healthcare expense true-up, third quarter 2017 is roughly flat to third quarter 2016. And for the year, we're going to expect it to approach 100 basis points of improvement. We'll have over 100 basis points of improvement in the fourth quarter. So, we feel the Cabinets business very much on its margin trajectory and as you referenced, the third quarter dynamic is a year-over-year comp issue.

Got it. That's helpful. Thank you for the clarification. Chris, I wanted to ask you, it's a little uncharacteristic. You talked about capital allocation in your prepared remarks. You've obviously put down two more acquisitions in Global Plumbing, which is great. Congratulations. Where is your head at? What's your outline for, like, 2018, 2019, 2020? Give me like a three-year bridge. You got a super clean balance sheet. You can leverage up. You got a lot of cash flow. What are you going to do? It looks like a lot of public assets now are trading at pretty healthy multiples. How are you going to find the growth and what do you want to do with all the liquidity from a capital allocation standpoint? Thanks and good luck.

Thanks. Yes, we're -- it's high-class problem. We've got strong cash flow and a clean balance sheet. So, we look out over the next three years and say, we've got roughly $3 billion to deploy. If you look back over the last six years, we deployed about $3 billion and allocated that a little bit more toward acquisitions, opportunistic share repurchases and continuing to increase the dividend and I'd look to do the same. To the extent we could find value-creating acquisitions, that'd be a higher priority, but I'm happy to be reinvesting in the business by buying back shares and continuing the dividend. I think in terms of public market valuations, you're right to highlight that there's a premium on a lot of the public assets. I think a lot of the things that we're looking at might offer better returns that are not currently public. That doesn't mean I wouldn't look at doing one. Obviously, we acquired Norcraft as a public company. So, for the right type of opportunity, I'd look at it and those are on the radar screen. But I'd rather be working in kind of the private market to the extent those are available. It's a long pipeline. There are a lot of things we look at. The team is busier than they have ever been. We've got a couple of things done. We've got more that we're working on right now. Can't predict if they'll close this year or into next year. But there's just a lot going on right now. You're right to call out the valuation, which ends up having us walk away from certain situations. But where we can find things where we can really add value, where we can add revenue opportunity as a part of the strategy, we can take up costs as we've done in the Cabinet side with the acquisitions because we have such strong leverage in our supply chains. In our other parts of our business, we're looking at other things where we can have some combination revenue and cost takeout. Then you pay a fair price for things, knowing going in that I can identify very clearly where I'm going to create some value. The Plumbing side, as I talked earlier, we're very excited about the revenue opportunities, and we know where they are, and we know where we can take this portfolio even farther, given the success we've had over the last 12, 15 months. So, it gives us confidence to pursue things, knowing exactly where they're going to fit in.

Could you just maybe give us a little color? When you're talk about the opportunities, are these big dollar spend opportunities or are these smaller tuck-in acquisitions just like the two most recent purchases? Thanks and good luck.

I think we've got -- we probably got, by count, more small mid-sized opportunities that you'd tuck into the business. But then there are a few larger things that we're looking at, both in our categories as well as potentially fifth leg. I wouldn't say that, that is where our priority is, but there are those things out there that could be attractive for us. Again, if I look at where can we add value, I don't want to buy something just to add it to the portfolio to deploy the capital. It really has to be where can we create value because we uniquely own that asset versus anybody else owning it or it being standalone today. And so it's a pretty heavy screen for us in making sure that there's good reason for us to own it.

Appreciate the discipline. Good luck.

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

Hey guys. Margin expansion have been really impressive in Security. How should we think about the operating leverage in this business going forward as you kind of lap some of these synergies from SentrySafe?

Yes, we'll -- Philip, this is Pat. We'll anniversary that by the end of this year. I would tell you that the kind of go-forward operating leverage of that business should span between the 25% to 30% you see in many of our businesses. We would expect that type of leverage to drive the OI margin up. It could be towards 17% over time. And as we start hitting that, we'll start making trade-offs of, do we want to invest different things back in the business to keep the topline going. But we firmly expect the business to deliver over 15% in full year margin this year and we expect it to continue to lever in that 25% to 30% range.

Got you. That's helpful. And with some of the hurricane impact and labor constraints you called out potentially lingering into the fourth quarter, how confident are you being able to achieve that mid-single-digit growth target for Cabinet? And as we look out to 2018, do you expect some of these bottlenecks to kind of vane off just because demand in Cabinets have generally been pretty choppy the last year or two? Thanks.

Yes, I think we're pretty comfortable with the fourth quarter in Cabinets. We're already seeing the pipeline build, the backlog build and we're seeing some of the impacts, especially in Florida, dissipate. So, [Indiscernible] flow. For perspective, Florida and Texas, combined, are about 12% of our total revenue as a company. So, it wasn't inconsequential further down Florida and to the extent it sucked in labor from the southeast. I was down in Florida two weeks after the storm and the crews running around were coming out of Georgia and Florida and surrounding areas, out of Carolina. So, it sucked in some labor that will then get pushed back out again. So, I'm comfortable. It's flowing well. The recovery is going well. It was just a shock given just the size of the business importance to us overall. As I go into 2018, I'd say, demand is strong. Demand is strong in Cabinets. It really is about the ability to start the project and move through the design and then the installation. And early in the year, there was a lot better clarity around kind of where the labor is deployed. Things got backed up. New construction is taking a lot of the skilled trades. And so the R&R part of the market, especially for more complex R&R projects, is just stretching out. Projects are stretching out. Where you might have gotten a project done in six months, they can now stretch out nine, 12 months. They can be done in segments. So, you're taking on part of the projects just given more of the availability. So, if I look out over the next couple of years, I'd say demand is quite strong for kitchen and bath remodeling. The cabinetry is the foundation of those remodel projects. We're a leader in cabinets, and we're going to participate as those rooms get remodeled. Consumer research, which we're doing on a continuous basis, continues to emphasize the top desire of consumers to remodel is their kitchen, only followed by the bathroom. And so kind of being in these markets with our Cabinets and our Plumbing business really positions us well to participate there. So, it's hard to -- it does look choppy. It does feel choppy as we talk to our partners out there in the market, both the home centers and the dealers and they reflect frustration that there are a lot of people out shopping, there's a lot of polling going on. But when they try to sequence it up for when the project's going to get taken on, a little bit of frustration out there. So, we'll work through it. And I'd rather be dealing with that kind of problem versus uncertain demand, which is where we were a few years back given economic considerations. Today, I think, affordability is very strong. Consumers have an interest in doing R&R in their homes. Existing housing stock is turning over at really strong rates, and I expect that to continue. And as people buy an existing home, the kitchen and bathroom are primarily remodel targets for them. So, all that, I think, backs up then the strong demand for the next couple of years.

Okay. Thanks a lot for the color.

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

Hey guys. Thanks for taking my call as well. Maybe if I could just press a little bit more on that last question from Phil. I think if you take out the calendar shift from the fourth quarter of last year, I think your Cabinet comp is somewhere around 7%, which is pretty healthy. Maybe are there any areas of the Cabinet business that you think are going to drive this fourth quarter kind of mid-single-digits off of that comp?

Yes. I mean, I'd look at the home portfolio and say, we're driving toward mid-single-digits for the fourth quarter in Cabinets. The strength of the business where the last four quarters, you saw -- we saw weakness on the premium and some weakness in Canada that has now stabilized and reversed. So, we've got positive momentum moving through each segment of the business. So if I look at dealers tracking toward mid-single-digits in-stock cabinets and vanities. If you play through the adjustments on inventory was at mid-singles in the third quarter and will remain mid-singles in the fourth quarter. Canada has reversed and is now running mid-single-digit positive with good mix coming through there. Builder direct will move mid-single, could go high single as they can ramp up completion. So, we're in a lot of projects. It's just a question of getting completions done. And then home center semi-custom, with our core partners, we're doing well. We're holding share there. It's really promotional cadence and where does that go and we've followed others. We've kind of been behind in terms of aggressiveness of some of our competitors, but we're holding our own in terms of share in the home center special order part of the market. So, I look across and I say, mid-single-digits looks good across the portfolio. Home center special order, probably a little more question mark just given that promotional cadence, but that's only 14% of our total portfolio. So, -- and we've got some really good programs going with our biggest two customers there. So, that's the finish up of 2017. As I look into 2018, again, the demand indicators all point toward some pretty strong growth. So, I'm feeling good about that demand.

Okay, that's helpful. And then maybe on the Plumbing side. The 22.2% margin was certainly higher than we had expected. And I think that you guys had anticipated about $8 million of planned incremental spend in the quarter. Did that get pushed into the fourth quarter by any chance?

I'd encourage you to -- and just we said in the first quarter when we came in at 19%, and everybody said, oh, no, your margins are falling apart. We're targeting 21% for the year. And there are spending differences quarter-to-quarter. I'd say 21% is a terrific thing to model our business around in Plumbing. The spending will ebb and flow a little bit in terms of accelerating in some quarters, depending upon as programs are set up and we're trying to drive through new product launches, we're trying to drive through some marketing spend. So, it'll ebb and flow. I'd just say, 21% is good for the year. I don't know if you can give any more color, Pat.

John, what I would also say is for the third quarter, no -- there were no delays or holdbacks to the investments in our brand and innovation and digital marketing and e-commerce capabilities. We're continuing to invest heavily in those the back half of this year, against what was pretty heavy investment the back half of last year. What drove some of the favorability in the third quarter versus the 21% was just the timing and net result of productivity improvement savings in our operations. That team is doing a great job. They had an aggressive plan for the year and they're delivering against it. But to Chris's starting point, right, we would suggest you model this business around 21%. We're trying to drive it to that level and invest in the business and there will be ups and downs from quarters.

To the extent we free-up, commodity starts coming out of the productivity, we're going to drive them into growth, which is our overall objective is let's hold it at 21%. Let's grow in the low teens in that business. And the success we're having so far gives us comfort that we've got a good team in place that will deploy those dollars in a very thoughtful way.

Okay. Thank you guys.

Your next question comes from the line of Tim Wojs with Baird. Your line is open.

Hey guys good morning or good afternoon. Sorry, it feels like morning. Can -- is there a way to think about what the pricing increase in Cabinets might look like in the fourth quarter, maybe in 2018? I'm just trying to kind of think about what [Indiscernible] might have cost you in Q3 and kind of how that maybe normalizes in the fourth quarter on the EBIT line in Cabinets.

A general answer, pricing tends to lag commodity and so we're moving pricing through and recovering any increases. And to the extent, Pat laid out, where we think the margin improvement's going to come in the fourth quarter or 100 basis points quarter-over-quarter and then, for the full year, approaching 100 basis points, that's embedded in there. And then as we move into 2018, we'll give you further guidance, but we're marching toward 14% to 15%. Typically, across all of our categories, all of our commodities, we've been able to recover commodity increases, but there's a lag. And as we kind of go back out to our customers and work with them to move the pricing through the system, it just takes a little while.

Okay, okay. And then if I -- just kind of maybe shifting gears a little bit to capital allocation and the buybacks. Was -- just given the buybacks in Q3 and maybe October to-date, is that a function of just you guys have more U.S. based cash and you thought the share price was attractive and you had done a couple of deals and you figure, why keep it on the balance sheet? Or is there any sort of change in terms of how you think about share repurchase versus M&A?

No, it was the former, not the latter. I think we've kind of -- we're working a lot of acquisition opportunities all the time, but we're not forcing it. And so to the extent that we push some aside or some get extended out, we keep accumulating cash. The one thing that we promised when we went out six years ago was we're going to be operationally disciplined and we'll react quickly to the extent markets turn down. So, we're not going to stockpile cash for rainy day. We're going to be efficient with our cash and we're going to be efficient with our balance sheet. And so if you looked at kind of where the markets were and where we're trading over the summer, we thought that -- and we've just completed our three-year outlook in terms of our plan and so we benchmark kind of looking at our internal plan based on conservative assumptions, how does that roll through over the next three years. And therefore, what's good value? And so we had a good basis for that value. And so as we've done in the past, to the extent we have cash, we deployed it opportunistically into some buybacks and we're happy we did it. And I think we're constantly running that evaluation and looking at what's near in terms of deployment of cash into acquisitions. So, no philosophical change. Things will appear a little choppy from time-to-time. But when you step back and you kind of tally it up as we look back on the last six years, it kind of falls into place, slightly more in acquisitions, aggressive opportunistic share repurchase and then a consistent dividend. And that's -- that has been what we're doing -- what we've done and that is what we'll do.

Great. Good luck on the rest of the year.

Thank you.

Your last question comes from the line of Mike Wood with Nomura Instinet. Your line is open.

Hi good evening. Just wanted to circle back on the dealer growth in Cabinets. I don't think you mentioned the hurricane impact there. But you're flat last quarter and dealer on a very tough comp and only 1% growth this quarter. Just wanted some more color if you have that there, including traffic growth.

Yes. So, dealer was up 1%. Would have been up a little bit more like 2%, given the concentration we've got, especially in Florida. And so that's tracking toward single -- mid-single-digits for the fourth quarter. Given the backlog that we've got right now, we're confident that, that's quite achievable in the dealer market. The thing that turned positive and as the quarter was unfolding kind of before the storms hit in Florida was that we were seeing really good progress on the premium end of the market and the core semi-custom. And those are the parts of the market that as I look back over the four quarters had been weaker and so them turning positive and seeing some good traffic and backlog building in those product lines was really encouraging. So, it was kind of as if kind of middle of September, I was ready to start doing high-fives and then we had the storm and then there was a pullback and kind of finished up a little bit weaker. But I'm comfortable that with the cadence that's emerged in the dealer channel right now that we're going to have a good fourth quarter and is setting up for a good 2018 as well.

Okay, great. That's helpful. And then just also how -- you don't talk about -- or at least, I don't recall you quantifying productivity much. But you mentioned it recently here in the call. I'm just curious how we should think about that. Is that use to go towards reinvestment? Is it offsetting labor, inflation and other things? And what sort of are the trends in the productivity that you're able to generate?

Our initial target is we must set off the internal inflation factors that are not commodity driven. But we often, where we want the opportunity, do want to push ourselves to drive investments and innovation in brands. We can often push beyond that. And in a few of our divisions, we've been doing that. Plumbing has been one of those areas where we've been driving productivity improvements beyond the typical labor and, like, internal inflation and then turning around and investing that money in new product development and in new capabilities and additional brand spend just to drive the growth, both organically and inorganically. But you can -- from a modeling perspective, we use internal productivity improvement to offset non-commodity inflation. We work to cover commodity inflation via mix of price and productivity improvements and hold our margins constant to leverage at about 25% to 30% as we grow our business.

Great. Thank you.

I will now turn the call back over to the presenters.

Thank you. This is Brian. We'll turn -- we look forward to seeing most of you very soon, and talking to a lot of you even this evening and tomorrow. So, thank you everybody for attending the call.

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