Good afternoon. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' Fourth Quarter 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin your conference call..

Good afternoon everyone and welcome to the Fortune Brands Home & Security quarterly investor call and webcast. We're pleased to be here today to provide an update on our progress during the fourth quarter of 2017 and provide our 2018 guidance. Hopefully, everyone has had a chance to review the news release issued earlier.

The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and our market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.

These risks are detailed in our various filings with the SEC such as our Annual Report on 10-K. The Company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

Any references to operating income, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis for continuing operations, with the exception of cash flow, unless otherwise specified. With me on the call today are Chris Klein, our Chief Executive Officer; and Pat Hallinan, our Chief Financial Officer.

Following our prepared remarks, we've allowed some time to address questions that you may have. I will now turn the call over to Chris..

Thank you, Brian, and thanks to everyone for joining us today. In the fourth quarter, sales growth accelerated across our businesses and it was led by Plumbing. Demand for our Home & Security products continues to be solid and our teams again drove strong operating margins across all segments.

For the full year, we continue to execute on our strategy of disciplined profitable growth as we increase earnings per share double digits. Sales grew 6% and our operating margins increased to 13.7%. Our teams again grew sales and margins simultaneously.

The margin improvement delivered during 2017 keeps us squarely on track to achieve 15% operating margins when the housing market returns to steady state levels over the next few years. In addition, we delivered incremental growth during the year, we spent a 140 million on the two plumbing acquisitions of Shaws of England and Victoria and Albert.

We purchased $215 million of our shares and again increased our quarterly dividend. All in all our teams have continued to execute at a high level against our strategy and we are performing well in the market that continues to recover gradually.

Our product and brand positioning remains strong and the momentum we have built sets us up for continued success in 2018. Let me first take you through our fourth quarter results and my thoughts on our full year performance in 2017. Then I will discuss our view of the U.S.

home products market, our 2018 outlook for sales and EPS growth, and our thoughts on capital allocation. And finally, I'll share a view on the impact of the recently passed tax reform legislation on our company.

Beginning with the quarter, overall sales increased to 6% with some storm-related weakness in October transitioning to strength as we moved into November and December. Operating margin performance was solid increasing to 13.5% with margin expanding across our home segments.

Turning first to the plumbing segment, plumbing sales were 10% in the quarter and with organic growth of 9% we continue to outpace the market. This was an especially strong performance against our 19% growth rate in the fourth quarter of last year.

The growth was driven by broad based strength in our core markets as consumers responded to our new marketing and accelerated pace of product innovation, strength in new adjacent categories including disposals in all of our markets and sanitary ware in China, and the successful integration and performance of the four acquisitions that were completed over the last 18 months.

As a reminder, the Global Plumbing Group was formed in the summer of 2016 and the strategy began to prove itself throughout 2017. The power of this platform to create value through accelerating organic growth and expanding incremental growth is already starting to show.

The Fuller product and brand portfolio, we now offer in plumbing combined with our well established distribution strength and leverage across North America and China is taking hold.

We're driving growth in new and existing sales channels including showrooms, hospitality and online, and the new team structures accelerated growth in our core mowing business as well. On the backend, we're leveraging share procurement, engineering, product development and overhead to drive efficiency and cost savings.

In short, the GPG has delivered on our high expectations in the first 18 months. Going forward, we'll continue to enhance our capabilities, products and talents while remaining active in looking for incremental acquisition of partnership opportunities. Importantly, we continue to believe we are on track to reach 2.5 billion in plumbing sales by 2020.

Turning next to Doors, sales were up 6% for the quarter. The doors team delivered another quarter of strong performance and overcame the headwinds associated with severe weather early in the quarter.

Wholesale growth was driven by share gains and new construction where the furniture brand continues to resonate in large home builders and industry leading door distributors. Retail door sales also continued to be a terrific story in the quarter.

Our new product and display investments have resulted in sustained share gains and additional store placements. As a result, retail sales have come in above expectations throughout 2017 just by significant inventory placements associated with new product launches in the prior year.

We have strong momentum in doors moving to 2018 and plan to invest more in this business, which Pat will discuss in a little more detail there. In the Security segment, sales increased 4% for the quarter. High single digit increases in Master Lock U.S.

retail and double digit increases in safety and international drove the growth and offset the exit of a commercial product line we announced last quarter. Safe sales were also up double digits in the quarter as we’re less constrained by our own capacity following the successful integration of our SentrySafe manufacturing facility.

Security business continues to post strong operating margin overall driven by the manufacturing consolidation and an improving mix. As we move forward, we see enhanced opportunity in 2018 to increase sales across commercial, retail and international markets with continued margin improvement.

For our Cabinet segment, sales were up 4% in the quarter, slightly above the cabinet market which we believe is currently growing at about 3% overall.

Similar to recent quarters, sales of in-stock cabinets and vanities were stronger than the overall market, growing low double-digit as we continue to gain share with our product innovation and our sophisticated supply chain and logistics models that support the unique needs of the largest home centers.

This part of market also benefits from low project complexity and strong value for price product lines. Sales in our largest channel dealer were up low single digit in the quarter. Our new construction lines performed well and the premium into the market was positive again, reversing negative trends we saw earlier in the year.

The middle of the market remains sluggish and our dealers continue to face constraints in their access to enough installers in many markets around the country. The balance of our cabinets business which includes builder direct, home centers special order in Canada grew mid single digit.

Strong new construction demand in builder direct drove solid growth in the quarter and builder sales increased to high single digit.

Builder direct business continues to generate strong sales and margin growth, as we continue to be precise in terms of where we focus, we are evaluating spending our footprint into areas where we can achieve profitable growth. Canada was down low single-digit, but up low single digit when adjusting for some exited business.

Looking past the quarter, our overall cabinets business, it's clearly we have some parts of the business that are performing very well.

These include simpler project offering at lower price points across our in-stock cabinet and vanity lines as well as higher price points in custom lines and dealer where we continue to invest in innovation, customer service and technology. And larger contractor remodelers are having more success securing trade labor.

The new construction builder market also remains robust across both builder direct and through our dealers. However, some parts of the cabinet market remained softer, notably the middle of markets semi-custom cabinet business continues to be constrained in many places across channels.

As we have done in the past, we are addressing these market opportunities and constraints ahead on. We are making targeted capital investments in parts of the cabinet market that are growing to increase capacity, innovation and service to support to growth.

In the middle of market semi-custom, we are taking things up and allocating our capacity against our best dealer in home center opportunities as we go deeper with important customer in markets that are grown and had labor available.

On the margin, we will also backing away from targeted pieces of less attractive business to help us to continue to improve our mix from a margin and growth perspective. We have also initiated some pricing actions to offset tariffs with commodity labor inflation. We will see the benefit of these actions as the year unfolds.

So overall for cabinets, sales growth in the quarter was solid and slightly above the market and at good margins. As we look forward, we see growth in 2018 for our cabinets business in the mid single digit, inclusive of the market dynamics we see, share gains we are experiencing and select exits of U.S.

and Canadian business that is also attractive to us going forward. Margins were also continued to expand as pricing actions began to cover inflation and we actively allocate our capacity and product innovation toward our most attractive opportunities. Turning to the full year, in 2017, we executed well against our strategy of profitable growth.

We delivered solid sales, earnings and margin results that continue to reflect health consumer demand for our Home & Security products and our continued commitment to disciplined profitable growth.

It's also a strong performance in the face of continued labor constraints the return to an inflationary environment, severe hurricanes and uncertainty on trade and tax policy throughout much of the year. In the full-year 2017, we grew sale by 6%, earnings by double-digits and increased the total company operating margin to 13.7%.

Importantly, inside of each business, we made significant progress on our strategies to enhance our sustainable competitive advantages and achieve profitable growth.

In plumbing, we proved out our GPG strategy and added to the power of the platform to drive accelerated organic and incremental growth, while maintaining the strong operating margins for this segment.

In doors, our share gain performance gave us a broader platform to build upon and our 2018 plan now includes significant investments to accelerate growth further. Our doors business produced solid operating margin improvement during 2017 rising by over a 150 basis points and we expect the continued solid margin improvement in 2018.

In security, our core business grew solid mid-single digits and full-year operating margin improved to nearly 15%. We have additional growth opportunities with new product introductions across our markets.

And in cabinets, we stay disciplined and focused on profitable growth while navigating a heavier promotional environment, continued trade labor constraints and new plywood tariff and elevated demand from low price points and simpler projects.

With our focused strategic approach, we continue to grow sales and profit despite the challenging market backdrop and some changes in mix, and we remain committed to leveraging our industry leadership. Now let me turn to our full-year outlook for 2018, starting with our view of the U.S. home products market.

Our 2018 annual outlook has built on an assumption that U.S. home products market which impacts roughly 75% of our sales grows at a 5% to 7% rate similar to last year's market growth with favorable housing market demand drivers and demographics.

Within that overall assumption, we anticipate that the pace of repair and model demand in 2018 grows at a rate of 5% similar to 2017. New home construction is assumed to grow at high-single digits in 2018. Single family is expected to continue to grow faster than multifamily and single family entry level activities expected to remain strong.

Our total global market which includes assumptions for the U.S. market as well as other international and security markets is expected to grow at a combined 5% to 6% for 2018.

Based on that total global market assumption continued, share gains plus our recent funding acquisitions, we expect solid top line growth for 2018 with our full-year sales increasing 6% to 7% over 2017.

With this markets sales growth, our teams are focused on delivering full-year EPS before charges and gains in the range of $3.54 to $3.66 which includes the favorable impact of tax reform. So overall our 2018 outlook is based on reasonable market growth assumptions based on the basket of indicators we amount there.

We will continue to execute on our growth strategy and I feel good about the winning momentum that are teams are carrying into the year. On top of improving sales and earnings organically across our portfolio, we also deployed capital in value creating ways in 2017 as we completed the two plumbing acquisitions.

We purchased shares and again increased our quarterly dividend. We continue to focus on creating meaningful incremental shareholder value by using our strong free cash flow and balance sheet to make strategic acquisitions and return capital to shareholders.

Our acquisition pipeline continues to be robust and remain encouraged by the number of things we are working on. While there was a brief pause in the fourth quarter as many parties awaited the potential implications of tax reform, the decks are not clear and many situations are becoming more active.

Some opportunities we're evaluating are tuck-ins and some are of more significant size. We are looking for long term opportunities that make sense strategically. As a reminder since our 2011 spin-off, we've deployed $1.5 billion on eight acquisitions over the past five years.

Over the next three years, we continue to believe we've the potential to deploy more than $3 billion to drive this incremental growth in shareholder value. Before I turn the call over to Pat, I wanted to talk about the recently passed tax legislation and its impact on our business. We're excited about the new tax legislation.

At a high level, it reinforces the advantages of being a big U.S. manufacturer with the large percentage of domestic sales. We're clear winners as a result of the changes and are better positioned now then we were six weeks ago. Large homebuilders are also now better off and U.S.

consumer will see more disposable income providing an increasingly healthy backdrop to the U.S. housing market. And so I do not see the new tax rules that specifically relate to housing and real estate is being a headwind.

Instead, I see an opportunity for incremental top line growth due to the strength of underlying demand in an environment which just became more favorable. Regarding our tax rate, the recently passed tax legislation was positive and going forward the benefit should be significantly favorable.

Our estimated 2018 effective tax rate will be between 24% and 26% all in, as a result a good portion of lower U.S. federal tax rate will flow directly to our bottom line. We now have more money to work with and tax incentives continue to invest in our already sizeable U.S. manufacturing and employee base.

Since the housing recovery began, our company has created over 4,000 jobs in the USA over 80% of them in manufacturing, plants and distribution centers across the country.

We will continue to invest in capital and people to drive growth, including property plant equipment, technology and an accelerated pace of new product innovation, which should help us drive long term growth in the business while generating even more free cash flow.

To sum up, tax reform is a significant positive that will enable us to continue creating growth opportunities and deploy additional capital to drive long term shareholder value. We look forward to leveraging our improved position to sell even more products in the most exciting housing market in the world.

With that, I will now turn the call over to Pat, who will review our financial performance and provide more details on our guidance..

Thanks, Chris, and good afternoon. As Brian mentioned to best reflect ongoing business performance, the majority of my comments will focus on income before charges and gain from continuing operations.

Let me start with our fourth quarter results, sales were 1.4 billion up 6% from the year ago despite labor constraints which continued to impact the rate of U.S home products growth and a soft October due to hurricane. Organic sales grew 6%.

Consolidated operating income for the quarter was 187 million up 14 million or 8% compared to the same quarter last year. Consolidated operating margin improved 20 basis points to 13.5%. EPS was $0.80 for the quarter versus $0.71 for the same quarter last year increasing 13% and was at the upper end of our guidance range.

For the full year 2017, EPS was $3.08 versus $2.75 last year increasing $0.33 or 12% and came in well above our initial guidance at the start of the year which called for $3 and full year EPS at the midpoint. Now let me provide more color on segment results.

Our plumbing sales for the fourth quarter were $469 million up 43 million or 10% driven by strength across most of our businesses and geographies including a strong finish from the companies acquired during 2016. Organic sales increased 9%. Operating income increased 10 million to 97 million, up 11%. Operating margins for the segment was 20.8%.

For the full year, plumbing sales of over a 1.7 billion increased a 186 million or 12%. Operating income of 371 million was up 39 million or 12% over the prior year. Operating margin was 21.6%. Our new global plumbing group is delivering on our strategy of growing sales above market while maintaining an operating margin around 21%.

In 2018, we expect plumbing sales to go high single digits, and for the plumbing group continues to target operating margins around 21%. Turning to doors, sales were a 129 million up 7 million or 6% from the prior year quarter. Sales were up at all channels and operating income increased 3 million to 19 million up 15%.

Operating margin was 14.5% for the quarter up a 120 basis points. For the full year, doors sales increased 6% to 503 million. Operating income grew 20% to 75 million and operating margin increased 160 basis points to 14.8%.

For 2018, we expect door sales growth to be in the high single digit to low double digit range as we invest in additional retail expansion and in new products to drive growth. Operating margin in our doors business next year is expected to be well above 15%.

2018 leverage will be below that of the last few years as we invest further in retail expansion and new product development. For security, sales were a 159 million in the fourth quarter up 6 million or 4% versus the prior year. Segment operating income of 24 million was flat and operating margin was 15%.

The flat operating income reflects the impact of material inflation. We expect pricing actions to offset material inflation during 2018. For the full year security sales increased 2% to 593 million, operating income increased 8% from the prior year to 88 million and operating margins was up roughly 80 basis points to 14.9%.

Strength in our core business drove the strong operating results as core sales grew 5% offsetting a commercial product line exit. We expect the performance of our core remains strong throughout 2018.

In 2018, we expect security sales growth to be in the mid single digits range as we capture additional top line opportunities in safe and leverage sales momentum in commercial and international. Operating margin in the security business next year is expected to be over 16%.

We expect price to offset commodity inflation and mix in operating improvement to drive margin expansion. Turning to cabinet, sales were 626 million up 25 million or 4% versus the prior year quarter.

Sales were up in all channels excluding Canada which declined slightly driven by the strategic exit and business are focusing we discussed on prior earnings call. Dealer sales up 303 million were up 1% from the prior year.

Sales of stock cabinets used and new construction were up mid single digit and sales of premium cabinet maintained stable low single digit growth. Both showed promising strength at year end. Softness in semi-custom cabinets limited dealer growth in the quarter.

Sales of in stock cabinets and vanities of 143 million increased low double digits, driven by strong home center POS and share gains, R&R projects requiring relatively low labor intensity such as those involving in stock cabinets, we continue to experience strong demand.

Strong demand and low labor intensity higher affordability product is a trend we see across our businesses and expect to continue. Sales in home center semi-custom, builder direct and Canada of 180 million were up 4%.

Those are direct sales increased high single digit to despite the team holding some orders in the quarter as builder is still behind due to labor.

Home center semi-custom grew low single digit and Canada declined low single digit, despite the decline we focused business in Canada continues to show progress as sales grew low single digit after adjusting for exited business.

Operating income for the Cabinet segment increased 3 million to 67 million or 5% over the prior year quarter with operating margin increasing 10 basis points to 10.7%. Slower than anticipated dealer growth in semi-customs and inflation relative to price constrained fourth quarter and second half margin expansion.

During 2018 pricing actions and capacity re-bouncing will reaccelerate margin expansion. Pricing actions have already been implemented in most segments of our cabinet business. Also our disciplined approach to promotion will be tightened further 2018 to be consistent with demand trend and the inflationary environment.

For the full year, cabinet sales of 2.5 billion increased 69 million or 3% over the prior year and operating income grew 5% to 272 million. Operating margin increased 20 basis points to 11%.

While our 2017 margin expansion was less than anticipated the team did a good job navigating a challenging market environment and continues to leave the cabinet and industry in terms of ability to grow sales and deliver strong operating margin performance.

In cabinet, we anticipate improved sales growth and operating margin expansion during 2018, driven by strong pricing and promotion discipline, capacity management and continued improvement in the dealer sales. We expect cabinet sales to grow mid single digit in 2018 with operating margin improvement of more than 50 basis points.

To sum up consolidated fourth quarter performance, sales increased 6% and EPS were at the upper end of our range $0.80. Our total company operating margin was 13.5%. For the full year 2017 sales increased 6% and EPS grew 12% to 308.

Total company operating margin was 13.7% a 50 basis point improvement and our full-year operating leverage excluding acquisitions was 27%. We are well on track to reach our long-term goal of approaching 15% operating margins when the housing market returns to steady state levels.

Turning now to capital deployment, during 2017 we repurchased 215 million in shares including 39 million during the fourth quarter we spent approximately a 140 million on plumbing acquisition and approximately a 110 million on dividends and increase the 2018 dividend rate.

2017 free cash flow was 464 million were reflecting a conversion rate of almost a 100%. Even after meaningful capital deployment in 2017, our December 31st balance sheet remains solid. Cash was 323 million, that was 1.5 billion and our net-debt-to-EBITDA leverage it was 1.4 times.

Additionally, we have significant capacity under our revolving credit facility to continue to deploy capital to drive incremental growth. Turning last to the details of our outlook for 2018, based on our projected 5% to 7% U.S.

Home products market growth and our total global market growth of 5% to 6% as well as continued share gains in our areas of strategic focus, we expect full-year 2018 sales to increase 6% to 7% compared to 2017. Our resulting outlook for 2018 EPS are in the range of $3.54 to $3.66. The midpoint of our EPS outlook reflects an increase of 17%.

The impact of tax reform on 2017 was nominal and the go forward benefit of tax reform to our business is significant due to the sizeable reduction on our effective tax rate. The annual 2018 EPS outlook includes the follow-on assumption.

Interest expense of around 55 million, a tax rate between 24% and 26% and average fully diluted shares of approximately 155 million. In summary fourth quarter and full-year EPS have strong growth.

With solid performance of our business for the year the momentum we have created and with the global plumbing group and the expected continuing market recovery give us confidence and continued solid growth for the coming years.

Importantly the 50 basis points operating margin increase in 2017 and another 50 basis points margin improvement expected in 2018 places on track to achieve our long-term operating margin targets.

Also as demonstrated by the continuing plumbing acquisitions share repurchases and the dividend rate increase, we remain focused on using our balance sheet and cash flow to drive incremental shareholder value. And our credit facility agreement provides significant flexibility to continue to drive incremental shareholder value.

I will now pass the call back to Brian..

Thanks Pat. That concludes our prepared remarks on the fourth quarter of 2017 and our full-year 2018 outlook. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.

I will now turn the call back over to the operator to begin the question-and-answer session.

Operator?.

Thank you. [Operator Instructions] Our next question comes from the line of Michael Rehaut of JP Morgan. Please go ahead. Your line is open..

First question I had was just on the broader macro outlook and as always very helpful to get your views on, as you stated previously, how you expect the different end markets to grow in 2018.

But I was hoping to get a little bit more detail in terms of what you're seeing in the U.S.? And what drives some of the confidence around some of the -- and specifically the U.S. housing market? How things have been -- you've mentioned the cadence in 4Q and how it's improved during the quarter, perhaps off some of the hurricane challenges.

But in general as you look at 2018, where do you see relative areas of strength across your different businesses? And potentially where could you see some areas of upside?.

Yes, we track a lot of variables in the market and the things that we're tracking and looking almost informally point positive. We did start the quarter in October still softer, especially down south and in Texas off the storms. We did -- we felt that the cadence of the business in October wasn't quite where it would have normally been.

It picked up November, December, December especially finished strong. You never know December historically is kind of a quiet month. But there was backed up demand flowing through December.

If I look across all of these were tracking, GDP, unemployment, consumer settlements, housing mission data, home ownership rates, rolling 90 days of orders, permits and starts, housing inventory both new construction and existing housing start inventory, quite good, affordability remains good, interest rates are ticking.

But in a spectrum of overall affordability where you've got disposable income rising as wages are going up, tax cuts will benefit, disposable income, the affordability metrics if you look at are good, R&R dynamics are positive.

I think historically it's availability of remodel includes to do -- there's much work as there is demand for it, I'll talk about that in a minute but there's strong demand out there, our kitchen bath dealers report a lot of traffic, except when the snow is falling and the storms are going on, and the showrooms were busy, kitchen best show was busy as well.

And there's a little bit of tailwind coming in off of the storms, kind of like Hurricane Sandy we could have put our finger on but it was a little bit stronger at the East Coast throughout the year.

And as we started to see that at the back half of the year, I think we'll see it in the first half of this year, so all that points toward a lot of demand, the real constraint in the market is labor, and the labor out in the market, we're looking at labor in terms of our plants, our ability to manufacture the products as we sell.

Labor in the end market skilled traded especially carpenters, installers, it's just there's a tight pull in, and so jobs are getting sequenced as the construction take a little bit backed up.

But projects are there and demand is there, just how does it flow, to the extent we have, pretty good weather first part of the year, we'll see a lot of that continue to flow through.

And then the other thing we're tracking obviously is inflation, both input cost inflation, wage inflations but then also gives you some pricing power of the market, and so that's what I am watching in general. But that's the byproduct of the strength that we're seeing overall. Even the tax cuts on top and for us it's a really good thing.

You know, currently the fighting phase off to be the big U.S. manufacturer with over 75% of our sales in the U.S., maybe we got a little tailwind finally after spending the last nine years in this recovery kind of fighting it off. Now, we got a little bit of breather back which feels good. So I think we're positive coming year.

And then across our businesses, I think we're going to see it unfolding in the end markets. Our two biggest business, plumbing and cabinets, is really seeing strong demand coming in. Doors, some great share gains there and in security numbers not to miss..

Thanks for that Chris, I mean it’s a great answer and certainly I agree with you know some tailwinds supporting continued solid repair model growth with perhaps the tax reform adding a little bit to that. And I know that’s in for some people little bit of contrast of concerns of you know repair model demand slowing as the cycle progresses.

So I appreciate that. I guess second question shifting towards from the top line part of the equation to the margin part of the equation. You know you mentioned in your guidance incorporating about a 50 bps margin expansion in '18, similar to the 50 bps you experienced in '17.

You know when you kind of look at from the incremental margin, consolidated incremental margin standpoint, you're now a couple of years in a row, if you blend again on a consolidated basis.

Looking in more closer to like the low 20s of an incremental margin versus kind of a banner year in 2016 when you almost hit 30%, and of course that was coming off of some investments that you're making in the prior couple of years.

So, my question is, how should we think about incremental margins over the next couple of years? I think is it fair to say that in '18 you have a little bit of a catch up with some of the pricing actions and some of the you know offsetting some inflation that you start to experience in the back half of '17? Should we still think about a mid 20s type of incremental margin as the norm, maybe you could help us kind of think through you know the plusses and minuses of the -- of what's helping or hurting the margins in '18?.

Mike, you should expect 25 plus percent incremental margin and I think if you adjust for acquisitions you'll see that. But I step us back to, we feel like we're probably on track for 15% when the housing market is at 1.5 million starts. We would see is kind of the 2020ish or thereabout timeframe, and we're marching towards that at 60 plus bps a year.

If you look at '17 and you were adjusted for acquisitions, you get about a 27% incremental margin. Year 16 was considerably higher and '16 benefited from deflation that '17 did not benefit from.

And '18 the first half of '18 we'll be taking price, prices will be flowing into various channels over the first half as though the margins of the second half will be found in the back half, but again if you look at '18 and again you get to the end of the year you are just for inflation you should be seeing leverage of 25 plus percent.

So we feel like we are on track for that 15 percentage steady state. We are still tracking incremental margin at 25% plus. There will be timing lag price to commodity or absorbing the early stages of acquisitions where you could be off that cadence by a little bit, but we still feel like we are broadly on track with where we have been heading..

Your next question comes from the line of Scott Rednor with Zelman & Associates. Please go ahead. Your line is open..

Chris, I wanted to maybe have you talk a little bit more about the cabinet strategy I mean to the prior question on incremental. It seems to be focused on that segment where you're expecting more margin expansion in 4Q. And you got a lot of different things going on as you look to '18.

So I think this is the business that you set the stage to get back to 14% 15% margins in two to three years.

Just want to hear kind of what's the strategy to get there, now that it seems like there might be a different path?.

Yes, I'd say. Second half of the year, we saw a couple of things going on obviously input cost rose. So we started pricing and actions in the fourth quarter, carrying through the first half of this year. It will take a while to work through system.

It's both pricing and reduction on promotion where the least aggressive of those promoting, but we are going to pull back even bit tighter. And then there is mix, the parts of the market are a little challenged in the mid market, semi-custom. They are flattish.

It's not significant negative like we saw in the premium end of the market probably 18 months ago, probably three months ago. But that mix part in the middle was a lot weaker than what we had anticipated. So, as we move in '18, pricing action will be a part of it.

The other piece of it is allocating our capacity into those more attractive parts in the market and focusing on those customers and those segments that have given a stronger margin.

These parts of the centers on the home -- parts of the centers on the home centers, the two largest home centers actually doing quite well, kind of looking aggregate across their in stock cabinet, vanities and especially order business. The third largest home center has been struggling and actually had pretty weak 17 in cabinet.

And so we are backing away from them and we are really redirecting and going harder at the two largest home centers as well as going deeper in dealer. We are expanding our dealer base. We had a number of terrific companies in 2017 to cheer away from some of our competitors and we are going deeper into that business.

And so that pivot moves you toward a regional mix of business in the market. So I would like getting back a few years, we exited builder west because the dynamic of that business was not improving and we allocated capacity to the parts of the builder market that were given us good return and good growth.

And it's the same thing now as we look at that middle part of the market where we are getting good growth. We are getting good growth good margin profile top two home centers. We are getting good growth and profile in dealer and we are going to run hard in those segments.

We are big enough we are sitting here across a quarter in the market and every channel every price point that we can direct the business we can direct the flow on what we want and still bring in very good growth but improve that margin profile.

So I mean that is what we've been doing over the last six to seven years we've gone from breakeven up to 1% margin have you exactly what I'm just driving so next step of journey is to continue to focus look at where competitively there is good margin directed business into that harder and backed away from parts of the market where it doesn’t look at the attractive anymore.

And our ability to execute that is really unparallel given our signs and scope of our business. So it's more of the same, but in transition you cannot see different effects flowing through the P&L. Is that that clear? Or is I -- there is a lot going on in that statement..

No, yes, I think that's the great detail, I guess just from the market perspective. Why do you think the markets I think you mentioned 3% for cash slightly below both your macro indicators and the R&R and new construction side.

Is there anything else competitively going on, I was just curious to get maybe your thoughts there?.

The 3% number is market overall, someone would say it's only two. For perspective, our fourth quarter in the U.S. only was about -- we did about 5%. So I take Canada out of our numbers, our cabinet number in the U.S. was about 5% growth, across the market that were saying about three, some would say it's a little bit less than that, it's labor.

The demand out there for projects is high. They're backed stuff and if you are going on to our viewer network, we're talking about kind of where is the growth kind of come, it's going to come to those places where they have access to labor where bigger dealers are locking up some labor it's installation and carpenter labor in the market.

So the demand is there, there is a lot of projects in the queue, a lot of designer activity it's just getting it through and into the market. So I'm optimistic about the market overall and I think we're solving this incrementally overtime so I think the owners are better than smaller builders in the market as accessing labor in general.

The bigger contractors are having more success from this smaller local price. So it's getting there but it’s working its way through. Home service as well, bigger home service they have more success and access to labor than as I discussed smaller close to that market as well. So, we will go where the strength is.

We'll go where the market is actually able to handle the projects and that's going to give us good growth and good margin. So that's the dynamics kind of one of those by products of tax labor market when you ask I don’t plan where loans were at right now.

You don’t have a lot of immigration and immigration typically would have brought in more still trades. We brought in m ore more carpenters, more electricians, masons, plumbers. So we have got the pool we've got. We're trying to bring some more talent into the industry and were making progress on it, but it's taking the time its taking.

Outside of that I'd just say, competitively we're in a very strong place in cabinets. We are winning share. We are winning business. Next time, we can get the flow into the market. The accounts are in there. The penetration of the counters are strong, so I feel good about positioning the business overall..

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

First I wanted to delve in a little bit more into the weather. I know that you mentioned that you certainly saw maybe some kind of slowdown that came earlier in January as a result of that.

Do you think that will sort of cause any kind of a shift in terms of the timing that we see things coming together this quarter?.

It's interesting to say we had some strong rolls through, good chunk of the country, but unlike where we had really bad weather year like 2014 where we kind of had half of the country frozen for six weeks.

Most of storm moved through, thawed out a bit, traffic resumed, our plants may have been off a day here or a day there, but got back up again and are recovering. So I am not it will persist.

There'll probably be a catch up into February from January volume, but it's nowhere near where we had really bad weather here like hurricane where it's kind of shifted demand into the latter part of the whole year.

So I am not as concerned about it as we sit here today, but it's February 1st, so I guess, I shouldn't declare a victory yet, but I think we're okay, I don't know it's just there were a few disruptive weekends, where people stayed home and didn't go to the local home center or kitchen or bath dealer to talk about remodeling their kitchen, they just kind of started the fire and sat back only until the snow melt..

And then my second question is and this is kind of bigger picture and thinking further out but if you work across your business and you think about maybe some of the political rhetoric that's coming down, the changes in the taxes, all these things. Do you think over time we could perhaps see more of your offshore competition moving to U.S.

base manufacturing? Did that kind of change their cost structure, the competitive dynamics that you face? How do you think about that coming together over time?.

So, a couple of parts to that, I think as big U.S. manufacturer, clearly the tax code, was really written to benefit companies like ours. And so as we sit here today, our cost structure advantage and I think that's a good thing for us, where international competitors should come to the U.S.

and set up plants, I think there's a curve on all of that, to come up and attract the labor and to get the process flows and this is the top industry in many places and so the experience we have in manufacturing and some of these sectors is to replicate.

So over time you could see it, I guess the pressure would come on wages bidding up for wage labor, in our marketplace, but for today I actually feel really good, I think as I said here a year ago, I was a bit more concerned about overall trade relations.

NAFTA said that there's been any huge breakthroughs, but the tone overall feels a little bit more constructive. So things like NAFTA, China, were not in the period of complete unknown which is what I felt like this time last year.

I think the parameters of where things can wind up are tighter and so we feel pretty comfortable about all of that, so I'd just say for today we feel really good, it's kind of like finally our time has come as a big U.S.

manufacturer, we hung in there, we've got over 16,000 people in the U.S., across 87 manufacturing facilities so when you write a tax code that benefits the U.S. manufacturers. We're sitting here in kind of sweet spot..

Your next question comes from the line of Michael Eisen of RBC Capital Markets. Please go ahead. Your line is open..

I just wanted to start quickly on the GPG and kind of thinking back when you set your targets I think the commentary was mid single-digit organic growth was upside from M&A, now you guys approaching 9%, it sounds like you're expecting organic parts to continue to be strong.

Can you help us think about how the original acquisitions you've made playing into the organic channel and whether the strategy has changed going forward to being more organic driven than acquisitions?.

Yes, I am delighted to talk about plumbing and GPG, it's going really well.

So when we did a lot of work obviously before announcing this, the changes we made in the summer of '16 and we talked reorienting and really allowing for more products to go through our existing channels, leveraging our back end, doing some acquisitions, but really bringing more product through the channel that we've got.

We did a couple of acquisitions early on and we followed on with some in '17 and that's going well. They're executing really well, the acquisitions were of a very high quality and so those products and those brands are very well accepted in the channels that we’ve got.

So we're moving more products our stores we’ve strong channel position across North America and across China, moving more product through China so that gives us greater confidence than I was even sitting here 18 months ago and as we’re looking at other acquisitions as we're looking at partnership opportunities to get other brands and other products, and move through the system we feel really good.

We also invested in some talent, upgraded our marketing organization, our operations organization, the pace and cadence of innovation picked up and so we're pushing more product through a faster cadence and so that's working well, there's just a lot that's executing really well and so I feel good about you know we laid out a target of 2.5 billion by 2020 frankly that's a lower risk target now than it was 18 months ago having done some acquisitions and having improved out the organic side of it.

And it gives us more confidence as we're looking at other things that we might acquire, partnerships we might have, we have set of metrics here to understand what's reasonable that we can bring through that system and those guys are executing really-really well so it gives us a lot of confidence.

And plumbing part of the market, we get really good margins there and our commitment is to kind of hold that margin at 21 to 22 in that range.

Starting 21, we can move ahead of that particular above the market and that's what we were able to in '17 and our plans are for '18, all quite reasonable and we're pretty excited, I mean we embarked upon something it looks great in a PowerPoint it looks great when you're talking about it, we got to execute and we now have two months execution and a team that's firing on all cylinders so we feel really good about the plumbing group right now..

Very helpful and very encouraging as well, I was just thinking of following up on some of these comments. As you look at your balance sheet and you talked about kind of a lull on the second half of the year in M&A activities specifically in that segment.

Chris I think you mentioned that your, you might have deals that seem active now but significantly higher in the year looking at things with a more significant size than you had recently.

Can you talk to maybe if that's more across the portfolio if you're considering things that are outside of your current product set and kind of bigger picture would it be unrealistic to expect more M&A activity outside of the plumbing group as you move forward the next couple of years, thanks and good luck?.

Thanks, I think we're looking at things within the portfolio across the businesses, probably more focus on plumbing than in the other sectors, we're looking in other sectors inside of our adjacent portfolio and we're looking at some things that are outside of the core, core but have very similar characteristics of being consumer oriented home products, not commodity building products.

So strong brands, strong channel positions, strong pricing power, all those things that are allowing us to take price down are characteristics of things we look in terms of acquisitions.

Don't want to say too much because I'm going to give away stuff we're looking at but there's a lot of things we're looking at now and I think there's receptivity as we're looking at things, particularly I think clarity on the tax law helps, there were durations where people were wondering how that was going to unfold in terms of the state taxes.

In general, I think just looking our inbound tax treatment on things we are acquiring is clear both international as well as domestic assets and then part of their selling understanding how things are going to get treated as they are realizing returns on new investments. So I think there is clarity. We deliver it.

We have had lot of things we are working on a lot of people we are talking to and we will remain disciplined and deliberate. But I think given this corporate the things we are looking at it I would expect we got additional things in 18 into 19 and we certainly have a balance sheet capacity to take those steps on.

And so we put pressure on ourselves to look at and working a lot of things. We don’t put pressures ourselves to close. I think we had trouble when you do that and pick corners. So we are disciplined in that. I wouldn’t call us over the conservative. We're smart about businesses and the factors that we are looking at. We have been in this long time.

I have been in this long time. And so, we are working on it hard, spending a lot of time on it. But we will remain disciplined, and then we have excess capacity we will certainly be active find that peers we currently have 550 million I think authorization of outstanding. So, you will see us doing that as well.

So we will be active in the plan on our capital this year, it's back to the commitment I made 6.5 years ago when we became public that we have great operators we don’t need the sales cash for any day. We will restructure new things every day so we are going to be aggressive in deployment of capital and we will take that spirit into '18.

On the market that I just talked about is we can just be bigger in the market a lot of reasons to be positive..

Our last question comes from line of Philip Ng of Jefferies. Please go ahead. Your line is open..

Good to hear you are pivoting some of your capacity and cabinets and doors to capture some of the growth down the road.

But just curious how quickly can you ramp that up? And with selling the used investment make you served used first time homebuyers and lower labor intensity market to more effectively?.

So as often the case, we are in middle of it. I have to stay out of describing things that there are kind of new and interesting, as we have already been doing that, and as opposed to we are going to go to that. So, we have already even knowing this so. Yes, we are targeting parts of the market where we see good margin profile and good growth.

Some of that is addressing first time homebuyer market are direct to builder business continues to be strong and our builder business through dealer is strong and national and we are coming assets with our strong portfolio which is coming into first time homebuyer universe. So we are just sitting tighter.

So as I talked about our -- we are going to harder in this direction that we have been moving and putting capacity in business up against the prices that we see the best opportunity. And not being afraid the back way from parts of the market that have underperformed and we are just not going to stick with stuff that is lack of cluster.

And that’s right now is some of that mid market I talked about some of that dynamics with the third largest home center which is not an attractive place to be in right now. So, we are going to double down on prices we're growing, we are going to double down on the partners that are growing with us.

And together, we are looking at opportunities on the market. We are already having success in that. We have just increased the focus in that part of the market. We have a great operating team. We have the best operating team in the industry in our cabinet group. And so, when we put our mind in stuff, we execute all the along.

In period of market moving, we are pretty deliberate about watching and don’t overreact. But when we commit to something, these guys execute like crazy and they're in middle of it and then it's going well. So, you'll see it unfold throughout the year, and you see that margin moving.

We will be expanding margin cabinets 50 basis points to 70 basis points and will come in close to 12% for the year-end and I won't keep margins forward. So feel good about that I think we evolved in this business over the last eight to nine years through recoveries, and it's a same core group just executing all over that business..

And then the growth out of your plumbing business has been really impressive. Based on what you are seeing, do you think you are outpacing the market just from some of the investments you are making? And China seems to be really strong where there we see some concerns in that market the real estate market cooling little bit.

Just want to get your thoughts on China as you think about 2018 as well?.

Sure. So overall in plumbing, we are facing the market for a fact to the basic of putting more products through the strength of the channels.

So where we've had the business historically only focused on our narrower set of products with the single brand, we've now got multiple brands going through this channels and where we really leveraging the power and the strength of our presence and that's driving lot of growth, innovation is driving growth, investments were making in brand building and marketing is driving growth.

E-commerce, we have an outstanding team there and they continue picking it up in market. So in that core and that core North America, yes, we're gaining share and there is real strength there. China is probably a little bit better than I thought it would be. It's a good year and 18 frankly, is just looking good.

I think the dynamic in China is overall the market tightening up, but there is a concentration in China with the bigger builders and the bigger builders are buying smaller builders. And we've got good relationships with the bigger builders.

And so, proportionately we're winning there because of investments we've made over the last decade with the great relationships and executing well there. And then the R&R part of that markets which come through, both showrooms and e-commerce is also strength for us.

We've got 1,000 showrooms, Moen showrooms, across the country and we are focused Tier 1 and Tier 2. And so, we are in the markets where the R&R market is pretty consistent and growing. So I'd say that market unfolded better than I thought it would in '17.

And looking at '18 and probably feeling better overall of their market dynamics, again I think a year ago, they will start building that markets there has been for a long time.

We've been there 24 years now and so we go through a lot of cycles in China, but we've got really good team on the ground been there a long time we've built that business from scratch and we how do it evolve with the market and leverage again the relationships and the channel strength where we see the end markets performing.

We follow where that's strength is so we can execute well. So, the market is doing well for us. We also expanded the product portfolio in China. We're moving to kind of full room solution and so, within the five to six years, we expanded into vanities, but most recently expanded into sanitary ware solutions and shower systems and other things.

So when you got kind of these Moen standup stores, you can really be pushing problem solutions and that's gone really well. So, that dynamic and a market at their local footprint is strong for us and a strong completive advantage..

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