Fortune Brands Innovations, Inc. (FBIN) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Victoria and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Second Quarter 2018 Results Conference Call. After the speakers' remarks there will be a question-and-answer session. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Senior Vice President, Communications and Corporate Administration. You may begin your conference call. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Good afternoon, everyone, and welcome to the Fortune Brands Home & Security Quarterly Investor Conference Call and Webcast. We're pleased to be here today to provide an update on our progress for the second 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 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 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 will allow 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. I'm very pleased with our results for the second quarter and feel confident in delivering the strong performance we have targeted for the year. Our teams delivered solid results overall, which was again on plan and met our overall expectations. The momentum inside of our Plumbing and Doors businesses continues to be very strong. Our Cabinet transition is going well and we took concrete actions to accelerate the repositioning of the business. Across the company, price increases continue to roll through all segments and are countering the increased material and labor costs we saw in the first half. Our progress in these areas positions us well for stronger operating leverage in the second half of 2018 and into 2019. In addition to our financial results, we successfully executed a number of important actions to set up the business for a stronger second half and longer-term growth. I'll have more to say on these strategic steps in a moment. Let me first spend some time on our view of the U.S. home products market. Next, I'll provide my perspective on our business performance in the second quarter. Pat will then provide more details on our second quarter performance and 2018 outlook. Starting with our view of the U.S. home products market; in the second quarter, the market for our home products grew at about the pace we planned. Market growth was better than the prior quarter despite a slower start to the second quarter due to wet and cold weather coming out of the first quarter. We estimate that repair and remodel activity grew close to 5% and that new construction grew high-single digits, roughly in line with our full year expectation. New construction and R&R activity picked up throughout the second quarter. And the second half is setting up to be stronger than the first half with demand remaining strong and builders and contractors working against solid backlogs. Now, let me provide some perspective on our business performance. For the second quarter, sales increased 5% in total. Total company operating margin was solid at 14.6%, but lower year-over-year as inflationary pressures were a headwind in all segments as we expected. Operating margin is expected to improve as we move through the year as our prices actions typically lag inflation by six to nine months and we've now rolled through price increases in all segments. Turning to the segments beginning with Plumbing; the Global Plumbing Group continues to perform as envisioned with low-double digit sales growth at our target 21% operating margin. For the last five quarters in a row, we have delivered above-market organic sales growth while maintaining industry-leading margins, a clear sign that the strategy is working. Results in both our core businesses and new platforms continue to be outstanding, and we're actively investing in new routes to market, digital capabilities and the product portfolio. For example, we recently formed a new dedicated hospitality and project sales team, bringing together sales professionals from our acquired and legacy plumbing businesses with a full suite of products and brands across price points. This team has already won incremental business that is shipping this year and has developed a significant pipeline into 2019 of double-digit millions in sales. It is an example of true synergy created by the GPG platform, as our more recently acquired brands like ROHL and Riobel are paving the way for access to the whole portfolio. Additionally, we've been leveraging our enhanced digital and analytic capabilities and are using those insights to bring new growth opportunities to our customers. This data has been informing our product, pricing and channel decisions, primarily in retail and e-commerce. Lastly, we're accelerating the pace of our innovation. We've rolled out new product categories, including disposals and water filtration in select markets, introduced matte black, gold and other new finishes, and integrated some of our smart products with virtual voice commanded assistance. Sales from new products launched in the last three years now total about 25% of overall sales and we continue to pursue engineering, design, and productivity improvements to push this number to 30% over the next three years. So, in Plumbing, we're off to a very strong start to the year and are carrying good momentum into the second half. POS was strong in the quarter, and some channel partners exited the quarter with lower inventory which could be a slight tailwind for us moving forward. We will continue to position our Plumbing business for accelerated growth consistent with our strategy. Our $1.7 billion Plumbing business is very much on track to grow sales organically and through acquisitions to our targeted $3 billion by 2021. With industry-leading operating margins at around 21%, the platform should drive about 60% of our total company operating profit growth over the next three-plus years. In Doors, our performance accelerated as we continued to take share in the door market. Our growth strategy and focused approach drove strong double digit growth through both the wholesale and retail channels. In wholesale, we continued to convert new builders, particularly in geographies with strong new construction activity in the South and West. We're pressing our advantage in fiberglass with new product launches and leveraging our national fabricator network. In retail, our high service levels, leading product quality and strong multi-year performance has compounded our growth in the channel. Special order sales continued to strong and in-stock sales tied to our remerchandising efforts in the aisle have exceeded our initial expectations. Across our channels, innovation is driving a stronger cadence of new product introductions. Increased focus on regional styling and a more contemporary lineup has helped grow our sales. In the Security business, our core U.S. retail sales grew 5% in total and we lapped the last quarter of a commercial business line we exited in the prior year. Price lagged metal inflation in the quarter, but is expected to reverse in the second half as shipments now reflect the full impact of our pricing actions. Turning to the combination of Doors and Security, on the last call, we stated our intent to grow the Doors business more aggressively, both through acquisition opportunities and new internal initiatives. At the end of the quarter, we internally announced our plan to combine the leadership of our Doors and Security units into a single segment under our Doors leader, Brett Finley. Starting in the third quarter, this will be a division with roughly $1.2 billion in annual sales and operating margin approaching 16%, with the potential to grow organically to over $1.4 billion in sales and a margin approaching 18% over the next 3.5 years. As we make progress towards these targets, this new structure will give us additional operating leverage across the businesses. We should also see greater capacity for growth through accelerated product development and enhanced acquisition integration capabilities, similar to what we've created with a common back office inside of the Global Plumbing Group. Brett is an outstanding leader, who's driven strong results across the Door segment over the last 2.5 years. He'll create a common platform with newly enhanced scale that can more effectively leverage investments, talent, and innovation across a larger business unit. I am confident in Brett's ability to grow and create value through the new structure, and we'll begin reporting results for the combined segment next quarter. Turning to Cabinets; early in the year, we provided more clarity on our plan to strategically pivot our Cabinet business. Throughout the year, we've been executing against our plan with a number of impactful steps still to come. To give you some context around our actions, we began the year with 27 cabinet manufacturing facilities across North America. Four that manufactured premium cabinets, eight producing mid-tier semi-custom cabinets, and the remaining 15 supporting our value semi-custom, stock and in-stock cabinets and vanity businesses. In the quarter, we took actions to further align our supply chain against our strategy. Specifically, we responded to some softness in the segments of the cabinet market and consolidated our footprint of plants that manufacturer mid-tier semi-custom cabinets, closing two of the eight plants that produced these products. We redirected the volume at these price points over the strongest of our remaining six plants to generate greater operating leverage going forward. At the same time, we undertook a set of actions to increase capacity and launch new products in areas where we are experiencing growth including in-stock cabinets and vanities, decorative laminate veneer products for builders, and value semi-custom cabinetry at affordable price points. These actions included expanding our in-stock cabinets and vanities footprint in Mexico and Texas by ramping up a new manufacturing facility and expanding several existing facilities, expanding capacity of our existing builder stock and DLV facilities in the Midwest and Carolinas, and adding to our automated paint capacity in value semi-custom. We will continue to take aggressive actions over the next four quarters as we execute on our pivot strategy, which will add tangible value to the business in the second half of this year and into 2019. These actions will position us to resume margin expansion beginning next year and provide the setup for continued expansion over the next three to four years as we drive a healthier, more predictable mix of business through our industry-leading dealer network, our large homecenter partners, and key builder relationships. With the significant capabilities and ability we have to flex our supply chains and the improvements to our cost structure and margin from the actions we took in the second quarter, we're making solid progress down the path we laid out in May to achieve 14% operating margin by 2021 with consistent mid-single digit sales growth. So, to recap the second quarter, it was solid overall with mid-single digit sales growth and nearly double digit EPS growth even as inflation continued to run ahead of price in the quarter. Despite these headwinds, the pricing and other actions we've taken to offset inflation are on track and we're well positioned to see the benefit of margin expansion as the year unfolds. We also took important strategic steps to position us well for the second half and longer term, especially in our Cabinets business. I'm very encouraged with the progress we have made in the quarter in our Cabinets pivot plan. And regarding the combination of our Doors and Security businesses, this change will position us to deliver a new level of innovation, acquisition capabilities and profitability to this part of our portfolio for years to come. Before I wrap up, let me review our capital deployment in the quarter and our broader plan to create long-term incremental value. Year-to-date through July, we've spent over $600 million on share repurchases for about 10 million shares so far in 2018. As we announced in a press release last week, we have remaining authorization for another $500 million in repurchases. So, we feel good about our 2018 outlook and are comfortable with our plans to drive value over the next three years. We're maintaining our current sales outlook and increasing our EPS outlook based on share repurchase activity. While we see significant value in FBHS shares, we also remain very active in exploring potential acquisitions. We are currently engaged in discussions with potential acquisition targets and are working on a robust pipeline of opportunities that we see coming to market in the next 12 months. While we do not have anything to announce today, we'll provide further commentary as the second half of the year unfolds. As a reminder, over the next three years, we continue to believe that we have the power to deploy an additional $3 billion to $4 billion to make strategic acquisitions, repurchase additional shares and increase our dividend to create meaningful incremental shareholder value. 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 from continuing operations. Starting with our second quarter results, sales were $1.4 billion, up 5% from a year ago. Consolidated operating income for the quarter was $209 million, down 2% or $3 million compared to the same quarter last year as inflation was a headwind as expected. Total company operating margin of 14.6% was in line with Q2 expectations. We remain well-positioned to deliver our 2018 outlook as operating margin and leverage accelerate in the back half of the year, driven by pricing and continued progress in our Cabinets pivot. EPS were $1 in the quarter versus $0.92 the same quarter last year, an increase of 9% and in line with our Q2 expectations. Our progress through the first half of the year has been solid and consistent with our plan. We continue to expect our results to be back half weighted with significant year-over-year EPS growth in the third quarter and especially into four quarter. Now, let me provide more color on segment results beginning with Plumbing. Sales for the second quarter were $484 million, up $49 million or 11%. Our GPG strategy is driving solid growth across channels, and we saw especially strong growth in U.S. wholesale, China and the acquired businesses in the quarter. Our organic sales continue to outpace the market as sales excluding acquisitions were up 9%. This demonstrates our strategy for the new Plumbing platform, continues to produce strong results even in a quarter where some channel partners pulled down inventory. Plumbing operating income was flat at $101 million with an operating margin of 20.9%, in line with our strategy for this business. Year-to-date Plumbing operating margin is also about 21% and consistent with the first half of 2017 despite significant inflation. Doors sales were $160 million, up $27 million or 20% from the prior-year quarter, driven by strong sales growth with big builders and share gains at retail. Operating income increased $5 million and was up 24%. Operating margin for the segment was 17.5%, a 60-basis-point increase from the prior year as strong sales leverage and pricing offset inflation in this business. Security sales were $147 million in the second quarter, up 3% versus the prior year. Sales were solid in our core U.S. retail locks and safes businesses. Segment operating income was down $2 million, due to metals inflation and the time lag associated with pricing actions taken in the retail channel. Heading into the third quarter, we have been successful in implementing price across all channels and are on track for second half and full year margin improvement. In Cabinets, sales for the second quarter were $638 million, down $16 million or 2% versus the prior-year quarter. Excluding the select homecenter and low margin Canadian business exits, Cabinet sales were up 1%. Excluding business exits, sales of in-stock cabinets and vanities grew mid-single digits on continued solid demand for these products. Builder sales were up low-single digits and were impacted by a slow start to the quarter due to weather in the Midwest and East where we have a significant portion of our business. Dealer sales increased 1% and saw a modest uptick in premium from the prior year. Homecenter special order sales were down, reflecting the impact of our planned pullback on promotions. Sales in Canada were up 6% as the changes we made in the business last year began to deliver benefits. In Cabinets, we anticipated a year of transition as we executed the structural changes outlined in our pivot plan. These significant improvement initiatives executed during the second quarter have improved our cost structure and began having a margin impact. Operating income in the quarter was $81 million, down 8% and operating margin was 12.7%. While lower on a year-over-year basis, these results represent substantial improvement from Q1 and are in line with the plan to get the business to 14% operating margin by 2021. Our pivot execution is off to a good start. We expect further improvement in the second half as additional operational improvements and pricing drive margin improvement. To sum up consolidated second quarter performance, sales increased 5% and EPS were in line with our expectation at $1. We are positioned well for a strong second half and full year. Our Plumbing and Doors businesses continue to outperform the industry and we have taken the pricing and strategic steps necessary to accelerate our performance through the balance of the year and into 2019. Turning to the balance sheet, our June 30th balance sheet remains solid with cash of $345 million, debt of $2.1 billion, and our net debt-to-EBITDA leverage is 2.1 times. We currently have $350 million remaining on our $1.25 billion revolver and we continue to have substantial capacity and flexibility to fund potential acquisitions and share repurchases. Year-to-date, we have repurchased over 10 million shares for approximately $600 million. Our approach to share repurchase continues to be opportunistic and focused on where we can generate significant returns. We have approximately $500 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 $3.62 to $3.72 versus $3.08 last year. Due to first half business performance in line with our expectation, pricing actions taken, progress in our Cabinet pivot, 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. We expect 2018 free cash flow of $500 million to $525 million with a conversion rate of over 90%. The annual EPS outlook includes the following assumptions: interest expense of around $68 million; a tax rate of approximately 25%; and average fully diluted shares of approximately 147 million. In summary, our teams did an excellent job navigating the inflationary environment and have positioned us well for a strong second half. Demand indicators remain strong and we delivered solid sales and earnings despite inflation headwinds and a weather-slowed start to the year. We also 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 for the second quarter of 2018. We will now begin taking a limited number of questions. Since there may be a number of you that would like to ask a question, I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Thank you. Your first question comes from the line of Adam Baumgarten with Macquarie. Adam Baumgarten - Macquarie Capital (USA), Inc.: Hey, guys. Thanks for taking my questions. Just to start, could you give us some more color on what you're seeing in your end markets and some of the actions you've taken that gives you confidence that second half sales growth will pick up and margins will improve? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. I'd start with taking care of our own house. We did a tremendous amount of work first half of the year, second quarter, talked through the actions we've taken in Cabinets, pricing action really across every part of our business, and we're seeing that impact now and we're going to see more of that coming into the second half. We see good demand flowing through the channels. You saw results in terms of growth; Plumbing very strong, Doors strong, and markets look good. I'd say coming out of the first quarter into the second quarter things were a little slow in the Northeast, Midwest, but they started picking up late-April and the whole country is progressing nicely. The West and South continue to be strong. And then, just we look out in terms of overall drivers across the markets. We come in a little later in the building process and there's quite a bit of backlog out there both on new construction as well as R&R contractors, and kitchen and bath designers. They're full and they've got a lot of activity that's going to come through here. So, it's going to be a busy second half. We're well positioned. We did a lot of work in the first six, seven months of the year. So we're feeling pretty good right now just based on the progress and the impact of all the things that we've done. Adam Baumgarten - Macquarie Capital (USA), Inc.: Great. Thanks. And then just switching to Cabinets, can you give some numbers around the annual savings you expect from the restructuring you've done year-to-date? Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: What I would say, Adam, is we expect operating margins for the back half of the year to be about 12% on average across the back half of the year and we expect once we get through this year to be making progress at about 50 basis points to 100 basis points a year from now through 2021. Through the second quarter, specifically, there have been a number of puts and takes. We weren't just taking costs out, we were investing in portions of the business that were growing. So I put the second quarter more in context of some sequential seasonal growth. If you look at the last five years in the Cabinets business, you've tended to see about a 550-basis-point margin step up from Q1 to Q2 based on seasonality and, this year, you're seeing about 850 basis points. And that among the actions we can see in terms of hitting and over-delivering OI forecast on a monthly basis give us the confidence we're on the right track in that business, we'll deliver a strong back half of the year, and we've put ourselves on track for the 14% margin. Adam Baumgarten - Macquarie Capital (USA), Inc.: Great. Thanks.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

Hi. Thanks for taking my questions. I wanted to focus the first one on plumbing and there's clearly a lot of moving pieces on the cost dynamics, both in terms of the inflation that you've incurred versus pricing dynamics, then looking at what could potentially come down the pipe in terms of tariffs, then also seeing things like copper rollover. Could you just help us kind of walk through how you expect all of this to unfold from a price, cost and margin standpoint in Plumbing over the next few quarters? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. I'd go all the way back to third quarter, late third quarter, fourth quarter last year, copper metals rising in the Plumbing business. We saw that coming at us and started taking pricing action in the first half of the year, and that really kind of matched up against what we saw in terms of input cost inflation. And there's a bit of a lag there. So, we've got components coming in, we assemble here in the U.S., and so we were adding value here in the U.S. as well. So there's a piece of it that's tied directly to component inflation and there's a piece of it that's under our own control. And so, we've matched that up. We were aggressive coming out. And I think – and as you can see, our target's 21%, we hit 21%, and that's inclusive of the investments we're making in the business to drive innovation, marketing, branding, data analytics. So there's a lot behind that. So we're in a good cadence. In terms of looking out into the future, metals have backed off a bit. We'll get the benefit of that as we kind of come in, but we're still working through, obviously, inventory that we've got in the system. And in terms of future tariffs, I can't speculate on what those tariffs are going to be and how they're going to unfold. We'll manage it. We'll manage it through a combination of supply chain, as I said, we add content here in the U.S., and through pricing actions. And so, we've been able to address those increased costs through a combination of all those actions to this point. That 21% margin's pretty solid. That's where we expect the balance of the year. So it's right on strategy. So, we're feeling like we have the ability to handle what comes at us and move pieces both in terms of pricing as well as supply chain to address it. So, we're kind of dealing in this uncertainty for a little while already and I think we've navigated it quite successfully.

Yes, certainly. Great. And shifting gears to the combination of Doors and Security. It seems like there's a couple things going on here that you're trying to set up this business for, and one of them seems akin to when you set up GPG and have started to roll in some acquisitions and kind of build out some multi-brand strategies and such underneath that umbrella and, clearly, that's driven some tremendous results. So I was hoping you could give us a little more detail on kind of what you see. I know you laid out some of the long-term financials there, but just what you see as the opportunities both from an organic product development standpoint, a little more detail there. And just seems like maybe there's going to be some increased focus on M&A in that combined segment. And what type of assets are you looking for there? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, terrific observation. I think the parallel is quite strong. First of all, we're taking kind of our two smaller businesses, bringing it under a terrific leader in Brett Finley. You've seen the results in Doors. I don't have to explain kind of how strong he is given his leadership of what was already a great business, and you look at what we've done in the last 2.5 years in terms of share and margin expansion. There is some scale benefit. So we took our two smaller groups, bringing it together, there'll be some scale benefits in a stronger common back office team. That will help accelerate some of the organic product development and really drive some more revenue momentum there. But it also, as you point out, will set up our ability to take on acquisitions and really bring them in house in a more efficient way. We could do it under the old structure, but it's just we've got a bit more leverage. We found that in GPG having kind of that stronger common group has allowed us to bring in a series of those acquisitions and they kind of hit the ground running and now we've combined some capabilities. We are looking at some things in that segment, so some combination of things in that door exterior product and security. There is some crossover in terms of we literally had separate engineering teams working on connected security products through both the door platform as well as portable security, safe security. And so combining that horsepower, that engineering capability is going to bring us some benefit and just allow us to accelerate some of those things, form some partnerships and do some things. So, those worlds were coming together. This should enable what was coming at us in any way. But it'll set up some good future organic and acquisition growth. So, we think it's going to come together nicely. Terrific leadership team, across both those businesses, we've got a lot of talented people. So, we're going to be really bringing together some strong capabilities, and you'll get some scale leverage just by bringing that together. It will be a $1.2 billion segment that compares to Cabinets, which is about $2.5 billion, Plumbing, which is moving toward $2 billion, so you'll have kind of three big healthy, scalable business segments.

That's really helpful color. Thanks, Chris.

Your next question comes from the line of Justin Speer with Zelman.

Hey, guys. Appreciate you taking the time. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure.

Just a follow-up on the combination of the two segments. Can you articulate what kind of maybe revenue and cost synergies you're planning? I know you're mapping towards an intermediate term goal, but in the near term, any kind of synergy that you're going to call out for that combination? Christopher J. Klein - Fortune Brands Home & Security, Inc.: I'd just say it's going to – as we look at kind of how it's going to evolve, putting them together, you'll see running it will be roughly 16% margin business. They have similar margin profiles to start. And it'll get us, on a combined basis, to about 18% operating margin over the next two, three years. So, I'm not going to break out kind of specific leverage within there, but it'll allow us to get to those kind of margin expansion numbers with probably a little bit more certainty and a little bit more speed. And then it'll allow us to bring acquisitions underneath that and leverage that set of capabilities, so you're going to get some synergy in terms of cost leverage on acquisitions, which is exactly what we see in Plumbing, which is you've got a stronger common back platform you can bring things in, in terms of brands and products and ride off of that, and you get some good cost synergies right out of the gate. So it's a combination of all those things.

Thank you. And I wanted to turn my attention or turn everyone's attention to the Plumbing business. You put up a very large first half comp, well above market demand at 12%, double digits, and when you see a 15% comp in the first quarter, it begs the question is there channel fill, is there going to be a pull-ahead risk, but then you put up a 9% in the second quarter and then you characterized it. I think you said channel partners have lower inventories in the quarter. Just help maybe provide context of how you get into the channel, and I understand the inventory situation, but also what's going on with this great growth that you're putting up. Christopher J. Klein - Fortune Brands Home & Security, Inc.: I guess step back and I'll take the first part of it which is just a lot of investment in capabilities. We've got the acquisitions that are working and coming together. That team was significantly enhanced in the first nine, 12 months of forming the GPG back in 2016; and so a lot of that product innovation, branding work, marketing, data analytics. There were investments going on that you're starting to see that impact flowing through. The acquisitions have worked well and they've worked well not just individually but in concert, bringing out the concept of the House of Rohl, which is a combination of those luxury brands. But we're also paving the way into hospitality and project work. And I'd say, you think about the old Moen business, terrific business, big work house of the company, strong profit generator, but it was really at the heart of the market and that was where the brand lived, and you couldn't as significantly penetrate a lot of that project work and hospitality work. Now, we've got greater entrée into those designers and architects and we're starting the conversation to open up the whole suite. So you're seeing a lot of that play through and you continue to see that growing. We're investing. As I've talked about the 21% margin, you could see some margin expansion except for the fact that we're investing for the growth. And so that's a very conscious investment dynamic and margin management so that you're kind of feeding that growth and we've got to make sure we're getting it back or you might see a little bit of that margin expansion. Your second point around inventory, Pat, maybe you can just handle kind of how – you're right and my comment was that there was a little bit of leaning out. So, it didn't go the other way, it went toward a little bit of leaning out and Pat maybe you can talk... Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Justin, on the U.S. and Canada, while we can't see POS and inventory from all of our customers, we can see POS and inventory from our biggest customers with regular frequency and so we can see our POS running at or above sales. And we can see inventory levels on a weeks' basis being very healthy and, in some cases, down below where they would traditionally be. So we feel good that this is underlying POS driven growth. And then we've seen in China very strong growth both from share gains and from product portfolio expansion and the businesses that we've owned for over a year, in particular, Riobel is raging ahead very successfully. So, it's all those things combined that allow us to feel good that this is just strong underlying growth, and it continues beyond the second quarter and it's really part of the third quarter. So we feel good about the second half of the year.

Excellent. Thank you, guys. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Right.

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

Thanks. Good afternoon, everyone. First question I had is, across the earnings season, so far cost inflation and price recovery continues to be one of the central themes. And I believe you said in your prepared remarks that both of these items remain on track with your earlier expectations. And I just wanted to confirm that and kind of, by component, what we've seen predominately with most of the companies is higher-than-expected cost inflation as the years progressed so far, and as a result incremental price increases and price recovery actions. I was curious if you saw that as well in your business in the different raw mats that impact your different segments or if, by contrast, cost inflation kind of remains where you thought it would be a quarter ago and you haven't had to take any incremental pricing actions against that. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. And I'd just say that's something that hit us to start – really started to come at us in the fourth quarter of last year. So, if you think about plywood tariffs and kind of the core brass and some of the Plumbing cost inflations came at us maybe a little sooner than other parts of the building products segment. So we kind of got off on this stuff hard, fast, early, and so we started taking pricing action later in the fourth quarter, in the first quarter, and then, yes, there was some continued acceleration, and so we've had to take incremental. But, I'd say, we worked our way through a chunk of it already and then took some incremental. And it wasn't just pricing, we're also working supply chain and pulling some other levers. So, I don't know specifically what's driving other categories that we're not in, but I'd say, for us, we took it seriously, took it hard, took it early, and worked it and continue to do that, but that's kind I think what's allowed us to, let's say, keep pace. We are going to get more levers in the second half and maybe, Pat, you can give a little bit of the color on that. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Yes. Mike, what we're trying to convey throughout our release and our script in terms of expectations is we knew going into the year, even before some of the inflation came in, additional inflation that came in in the first quarter, that our first half inflation would exceed price and the back half price would exceed inflation. That was in our plan. And while we don't give quarterly guidance, we even signaled at the end of the first quarter call that that would be the circumstance in the second quarter, that inflation would exceed price, and that is certainly what happened. I would give you the context and we usually talk about inflation in terms of EPS. Our plan would have called for inflation in the area of $0.25 to $0.30 for the full year and, most certainly, there's been more inflation, both commodities and logistics, than we expected. It's probably more like $0.45 to $0.50 for the year, and that's in our guidance, but we've taken incremental price. You'll see about 70% of our price come in the back half of the year; our net realized price will come in the back half of the year. And for the back half of the year, we will cover – our run rate will cover inflation and, even for the full year, we still expect to cover inflation with price so the margin by which we cover it will be much tighter. And all this is in our guidance. I think our teams have done a great job monitoring the situation very closely, working with channel partners, and working inside their organizations and, as Chris said, not just to take price, but to pull other levers, whether it's material substitution or other cost savings. But this has been an area where we've been working since the latter part of last year and pretty much on a continual basis through present day with some of the last increases kind of going in at the end of the second quarter and really part of third quarter. Christopher J. Klein - Fortune Brands Home & Security, Inc.: And it's not a – part of what the dialog was back in January and in April on the calls and with investors is we saw this coming; it was in our early numbers, it was in all of our activities, we were working it. And so we maybe just have benefited that some of this stuff hit us in our sectors a little earlier, so we were forced to get on it. But we continue to press all the levers we've got.

I appreciate that and very helpful some incremental color there. I guess, secondly, it seems like most of your businesses, as you've kind of said – stated, are on track, your expectations for the quarter are on track and it feels like that's kind of by segment, you can apply that statement. Just perhaps slightly more granular, but you increased your EPS guidance by a few pennies. You actually lowered your operating cash flow guidance by about $5 million. So just wanted to get a sense of what was driving both of those. I don't know if the EPS was from a share count perspective, if operating it's either – because it would seem like most of your margin expectations are in place by segment. So just trying to get a sense of those two full year guidance changes, albeit slight, what's driving each of them. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Yeah. For the most part, you're correct in understanding the EPS raise is driven by the incremental share repurchase activity. So the incremental share repurchase activity that we've had since the first quarter call would – net of interest expense, would give you about $0.03, maybe $0.04, and so that's what we've put into the guidance. And the midpoint of the guidance went from $3.64 to $3.67, that's the primary driver. The change in the cash flow outlook of roughly about $25 million mostly a tax timing item that has become somewhat uncertain just around some of the new behavior in the treasury; modest change to other operating dynamics, but it's mostly timing of around a tax item. And what I would say on our full year outlook is we still see the market being strong. We still see U.S. housing 5% to 7%, global markets 5% to 6%. We still see our sales growth 6% to 7% as we stated our EPS growth in the range of $3.62 to $3.72. And our OI margin improvement, our initial guidance was roughly 50 basis points, we're probably in the 30 basis points to 50 basis points range just based on some of the inflation with the benefit from the share gains. But that, I would say, should tighten up the guidance for you, Mike.

Great. Thanks so much.

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

Hey, guys. The restructuring effort in Cabinets seems to have progressed quite well. If there were any big hurdles on the operational front, is that pretty much behind you and can you now pivot to focus more on the commercial front so you track more in line with the broader market on Cabinets? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yes. It's a combination of things. I think we have been growing in those segments of the market that we're targeting, so in-stock cabinets, vanities, some parts of the builder business, the value part of the business, the West and the South have been quite strong, so all that is underlying, at the same time, kind of pulling back from some of this mid-tier business, which hasn't been as strong. So, we're down that road. You will see better revenue performance in the second half out of the Cabinet group, and so that is part of what the plan is and is flowing through as we're looking at orders in the first part of the quarter. July orders look strong. So I think you will start to see that flow through very much consistent with what we laid out in May as the overall pivot, which is focusing on those parts of the marketplace that we see growing. Lining up ourselves against that, we've already got a good portion of that business. We're expanding some capacity there and we're expanding some capacity in Mexico in some value parts of our supply chain so that's got very strong leverage. And there's good profitability in those segments of the market. There's more automation, more kind of a cost supply chain or standardization. So we get great leverage in that part of the market. So, yes, you'll see good commercial progress on that side, and then we'll be rolling some additional product out against those growing segments, and that'll be not just back half of this year, but into next year. So we're focused on driving that mid-single digit growth as well as moving the margin up to 14% over the next three years, and we're on track. I'm comfortable. That team has done a tremendous amount of work. When we were shutting plants down back in 2008, 2009, you weren't as concerned about keeping customer service levels high, doing that work and maintaining that front-end of the business. When we're in the kind of market we're in today where there's still a lot of demand out there. We've been fairly methodical in making sure that we keep that service level high. And as we're progressing and moving capacity around that were gently handing off a lot of that service to other parts of our network. So they've done an outstanding job in doing that and we're set up for a good second half, we're set up for a good 2019, but there's a lot more things that they're still moving against, both on supply chain as well as on the front end with product.

That's great and, Chris, you touched upon this a little bit already, but with the potential tariffs, can you talk about the potential impact you could see on your different businesses, whether it's Plumbing or Cabinets and how can you manage that? And does that potentially make your product a bit more competitive relative to imports, particularly on the Cabinet side of things? Thanks. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. I guess things will unfold as they'll unfold. We've dealt with what's come at us already and we've already had some hits in terms of plywood and some steel and other things that have been input costs to us. And we've dealt with that through a combination of pricing and supply chain. And I'd say, in general, from a – we're a big U.S. manufacturer. We're a big North American manufacturer. And so we've got a good North American set of capabilities. We add value in North America, we add value in the U.S., we're a big assembler; we do fully integrated manufacturing in parts of our business. So that works to our advantage across big chunks of the portfolio, especially in Cabinets. I'd say other parts where you've got components coming in, there is a China element to our supply chain and we'll see how that unfolds and we'll react to it as it unfolds. So, beyond that, we've been able to deal with what's come at us in a pretty significant way already and we'll see how this plays out throughout the fall. But I think, relative to those who are making a lot of finished goods in China and shipping them in, we're in a better place because we can move some componentry around and continue to add a lot of value in the U.S. as part of that supply chain. There's also a bit of a lag in terms of how this plays through the businesses. Supply chains coming out of Asia are longer, so you've got a bit of time to react to how they're flowing through.

Your next question comes from the line of Susan Maklari with Credit Suisse. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hello. Susan Maklari - Credit Suisse Securities (USA) LLC: My first question is – yeah, can you hear me? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah, I can hear you. Hi. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. Perfect. My first question is around there's been a lot of talk around the elasticity of demand in building products and, certainly, your results this quarter show that you can continue to get price while keeping the top line pretty healthy. But it'd be great to get your perspective on that. How do you think about your – looking out, your pricing power and ability to continue to cover some of the inflation that could come through? Christopher J. Klein - Fortune Brands Home & Security, Inc.: I think it depends on the parts of our business. I'd start by saying we're leaders in our category, we've got strong brands, we've got strong positions in our markets, and so we're already in that strong leadership position. I think then you can move through the categories. I think, in Plumbing, you've got really strong brand position, a lot of innovation coming through, and so we can take price and we have taken price. It isn't unlimited. I think there is a point where you'll get pushback to the channels, which is why you've got to be also working supply chain in concert with that and you've got to be deliberate and take a little bit along the way as opposed to just taking big bites all at once. And so that's what we've been trying to do across that business. I think in the Door market, there's an interesting dynamic between steel and fiberglass and we're much bigger in fiberglass. We do have a steel product line as well, but there there's a crossover point when steel rises and you have to price that up to the bottom end of fiberglass. Given a choice between the bottom end of fiberglass and the high end of steel, both builders, contractors and consumers would prefer the fiberglass' better performance. If you close that gap a little tighter then it carries over and you're seeing more growth in the fiberglass side of the portfolio. So that's an elasticity phenomenon that actually works to our advantage. Across cabinetry, you've seen kind of the middle part of the market and we talked about the pivot, and that's really kind of some elasticity in the middle part of the market with some demand growing in the value semi-custom and more of the stock part of that market. At the high end of the market, there's still a good premium part of that market, and we're taking price across that continuum, but I'd say the consumer behavior is disfavoring that middle part. But, on the other two parts of the portfolio, we've taken price across cabinets all the way from the in-stock product all the way up through premium, but again, you take it kind of in increment across that. And then in our Security part of the market, again, strong brand, Master Lock. We've taken it both on the retail and commercial side. And so it's not unlimited what you can take there, but we've taken what we need to take to offset those input costs. So I'd say, if you've got strong brand, strong market positions, you're in good place to take it, I think you've got to be deliberate about it and you've got to work it on all sides, and that's what we've been doing up to this point. And then we'll keep taking what comes at us and deal with it in a very similar way. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. That's very helpful. And then, obviously, you've been pretty aggressive on the share repurchase side in the first half of this year. You also mentioned that there's a pretty healthy M&A pipeline that you have. How are you thinking about the uses of cash as we think about the back half of this year and then maybe even into early next year? Christopher J. Klein - Fortune Brands Home & Security, Inc.: I think they both are good uses of cash and capital. I'm happy with our repurchases up to this point this year. I think if we continue to see opportunity, we have capacity for another $500 million there. So that is still a possibility on that side. We're looking at acquisitions and, in the midst of looking at things, want to make sure that its good value. So we're looking at high-quality businesses and making sure that we can buy them at what are reasonable prices and we're looking at a number of different things. So I'm hopeful that that equation works. And so I'd kind of be looking at both simultaneously and looking for us to continue to use capital in the second half of the year and into 2019. We've got good strong cash coming out of the businesses that we've got. We're moving aggressively in terms of repositioning actions when we've got to take them. And so, we've got a good operating set of folks leading that side of the business. So I'm comfortable with our cash flow and our ability to take on the levers that we need to create incremental value. Susan Maklari - Credit Suisse Securities (USA) LLC: Got you. Okay. Thank you. Good luck. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you.

Unfortunately, we have run out of time for questions. We thank you for your participation in today's conference call. You may now disconnect.