Fortune Brands Innovations, Inc. (FBIN) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Scott, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' Home & Security First Quarter 2018 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. Brian Lantz, Senior Vice President, Communications and Corporate Administration, you may begin your conference. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Good afternoon, everyone, and welcome to the Fortune Brands' Home & Security Quarterly Investor Conference Call and Webcast. We are pleased to be here today to provide an update on our progress during the first quarter of 2018. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investor section of our fbhs.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and on market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC such as our Annual Report on 10-K. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Any references to operating profit, earnings per share or cash flow on today's call will focus on the 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 for some time to address questions that you may have. I will now turn the call over to Chris. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you, Brian, and thanks to everyone for joining us today. Our teams delivered solid sales and earnings growth in the first quarter, which was on plan and met our overall expectations. This was in spite of the challenging weather across the Midwest and East Coast versus last year's milder winter. We also had inflationary input cost across our businesses that we are pricing for, and we will see more of the benefit in margin expansion as the year unfolds. Our business has performed well overall, and the results in our Global Plumbing Group were outstanding. Based on the strong momentum we see in our Global Plumbing Group, share gains in Doors and Security and our accelerated set of actions to pivot our Cabinet business, which should drive more value in the second half of the year and into next year, we took advantage of the pullback in our share price, and we purchased a significant amount of our stock in the first four months of the year. I will return to the subject of capital deployment in a moment. Let me first spend some time on our view of the U.S. home products market. Next, I will provide my perspective on our business performance in the first quarter. Pat will then provide more details on our first quarter performance and 2018 outlook. Starting with our view of the U.S. home products market. In the first quarter, the market for our home products was slightly below the pace we planned. We estimate that repair-and-remodel activity grew between 4% and 5% and that new construction grew mid-single digits, slightly below our full-year expectation of high-single digits. The weather impact in the quarter, both on bigger ticket R&R and new construction, appears to be transitory, and our demand indicators remain strong. So our full-year outlook for both new construction and R&R remains unchanged as we head into the busy spring selling and construction season. Now, let me provide some perspective on our business performance. For the first quarter, sales increased 6% in total. Total company operating margin was similar to last year at roughly 10% as inflationary pressures were a headwind in all segments as anticipated. Operating margin is still expected to improve as we move through the year, particularly in the second half, as our pricing actions typically lag and many products are now shipping with price increases that offset the higher input costs that the industry is facing. Beginning with our Plumbing segment, we saw a strong performance from our most significant earnings engine, the GPG. Sales were up 19% for the quarter. Organic sales were up over 16%, with strong double-digit growth running ahead of the market across all channels, including wholesale, retail, Canada and China. We saw a significant share gains across all markets as a result of the strategy shift and management changes we initiated in 2016. And the new management team continues to execute and build momentum even with weather-related headwinds in many U.S. and Canadian markets. POS was strong in the quarter, and inventories look healthy moving forward as our channel partners more fully embrace the value that our GPG platform brings to their customers. The performance we are seeing is being driven by coordinated strategy. Taking a broader portfolio of products and brands into our existing market-leading channel positions across North America and China; growing a newer less penetrated sales channels such as hospitality; accelerating the portfolio with a more rapid pace of innovation; making more targeted investments in brand building; and leveraging more sophisticated channel capabilities, particularly in data analytics and e-commerce, where we continue to invest. The impact of these actions can be seen in our sales growth and share gains, our strong mix and our improving margins. Operating margin was solid and a little above our expectations for the first quarter as pricing actions and a better mix offset some of the inflation pressure and the increased investment spending are leveraging to drive sales growth above market. We will continue to position our Plumbing business for accelerated growth, consistent with our strategy. We're excited by the recent performance and long-term potential of the Global Plumbing Group, which has been building momentum over the last four quarters. And our broader band lineup is delivering results. Our recent acquisitions such as ROHL, Riobel, Perrin & Rowe, Shaws and Victoria + Albert are all performing well. And we have been successful going to market with this collection under the new channel concept, the House of ROHL, which our channels are embracing. In summary, our GPG strategy is working really well. The new team is executing at a very high level, and our Plumbing business has reemerged as the next big driver of earnings growth for our company. In our Doors business, sales were up 8% against a strong first quarter comp from last year as we continue to take share in the door market. Sustained share gains and mix improvements contributed to the strong performance in Doors, which was driven by low-double-digit growth by big builders in the wholesale channel. Retail sales also continued to grow and were up low double digits as well after adjusting for the prior year inventory load-in associated with retail wins. These results would have been even stronger but for the weather headwinds in the Northeast and Mid-Atlantic and the prior year inventory load. The team also faced commodity pressures but has rolled in price increases that will more fully leverage as the year unfolds. Similar to our Plumbing Group, we have a relatively new Doors leadership team that has been upgrading its management talent across functions since 2016. They have refined their strategy, invested in new technology and innovation center and are delivering more rapid and sophisticated innovation and enhanced product offerings. As a result, the Doors team has continued to outperform the market and gain share by driving innovation in wholesale and retail, leveraging their distribution strength and refreshing targeted parts of the product portfolio. Sales from new product introductions at the high end of the fiberglass line were up double digits in the quarter and we're seeing strong sales tied to our new composite edge products and industry-leading door systems as well. We're evaluating new ways to continue to grow our Doors business aggressively, both through acquisition opportunities and new internal initiatives. In the Security segment, sales were solid and increased 4% from the prior year despite a strong comp and the headwind from winding down a non-core commercial line that we chose to exit in the middle of last year. Our core retail and commercial lines were up over 6% growing faster than the market. The growth was driven by solid sales in U.S. retail and commercial channels, which includes industrial accounts and security distributors. Retailers have been responding positively to our new product refreshers and combination locks, stainless steel padlocks and safes. The commercial channel is seeing strong pull-through from accounts with their presence in the construction market. In our Safes business, we continue to expand capacity in our new manufacturing facility. Margins were roughly even with prior year and impacted by inflation, but we continue to expect margins to improve in the back half of the year as price covers the input cost pressures we are experiencing. Before I transition to Cabinets, let me share some quick perspectives on our overall portfolio and the thought process through the early part of this year. As I just described, we see significant strength and momentum inside of our Plumbing, Doors, and Security businesses which represent two-thirds of the earnings power of our company. These businesses are running a bit ahead of our plan despite the weather and inflationary headwinds in the quarter. In Cabinets, the market continues to evolve in terms of consumer preferences, price points and labor constraints. We have successfully navigated the changes in the cabinet market over the last decade by refocusing our product lineup, supply chain, and customer service to address the needs of the consumer and our channels and from time-to-time have pulled back from the parts of the market that have become less attractive. As a result, you have seen us accelerate growth and gap up to the next margin threshold after each period of transition. We are now in the middle of one of those transition periods and are actively setting up the next wave of growth and margin expansion to achieve 14% operating margin with consistent mid-single-digit sales growth. More specifically, since our fourth quarter call, we have accelerated our plans for the strategic pivot in our Cabinet business and pulled forward some of our repositioning and restructuring actions. We believe these actions will play out over the rest of the year, begin to add value in the back half of the year and into 2019, and set us up nicely to capture profitable growth and expanded margins to 14% over the next three to four years. We have begun by investing and increasing capacity to support growth in the areas where we are already taking share and where more predictable volumes will flow in the Cabinet business over the next few years. At the same time we are reducing capacity for some slices of business in the U.S. and Canada in order to align our cost base to the potential we see in these areas which will result in some one-time charges in the second quarter. The impact of these actions, both the capacity reductions and business exits, should improve margins going forward and eliminate some of the top-line drag in these underperforming areas. When repositioned, we'll have a healthier mix of business going through our industry-leading dealer network, our key wholesale partners and our builder relationships, and an expanded margin profile as we leverage our unique supply chain advantages. In terms of the first quarter results in Cabinets, where normal winter weather, inflation in tariffs impacted Cabinets more than our other businesses. Storms caused multiple plant closures throughout the quarter, resulting in some operating inefficiencies and more typical operating leverage in the first quarter, most of which was already anticipated and in our plan as we were comping against a mild 2017. Sales overall were up 1%, adjusting for our exits. Our core dealer business was down slightly and was tied directly to accounts impacted by weather slowdowns, primarily in the Northeast and Midwest, as our dealer business in the South and West was much stronger. Our core in-stock cabinets and vanities business was also strong, with good POS. As previously discussed, we have increased prices and pulled back on promotional activity to offset input costs, which is currently playing out through our channels. The net result of the softer first quarter, coupled with pricing and accelerated restructuring actions in the first half, is that we now see our Cabinet results accelerating more significantly in the second half of 2018. I am confident that the results of our actions should begin adding value in the second half of this year and set us up well for the next three to four years of sales growth with higher margins than we enjoy in Cabinets today. So to recap the quarter overall. Results were solid and met our expectations in total. We again executed well in the U.S. home products market that ran a little below our plan due to weather. Our teams did an excellent job of growing our company sales and holding the line on margin until price has a more meaningful impact in the back half of the year. Before I wrap up, let me return to our capital deployment in the quarter and our broader plan to create long-term incremental value. Year-to-date through April, we have spent $400 million on share repurchases for about 6.4 million shares. We feel good about our 2018 outlook and are comfortable with our plans to drive value over the next three years. We're also engaged in active discussions with a number of potential acquisition targets. And the volume and pace of activity remains elevated. While the timing is uncertain, some capital deployment against M&A is likely to occur in the next 12 months. In terms of targets, we're assessing a number of opportunities across our businesses. And we also continue to evaluate the possibility of adding a new home product segment or category where we do not have a presence today. Regarding share repurchases. We plan to continue to use them opportunistically as a vehicle to generate attractive returns, consistent with prior practice. Using our strong cash flow and balance sheet, we have the capacity and flexibility to make strategic acquisitions, repurchase additional shares, and increase our dividend to create meaningful incremental shareholder value. As a reminder, over the next three years, we continue to believe that we have the potential to deploy an additional $2.5 billion to drive incremental growth and shareholder value. So to sum up, the demand for our home products remains solid, as we expected, and our year remains on track despite more normal winter weather. I'm encouraged by the strong momentum in the GPG and by our continued success in Doors and Security. I'm also encouraged by the pace of execution on our plans to drive long-term value in our Cabinet business and believe that all of our businesses have taken the right actions to address the pickup in inflation that we are seeing. So based on how things are progressing, we feel more confident in our full-year performance. We are maintaining our current sales outlook and increasing our EPS outlook based on share repurchase activity. We will further revisit our outlook on our second quarter call after assessing the key spring and early summer selling seasons. Long-term, we see continued solid demand for housing and home products, and our businesses are well-positioned to capture that demand. Plus, we will likely have an opportunity to add some businesses along the way. Now I'd like to turn the call over to Pat, who will review our financial performance and provide detail on our EPS outlook for 2018. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Thanks, Chris. As Brian mentioned, to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gains for continuing operation. Let me start with our first quarter results. Sales were $1.3 billion, up 6% from a year ago. Consolidated operating income for the quarter was $124 million, up 5% or over $6 million compared to the same quarter last year. Total company operating margin was 9.9%, roughly even with last year. We remain on track to achieve our goal of 50 basis points of operating margin improvement for the year. EPS were $0.56 for the quarter versus $0.53 the same quarter last year, an increase of 6%. EPS met our expectations in the quarter, and we were pleased by our team's ability to grow earnings during a period of elevated inflation and a more challenging winter. Now, let me provide more color on our segment results. Beginning with Plumbing, sales for the first quarter were $450 million, up $71 million or 19%, with share gains and our GPG strategy driving strong double-digit growth across all channels. Excluding acquisitions, sales were up strong double digits in the quarter, rising over 16%. Plumbing operating income increased to $92 million, up 33%. Operating margin was 20.5% and came in above our initial expectation, driven by strong leverage on our sales and share gains. We are taking our full-year Plumbing sales outlook up based on the strong Q1 performance. Versus our original outlook of high-single-digit growth, we now expect full-year Plumbing sales in the low-double-digits range, exclusive of any further acquisition, with margin performance at or slightly above 21%. Door sales were $110 million, up $8 million or 8% from the prior year quarter, driven by strong wholesale growth with big builders and continued share gains. Operating income increased $6 million and was up 73%. Operating margin for this segment was 12.5%, a 470 basis point increase from the prior year, as strong sales leverage and favorable mix resulted in first quarter margin above our expectations. For the full year, we expect Door sales to continue to outpace the market. Given our strong start to the year and the back-end weighted nature of our strategic expansion to retail, we now expect to achieve the high end of our original sales outlook for Doors. For the full year, we now anticipate Door sales in the low-double-digit range, with continued strong operating margin well above 15%. Security sales were $137 million in the first quarter, up 4%. Sales were impressive in the quarter as we comped to a growth rate of over 7% last year and considering the wind-down of a single non-core commercial line we exited last year. Segment operating income was flat at $15 million due to inflation, and the operating margin was 11.1%. For the full year, we continue to expect operating margin of over 16% in Security, with sales growth in the mid-single digits. In Cabinets, sales for the first quarter were $557 million, down $16 million or 3% versus the prior year quarter. Excluding the home center business, we exited at the beginning of this year and select low-margin Canadian business we exited in the middle of last year, Cabinet sales were up 1%. Excluding business exits, sales of in-stock cabinets and vanities grew high single digits on continued solid demand despite lower customer traffic due to weather. Builder sales were up low single digits despite a clear impact on new construction activity in the Midwest and East where we have a significant portion of our business. Dealer sales were off by low single digits on lower new construction activity and showroom traffic due to weather. Home center special order and sales in Canada were also down, reflecting the impact of our pullback on promotions. In Cabinets, where we anticipated a challenging first half, operating income in the quarter was $24 million, down 49%. Operating margin was 4.3%. Given the accelerated strategic changes Chris described earlier, we now expect full-year sales growth and operating margin in Cabinet to be slightly lower than expected at the start of the year. For the full year, we now expect cabinet sales to be up low single digits, with operating margin around 11%. To sum up consolidated first quarter performance. Sales increased 6%, and EPS were on plan at $0.56, overcoming a challenging comp to a milder winter and widespread inflation. Our total company operating margin was 9.9%, similar to last year despite the headwind. Turning to the balance sheet. Our March 31 balance sheet remains solid with cash of $244 million, debt of $1.9 billion, and our net debt-to-EBITDA leverage is 1.9 times. We currently have over $600 million remaining on our $1.25 billion revolver, and we continue to have substantial capacity and flexibility to fund potential acquisitions and repurchase additional shares as we move into the higher cash flow-generating quarters of the year. Year-to-date, we have repurchased over 6.4 million shares for approximately $400 million. Our approach to share repurchase continues to be opportunistic and focused on where we can generate significant returns. We have approximately $160 million remaining on our current share repurchase authorization. Turning last to the details of our outlook for 2018. As Chris mentioned, we are increasing our 2018 EPS outlook to the range of $3.58 to $3.70 versus $3.08 last year due to strong business performance in the first quarter and our share repurchase activity. We are encouraged by the positive demand signals we continue to see in the U.S. housing market and our business performance. The important spring selling season, especially after this more normal winter, we'll inform any further update to guidance at the end of the second quarter. We expect 2018 free cash flow of $525 million to $550 million with a conversion rate of over 90%. The annual EPS outlook includes the following assumptions: Interest expense of around $63 million, tax rate of approximately 25%, and average fully diluted shares of approximately 150 million. In summary, we are off to a good start to 2018. Demand indicators remain strong, and we delivered solid sales and earnings despite inflation and weather impacts across our categories. We remain well-positioned to use our balance sheet and cash flow to drive incremental shareholder value through acquisitions, share repurchases and dividends. 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 first quarter of 2018. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then re-enter 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?

Your first question comes from the line of Susan Maklari with Credit Suisse. Your line is open. Susan Maklari - Credit Suisse Securities (USA) LLC: Thank you. Good afternoon. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi. Susan Maklari - Credit Suisse Securities (USA) LLC: My first question is just on Plumbing. I mean, obviously, you're continuing to outpace the market there, very impressive. Can you just give us some color on was some of this outperformance led by certain price point or a certain brand within that group and maybe what you're seeing in terms of some of the more recent acquisitions that you've done, how those have been performing? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, it was really widespread, and that's what's impressive about it. We saw a momentum building in Plumbing over the last few quarters, and it kind of came to ahead this quarter. But the business overall has just got a lot of momentum across all channels across the U.S., Canada, China, wholesale, retail. And I guess, I'd step back and say it really is a byproduct of the changes we made going back 2016. The new strategy we've put in place, new management we've put in place. And the premise is, can we bring more brands and more products through our industry-leading channels across wholesale, retail, China? And that's what we've been doing over the last almost two years. Some of it is the success of the acquisitions, so all the new acquired businesses are performing very well in and of themselves, but then we're bringing them through channels. And some of the new styles and innovations are coming out of the acquisitions, so we're spreading that across the portfolio. Branding is really kicking in, and the new branding messages are more targeted and more impactful. We're investing in e-commerce and social media, and that's paying back. So it was kind of – I was looking for weakness across the whole portfolio in Plumbing, and there was not in the first quarter. I think it is real momentum. And if you look at our strength in our channels, we have a large part of the top 80 builders. We don't disclose the exact number, but it is a considerable amount of that market, very strong in wholesale, very strong in retail. The innovation engine has accelerated at this point. We're pushing more and more through there. So it all kind of came together, and I'd say it sets us up and orders look good right now. So it's rolling through. Inventories are healthy. I just – I think we're in a really good spot there. And obviously, the margins are strong. We took pricing coming out of the fourth quarter, really starting in the fourth quarter. And maybe we're a little ahead of the market. And so it started to kick in, in the first quarter. It's going to come more into the second quarter and second half on pricing. Our margin was good. There's still some pricing that's building up in the channel. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay, well, that all sounds like a good place to be. In terms of raising the guidance, obviously, it's impressive, especially given the inflation that you and a lot of your peers have been seeing. Can you just give us some sense of the magnitude of the increase in costs that you saw in the quarter, what you're thinking going forward? And then maybe just any details or further details around some of the pricing actions that you're taking? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, I'll start, and I'll let Pat give you a little more color. But I'd say, we were clear eyed coming into the year, and we saw the commodity increases coming at us. They picked up a little bit more in the first quarter, but we were in the midst of pricing actions as we exited the fourth quarter and came into the year. So some of what you're seeing in the businesses reflect that. But Pat maybe can give a little bit more detail. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Yeah, I would echo that first that we expected a lot of inflation not just in 2018 but also in 2017. And so our teams were very clear eyed about this year and remain so. We had some pricing actions that started last year. Some that came in the early part of this year. And with some of the additional inflation that we're seeing that will play out the balance of the year, we fully expect pricing within 2018 to cover the inflation we have within 2018. As Chris said, there'll be some more building throughout the back half of the year. And so as it's fully in place by the back half of the year, that's when you'll see more of the margin expansion that gets driven by our innovation or our mix enhancements. And you'll still see a bit of headwinds through the first part of the year. But as you saw from our first quarter results, we take very seriously consistent margin delivery. And given both the weather and the inflation we faced in the first quarter, our teams did a great job holding the overall portfolio margin. And we certainly expect our margin performance to build throughout the year, and you'll see most of that benefit come in the second half. Susan Maklari - Credit Suisse Securities (USA) LLC: All right. Thank you. Good luck. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

Your next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

Thanks. Good afternoon, everyone. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi Michael.

I had a first question just on some of the changes around guidance. And perhaps, I'm doing the quick back-of-the-envelope math incorrectly. So maybe you can provide some clarity. With the reduction in the share count from 155 million to 150 million due to the share repurchase, I'm coming up with that being a $0.12 per share benefit. Yet you raised the full-year guidance by only $0.04. At the same time, you had – it looks like you reiterated the sales growth as well as the expectation for 50 bps of consolidated margin expansion. So I'm kind of confused where – what's happened to the other $0.08. I would have thought that, perhaps, with some of the near-term issues with Cabinets, the $0.08 would have been explained by some of the shorter-term issues there. But perhaps you can help me with that. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Mike, it's Pat. First of all, we will have about $14 million, $15 million of incremental interest expense associated with those share repurchases. So when you look at share repurchases net of incremental interest, you're kind of in the $0.07 to $0.08 range. So our guidance going up $0.04 gives you half to more than half of what we'd expect for the year. And as we mentioned, we feel good about the year and our business. We're waiting to see how the spring plays out. And then when we get to the end of the second quarter, we'll see if additional revisions are merited. But we're feeling good about our business, and we feel like we're biased towards the upside.

Okay, that's helpful. And thanks, I didn't catch that on the interest. I guess, second question, a lot of – there's been a lot of focus, as all of you guys know, around Cabinets. And fantastic, fantastic results on Plumbing without a doubt. But on the flip side, I think the first quarter adds a little momentum to some of the more skeptical out there or bearish on the Cabinet segment. Maybe you could go into a little more detail in terms of what drove the margin drop in the quarter. You'd mentioned the plant closures as one. And how you're thinking about 2Q and the actions that are in place or set to be – set to play out over the next few months to get to the 11% margin and the, what I'd assume is, pretty strong improvement in the back half. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So I'd start with our plan coming in the first quarter was for the margin compression. Last year our 8% margin was pretty unique in the first quarter. The Cabinet business typically doesn't perform very well because of the fixed costs that we're carrying throughout the year. So as you know, seasonally, December, January, February in building products is – it was a difficult winter. You're just not getting that much volume come through. So that's what we planned for. And we had a little rougher February, March than we would have anticipated. And so that definitely impacted on the operating leverage in that business. So that was one piece of it that kind of came through. There was a little bit more commodity pressure as well. But in general, the quarter played through okay on the dealer side of the business, which is 50% of the business. You were down low single. All of that came on the East Coast and Midwest. The rest of the country was actually up pretty nicely mid-single. In-stock vanities and cabinets were up high single. So we were pretty encouraged by that. And our direct-to-builder business, again, in the places where the weather was impacting it, were down a bit. But overall, were quite strong. So really, it's the restructured parts of the business, which are Canada, which we've talked a bit about and we're zeroing in on the parts of that market that we like and exiting some of that market. And then we've talked about some of the home center business that we've pulled away from on special order side only. And so that's kind of the setup on the revenue side, both the quarter and how the year is going to play out. I mean again, it's integrated in our plan. On the restructuring side, we'll go into a little bit more of that in the second quarter – after the second quarter results. But effectively, we're investing in the stuff that's selling really well. And so we're taking share in the parts of the market that are, perhaps, simpler product lines, going through dealer into builder, the in-stock vanities, cabinets. There's a lot of demand there. And so we're putting more capacity in there across North America. So that includes our operations in Mexico, and so some of that is just lower cost actually (34:28). And then we're taking capacity out of those parts of the market that have been softer. Really, we've been talking about kind of the middle parts of the market being softer over the last four or five quarters. And so we're taking some costs out of that, some fixed costs out of that. Won't go into more detail on that. And so you're going to see basically a leverage shift inside that business. And it's going to set up around where there's good growth in the business inside of our portfolio. So obviously, as we're moving through things, less certainty about a straight line, but this is kind of how we've run the Cabinet business since 2009. When I came into the business, we were losing money and we started pivoting around stuff that was working and cutting the stuff that wasn't. And we've been through expansion from 0% to 3% margin to 7% margin to 11% margin. And now we're pivoting to go up to 14% margin over the next few years. And it's all inside of the envelope of the business that we've got and the channels that we've got. So I sit here today more comfortable than I was a couple quarters ago because our teams are executing harder. And I can see kind of where the impact is coming. There are big chunks of our business that are delivering those margins today. And what I'm sharing with you is clear out those parts of the business that haven't been performing and, frankly, weighing it down. So I think we're in a pretty good spot and feel good about it. I understand kind of where there's some anxiety around it. But also put it in perspective, it's one-third of the earnings power of our company. The other two-thirds, I think had a pretty good quarter, and it's setting up for a real good year and running ahead of plan. And so in that context, with the kind of significance of things we're doing, I actually feel really good about where our Cabinets business sits right now.

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

Hi. Thank you, guys. Chris, just continuing on your commentary on Cabinets. So going back to your opening remarks, where 14% is still the bogey, but it sounds like it's a little bit further out. Is the right way to think of it is that the restructurings will happen this year, you'll be around 11% this year. And then you're looking at roughly 100 basis points a year? So it's 3 years or after that you'd aim to achieve that 14%? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, that looks pretty good. So 11%, maybe a little bit more, depending on how quickly things move through and where the leverage comes from. And then we're in a good flying formation as we move through 2019. And so you'll start to see that leverage. Again, kind of think about it as additions and subtractions, subtractions off the cost base, which clearly will improve leverage, subtractions off parts of the portfolio that were dragging on the top-line and just were not growing kind of sequentially. And then doubling down in parts of the market where we're growing and taking share. So the in-stock cabinets and vanities business has been growing robustly over the last 2, 3 years, taking share, growing strong inside of our dealer business, strong builder business. So we have direct-to-builder, but we also do a lot of builder business through the dealers. And that product portfolio, we're adding some additional product lines too. So that's going to continue to grow. And then our direct-to-builder business, that's 80% of our revenue is kind of right inside of that sweet spot. And then as we've talked about before, we're restructuring part of Canada, we were kind of wide and thin across a lot of Canada and we just try to narrow in more on where we've got real strength and pull out of some parts of the market that we're more kind of on the fringe. So...

Okay. And then on price versus raw materials, it sounds like you're neutral across the portfolio for the full year. But I'm sorry if I missed it, but did you give a number for where you were in the first quarter? And then just a sense of what does the trajectory of that recovery look like? How heavy is the recovery in the second half of the year versus the first half of the year versus something that maybe is more moderate through the year? Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Dennis, Q1, Q2 price will trail inflation a bit. Think about it in terms of somewhere between $5 million and $10 million portfolio-wide. But by the time we enter the second – exit the second quarter rather, we'll be covering it fully. And so it'll be a bit of a headwind. The first part of the year, it differs by product line and by months because the effects by product line and the price increase is going in differ. But by the second quarter, we'll be neutralizing it fully. And therefore, the productivity gains we're making in our businesses, the innovation and the mix improvements will show through and be driving margin expansion in the back half of the year.

Okay. Appreciate it, Pat. Thank you, guys. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thanks. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Thanks.

Your next question comes from Michael Eisen with RBC Capital. Your line is open.

Good afternoon, guys. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi.

Was hoping you guys could start off talking a little bit about the Doors segment, pretty good results coming through. You guys talked about outgrowing the market. Can you talk about how much you're outgrowing the market? And I think you mentioned a new retail placement that should accelerate growth in the back half of the year. Can you give a little more color on that as well? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. Yes, I think we're – I won't give – put an exact number in terms of how far ahead of the market we are, but we're clearly taking share, running better than kind of if you look at the other public newer companies. Our growth has exceeded theirs, and it's going to continuing as we look at where we're taking it. A lot of that's coming out of the wholesale side of the market. So that's builder market. Door business is about 50:50 new construction, R&R. Our whole portfolio is more like 65 R&R, 35 new construction. So it's tilted more towards new construction. And so we're doing better with bigger builders and through our wholesale channels. Some of that's also just innovation. So at the higher end of the market, we're driving more product there at higher price point. So we're taking share on that basis as well. In retail, we've got a really strong long-term relationship with Lowe's, and we just continue to expand that relationship. And so that's been a lot of success we've had there, and we continue to work closely with them, real partnership to drive a lot of growth with them kind of across all their price points and working closely to try to drive them in the category. So that's worked really well. So it's a combination of innovation and just channel strength across business. Great team there and they really ramped up the innovation side of that business. And now you're seeing that it took a little while. It was always kind of up and along, but we really pushed it hard in the last 18 months, and you're kind of seeing that flow through the market.

Yeah, I know, that's encouraging, and I appreciate all the color. And then just a quick follow-up. You guys both mentioned that the idea of some more M&A coming in the next 12 to 18 months and kind of the potential for another leg to the story. Can you talk about a little where you're comfortable with leverage at this point of the cycle and how we can see that potentially playing into the size of a deal you're able to do here? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. So I'd say, we're active and looking at things, and we're just in the midst of a number of different things. Our primary focus is inside of the businesses that we've got because we get the best leverage if it's inside of one of the four parts of the business that we've got. So there are things that we're working on right now across those businesses that could materialize here. And so we'd be pretty excited about that. In terms of another category, we've looked at other things that are similar to what we're in today. Heavy consumer involvement, so not commodity-building products but more consumer home products where the innovation that we're really good at can play through channel strength, really matters. You got pricing power, which clearly we do, that demonstrate. So there are some categories that look like that, and so we visit those as well. I'd say for where we're at in the cycle, I mean, we spend a lot of time looking at a lot of forward indicators around demographics and household formation and where the building cycle is. And so we're comfortable that the things aren't going to stop here anytime soon, understanding interest rates are rising and some other things. But in terms of overall leverage, we'll be appropriately conservative, but we've got a lot of headroom inside of the cash flow ahead of us. We throw off a lot of cash. Left on our own, we'd be delevering pretty quickly. Pat, I don't know if you want to comment a little bit more just on kind of how we think about leverage. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Yeah. The 1.9 times that we finished Q1 is a little bit of a fall seco. It's a correct number, but we produced most of our cash from May through December. And so the headline might grab as if we're high leveraged right now, but absent any further capital deployment for the year, we'd finish the year at 1.3 times. Christopher J. Klein - Fortune Brands Home & Security, Inc.: So we're going to try not to do that. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: We're going to try not to do that, but we have – so we feel like we have plenty of room. I wouldn't anchor on the March 31 leverage ratio and think that it's an indication of where we'll spend most of the year.

Got it. I was actually more so looking to how high you're comfortable going for the right deal. Christopher J. Klein - Fortune Brands Home & Security, Inc.: I think we've kind of probably got a natural target at about 2.5, but I think if it was a right deal, especially if it was synergistic and fit within one of the businesses, so near end, very high probability of synergies flowing, which is what we've seen in some of the things that we've done already, it could go a little bit of above that. And then you're paying it down pretty quickly because our core business is throwing off a lot of cash. And if it was in our wheelhouse, you'd probably see some pretty quick delevering going on, too. So, I don't know that we've got a number but I think we've got a lot of capacity to do the things that we want to do and kind of the things that we're considering looking at now. And especially in sequence, we don't do everything – if we did something in the next six months, you're paying down all along the way. And then if you did something else six months after that, it's kind of on cycle with the earnings that you're acquiring.

Understood. Appreciate all the color. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

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

Hey guys. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi.

When you think about a fifth leg, would that potentially be a larger deal in size and some of the things that you're looking that are more similar to what you're doing right now? Are they bolt-on and I just wanted some color around that? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, I mean, it is probably bigger than just a bolt-on that we've maybe done before or a mid-sized deal and that we'd want a leadership position in whatever we are going in. I don't like the idea of playing on the fringe of a market that we haven't been in historically. So we'd be pretty clear eyed about that and make sure that we come into something where we could establish just a strong position right out of the gate and it's close enough in terms of understanding consumer behaviors in our sector and what consumers are responding to as we see some commonality across our businesses and how they're thinking about their homes and what they're emphasizing. And so if we can translate that into another consumer involved category, in a leadership position, by definition, that's probably a little bit bigger. So we are not going to bet the ranch, nobody should be worried about that but that probably means that you're on a little bit larger size.

Got it. And Chris, I couldn't help but notice how excited you are about some of the efforts you made in Plumbing and you're obviously seeing a lot of momentum there. Just trying to gauge when we think about this business historically, it's we view it more as a mid-single-digit growth business. You're clearly outpacing that, but just trying to gauge how sustainable this growth trajectory is for the next few years. Is the new normal more high-single-digit growth? Any color would be very helpful. Thanks. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So going back to kind of last, really, 18 months ago, summer fall of 2016, we started talking very clearly about holding margin in that business between 21% and 22% margin and investing in growth and started making very conscious decisions in investing in products, investing in brand, investing in technology, data analytics, e-commerce, a lot of things that were really set up to drive growth across multiple fronts. And it was with a leash on spending, which is the deal is we could have accelerated margin, but we're better off if we can get above-market growth at 21%, 21.5%. And they've been able to deliver, and I think that's where the excitement is. It's in the excitement that if you look at – actually, four – last four quarters, you can see sequentially performance relative to the four quarters before that, picking up 8%, 8.3%, 8.6%. Now against last year's first quarter, up much stronger organically 16%. But yeah, we'll be in the low teens this year, and I think you should expect we're going to grow a couple of percent more than the market overall. And there'll be pockets of that market that will be even stronger because what we're doing is working. And so that's – I guess the excitement comes from is it a lot – it isn't one big thing. It's a lot of concrete pieces of a strategy that are again – executed against a higher-caliber team they brought in a lot more talent there and align that team with a great culture – a performance-driven culture. And that's what's happening a lot of people talk about all that stuff and frankly, that's what I was doing was talking if I go back 18 months ago. And now you can actually see it playing through. So, I guess that's what you're picking up.

Your next question comes from the line of Tim Wojs with Baird. Your line is open. Josh K. Chan - Robert W. Baird & Co., Inc. (Broker): Hi. Good afternoon. This is Josh Chan filling in for Tim. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi Josh. Josh K. Chan - Robert W. Baird & Co., Inc. (Broker): Hi. If I could piggyback on the Plumbing growth, could you just kind of go through different channels or verticals, however you want to describe this, kind of where you think you are underpenetrated because presumably those are the areas that you have a better runway for above-market growth? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So you could – I'll take it across, you look at North America, U.S. and Canada, where we've been market leader overall for a while. Across wholesale, within the wholesale market, you've got our builder business, which we've got an extraordinary share of the top 80 builders. And as we bring a broader product portfolio into those relationships, they responded well. So this would be in addition to Moen and bring some of the acquisitions into that channel. And so as they're building higher-end communities, taking some of our higher-end brands and bringing them into those communities, so that's extending that out. And so that's playing through in retail, taking a broader product portfolio. So we've acquired disposals, we've acquired some other adjacencies within that category. So it's putting more through that part of the market. And then in e-commerce, we've made a lot of investments there. We've been growing really over the last 18 months at a pretty strong clip. And it's – there, I think it's being conscious of the other channels and being conscious of what's selling well. It's incredibly data-driven. We've got very, very talented people. Again, we upgraded that team over the last couple years. We're on par with anybody in the sector and working closely with all of our channel partners there to really make folks successful and bring more products through that channel that's selling well. China, very interesting case there. Where they're really just expanding the whole room in terms of bathroom and kitchen in China. Very aggressive at taking not just stuff that we own but partnering in other categories, in shower surrounds, in toilets and other categories that we don't own anything. Partnering with them and bringing whole suite solutions into our 1,000 locations in China and then also selling more into the builders there. And that builder channel is growing much more quickly, as builders are starting to behave in China more like they've been in the U.S. where they're finishing out the entire kitchen and bathroom as opposed to leaving them as shells. So that part of the market is growing pretty aggressively. So when I said earlier, it's kind of across the waterfront, it's kind of across each of those channels. And then within there, it's at the price points where we play. Where Moen plays in the heart of the market and we've been strong with Moen, taking share, playing strong in the heart of the market. And then a lot of our acquisitions are filling out those other parts of the market, where we didn't have a big presence in more of the premium side of the market. But then there's designs and there's product functionality that we can borrow from and bring into part of the market, Moen, finishes, styles, things that start in the leading edge of the market. Lower volumes, but it's where the designers spend all their time. And then bringing those design cues and those product innovations into the heart of the market. And that's kind of how the markets evolve. In terms of new channels opening up, I'd just point out hospitality, which is big hotels and also kind of mixed properties where you've got hotels and higher level multifamily in single projects. That was a market that, just as Moen, we had to chip away, chip away, chip away. Now with the portfolio that we've got, we can walk in with a full bag into any project out there and go head-to-head with anybody in the market. And fill it in then with a combination of both our, ROHL, Riobel, Perrin & Rowe, Victoria + Albert product and then bring in Moen in those other parts of the project, where typically you could expect a Moen. But if you're not in there, talking with the designer and the architect, you weren't getting kind of their full audience. Well, that's happening now. And that's starting to flow through the business, you're starting to see it in the revenue, but the number of projects teed up behind right now is starting to accumulate, too. And so that's exciting because you're taking a market-leading position, and then you're trying to penetrate parts of the market that we knew we weren't getting our fair share. But now with this bigger portfolio, we'll be able to execute there. Josh K. Chan - Robert W. Baird & Co., Inc. (Broker): Yeah. That's definitely very good to see the strong execution there in the Plumbing side. If I can ask about the Cabinets business, just in terms of setting the expectations for next quarter. So typically, I think, in Q2, you have kind of a margin that is above the full-year average. But given the run rate from Q1, I just wanted to ask about, are there any guideposts that you want to give us in terms of Q2 Cabinet margins, that would be really helpful. Thank you. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Yeah. We don't – we try not to give the specifics across quarters. You will still see both Q2 and Q3 margins above the full-year average in Cabinets. But we'll have some transition going on there as well. So Cabinets, for the second quarter, will probably be a little bit below last year. But it will be above the full-year margin, and it will be significantly above where it was in the first quarter. Josh K. Chan - Robert W. Baird & Co., Inc. (Broker): All right. Great. Thank you for your time. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Perfect.

Our final question comes from the line of John Lovallo with Bank of America. Your line is open.

Hey, guys. Thanks for getting me in here. Chris, maybe just from a high level. I mean, you talked about changing consumer preferences in the Cabinets business and how you're kind of evolving the Fortune business as you've done in the past to kind of target that next wave of growth. What, in your opinion, does that next wave of growth look like? And maybe on top of that, is there anything that's changing from a competitive standpoint that's impacting the industry's dynamics? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. I think it's an interesting time in the market, and I would go back to I've kind of watched this thing unfold over almost a decade. And you're in a period right now where it's less competitive dynamic. It's more we've talked about constraints around labor, and we've talked about simpler designs. And so that starts to translate into consumers behaving in a way where, okay, if it's going to take me a little bit longer, and I'm going to have to struggle to get a more complex design, and there's cleaner looks out in the market today in any event, then maybe I'll move to a more simplistic part of that market. That's for part of the market. The other part of the market, the high-end continues to roll as it always had. So what we've seen come through, both our dealer channel and our in-stock and vanities business, is real strength there. And we've been running hard to catch up, but we continue to have strong demand there. And so we're investing more. Some of that's in our Mexican operations because that's where some of that product comes out of. Some of it comes out of our USDA network. And then some of it comes out of our more stock platform or stock-type platforms. And so we on the one hand see strong demand in that part of market. In the middle of the market, so it's kind of like in the tweeners, that's where it's kind of been flexing a little bit strong, little bit off, little bit strong, little bit off, for kind of the last four or five quarters. And so we've kind of said, all right, there is a core of that business which looks good. We are going to build around that core, and then we'll take a little bit of capacity out of that part of the market, bring it into our most efficient operations. So we'll get leverage around what we can predict. So we're a realist, we're clear eyed. We're just saying, we can see sitting on top of a quarter of this Cabinet market, what's working. And we're going to drive harder there. And it's going to be inside of the channels that we're in, so we're – 50% of our revenue comes through dealer. Got a quarter of our business coming through that in-stock and vanity business through the two big home centers. So, we're going to focus hard on that. And then the other parts of the market, we like other parts of the market. We're just going to dial in on what's working and then pull some capacity back out again so we can get some leverage there. And I think that sets us up, the reason I'm talking about it sets us up nicely for next couple of years is because we're playing through those trends that are already existing in the market, and we're leveraging the positions that we're in. We are not having to run out and go get stuff. We are just playing harder in those parts of the market that are working and then there are slices that we are just saying, all right, we're going to rationalize some capacity around it and we still have flexibility inside the facilities that we maintain and we can flex up shifts so we can do some other stuff, so if that part of the market comes back a little bit stronger, we've still got that flexibility and we'll just closely monitor it. So I think the great thing about being of the scale that we are in Cabinets is that we can uniquely see across the whole market, and we can say, all right, this is where we want to go. And others can make their bets and do their own thing, and that's great. But we know what we know how to do and we know how to execute, and we have a great plan and a great team, and they're running hard against it. And as I said, I feel better today because we've got a tight plan and they are driving it hard. And so I feel good about where that business is going to go because we can control what we can control.

Okay, that makes sense. And then the second question, I think I may have missed this. But I thought I heard you say that there is some walk-away business in one of the home centers. I was just curious what – was that in Cabinets and maybe if you could quantify that? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Let me quantify this, it's sort of third home center. So I just – I don't like talking about our customers by name, but there's two big ones and then there's a third smaller one. And so there's Cabinet business there that we exited at the beginning of the year and so that business was in decline for us and so it didn't make sense for us to continue with that. And in turn, we're heavily focused on the two large home centers and their special order business and are excited about what they're doing.

Okay, thank you very much guys.

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