Good morning. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Fourth Quarter 2019 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.I would now like to hand the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin your conference call.

Good afternoon, everyone and welcome to the Fortune Brands Home & Security Fourth Quarter and Year-End 2019 Investor Conference Call and Webcast. 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 a 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 unless otherwise specified.With me on the call today are Nick Fink, our Chief Executive Officer; and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we've allowed some time to address questions that you may have.I will now turn the call over to Nick.

Thank you, Brian and thanks to everyone for joining us today. In the fourth quarter, our teams continued to execute against our growth strategies. We delivered solid results as sales grew 4% and we continued to improve overall operating margin. I am particularly proud of our team's performance during the year. In 2019, we experienced a housing market that grew slower than planned as well as a variety of other external pressures most significantly higher tariffs. We overcame these challenges and delivered solid performance showing that we can execute well in a challenging environment.As we enter 2020, with the backdrop of a strengthening housing market and a more stable trade and tariff environment, I'm excited about our prospects as we continue to outperform the market and make the long-term investments to position our portfolio to continued growth and improving margins.Each of our segments is well positioned to grow in 2020 and we continue to allocate resources and capital to capture our highest return opportunities. Coordinated efforts across our supply chain, legal and pricing teams continue to work to optimize performance and mitigate the effects of tariffs. We will continue to focus on our cost structure through supply chain, manufacturing footprint optimization and other initiatives like indirect spending to better improve margins and our financial performance in 2020 and beyond.I'm also extremely proud to note that our strict emphasis on safety resulted in record low recordable incidents and continued low loss time rates investing in the safety and wellness of our people, so that they can return home in the same or better shape than they arrived is a top priority. It is engraved in our values, our culture and our strategy.We are honored by the recognition and accolades that we have received for our environmental, social and governance efforts this…

Thanks, Nick. As a reminder, the majority of my comments will focus on income before charges and gains in order to best reflect ongoing business performance.Let me start with our fourth quarter results. Sales were $1.47 billion, up 4% from a year ago. Consolidated operating income for the quarter was $207 million, up 15% or $26 million compared to the same quarter last year. Total company operating margin was 14.1%, up 140 basis points over the same quarter last year.EPS were $1 for the quarter, up 16% versus $0.86 for the same quarter last year. We remain pleased by our team's continued ability to grow sales and earnings during a period of softer market growth, the persistence of a challenging trade environment and while navigating significant supply chain transitions in a number of our businesses.Now let me provide more color on our segment results, beginning with Plumbing. Sales for the fourth quarter were $548 million, up $60 million or 12%. Continued strong double-digit growth driven by results in China and the U.S., which powered through the continued market weakness in Canada and Mexico.Plumbing operating income increased 9% to $119 million for the current quarter. Operating income for the full year was $436 million, an increase of 10% over 2018. Operating margin for the quarter was 21.7%, an excellent result driven by cost discipline and sales growth leverage. For the full year Plumbing operating margins came in at 21.5%.Full year 2019 sales crossed $2 billion for the first time up 8% versus 2018 up 9% adjusting for FX. We concluded our fourth straight year of strong growth and over 21% margins. Our strategies are clearly working and we expect another strong year for Plumbing in 2020.Doors & Security sales for the fourth quarter were $331 million up $24 million or 8%…

Thanks, Pat. That concludes our prepared remarks on the fourth quarter and full year of 2019. We will now begin taking a limited number of questions. [Operator Instructions]I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Thank you. [Operator Instructions] Your first question comes from Justin Speer with Zelman & Associates. Your line is open.

Thanks guys. Appreciate it. I wanted to start with Cabinets. Just looking at that growth there? I know it was muddled by the 53rd week last year. But with what you're seeing with anti-dumping duties, curious what you're seeing on the ground real-time and how you think your book of business will grow relative to the market in light of what you're seeing with the antidumping duties and the impact on Chinese imports?

Hey, Justin. I'll start with -- if you take a step back from that start -- there's no question there is a ton of demand for value price point cabinetry. We saw that come through frankly throughout the whole year, particularly strong in the fourth quarter. And in December, I mean, plus 18% for orders for that part of the marketplace.So, you take that as a backdrop. We have the product suite that's well set against that. We're putting in capacity to serve that. And then as you look to the anti-dumping countervailing duties to the extent that materializes or materializes even quicker than we would anticipate, I think that's an additional demand tailwind.So, as you think about it, I mean it's been a healthy -- a very, very healthy part of the business even prior to these anti-dumping duties coming into effect. And now as we see them come into effect, there's a potential tailwind.As we said before, there was a very big inventory hangover that needs to work its way through the system. Our estimation is that's probably coming out around now as we head into Q1 and beyond. But if you look -- if you step back and you look at our overall plan, we're projecting 4% to 6% growth for the segment. That's a pretty significant departure away from what's been call it flat to down over the last couple of years.And even as a category inclusive of subsidizing ports, we would have estimated that we're in the 2% to 3% range. And so, we are seeing it come through. We've got a significant amount, I'd say, baked into the year. But beyond that, it's going to take a couple of years for the kind of capacity to be built in to service that part of the market, with the quality and service that our customers expect of us, if we were to size that.Now we would guess that's probably $200 million to $300 million incremental opportunity that -- for our business at the part of the business that we want to go after with, the margin structure we want to go after then we fully intend as we continue to roll out these products and put in the capacity to go get that business.

Excellent. And then, just one follow-up question for Plumbing. The growth there has been really special. And I wanted to maybe get some context, if you can unpack that growth for us by your regions or core markets and really help us understand what's going on in China. It's been a really good growth there. But what you're doing there? And how much runway you have in that growth initiative?

Okay. Well, I'll give you some high-level views, and then I'll turn it over to Pat. He can give you some specifics. I'd say first, if you step back you look at a quarter like Q4 lights-out performance you look at a year like 2019 in a 9% ex-FX in what was a slow market. So, I'd say thank you for the compliment really solid performance and to put up that kind of performance it really has to come across the whole portfolio. So you do have a business that has really been firing on all cylinders. The way they're going about that I'd say is, twofold; one has been a really strong focus on reenergizing the core Moen business. So that is the Moen brand in the U.S. market and really powering that through the twin engines of brand building and innovation.Now on the brand building front, we rolled out about a year now our hero for beautiful water campaign. And we're seeing market improvement across all spectrums of brand health, awareness, loyalty purchase intent and it's driving share gains. And as we mentioned in the remarks particularly with our targeted demographic which is the entry-level homebuyer particularly millennial-aged adults.And so that is a really important part. And we didn't start with weak brand to begin with. We started with the strong brands. And so -- I really commend the teams' willingness to kind of disrupt themselves and drive performance there. You take that brand building and then you couple it with some of the innovation that you might have seen at KBIS and the consumer-relevant innovation that we're bringing which is not only helping -- so our share gains is helping drive reappraisal of the brand.And so those are two really powerful pillars that are helping drive the…

No I would build on the comments around sustainable profitable growth I think Justin our expectation on the market in China. So the overall market is 5% or less. So we're expecting the economy inclusive of the housing economy to slowdown in China. But a lot of the strength of our growth has been through category expansion by getting into product lines that we're not into in NAFTA things like sanitary ware and our market share of sanitary ware in China is less than 1%.And so while we would fully expect the Chinese market to moderate there's two things that we feel still remain in our favor there is: one the Chinese government does rely on housing for its overall GDP growth. So we think it's going to moderate but not crater in the near term.And then second, we have a lot of growth from category expansion to go. And so we're managing our business in China just like we do here in the U.S. in the broader NAFTA region which is sustainable profitable growth and we expect that of the team on the ground in China and they've delivered very well against that.

Thank you.

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

Hey guys. Your 4% to 6% sales guidance for cabinets that's pretty impressive a sharp reacceleration. Just curious if you could unpack for us if you've layered any pricing and help us understand how many points of growth you've laid in for the tariff dynamic we're taking share in? And remind us like how much of your business in cabinets is tied in new construction?

Pat, do you want to...

Yes I would say when -- first I'll reference 2019. So you look at full year 2019 which adjusting for the 53rd week is a roughly flat year. You were seeing in any -- we have multiple value price point product offerings. You're seeing mid single digit to high single-digit growth for pre-existing brands.Obviously things that are new like Mantra are growing off of a new base, so growing rapidly but off of a new base.We would expect next year that, all of our entry price point brands which are quickly becoming over 50% of our business. They finished 2019 at -- in the high 40% of our business, but probably be in the 50% to 55% of our business next year.We're going to expect them to be growing in the high-single to low double-digit range, across a range of product lines that service that market. And we're going to expect the rest of the business to be towards flat.And that -- there is some improvement in that as well, we've been pulling back from certain parts of the higher price point business. And we've also seen some stability of semi-custom in the dealer channel not perfect stability yet.So that's our outlook. And we would expect a lot of that growth above the market. Because you're thinking of a 4% to 6% housing market, when you're talking value price point brands growing roughly double that.That is in part on the China import situation. But it's just also in part on consumers and tradespeople continuing to shift, towards value price point products, whether they were using imports or not previously.

Got it, okay. That's really helpful. Sorry.

You're really starting to see the effect of the pivot. And the balance of the portfolio as it's -- as the growing part which has been growing really well for a while, it's just become the majority of the portfolio. You just have to balance that to bounce forward towards growth.And yes as Pat referenced those trends of kind of accelerated value price point and more stabilized dealer semi-custom, we saw that towards the end of the year. And so as that plays through, you just get a much better growth mix.

Got it, that's helpful. And from a growth and performance standpoint, great to see Doors & Security bounce back. Help us understand the key drivers for what you're targeting for 2020. Certainly the Door side of things, levered to new construction?Are you starting to see that part of the business reaccelerate and some of the operational and tariff dynamics on your security side, is it pretty much behind you. And we should expect that part of the business to kind of reaccelerate from a growth standpoint and profitability standpoint? Thanks.

Okay. Let me – okay, I'll take those in parts. And then, I'll hand it to Pat for a little bit more color. I'd say if you step back from Doors and Security, I would start with a lot of growth that we expect to come out of Fiberon. So we're very, very focused on the expansion of the Fiberon opportunity.And as a reminder, the main opportunity there is against what that's 80% of the market. And as we go in there we saw the strong consumer brand against kind of unbranded wood. And put the expansion into our bicoastal footprint.And again it's our new distribution gains. We expect a fair amount of growth to come out of that business. That started to go in and -- at the end of last year, as we start to shift towards our distribution gains. And I'd say that, it was tracking ahead of expectations.And so, we feel very good about the Fiberon opportunity. And now we've talked to you on that in a bit more detail. If you go over to Doors, Doors from a POS perspective actually performed really well, in the fourth quarter. We had some inventory rebalancing inside of retail.We're -- believe we're through that now. And then, we do expect as you point out to see some acceleration on the wholesale side with exposure to new construction there. And inventory was fairly lean throughout the year. And so, that is a nice opportunity as we're through that rebalancing.And then, security yes, through the operational challenges associated with that kind of product platform change that we did -- saw the big bounce back in margin which is really healthy and then some nice performance coming through. And so, that will be much more post that just kind of back to good execution mode.

Yeah. I mean so all the businesses grew both in the quarter and the year. And I think as you look -- that's referencing 2019, obviously. As you look into 2020, as Nick referenced, we would expect decking to grow roughly mid-teens or better.We would expect Doors to move with the U.S., new construction and R&R market it's probably 60-plus percent new construction. So it's going to be in the mid-single digits and it will travel higher than that. If the labor is available, because it certainly seems like there's new construction demand and that's really strong. And then we would expect our security business to be in the low to mid-single digits, depending on the mix of business. But all businesses grew in the quarter and the year. The issues that challenged us at the end of 2018 security are long behind us and the team is very focused on both growth and margin expansion across all the business units.

That’s great color. Thanks a lot.

Your next question comes from Timothy Wojs with Baird. Your line is open.

Hey, guys good afternoon.

Hey, Tim.

Maybe just on Cabinets. Maybe if you could give us just a little bit of an update on where you feel you are from a capacity standpoint particularly on the semi-custom business. So I think that that business has maybe undershot your expectations in 2019? And it seems like you're seeing a little bit of a recovery there. So just kind of curious when you think you can align some of the capacity there for more of a flat to flattish type market

Yeah, I would estimate we'll be through that by the end of 2020. So there's still some work to do. Most of the work has been done the team has put a lot of gains that I think now we're probably in the final stretches, but expect a bit more to come out as we just rebalance it and make it more efficient. And it's not -- it wasn't just as simple as taking a bit out.The route to doing that was a big amount of work against creating a network that was far more flexible across all of our nodes than you historically have seen in the cabinet business. And so as we come out of the backside, it's really about having a more effective footprint I think is the way to think about it probably, more variable ability to drive across different areas of it. And so if growth were to come through that we would have the flexibility to address it. But we'd start out from a much better cost position.If I estimate by the end of the year we're probably through that. I'd say it's been phasing accelerating with Dave Banyard's leadership in there and really pressing on both accelerators of getting through that -- the semi-custom rebalancing as well as putting in more capacity on the value and stock side of the business where we're seeing such growth.

Okay, okay. That's helpful. And then just on Plumbing just the overall growth guide for 2020. So you guys did close to 9%, which is great in 2019. And you're guiding more to a slowdown there I guess in 2020 despite seeing faster new construction I think that business tends to be overweight in new constructions. So could you just, kind of, true us up on why exactly that would be happening? Or why is it exactly we see a deceleration?

Yeah, Tim we call that the Plumbing business in total has a healthy chunk call it two-thirds or thereabouts that is R&R. And even within that R&R it has just a pure replace component that is a bit unique to plumbing versus the rest of our home products business. And so we have -- we're expecting a modest R&R acceleration. They don't call it 3.5% plus or minus half a percentage point and pure replace tends to trail below that and then we're moderating China a bit. And so I think it's nothing more than the mix of a U.S. housing market that we expect to be in -- somewhere in the 4% to 6% range and beat that and then have China be in the teens or thereabouts.

Okay, okay. Sounds good, Appreciate the color guys. Good luck on 2020.

Thank you.

Thank you.

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

Thanks. Good afternoon, everyone.

Hi, Michael.

First question I had was on how you're thinking about capital deployment this year and next. Obviously you guys have always taken a pretty balanced approach between -- after the necessary CapEx, balancing it between bolt-on opportunities or acquisitions and share repurchase.With the strong free cash flow generation expected just trying to get a sense of number one, how you see the M&A backdrop today in terms of the opportunity set in front of you? Is it greater or lesser than it's been? And maybe talk about valuations a little bit. And if that remains a little quieter this year if we could expect an acceleration of share repurchase?

Sure. I'd be happy to talk about that. And so just again the priorities we've always been consistent and very clear. First and foremost, we do look for opportunities within the business. Those are our highest returns. And we have some really nice things that we're investing behind that are going to drive good growth. And then next, we go to target an M&A and it's accretive. And to the extent beyond that we look to return excess capital to the shareholders. And so that's kind of our clear priority in that order.If you look within M&A specifically, our priorities are going to remain within Plumbing and Outdoor Living. But we are also always evaluating other branded higher margin opportunities where we feel that we could drive incremental value by leveraging the FBHS model into them and Fiberon is a great example of that. We had a model and a playbook that we thought we could bring to it. We had an asset in a route to market system through Therma-Tru that was best-in-class. And so bringing the brand building capability the route to market capability again is something like that. That's allowed us to drive a lot of value and give it for our shareholders.And so that's how we're thinking about opportunities. Specifically with respect to flow, M&A was slow in 2019. I think there's no question. And as should be expected I think in a year where the housing market was slower sellers probably cinched the year working their businesses and driving to better performance. I'm not going to get into the business of trying to predict whether things get done or not, but if I'm to measure it by the level of activity, I would say for sure that activity has increased and we're definitely seeing increased inbounds that our team is working on.And so it does feel that as we're coming into this strengthening housing market there is increased activity in M&A and you can just sort of play out probability against that. That said, you touched on valuations as well. We will stay disciplined. We've got a good track record for being disciplined and we will be disciplined. And against high valuations, we're really going to focus on the quality of synergies and the quality of value creation that we can bring and hold the bar high on that.With respect to buybacks, we do run our model against the stock and against our plan and what we expect our plan to deliver in terms of value accretion for shareholders and tend to look opportunistically to buy stock as we have in the past. In 2019, we spent about $100 million. And our stock is still undervalued. There's a way to go. And so as we kind of balance out those opportunities, we'll be testing the value against what we know to be our value creation as we go along.

Great. Thank you very much. I appreciate all those comments. I guess for my second question, I just wanted to revisit cabinets for a moment, obviously, a big transition over the last couple of years. And the comments you made around the new management team continuing to accelerate some of the transition work that you're doing. I just wanted to get a little bit of perspective in terms of perhaps what inning you think we're in, in terms of that transition? Because obviously we've heard a lot of the restructuring and the capacity shifts have been ongoing now for perhaps 18 months or so.So just trying to get a sense of where we are in that process? How much further you think we need to go? Because obviously that also comes along with it maybe a little bit higher or temporary areas of expense or disruption or inefficiency and would there be another step function improvement let's say if we're still getting through that this year another step function improvement and profitability to expect in 2021?

Sure. I'd start by saying I think we're in the later innings of the pivot in U.S., it's been going on for a long time and it has been monumental. Shifting this footprint to the extent we've shifted it. I think the outcomes of the fruit that's bearing off of that is the kind of growth that we're expecting in 2020.And so if you think about -- we've had to make the change to get to a point where our footprint supports that kind of growth. That would indicate to me that we're in the later stages of the pivot. And come to a point where in 2020, we're indicating 4% to 6% growth with meaningful margin progress.No, we're not done, but a lot of the changes are well underway. And now we're starting to see the benefits.Now you look a little bit even within Q4, and we're encouraged by seeing really, really strong orders at that value price point where we're putting in the last piece of plus 18% for December and seeing stabilized semi-custom orders in Q4 in our dealer channel against that semi-custom business. And then you look to the margin performance within that and Pat touched on this that we saw some temporary inefficiency as we ramped more Mexico capacity. And you're right. I mean it is very hard to do and you experience inefficiency along the way.We're now through that and we're seeing the solid margin progress that we expected to see not coming through the business, as we're through it end of December and into January. And so just another good proof point to us that as we round the corner on the pivot and starts to look for that kind of growth and margin accretion we have the business pointed in the right way, we have the capacity where we need it and we're starting to get the performance out of it.And so there is work to do. We will continue to rebalance in the customer activity working really, really hard to put in more value price point capacity. And with the growth rates, we're seeing we're going to have to add capacity there. But I believe in 2020, you're going to see the benefit of the work that's been done over the last 18 months come through from both the top line and a margin perspective.

Great. Thanks very much.

Sure.

Your next question comes from Susan Maklari with Goldman Sachs. Your line is open.

Thank you. Good evening.

Hi. Susan.

My first question is just can you talk a little bit to the raw material environment that you are seeing as we go into 2020, how that's kind of baked into some of these margins in some of the margin guidance you've given us? And how we should be thinking about it coming through over the course of the year?

Yeah. So for -- I'll start with 2019 and I'll go to 2020 to put them both in perspective. So 2019, I'd say total inflation commodities tariffs logistics was about $80 million, $85 million in total a little more than 2% of cost of goods sold. And of that $80 million, $85 million about $50-ish million was tariffs.As we look into 2020 and we look at inflation again looking at those same three components we would see full year inflation in the $40 million to $50 million range. So roughly 1% of COGS and about $10 million of that is logistics. And so in terms of inflation it's about half the rate that we saw in 2019 and we'll offset it with supply chain and where necessary price.Tariffs a bit more, I'd say, a complicated element in the sense that what things are falling off versus coming on. So I kind of put tariffs into a non-inflationary discussion they were about $50 million in total in 2019, they'll be about $55 million in total to the P&L in 2020, but that is with again certain things falling off new things annualizing and some things coming off the balance sheet.So I think of tariffs less of an inflation driver and more of a year-over-year almost flat dynamic we're dealing with. We will exit the year with some tariff favorability as some of the balance sheet stuff comes off in the first half of the year. But you shouldn't see a margin profile cadence throughout the year that is driven by any real specific inflationary or tariff dynamic. None of them are big enough relative to the supply chain and pricing actions in the quarter.And most of what's driving the 2019 result and the 2020 result in terms of tariffs are different board product and other hardwood product glass and logistics much more so than metals.

Okay. That's very helpful. Thank you. And then to follow-up You mentioned in your remarks Nick that there is upside to this guide and to your results this year depending on how things move obviously with all the initiatives you have going on as well as the macro. But as you kind of look across the business and the opportunity set and the things that you are doing, where do you see the most opportunity? Where could we expect the most upside in there? And how do you think about that coming through?

Well, I'll take a step back and for starters, I look at almost 2019 is the proof point right – I couldn't be prouder of our team's performance in 2019. Frankly, it was a year we came into – ended up with a softer market than we anticipated and all sorts of stuff coming at us. And the business outperformed the market, right. It solidly outperformed the market. We got some margin accretion. And so if you take that kind of momentum and you place it against our assumptions for 2020, what we've done in 2020 is we built a plan that will outperform the market. And I would take that as the starting point.Now, we've made assumptions around what we think the market will do. We're seeing some really encouraging figures from builders. We have to assume a rate at which that activity is going to convert from builder order books into permits starts and then our orders. We see R&R and we see demand for housing, we see a really favorable interest rate environment on mortgages we've got to make a – we've made some, I'd say, fairly prudent assumptions about the rate at which R&R could improve over the course of the year.And then we put around at a plan in which we go, well, we're going to beat that market. So the underlying premise is to the extent that that market turns out to be better we expect to still have market outperformance and that's where we'll see upside and that upside would place us towards the high end of our guidance and that's conceptually how we think about it.Now, where would that come through? Well, new construction is an area, which we've made a set of assumptions to the extent that builders are able to get labor conversion in foster or productivity of labor out. There could be some upside there, if R&R strengthens or in another area is if the antidumping countervailing duties have an even foster effect on our Cabinets business than we've anticipated. All of those are areas for opportunity. If you look then how that plays out against the portfolio, one thing that's really nice about our portfolio is we've got this balanced exposure to that R&R market about two-thirds of the portfolio, but we've got some really nice exposure to the new construction market. And the way, we work it is in a slow year like 2019, we'll manage expenses very tightly to still deliver a good year for shareholders. But in a year with some market tailwind as we expect 2020 to be we really hope to enjoy that exposure to the new construction. And that plays out to varying degrees, but it plays out throughout the portfolio. And so I think if you look at Plumbing Doors Decking, I mean, all of those and of course Cabinets are exposed to some of that new construction tailwind.

And that's all the time that we have for questions. I return the call back to the presenters for any closing remarks. Thank you for joining today’s conference call. You may now disconnect.