Fortune Brands Innovations, Inc. (FBIN) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Third Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin your conference call. Brian C. Lantz - Fortune Brands Home & Security, Inc.: Good afternoon, everyone, and welcome to the Fortune Brands Home & Security Quarterly Investor Conference Call and Webcast. We're pleased to be here today to provide an update on our progress during the third 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 our market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filing 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 their prepared remarks, we've allowed some time to address questions that you may have. I will now turn the call over to Chris. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Thank you, Brian, and thanks to everyone for joining us today. Our teams managed to grow sales and EPS in the third quarter, despite the summer and early fall market that was slower than expected and the impact of Hurricane Florence on our North Carolina operations. The market's been growing at a slower pace since July and running at the lower end of our planning range. There's more moderate growth period, it's not unlike other pauses that we've seen throughout this recovery as buyers, sellers and renters adjust to changes in affordability in local markets around the country. Even with this market moderation, consumer demand for our Home & Security products continues to be solid overall. R&R, which accounts for about two-thirds of our business, remained stable at mid-single digit growth rate for the eighth consecutive year. Additionally, our Plumbing and Doors momentum continues to be strong and the disciplined actions that we've taken all year on price and supply chain to offset inflationary pressures are having a greater effect. So, despite the more uncertain environment and third quarter results that are not as we expected, we continues to execute aggressively against our plans. We are managing costs tightly, adjusting supply chains to address inflation and tariffs, launching new products and getting price. Even with significant headwinds and inflationary pressures, our sales and margin are holding in advance of further actions we are taking to improve each business. We're adjusting our full-year guidance down to reflect our third quarter results, the impact of our recent acquisition and bond financing, and an assumption of market growth that is at the bottom end of our range for the balance of the year. Let me first take you through our view of the U.S. home products market. Next, I'll provide my perspective on our business performance in the third quarter and the effect of tariffs on our business. Pat will then provide more details on our third quarter performance and the 2018 outlook. Starting with our view of the U.S. home products market, growth rates in the market for our home products moderated during the summer and early fall, particularly relating to single family new construction as consumers adjusted expectations on interest rates and price against a limited supply of housing. In the quarter, we estimate repair and remodel activity grew at about 5%, and new construction grew at about 6% to 7%, reflecting the low end of our full-year expectation. Our updated 2018 annual outlook is based on revised assumption that the U.S. home products market grows at a combined rate of 5% for the year versus our initial estimate of 5% to 7%, which is still solid growth even at a more moderate rate. Also, the fundamental drivers of our market, which include employment, wage growth, household formations and consumer confidence, all continue to remain positive. Before getting into the details on the quarter, let me provide some additional high-level thoughts on our current view. One, while the market is moderating some, particularly in single family new construction, we do not see a housing downturn or recession in 2019. Two, as we exit the third quarter, we are now fully covering commodity and freight inflation. Three, tariffs are not trivial, but they are manageable. And four, we expect our Cabinet business to return to sales growth and margin expansion in 2019 following a tremendous amount of activity to restructure and reposition the business in 2018. With that, let me now provide some perspective on our business performance. In the third quarter, sales increased 2.4% in total or 4% excluding the impact of the hurricane, and total company operating margin came in at 13.8%, or 14.5% excluding the hurricane. Hurricane Florence hit our Plumbing operations hard at the end of the quarter and led to eight-lost shipping days as our main Moen assembly plant for the U.S. is in New Bern, North Carolina, and our component warehouse is in Kinston, North Carolina. The effect is to push some sales from Q3 to Q4. Across the company, we have a number of operations in North Carolina. Although our manufacturing facilities missed some third quarter production time, they are all up and running, having suffered only minimal damage during the storm. The largest impact on our company was to our associates, as a number of them were displaced from their homes or had to navigate flooding. As part of our recovery effort, we partnered with Team Rubicon, a volunteer disaster recovery organization and hundreds of our associates contributed to raise nearly $60,000 in relief funding to support their fellow employees and neighbors in North Carolina. All of our facilities are back to normal staffing across multiple shifts and weekends. We are recovering shipments and have already moved through much of the backlog created by the storm. Turning to the segments, beginning with Plumbing, we continue to outperform the market with our GPG strategy. Excluding the hurricane, our sales rose over 9%, and our operating margin came in at nearly 22%. Organic sales growth was 7%, excluding the impact of the hurricane. Results in both our core businesses and new platforms continue to be outstanding, and we are actively working to enhance the platform by investing in brand, talent and products. For example, we recently repositioned the Moen brand in the U.S. by launching our new 'who designs for water campaign'. The new ads are off to a strong start, and we've seen positive consumer response. On the product front, innovation continues to pay off as 25% of sales are now coming from products introduced in the last three years. Modern styles and innovative finishes are driving solid growth across price points, brands and channels. The pace of innovation across all of our brands is significantly higher. So in Plumbing, we're having a very strong year despite inflationary headwinds and are carrying good momentum into 2019. Continued strong POS in the high-single digit range drove our third quarter growth. Inventory levels continued to run lean in both wholesale and retail channels, and Plumbing operating margin continues to be on target, even with significant inflation in 2018. We will continue to position our Plumbing business for above-market growth consistent with our strategy. In Doors & Security, our performance accelerated overall as we continued to see strong door growth with wholesale builder wins and the continued contribution of new retail R&R programs launched earlier this year. In Security, in interim production challenge affected sales and margin at Master Lock for the quarter. As the launch of our newly upgraded ball bearing laminate lock was the largest launch in our history and stressed capacity at the same time we saw stronger commercial sales activity. As we exited the third quarter, the production bottlenecks have been addressed, and volumes and margins are improving. Our newly combined Doors & Security leadership team has improved execution since it was put in place last June, and these manufacturing challenges are mostly behind us as the world-class (9:12) approach is taking hold in the combined business. The expansion into outdoor living with our acquisition and integration at Fiberon is going well, and through the first month of ownership, we've moved quickly on plans to capture synergies in 2019. We are on track to deliver $0.05 to $0.06 accretion in 2019, and $0.09 to $0.10 in 2020, including financing costs associated with the acquisition. The more we get into the business, the more excited we become regarding the potential of this acquisition. Importantly, the integration of the Doors & Security units and the formation of consolidated back office is progressing as expected, which should set up a strong 2019 with continued sales growth and margin progression across the segment. Moving on to Cabinets, when adjusting for the business exits, our sales grew 1% and operating margin was 11%, excluding the hurricane impact on our Kinston plant. While we have deliberately ceded some share overall in Cabinets this year with some business exits, we are focused on winning in the segments of the market that offer us more consistent profitable growth. Throughout the year, we've been realigning capacity and product lines with margin improving sequentially quarter-over-quarter, even as input costs rose more than anticipated. Sales volumes are solid in the targeted segments despite lower than expected second half market growth. As proof points in the third quarter that our strategy is on track, we delivered 11% margin ex-hurricane, while growing in segments of the market that we are targeting. For example, sales of in-stock cabinets and vanities continued to be strong and grew low double-digits in those accounts. Sales of stock cabinetry products across builder direct and dealer continued to be very good and rose high single digits in the quarter. And while sales of semi-custom cabinets declined, our margins are improving as we focus on attractive parts of this market, tighten the cost structure and balance capacity for these products and capture pricing to offset inflation and tariffs. We expect all the restructuring and repositioning activity in 2018 will position us to resume annual margin expansion beginning in the first quarter of next year. On the revenue side, we are focused on growing profitably in the simpler, cleaner styles and finishes that permeate the market. I'm confident that we will return to mid-single digit growth in 2019 as our dealer, home seller and builder relationships remain strong and we've coupled products that are selling well today with the launch of new value oriented products that leverage our unique North American supply chain capabilities. At the Investor event in February, you'll hear more about our reoriented Cabinet platform and our long-term expectations for the newly positioned Cabinet business. So to recap the third quarter, since the July call, we've experienced the impact of a significant hurricane on our North Carolina operations, continued strong inflation, and more moderate home products market growth. Despite these headwinds, we made excellent progress on price and supply chain versus these rising costs. We also took important strategic steps to position us well for 2019. I'm very encouraged with the progress that we've made in the quarter on our cabinets pivot plan; the new product introductions and brand positioning in our Plumbing business; the continued integration and operational improvement of our new Doors & Security unit; and the acquisition and integration of the Fiberon composite decking business. As we look into 2019, we are still positive on the market. We see a stable R&R market and a more modest but positive new construction market. We'll detail our outlook for 2019 early next year with the Investor event in Boston on February 6. Given all the changes we've made to our businesses, coupled with some uncertainty in the current market environment, we wanted to hold this event and have a candid discussion with you about how we're positioned against the market going forward and provide an opportunity for you to meet more members of our strong leadership team who are driving these businesses. Before I wrap up, I want to address a topic on which we've received a number of questions lately, the impact of tariffs on our businesses. In the fourth quarter, we estimate modest impact in the tariffs, roughly $2 million to $3 million, which is included in our revised guidance. More will come in 2019 if we move to the 25% tariff level. However to give you some sense of the total impact, even at 25%, the total impact across our businesses amounts to roughly half of the $90 million in commodity and freight inflation we have already absorbed in 2018. So on order of magnitude basis, the tariffs are significant but manageable. And you have seen us successfully navigate 2018 inflation with aggressive supply chain and pricing actions. Given the current trade dialog, we've already begun aggressively working supply chains and our pricing strategies to recover from a 25% tariff scenario, albeit with a quarter or two lag into 2019. Once we manage through the initial impact, we actually see potential upside for us from the tariffs, given our competitive positions. Considering we are very well-positioned in plumbing versus private label as well as other branded competitors since we assemble the majority of our finished goods in the U.S., and many plumbing components used in the U.S. assembly have been excluded from the section 301 tariffs. Also in Doors & Security, we own a door component facility in Mexico. And for security products, we have a very large North American footprint that should advantage us relative to others in Asia. Finally in Cabinets, Commerce Department clarity on the enforcement of the 200% plywood tariff on flat pack products coupled with a 25% tariff on components is likely to hit Chinese import competition harder as we move into 2019. Our U.S. and Mexico operations could have a distinct advantage over the importers going forward, which is also aligned with the spirit of the trade policy. To advantage large U.S. manufacturers like ourselves, the significant number of employees, sales and taxes paid in the United States. All of our capacity rebalancing over the last year will take advantage of our unique North American supply chain. Now let me review our capital deployment and our broader plan to create long-term incremental value. In the quarter, we closed the acquisition of Fiberon for $470 million and year-to-date we have repurchased over 11 million shares for approximately $650 million. Our approach to share repurchase continues to be opportunistic and focused on where we can generate significant returns. We have approximately $450 million remaining on our current share repurchase authorization. The team continues to work on a robust pipeline of potential acquisition opportunities and we'll provide further commentary as developments occur. This year, we've deployed over a billion dollars and, as a reminder, over the next three years we continue to believe we have the power to deploy more than $3 billion to make strategic acquisitions, repurchase additional shares and increase our dividend to create meaningful incremental shareholder value. So in summary, while we've revised our 2018 outlook down to reflect a softer market, we feel good about our performance this year, given the headwinds, and expect strong execution in the fourth quarter. We also have confidence in the steps we have taken to set up each part of the business to accelerate our performance in 2019, and our broader plan to drive value over the next three years which you'll hear more about at our event in Boston in early February. 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 operations. Starting with our third quarter results, sales were $1.4 billion, up 2.4% from a year ago. Hurricane Florence caused approximately $22 million in shipment delays, which impacted growth by 160 basis points in the quarter. The storm impacted our Plumbing and Cabinet groups, we expect to recover these sales within the fourth quarter. Consolidated operating income for the quarter was $191 million, down 5% or $9 million compared to the same quarter last year. The hurricane was at $13 million headwind to operating income, though similar to sales most is expected to be recovered in the fourth quarter. Total company operating margin of 13.8%, or 14.5% excluding the hurricane was still below our expectations, driven by lower volume due to a softer market and the temporary inefficiencies in our Security operations. EPS were $0.93 in the quarter versus $0.83 the same quarter last year, an increase of 12%. We estimate approximately $0.07 of EPS headwind in the quarter due to the hurricane. The result is below the Street and our own expectation; however, the execution of our plans continues to be solid. Price is now covering commodity and freight inflation and we have been addressing the current and future tariff scenarios, which we expect to manage effectively as we have inflation during 2018. We see a number of positives in our business, including our Plumbing and Doors performance, which continues to produce above-market growth and deliver on margin expectations and the progress in our Cabinet business, which is driving the anticipated fixed cost structure changes and it's pivoting more of our capacity towards the higher growth parts of the market. We expect to finish 2018 on a positive note in the fourth quarter, even with a slightly slower housing market. Now, let me provide more color on segment results. Beginning with Plumbing, sales for the third quarter were $462 million, up $23 million or 5%. Sales adjusting for the hurricane were up 9% as our Global Plumbing Group strategy is driving above-market growth with high single-digit POS. Our organic sales continue to outpace the market, as sales excluding acquisitions and hurricanes were up 7%. Plumbing operating income was down $4 million to $94 million, with an operating margin of 20.3%. Adjusting for the $11 million hurricane impact to operating income, margins were 21.8%. Year-to-date, hurricane-adjusted Plumbing operating margin is at 21.1%, a clear indication of our ability to maintain margin, despite significant inflation and a slower market. For the full-year, we expect sales growth approaching 11%, with over 8% organic growth and margins of approximately 21%. Doors & Security sales increased 8%, driven by continued strong double-digit sales growth of our Therma-Tru doors, partially offset by a lower single-digit sales decline in Master Lock due to the temporary inefficiencies in our Security operations. Operating margin was 16.1%. Fiberon deal costs and the operating inefficiencies in Security weighed on margins relative to the prior-year, but we expect these issues to be transitory. For the full-year, we expect sales growth for the combined business approaching 11%, and operating margin between 14% and 15% compared to a prior expectation of above 15%. In Cabinets, sales for the third quarter were $599 million, down $15 million or 2% versus the prior-year quarter. Excluding business exits, Cabinet sales were up 1%. Sales of in-stock cabinets and vanities grew low double-digits on continued solid demand for these products, excluding the exit of U.S. home center business. Builder sales were up high single-digits and rebounded from the weather slowed start to the year. Dealer sales increased 1% and saw high single-digit sales growth in the south and west regions of the country. Home center special order sales were down as we continue to promote at a level below that of our competitors. Cabinet operating income in the quarter was $65 million, down 7% and operating margin was 10.8%, or 11% adjusting for the hurricane. Operating margin continues to improve each quarter versus the prior-year. And in the fourth quarter, we expect operating margin to be equal to or better than that of the prior-year. In the fourth quarter, prices now covering inflation, sales of in-stock cabinets and vanities and stock cabinets are expected to remain strong, and we expect better semi-custom performance as we refine our promotional strategy. For the full-year, we expect reported sales to be down 1% to 2%, or flat to up 1% adjusting for the exits. And we expect operating margin in the range of 10%. In Cabinets, a year of transition was expected, but the market was weaker than anticipated. Execution of fixed cost structure reductions were on plan and being pursued expediently, our in-stock and stock product lines continue to grow strongly, and we continue to make progress in expanding the shares of these product lines, while also leveraging our supply chain scale to improve the cost competitiveness of our mid-price semi-custom product lines. To sum up consolidated third quarter performance, sales increased 2.4% and EPS were $0.93. Despite the results below our expectations, we are positioned for a solid fourth quarter and a strong 2019. Our Plumbing and Doors teams continue to outperform the industry and we are realizing greater benefits from the Cabinet pivot. Importantly, we have taken the pricing and strategic steps necessary to deliver improvement during the fourth quarter and to accelerate growth in 2019. Now turning to the balance sheet. Our September 30 balance sheet remains solid with cash of $390 million, debt of $2.5 billion and our net debt to EBITDA leverage is at 2.5 times. We currently have $750 million remaining on our $1.25 billion revolver and we continue to have substantial capacity and flexibility to fund incremental capital deployment opportunities. Year-to-date, we have deployed over $1.1 billion, $470 million for Fiberon and approximately $650 million to repurchase over 11 million shares. Our approach to share repurchases continues to be opportunistic and focused on where we can generate significant returns. We have approximately $450 million remaining on our current share repurchase authorization. Turning last to the details of our outlook for 2018. As Chris mentioned, we are adjusting our 2018 EPS outlook to the range of $3.41 to $3.49 versus the prior guide of $3.62 to $3.72, and versus $3.08 last year. Driven primarily by lower volume due to a softer market and the temporary inefficiencies in our Security operation. Fiberon is also marginally dilutive to the fourth quarter, given the fourth quarter decking, seasonality, deal cost and incremental financing. The financing will cost us approximately $0.03 in 2018, but the ability to lock in a 4% interest rate on a five-year $600 million bond, before underlying treasury rates inflected over the last month will provide attractive financing going forward. We expect Fiberon to be accretive in 2019 and beyond. We expect full-year net sales growth of 5% to 6%, with free cash flow of approximately $460 million and a conversion rate of over 90%. This cash flow expectation reflects our forecast adjustment and modest inventory builds due to pre-tariffs inventory purchases. The annual EPS outlook includes the following assumptions. Interest expense of around $75 million, a tax rate of 25%, and average fully diluted shares of approximately 147 million. In summary, our teams have positioned us well for improved fourth quarter and a strong 2019. Fundamental drivers of housing market demand remained strong, specifically housing formations, employment and wage growth. Our teams are doing an excellent job navigating inflation, tariffs and a slower than expected market. We remain well-positioned to use our balance sheet and cash flow to drive incremental shareholder value through acquisitions, share repurchases 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 third quarter of 2018. We will now begin taking a limited number of questions. Since there may be a number of you 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. And your first question comes from the line of Dennis McGill from Zelman & Associates. Your line is open.

Hi guys. Thanks for taking the question. First one for you, Pat, I think you touched on all of these, but I just wanted to clarify, to make sure we've got the moving pieces correctly. When you look at the $0.22 reduction in guidance, can you just walk through the pieces again? I think you hit almost all of them there, but it'd be helpful to have them all at one time. Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Yeah, I would say, there's some the smaller pieces to get those out of the way first, I'd say, $0.01 hurricane, $0.01 tariffs, $0.03 Fiberon, so that's $0.05. And then the balance is market and security with about 75%, 80% of that being market and the rest being security inefficiencies.

Okay. Got it. That's helpful. And then, Chris, big picture when you thought about how the outlook for the rest of this year and how you're setting plans for 2019, I think you said most of the reduction in the outlook was on the new residential side. Can you just talk through what you're seeing now, whether that's in backlog or conversations with customers or what's just anticipated on your behalf versus from things that you're seeing in the marketplace? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. I think sitting here 90 days ago in August, you're ahead of the fall season, and really starting later August and into September, we saw some builder weakness coming through on wholesale, and a little bit of R&R. R&R held up pretty well. But it wasn't as robust on the bigger ticket side of that market. So, as we look at the balance of the year, 5% R&R still feels good and I think looking into 2019 that's a pretty stable number. The real volatility is more on the new construction side, single-family new construction. We had assumed beginning of the year that that was high single-digit up to 10%, now it feels more like mid. And I'd say going into next year, that's probably about what we'll have. We'll have better look by the end of the year and we'll see where orders start to build. But I don't think that based on just around the country market-by-market, the discussions that we're having they're certainly price-pressure, interest rate pressure, in parts of the country, and I think it's easy to call out those parts of the country, but there are a lot of other places where the affordability level, in general, is still pretty good. Entry level, in general, is more stressed. But the broader market is still reasonably affordable, especially in comparison to rental rates. So, it feels like a slowdown, but it's more of a pause, maybe similar to summer of 2014, as you remember kind of as we move through the initial, there was an interest rate pop and it settled back and set up a pretty good 2015. I'd say for planning purposes, we're going to be straight up the middle in 2019, and say, okay, kind of modest mid-single new construction. But I see, just a lot of the fundamentals are still in place driving the new construction market. All the household formation, employment data, wage increases, disposable income, household wealth, those are all still kind of fundamental building blocks that are in place. And on the R&R side, you just look at the age of the housing stock, look at all those homes that we built in the late 1990s, early 2000s coming into the 15-16 year mark, when significant R&R starts to take place. So, all those factors are still in place. And so, I'd say we're pretty balanced in our view, softer second-half this year, but we're looking for a pretty good 2019 and all the work that we're doing is going to have a really strong effect in 2019. So, to be candid, that's why we decided to meet on this Investor event in February to kind of lay all this out, to say, hey, here's a range of where we say the year is, but look at these three businesses that we've got, and all the things that we've done to position these business for the market that we see, and we're pretty excited about where 2019 can be.

And your next question comes from the line of Susan Maklari from Credit Suisse. Your line is open. Susan Maklari - Credit Suisse Securities (USA) LLC: Thank you. My first question is around some of the pricing initiatives. Obviously, it sounds like you're continuing to see success there, but I guess have you seen anything change, as you think about some of your more recent initiatives relative to the ones you've put in maybe more at the beginning of this year or last year? And how are you thinking about the trade-off between some of the price versus the volume, just given what we are seeing in the market? Christopher J. Klein - Fortune Brands Home & Security, Inc.: So, I think, philosophically, we've been consistent in taking bites out of it over time. So rather than wait and take bigger increases, we've been more frequent in taking smaller increases more regularly. So, we started this time last year as we saw on the Cabinet side, plywood tariffs come in, as steel and aluminum came in beginning of this year. We initiated pricing actions. And really through the year, I mean, we took pricing actions in August. And we took recent pricing actions that are going to kick in in several of our businesses in November. And so, being deliberate and not shocking the system has worked quite well for us. As we're trying to offset initially commodities, and now as we look at tariffs, it's a combination of pricing and the supply chain actions we can take and working our supply chain so that we're moving out of where tariffs are going to hit and being pretty aggressive in thinking about how to leverage our own capabilities. And we've got big operation in Mexico across all of our businesses, so there's all those levers we're pulling. So, as we're looking at this, we're not thinking, we have to go recover everything in price. Having said that, as we're looking out at next year, commodities stabilizing, wages still ticking up a little, but the tariff issue is, for us not as big as an issue as what we just took on in 2018. So, it's in proportion about half or less than half of what we just covered off on in 2018. So, the combination of supply chain and these incremental prices, we're pretty comfortable we'll cover off on it. There's a lag on pricing. You put pricing in and then it kind of flows through, but we're comfortable because of the success we've had over the last four quarters or five quarters. And our approach is really playing through. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. That's very helpful. And then, in terms of Plumbing, you're obviously continuing to see success there. And with the rate of organic growth that's coming through, as you kind of look out there, and clearly you've been able to get into some slightly different end-markets and price-points and all those kinds of things, can you just give us some color on what you've seen in terms of those different areas of the business. Are there certain areas that have may become off more or other areas that are holding up better? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. I think, you look across, we've got kind of a core retail business, core wholesale and builder business and then with our acquisitions, we've enhanced the showroom and some of the hospitality side of the market. And then, we're also moving into some exposure into some adjacent markets as well. And I'd say, across the waterfront we're seeing success. So, across retail, it's really about product innovation, we keep bringing them more products, it's about branding and marketing and our e-commerce efforts and so those continues to go well. On the wholesale side, we've worked to refresh showrooms. We worked closely with builders and so in proportion we feel good about the share gains that were taken there. So, even as I said earlier, even in a more modest new construction market, we're gaining share in that market. Bigger builders are gaining share and we have a big percentage of the top builders that we service there. So, as they continue to outpace the market, we continue to do well. And then on the higher end of the markets, both luxury as well as hospitality side of the market we talked about that, that we're building a strong pipeline coming into 2019 on a lot of project work and so that's driving a lot of that effort. And then lastly our business across China is actually doing pretty well this year. So, that's expanded from more adjacencies in that market, moving beyond just faucets and showers and sinks into full-room solutions focused primarily on bathrooms, but that effort is having pretty good success in that market overall. So, I'd say, it's a multi-front effort that continues to have success. The team is strong and quarter-over-quarter they keep delivering and we're focused on margin there too. So, we've taken price where we've seen the opportunity to cover off on the inflation and obviously the approach we take into 2019.

And your next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.

Good afternoon. Thanks for taking my questions. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi.

Hi. My first question, just going back to the two questions on cost. The first one on tariffs and Pat I think you mentioned in your remarks that part of the free cash flow guide coming in is due to some working cap adjustments as you build inventory ahead of that. I think Chris has alluded to tariffs being roughly a $45 million impact, if the full $25 million goes into effect. I was hoping you could give us a little more color on what you were doing on the inventory side, and is that something that helps to offset some of the $45 million early in the year, or is that $45 million net of some of the adjustments you guys are making between that and other internal initiatives? Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: The inventory stuff we're doing is very modest, single-digit millions, most of the free cash flow adjustment was driven by our income adjustment that you saw on the EPS, probably 85%, 90% or more of it. And that $45 million is roughly, a net of those inventory actions. That's kind of what we're sitting at.

Okay. Thanks. And my second question is kind of related, but just overall context of costs, when we think about those tariffs, I think some comments saying that some commodities may stabilize, and we've seen that as well, but just as you're planning your 2019, and what you're doing around pricing, what is the kind of net effect cumulatively of raw material inflation and tariffs that you're planning for in 2019? Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: Well, we're not giving 2019 guidance yet, but I'll put some things into some context. One is, this year, 2018, our total cost of goods sold will be around $3.5 billion. So, if you had took our COGS base this year and you put it up against a worst case scenario of tariffs, the full-year at 25%, you're talking something that's barely over 1% of our total COGS base or something that's under 100 basis points of our net sales. So, certainly nothing we trivialize, because we're very returns and margin-focused, but something that is very, very manageable. As we look into 2019, most of our major commodity buckets, especially things relating to brass and steel have stabilized or declined. So for most of our major commodity-spend we're feeling like, unless there's some environmental change we're at tailwinds, about what we're expecting for next year, we'll focus on whatever plays out with tariffs, which we're preparing to deal with whatever comes our way. And we'll do it with supply chain and price, not just price. And then, we do expect ground freight inflation in the U.S. to persist, but that was something on the order of, call it, less than $10 million this year. So, these are things again we don't trivialize them, because we pride ourselves on being margin leaders. But we certainly feel that these are manageable relative to the 90-ish-million-dollar of commodity and freight and inflation we managed in 2018.

And your next question comes from the line of Steven Kim from Evercore ISI. Your line is open.

Hey guys. This is actually Trey on for Steve. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Hi.

I want to touch on your comment on Doors and Security first. You mentioned how you expect operating margins for the year to be 14% to 15%, and it really sounds like at that point your expecting margins in the fourth quarter to be below where they were in the third quarter and maybe even flattish year-over-year, which sounds like the headwind from Security is going to linger. So, I was wondering, if you could talk a little bit about how long you expect that those issues to kind of linger through the system? Patrick D. Hallinan - Fortune Brands Home & Security, Inc.: We expect to be through the operational inefficiencies by the end of this year. The leadership team there has gotten their arms around the problem. We have some new ops leaders in that business, and we'll finish the year with some of the inefficiencies lingering into the fourth quarter, as you're pointing out, but we should be through them as we go into next year. And that's a business that we still expect to take to 17%-plus over our strap planning horizon. Both of those businesses, Doors and Securities were on that trajectory before we combine them, and we certainly expect to keep them on that trajectory. Christopher J. Klein - Fortune Brands Home & Security, Inc.: And Fiberon is in that same profile, Fiberon will bring sales in the fourth quarter, but not a lot of margin addition because it's a softer period, it's a seasonal business, but Fiberon will be a part of that mix that'll drive it from mid-teens to high-teens or in margins that'll be a nice addition.

And then looking at the Cabinets business, I know you said you're adjusting for the exit of some of your home center in Canada. You expect the year to be flattish to slightly up. What confidence do you have or what leverage do you think you can pull to expect volume growth to resume next year, is that something that you're not really looking for at this point? Christopher J. Klein - Fortune Brands Home & Security, Inc.: No, we're looking for mid single-digit growth in Cabinets next year. Full stop. Absolutely. So, we reposition that business around the growing parts of the market, which are already performing at a mid to high single-digits lever, and we backed out of parts of the market that we're performing on a negative side and then we're launching new products into the market, that are at the values and the custom side of the marketplace through our, a lot of that sort of dealer channels and some through home centers. So, the combination of all those things, we will have the confidence against the exit will be out, so the business exits will be out by year-end. And then the underlying growth that we've already seen across our businesses, where we have in-stock and vanity growing double-digits. We've got the stock business growing mid to high single digits on the builders' side. The dealer channel was up this quarter, across the board, so the underlying strength of the business is already performing in there, and by calling out the poor performing parts of the business you're going to see both the margin and the sales side come through. So, we've got a high degree of confidence, because of the plan. We started working this plan summer fall of 2017, we started talking about it in February, and detailing the actions that we're going to take. We've taken out two semi-custom plants, which is not insignificant from a cost standpoint leverage point, to balance capacity there. We exited the third home center, we've got strong relationships with the largest too, but the third home center was not performing to the place that we would have liked to see that. We exited business in Canada. And so, we're actually really excited about the progress we've made this year on the Cabinet side. We're going to be very clear about our outlook in 2019. And our Investor Day in February, we're going to highlight, here's the new platform, here's where the growth has already been coming from, and here's where we're going to see more growth, and this will return to a predictable business with attractive margins.

And your next question comes from the line of Matthew Bouley from Barclays. Your line is open.

Hi. Thanks for taking my questions. Just wanted to follow-up on some of the Fiberon commentary. Just now that the deal is closed, have you found any kind of potential further areas of synergy, whether on the cost or revenue side now that you've been able to kind of take a closer look at it? Thank you. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. So, it's only been like four or five weeks, but we got in there quick, on the cost side, we talked a bit about the fact that the input into composite decking requires wood flour, sawdust, and we happen to own a large cabinet operation that throws off a lot of that. And so that is going to progress pretty quickly. Those are the cost synergies that we've got across the business that we're pursuing as well. On the revenue side, we've talked about the opportunity to leverage the Therma-Tru distribution and a lot of those discussions are going well, we're kind of out of the gates on pretty quickly on that. And so, as we've gotten together it's been everything we thought it would be. It's really an extension of Therma-Tru, I think that's the way you're going to see it play-through, we've been in advanced materials, composite materials for a long time with Therma-Tru, and a lot of this is kind of engineered product, and as those teams come together, they're all talking same language. Similar on the distribution side, both home center and through and our broader Therma-Tru distribution lumberyards, two-step, there's a high degree of overlap there, so it's a very comfortable integration. I think about it as an extension of what we've been in within Therma-Tru, so it doesn't feel like a fourth or fifth leg, it feels like a natural, those two businesses come together. Operationally, outstanding, great team, and the teams are working really well together, speak the same language. So when you do an acquisition, you walk in and you're like, I think I know what I'm getting into and you hope that it's exactly what you hoped for. It's actually turned out early on to be even better than what we thought and the teams are working well together.

That's helpful. Thank you for that. And then just following up on Cabinets, beyond the next couple quarters, when you're talking about repositioning to the growthier categories here, how do you think about balancing that versus the potential for different categories to be more attractive at different points through cycle. Thinking longer term. I guess, really how nimble can you be going forward post this repositioning around adapting to different areas of different kind of growthier areas of the market? Thank you. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Growth areas of the market within cabinets, or growth areas of the market within building products in general?

I'm speaking specifically about Cabinets. Thank you. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Yeah. We've got a broad portfolio. So, if you look at where we participate in the Cabinets industry, we touch everything from the bottom end of in-stock it might be an $80 or $70 cabinet or vanity, all the way up to luxury at the top end a couple thousand dollars and you could build yourself $150,000 with our premium cabinets. And so what we really try to focus on is where there's some more sustained weakness in the semi-custom part of the market and where the market has moved either to the value side or continues to stay up in the premium side. So that middle part of the market is where that weakness has been. And so, we've taken capacity out. We still participate in that part of the market, and so we've – I'd say right-sized it and are pushing more in the parts of the market that are growing. But we can move to where the demand moves over time. I'd say where we sit today you've got a lot of consumer appetite for painted product, for simple color schemes, white, gray, neutral tones. We saw that that was the trend five years ago in the premium end of the market and that has moved more into the main market. What is the price or the style palette today up in the premium market is not simple whites and grays painted. There's a lot more exotic looks, textured patterns, and more sophisticated cabinets. That will move its way into the main market. We'll probably achieve that five years from now through a lot of laminate product and take our (49:55) product and make it replicate a lot of those more exotic looks. So I think our ability to play across that spectrum we retain, but we're not sitting and waiting around for the middle part of the market in semi-custom to come back. We're focused on returns. We're focused on driving earnings creating more predictability in that business. And so, 2019 we're going to show up and grow, and deliver margin expansion. But to your point we're going to retain the ability to continue to evolve where that market evolves, and address where the consumer is going to be. So, I feel good about it. Leveraging, in hindsight, leveraging our supply chain with advantages down in Mexico, was absolutely the right thing to do. It was right thing to do as we were working on this a year ago. But as you look at the tariff regime, and everything coming in through China, it's even more competitively advantaged relative to the rest of the marketplace. And I get pretty excited thinking about the supply chain that we've got there and the ability to leverage that across what's going on with everybody else scrambling to figure out what they're going to do without China and we're already positioned really well to succeed in 2019 with China tariffs coming in on everybody else. So, I think it could be a pretty good year in 2019 and then out the next three or four years, and the Cabinet business is going to be strong.

Your next question comes from the line of Doug Clark from Goldman Sachs. Your line is open. Doug Clark - Goldman Sachs & Co. LLC: Hey. Thanks a lot for taking my question. I do want to come back to the tariff piece, just because I want to understand the decomposition of the pricing pieces versus the supply chain management piece. So first of all is your expectation that if 25% tariffs go into effect at the beginning of 2019, you would immediately offset that or there would be a time lag between the remedies taken and the cost burden? Christopher J. Klein - Fortune Brands Home & Security, Inc.: So, we're already working on actions on the supply chain to move out even more significantly out of things that would be impacted by tariffs. We were quite successful in working with the Commerce Department on the Plumbing side, on Plumbing components that come into our assembly facility. We assemble more faucets than anybody else in the market. We retain a large North American assembly operation, so we work the Commerce Department to say you want to keep U.S. jobs? You should advantage guys like us, who do all that assembly work here in the U.S. and it worked. So, they eliminated a lot of those components out of there. We had already worked hard on the Cabinet side, as I just addressed to move stuff out of China. We continue to work on that. To the extent we had door components, we're moving more of that into Mexico and our own operation. So, that has all started and has been underway really in earnest starting this summer and into the fall. On the pricing side, we've also started targeted actions. And so, we're already trying to work through that, so action is happening now – with some stuff but all of our reads coming out of the Commerce Department is that we should count on 25%. Everybody is spending 25%. Longer term, we think it does help us. We're better positioned than most of our competitors across our markets with our North American supply chains and so should be a good thing. Doug Clark - Goldman Sachs & Co. LLC: That was helpful. And then you mentioned during the prepared remarks that there's still a fairly robust pipeline in terms of the M&A, I just want to get a little bit more of a nuance to view as to what your appetite looks like today, kind of post the Fiberon acquisition a bit of an elevated debt leverage structure and that in the context of your plans to grow Plumbing through acquisitions over time? Christopher J. Klein - Fortune Brands Home & Security, Inc.: Sure. So, we continue to be active in working on a number of the situations. I'd say from a leverage standpoint, we throw up a lot of cash so we'll continue to do that, and you'll see us delever as the year unfolds next year. So, we don't feel constrained today as we sit here, we still have a strong interest on the Plumbing side, we're in the midst of some things on the acquisition side as well as the partnership side and we'll be talking more about that when we get together in February, in Boston we'll talk about some of the partnerships we've done in Plumbing, and that's going to extend us into some categories that we're planning today, but will be much bigger in there. So, we're looking at acquisitions, we still have an appetite, we're obviously not cavalier, I think we deployed a lot of capital this year, shared repurchases as well as Fiberon, we're pleased with what we've done, the refinancing, the bond deal we did, at a 4% coupon on $600 million was terrific, and it was a good time to be doing that. So, we could be active in looking at that, and I'd say looking into 2019 you'll see us deploy more capital.

And your last question comes from the line of Keith Hughes from SunTrust. Your line is open.

Yeah. I'm sorry. Just one more question on the tariffs. So, you said a lot of things on tariffs in the call. The amount that you could be impacted is 25%, is it primarily on cabinet to components, or are there other areas of the business where that's going to be impacted. Sounds like Plumbing is not nearly as much. Christopher J. Klein - Fortune Brands Home & Security, Inc.: Cabinet and Plumbing obviously are two biggest businesses, most of that proportionally, and so there's the other things we've done already within Plumbing to get things excluded so then what remains we're working with a supply chains. Some of our suppliers actually have facilities outside of China, so we can move with them into other markets that won't be impacted by tariffs and then we're looking at other suppliers. Similar to cabinetry, we've moved stuff out already, we continue to move things out, and then there's a little bit in our other businesses as well. So, there's a little bit in Security componentry that's coming out for our locks business, some componentry in Doors, so we're just working all sides of that. But the two big ones would be our two biggest businesses.

Thank you.

Thank you for joining today's the Fortune Brands third quarter 2018 results. Good-bye. That concludes our conference call for today. You may now disconnect.