Fortune Brands Home & Security Inc

LSE:0IRN

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home & Security First Quarter 2019 Earnings Conference Call. [Operator Instructions]

Thank you. I would 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 Lantz, executive]

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security Quarterly Investor Conference Call and Webcast. We are pleased to be here today to provide an update on our progress during the first quarter of 2019. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investor section of our fbhs.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on our 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 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 have allowed some time to address questions that you may have.

I will now turn the call over to Chris.

[Christopher Klein, executive]

Thank you, Brian, and thanks to everyone for joining us today. In the first quarter, our performance was on plan in the U.S. and Canadian housing market that started the year slowly as we expected. We had anticipated some weakness in the first half given the slower momentum at the end of last year, and we executed well in a softer market by positioning our businesses appropriately and managing them tightly.

At our February 6 Investor Day, we outlined a set of actions we were taking across the company to address market and industry challenges and increase exposure to the more stable and predictable segments of our markets, all in the backdrop of more moderate market growth. Through the first quarter, both the market and our performance have been consistent with what we laid out in February. We're making solid progress on the business plans we communicated, including in Cabinets and Security, and we're focused on consistent execution even in periods of slower growth. Although much work remains ahead and the market overall is likely to remain soft through the first half, I'm very pleased with the start of the year across our businesses.

Let me first take you through our view of the U.S. home products market. Next, I will provide my perspective on our business performance in the first quarter. Pat will then provide more details on our first quarter performance and 2019 outlook.

Starting with our view of the U.S. home products market. In the first quarter, the market for our home products was softer and grew at the pace we planned, about 2% to 2.5%. We estimate that repair and remodel activity grew around 4% and that new construction spending on our product categories was down low single digits.

We continue to expect the second quarter market to be soft. However, the pace is beginning to pick up here in April, and we expect to see demand improve month-over-month. Orders are trending positively, and the fundamentals that drive housing and R&R demand are improving. Mortgage rates have fallen below where we thought they might be. New and existing housing price increases have moderated. The economy is slightly better than we thought, and the recession does not appear imminent. There appears to be progress on trade discussions, and consumer confidence is improving. All in all, we're more comfortable with our February assumptions regarding a modest acceleration of growth in the second half of 2019.

Now, let me provide some perspective on our business performance. For the first quarter, sales increased 6% in total. On the top line, we performed well across the company and grew on an organic basis, ahead of a market that was low single digits in the quarter. Total company operating margin came in 80 basis points above last year at 10.7%. We delivered on our margin expectations as we continued to be aggressive with our cost management and supply chain actions.

In addition to these cost actions, our pricing actions last year recovered tariff and other inflation throughout the second half of 2018 and into the first quarter.

Now, turning to the segments, beginning with Plumbing. Sales were up 2% for the quarter and up 3.5%, excluding FX. Our Plumbing business achieved its plan on sales and margin as we saw continued strong growth in China, and growth in our U.S. business was as expected.

Channel growth continues to outpace the market as we expand our presence into whole room solutions, and our strong execution across this broader portfolio of products is driving share gains. In the U.S., wholesale of POS ran ahead of sales, and inventories are running lean as our channel partners continued with a conservative approach in the first quarter. This trend is not surprising and has the potential to act as a tailwind and improve our second half in line with our expectations. The gradually improving market, coupled with this team's pace of product innovation and channel expansion, gives us confidence that the plumbing team remains on track and is positioned to accelerate growth in the second half.

In our Doors & Security segment, sales were up 20% and 5%, excluding Fiberon. In this group, doors continued to perform well in a softer new construction environment, with door sales increasing high single digits on the back of strength in retail as the wholesale channel saw some destocking with the weaker new construction market.

In decking, we've been rapidly integrating the Fiberon acquisition and accelerating investments there ahead of plan to achieve targeted growth opportunities that will begin to be realized in the second half of the year and into 2020 and beyond.

And in security products, we improved operating performance and grew sales low single digits while improving our margins versus prior year.

Overall, the Doors & Security segment is tracking to plan on sales and profits. The segment will reflect some increased seasonality in its quarterly profit profile associated with the decking business of Fiberon. Additionally, we have been investing in capacity and innovation in doors and Fiberon to sustain above-market growth rates and realize new opportunities. Our integration effort with Fiberon is progressing well, and we're investing in product line expansion and capacity ahead of a range of new opportunities that will begin to be realized later this year and into the following years. We look forward to updating you on our exciting progress in the recently formed Doors & Security segment as we move through the year.

In Cabinets, our team achieved 3% sales growth in the first quarter, which marked a reversal from the negative sales trends we saw all of last year. The team also delivered 350 basis points of margin improvement, which is slightly ahead of our expectations.

Our performance was a solid start to the year and is clear evidence of the concrete progress of our pivot plan. As we continue to align our product lines and capacity toward growth opportunities, demand for simpler bath and kitchen remodel projects continues, and sales of value products remain strong. Both of these are signs that we are on the right track strategically in terms of where we are pivoting our Cabinet business.

As I look at value-priced cabinets broadly across home center, dealer and builder direct, in the first quarter, we saw home center in-stock cabinets and vanities continuing to grow above market; online and e-commerce business that is accelerating within this price point; stock products offered through our dealer network expanding; our targeted builder business taking share in most parts of the country where we compete; and lastly, our decorative laminate veneer product winning across the board and taking share in builder direct and other new construction-facing channels; margins continue to be very good in value cabinetry in the low teens as we leverage Mexico and automate and streamline more facilities in the U.S.

Turning to semi-custom in Canada. The market and our business growth remained challenged in the first quarter. However, we are aggressively restructuring capacity and supply chains and driving pricing actions to continue to improve profitability in this part of the market.

Over the course of the past year and continuing into this year, we have taken a number of actions, including rightsizing our capacity, eliminating several plants and reducing fixed costs broadly throughout the segment, standardizing product lines to further leverage our global procurement and Mexican component manufacturing, and investing in automated finishing. Work in these areas will continue throughout 2019, and despite a first quarter cabinet market that was soft overall as forecast, we continue to make good progress on our pivot plan and target those parts of this market that continue to grow.

As a reminder, we're executing our pivot plan as we believe that, over time, the scale of our logistics, advantaged and low-cost Mexican production platform, combined with our distributed assembly and industry-leading made-to-order facilities in the U.S., will be competitively advantaged in the marketplace versus both import and domestic competition. These actions reflect not only our longer-term view on the industry but also position us well for the next 3 to 4 years of profit improvement and growth. The shifts we are making increase our exposure to the more stable and predictable parts of the cabinet market and at higher margins than we enjoy today.

So to recap the quarter. Our performance was on plan in a market that started out slowly as we expected. Our Plumbing business delivered on its planned sales and margin, and our Cabinet pivot is showing more visible signs of progress. Our Security business is back on track, and we're making some investments into our new Fiberon platform to capture some exciting growth opportunities that will unfold later this year and into the next several years. Our teams did an excellent job of growing overall sales and margin in the soft market and in the quarter where our channel partners continued to manage inventory conservatively. Despite these planned headwinds, we remain on track for the year.

So based on how things are progressing, we feel more confident in our assumptions regarding modest second half expansion. While it is too early to update our full year outlook, I am more confident in the progress we have made in Cabinets and Security which were 2 areas with more uncertainty as we exited last year, and in our general ability to execute in the softer market. Given the housing market volatility over the past few quarters, we are maintaining our current sales and EPS outlooks, but we'll further revisit our outlook on our second quarter call after assessing the key spring and early summer selling seasons.

Before I wrap up, let me return to our capital deployment in the quarter and our broader plan to create long-term incremental value.

Year-to-date through April, we have spent $50 million on share repurchases for about 1.1 million shares. We plan to continue to use share repurchase opportunistically as a vehicle to generate attractive returns consistent with prior practice. We also continue to evaluate a pipeline of potential acquisitions. Using our strong cash flow and balance sheet, we have the capacity and flexibility to make strategic acquisitions, repurchase additional shares and increase our dividend to create meaningful, incremental shareholder value while still deleveraging naturally throughout the year. As a reminder, over the next 3 years, we continue to believe we have the potential to deploy an additional $3 billion to drive incremental growth and shareholder value.

Now, I'd like to turn the call over to Pat, who will review our financial performance and provide detail on our outlook for 2019.

[Patrick Hallinan, executive]

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

Let me start with our first quarter results. Sales were $1.3 billion, up 6% from a year ago, 3% organically. Consolidated operating income for the quarter was $142 million, up 14% or $18 million compared to the same quarter last year. Total company operating margin was 10.7%, 80 basis points higher than last year. We remain on track to achieve our goal of around 50 basis points of operating margin improvement for the full year.

EPS were $0.63 for the quarter versus $0.56 the same quarter last year, an increase of 13%. EPS met our expectations. We are pleased by our team's ability to grow sales and earnings during a period of slower market growth and with the persistence of a challenging trade environment.

Now, let me provide more color on segment results. Beginning with Plumbing. Sales for the first quarter were $459 million, up $9 million or 2%. Excluding currency, sales were up 3.5% in the quarter, which was above our expectation given the 16% organic sales growth rate delivered last year.

Mid-single-digit U.S. POS and continued strong growth in China drove the quarter with reported sales results muted by unfavorable FX and U.S. and Canada channel inventory reductions.

Plumbing operating income decreased 2% to $91 million. Operating margin was 19.7%, right in line with our plan and consistent with typical first quarter Plumbing operating margins. Last year, first quarter Plumbing margin benefited from favorable volume and mix dynamics we did not expect to repeat in 2019. We continue to be on track with our full year outlook in Plumbing with sales up in the mid- to high single-digit range and operating margin of around 21%.

Turning to Doors & Security. Sales were $296 million, up $49 million or 20% from the prior year quarter, with Fiberon contributing $37 million to a seasonally low quarter for decking. Operating income was lower by $3 million, in line with our expectations and driven by expected first quarter investments and other anticipated margin items, in particular, product innovation and capacity investments in doors and decking for important 2019 and early 2020 growth initiatives; purchase accounting amortization during a seasonally light decking quarter and ahead of offsetting synergies, which are tracking as expected; uniquely strong prior year doors mix associated with a new product launch; and above-average doors operating performance, both of which produced a uniquely high first quarter doors operating margin we anticipated would not repeat during the first quarter of 2019. We remain on track to deliver high teens sales growth and segment operating margins of around 14% in 2019.

Our base Therma-Tru and Master Lock businesses expect organic sales growth in the mid- to high single-digit range in 2019. Importantly, security products returned to growth and delivered solid operating performance in the quarter.

Turning to Cabinets. Sales for the first quarter were $573 million, up $16 million or 3% versus the prior year quarter. Sales were positive across most product categories with especially strong sales of value cabinets, as Chris mentioned. Home center special order and Canada were the exceptions and were lower in the first quarter on softer market demand for semi-custom cabinets and a weak overall housing market in the case of Canada.

Operating income in the first quarter was $45 million, up $20 million or 84% versus the prior year. Operating margin was 7.8% or 350 basis points higher year-over-year, an excellent result given the soft market.

While we are off to a solid start to the year, our Cabinets pivot is not complete, and we are on a journey that targets improvement in half year increments. For the full year, we remain on track to deliver 3% to 4% sales growth with around 70 basis points of margin expansion, but we do not expect sales and margin progress to be uniform across quarters. For example, in the second quarter, we are supporting a number of new product introductions into the value part of the market, which, while positive overall, are likely to slow operating profit growth relative to the first quarter pace and relative to last year, though we expect to deliver double-digit operating margin performance during the second quarter.

For the company, to sum up consolidated first quarter performance, sales increased 6%, 3% organically, and EPS were consistent with our plan at $0.63, demonstrating our ability to execute and drive growth and margin improvement in a slower market. Our total company operating margin was 10.7% or 80 basis points above last year and was led by Cabinets profit improvement, lower corporate costs and tight management of our businesses across the board.

Turning to the balance sheet. Our March 31 balance sheet remains solid with cash of $281 million, net debt of $2.2 billion, and our net debt-to-EBITDA leverage is 2.5x. We also added to our financial flexibility in the quarter by extending the maturity on our term loan to March 2020 at an amount of $350 million, and we continue to have the capacity and flexibility to fund potential acquisitions and share repurchases as we delever naturally throughout the year and over time. Year-to-date, we repurchased 1.1 million shares for approximately $50 million. Our approach to share repurchase continues to be opportunistic and focused on where we can generate significant returns. We have approximately $364 million remaining on our current share repurchase authorization.

Turning last to the details of our outlook for 2019. As Chris mentioned, we are maintaining our 2019 EPS outlook of $3.53 to $3.77 with the midpoint of $3.65 representing 9% EPS growth versus the prior year. We continue to expect full year sales growth of 6% to 7.5% and organic sales growth of 3% to 5%. While it's too early to update our full year guidance, we are encouraged by the improvement to demand drivers critical to the U.S. housing market, in particular, housing affordability, employment and wage growth; and by our business performance, in particular, in Cabinets and Security. The important spring and early summer selling season will inform any guidance update at the end of the second quarter.

As a reminder, and consistent with our initial guidance, we continue to expect first half sales growth of 5% to 6% and first half organic sales growth of 3% to 4% and first half EPS growth of 6% to 7%. This continues to be our first half expectation.

We expect 2019 free cash flow of $500 million with a conversion rate of over 90% and EBITDA of around $950 million, consistent with our Investor Day expectations.

The annual EPS outlook includes the following assumptions: interest expense of around $94 million, a tax rate of between 25% and 26% and average fully diluted shares of approximately 142 million.

In summary, we are off to a good start to 2019. Our teams executed well in a slower market while making significant progress on strategic initiatives. For 2019, we expected a soft start to the first half of the year with market growth in the 2% to 3% range. We got exactly that, and our teams delivered, putting us on track to achieve our full year financial targets.

I will now pass the call back to Brian.

[Brian Lantz, executive]

Thanks, Pat. That concludes our prepared remarks on the first quarter 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?

[Operator]

[Operator Instructions] Your first question comes from Justin Speer with Zelman & Associates.

[Justin Speer, analyst]

Just a very large incremental margin there for the Cabinets in the quarter. And can you relay in terms of your pivot strategy the fixed cost savings that you're expecting to extract from that strategy incrementally this year? And then, separately, the mix of value versus nonvalue product today versus last year and the margins of that nonvalue product?

[Christopher Klein, executive]

Yes. We don't break out the kind of contribution between those lines. I'd say the results reflected the combination of a number of things that we've done inside that pivot plan. So as you point out, we took out some significant fixed costs last year, closed 2 plants and took out some other incremental costs primarily around the semi-custom part of that market. In turn, we put some capacity into Mexico to support the value side of the business, and so that certainly contributed to some leverage. We also, as we talked about last year, took quite a bit of incremental pricing to offset tariffs in other commodities that we described throughout the year. And then the mix, I think, improved a bit, too. So the combination of those things. From a growth standpoint, clearly, the value part of the market, the in-stock and value part of the market showed some really nice growth in the quarter. The overall semi-custom and the other part of the market was less robust. Dealer was okay, but as we pointed out, the home center semi-custom side of the market was a little soft and Canada was a little bit soft. So the value side of the market clearly was driving more of the growth. But I'd say improvement across the board and a culmination of a number of things. And this is what we expected. I know it's frustrating where we were last year as we're describing a number of things and actions we were taking, and it wasn't all transparent. I think you're going to see a steady cadence of that transparency unfold throughout the year.

[Justin Speer, analyst]

My next question, just following up on Plumbing from last quarter. I think you mentioned 25% tariffs in your margin mapping or roughly 80 basis points headwind to the overall business implied in that $45 million headwind from a 25% tariff. How does that affect or how does that change with a 0% tariff? How does that change your mapping, if at all, in terms of pricing or margin assumptions for '19?

[Patrick Hallinan, executive]

* Q Yes. Justin, recall when we talked guidance for the year, Plumbing and beyond relative to the 25% -- or 25% tariff scenario, we stated both at the Investor Day and the earnings call before that, that if that were to emerge, we would offset it with cost initiatives and price kind of dollar for dollar. And it wouldn't be a change one way or the other up or down in our EPS dollars for the year. Now, if 10% tariff dropped off, that certainly is beneficial but beneficial more to 2020 unless it were to happen literally tomorrow, right? I mean most of those goods are obviously coming from China, where it takes about 3 months from order to receipt and then about another 3 months for another flow to your balance sheet onto your income statement. So any change to tariff that's kind of June or later doesn't really change the income statement for 2019. But just as a reminder, consistent with the guidance we gave out, the 10% tariff scenario for fiscal '19 was about $25 million of inflation for the total business, not just Plumbing.

[Operator]

Your next question comes from Tim Wojs with Baird.

[Timothy Wojs, analyst]

Nice start to the year. Maybe just stepping backwards. Maybe if you can talk a little bit of kind of what you saw around demand as you kind of went through the quarter. And I'm specifically kind of interested in margin, how April has kind of shaped up for you.

[Christopher Klein, executive]

Sure. We expected pretty soft quarter overall given that we lag on the new construction side by a quarter or 2. And so everybody saw what happened in the last 2 quarters of last year. So we knew that would impact that side of the business in the first quarter. But it came in about as expected, so a little soft. Not worse, but about where we thought it was. And on the R&R side, still decent demand, maybe 3.5%, 4% demand on that side of the market. I think there was -- January was okay. I think you saw, as the quarter unfolded, a little softness in February. And then as we got to the end of March and early into April, business picked up. So here in April over the last couple of weeks, we've seen some more encouraging signs. So I'd say, in general, it's as expected. And it unfolded in terms of mix and market dynamic in the way we thought it would.

[Timothy Wojs, analyst]

Okay. Okay, and then maybe on Cabinets. Can you talk a little bit about just some of the costs associated with what sounds like some -- I don't know if it's marketing promotions or some sort of training or things like that around the value product launch? If there's any way to kind of run through what exactly you're doing there and then -- and maybe how much that might be costing you in the second quarter?

[Christopher Klein, executive]

Yes. In general, we're launching a couple of new products, but more significantly, there's a product run through dealer that is coming at kind of the simplified part of the market part there, where we've got products today but this is probably coming in tighter around a limited selection and a sharper price point. So there are some normal launch costs in terms of just supporting that from a sales and training standpoint. So that's kind of going to unfold in the quarter. I'd say the quarter is still going to generate nice margin, as Pat illustrated. I mean you'll still be below teens margins. So...

[Patrick Hallinan, executive]

Yes, It'll be like 11.5 plus or minus 50 basis point margin for the quarter, Tim. And it's the kind of typical startup cost and launch cost associated with the product offering.

[Operator]

Our next question comes from Nishu Sood with Deutsche Bank.

[Nishu Sood, analyst]

Just the comments you made about demand trends showing some signs of improvement in April, I was just wondering if you could give us a little bit more color about that. What products, channel end markets, just a little -- if you could get a little more specific about what specifically you were seeing in April in terms of improving demand trends.

[Christopher Klein, executive]

Sure. I think in the context of a pretty soft first quarter, exited March into early April, and I think the overall sort of activities that we observed on the Cabinets side as we looked at shopper behavior and traffic overall, quote activity through our dealers, which we have proprietary insight into through our big dealer network, and then orders beginning to pick up off those quotes coming through. We certainly saw the same feedback through our retail partners and some order activity coming through there. On the builders side, not too much. I think we commented that the channels are lean on the wholesale side across Plumbing, across Doors. We expect those may pick up, but we haven't kind of seen that activity pick up in anticipation of builder activity. So it's really more just concrete shopping, quoting and on the R&R side, behavior coming through. I haven't uttered the word weather yet, and I really hesitate. But I think there are parts of the country where you just saw a lot of shopping activity muted in February and March and maybe opening back up again here as we enter April.

[Nishu Sood, analyst]

Got it. Got it. And the destocking or the inventory lightness that you mentioned in wholesale -- in the wholesale channel, was that the case in retail as well? And also in terms of some of the destocking activity, would you say that it was roughly in line with the level of demand weakness? Or was it greater than that and therefore might represent some potential tailwind later in the year?

[Christopher Klein, executive]

So second half of your question first. It was -- POS was running ahead of sales. So there should be some tail wind coming into the second half. Not unexpected. I think the channels are -- understanding that there will be demand materializing, waiting to see it materialize. The reality is we can respond pretty quickly, and so they count on us to respond pretty quickly, and we do. And so they're being efficient, and so it's not completely unanticipated. But as they see demand starting to pick back up again, they'll push through. POS was actually stronger than the sales results that we put out both in Doors and in Plumbing. So that's an encouraging sign. I'd say in terms of wholesale and retail, more pronounced in wholesale than in retail. I think retail in general -- the general trend in retail has been for them to be managing their channels tighter. So I think that general trend continued. But I'd say, I think, pronounced -- more pronounced was, I think, those exposed to more the builder activity, just kind of waiting to see it show up before they push an order button.

[Operator]

Your next question comes from Stephen Kim with Evercore ISI.

[Stephen Kim, analyst]

That question regarding the pickup in the business, and you haven't seen the restocking manifest itself yet. I just wanted to clarify that, that was assumed in your guidance, right, and you didn't anticipate that you'll be seeing it that quickly. And then also, assuming that's correct, I was curious if you could talk about the Cabinets business. Specifically, you talked about the semi-custom being a little bit weak. Was curious if you think there may be any likelihood that there would be some exiting or reduction of shelf space associated with the higher end of the cabinet array in the home centers.

[Christopher Klein, executive]

Yes. So I guess the first question on was this anticipated in our guidance, yes, we expected a pretty soft start to the year, and we looked at channel positions as we started the year and assumed that given the soft start on new construction, we projected negative new construction activity in the first quarter, that there wouldn't be that restocking. So that was anticipated, and things unfolded as we thought they would. In terms of your second question, just on the cabinet market overall. I think there is -- we talked about the shift more to value, simpler projects. There is still a market there for premium and for that higher-end, more complex and costlier project. And so our dealers still carry those product lines, and we still work with designers. That activity is less than it had been, but it is still there. And as building picks up and especially in kind of more affluent areas, that will still be a business. So we're not exiting those product lines. I'd just say all the activity that we've been about has been balancing our capacity to where we see the demand at. And we're still operating across a huge spectrum of price points from entry-level down sub-$100 all the way up through over $1,000 cabinet box. And we're still operating across there, but we balance our capacity and our cost structure to match where the demand is, and we're comfortable that we're positioning that appropriately.

[Stephen Kim, analyst]

Yes. That makes a lot of sense. Last question I guess on Cabinets again is obviously, there's been some talk of competitive change in ownership in the cabinets industry. I'm curious as to how you look at it at the industry dynamics really over the course of the next couple of years. How do you think that shift in ownership is likely to affect your opportunity set or your strategies that you'll be -- you're employing this year in light of this forthcoming change?

[Christopher Klein, executive]

Because we've been pretty clear eyed in looking at the cabinet industry over the last couple years and have taken a lot of action to control what we can control, and we're really encouraged with the progress that we've made there and the results that we're delivering. And I'm not sure that ownership change in our competitors is going to impact that. We are confident in what we're doing and the success that we're having and where we're having it and the plans that we've got and the further actions that we're going to take. And so we feel that we're competitive irrespective of the changes in the dynamics in the industry. We've taken tough actions, and as I said earlier, there hasn't been as evidenced last year as they will be this year. So things externally will play out the way they'll play out. We'll be competitive against whoever else is in the marketplace, and we feel comfortable with the strategies that we're executing on.

[Operator]

Your next question comes from Phil Ng with Jefferies.

[Philip Ng, analyst]

Congratulations. A strong quarter. Particularly on the growth in Cabinets, 3% was pretty solid from our perspective. Would this segment potentially see more of an uplift with some of the trends you highlighted, where things are picking up in recent months, particularly on new construction, I would imagine, and I believe you have a pretty nice rollout of some new products coming out there, so I'm just curious how the adoption is coming along.

[Christopher Klein, executive]

I think we called for low single-digit growth. That's what we achieved in the first quarter. I think as the year unfolds, you'll certainly get a benefit of some new construction. It will be more back half-weighted, which is where we see demand coming at us across the board from new construction. So I think you'll see that benefit us. What we projected for the year assumes soft new construction activity first half and a modest pickup second half and kind of a traditional R&R marketplace. 4%-ish is reasonable, and so that should support that level of activity. Pat, I don't know if you have any other comment.

[Patrick Hallinan, executive]

I would say, Phil, we expect Cabinets for the full year to be in that 3-plus percent range. We delivered that in the first quarter. You'll see that be the average across the next 3 quarters. There'll be ebbs and flows. I think the second quarter will be close to where the first quarter was. The third quarter will be higher with some of the value product launch and the comp dynamics we have versus the third quarter of last year. And the fourth quarter will be a little bit below that average, not because there's anything wrong, but just because we had a 53rd week in the fourth quarter of '18. And so that will be the only kind of comp dynamic. But we'll be traveling in that 3-plus percent range on average for each of the next 3 quarters of the year. And it will be led, as it has been led, by value price point products, both those back at the home center and those going through the dealer channel and the builder channel. And we're expecting to see continued softness in the mid-price points with semi-custom cabinets in Canada both just because of the market dynamics around semi-custom and the Canadian housing dynamics. And we're working to adjust those cost structures proportionate to those market dynamics.

[Philip Ng, analyst]

Got it. That's great color. And then from a Fiberon perspective, can you provide a little more color how that business performed in the quarter? And it sounds that you're adding some incremental capacity. How much supply could that unlock? And does that provide some opportunity for you to pick up some share or you've already picked up some share? And just lastly, from a capital investment standpoint, I can't imagine this is a big spend, but just any color on that front would be helpful.

[Christopher Klein, executive]

Yes. So Fiberon is going well. Anytime you buy a business, and we've bought a number of them, you find good things and then you're surprised with some bad things. And so the good things far outweigh anything else we found. The team is working hard. We had a set of opportunities that we were targeting, and I'd say -- I'm not going to give specifics on them but they're progressing faster than we had even anticipated. And so we're going ahead and making some investments in both some product and some capacity. And it's within range. It's not going to really put pressure on our EPS guidance or our capital budget. It's all within the range. But I'd say we're pulling some things forward earlier into the year to allow us to accelerate some of those revenue opportunities that we've got. That should start to unfold second half of the year and come into 2020. So everything on track, I think, from both a revenue and margin standpoint. It's just that we're going to accelerate some things. And we're excited, and we'll be more transparent about that as they unfold.

[Operator]

Your next question comes from Stephen East with Wells Fargo.

[Truman Patterson, analyst]

This is actually Truman Patterson on for Stephen. Just following up on --- hey, just following up on a prior question on Plumbing and tariffs. Have you guys actually altered your supply chain to offset the 10% China tariff? Or have you guys primarily mitigated this through pricing? And then kind of a second part. Assuming that the tariffs would drop to 0%, you said that the benefit would be in kind of 2020. Would that impact your pricing decision? Would you guys try and capture that tailwind and expand your margins? Or would you guys more look to reinvest, kind of keep margins capped at 21% to drive additional market share?

[Patrick Hallinan, executive]

Truman, in the case of Plumbing specifically, because all of our businesses are attacking the tariff situation through a combination of cost and price, it's not just price. And obviously, supply chain change is part of that formula, I would say, in the case of Plumbing more specifically, it's more cost takeout in areas where we could accelerate it, pricing and some cost sharing with vendors more than getting out of China. That's harder to do in Plumbing than it is in some other categories that we have like in Cabinets where we are very much departing China from a wood products perspective. So there's less retooling of the supply chain and more just changing the cost structure of it and then balancing out price for the remainder. I would say consistent with what we've been saying, we're going to maintain roughly 21% margin in the Plumbing business to drive above-market growth. And so to the extent we end up with any kind of favorable event, we tend to invest that in innovation of brand, and we'll continue to do that, whether it's driven by tariffs or something else.

[Truman Patterson, analyst]

Okay. Okay. Jumping over to your Doors & Security segment. Margin seemed to be a bit more pressured than what we were expecting. I know you guys mentioned some tough comps and individual businesses. Could you maybe break apart the segment and discuss the individual operations? And I know in the back half of '18, you guys also had some manufacturing issues with the ball bearing locks. Could you give us an update on this?

[Patrick Hallinan, executive]

Yes. So to hit where you finished your question, just really clearly, our Security business had a really nice first quarter. They returned to growth, and they had operating margin improvement versus the prior year and delivered solid operating margin that has them on track to make very significant operating margin improvements for the full year. So it's good to see, and much as we expected, our Security business performing again as it has throughout much of its history. In terms of the whole group, it's what you're referring to of the profit and margin performance of the group. It was really driven by the 3 items we referenced in our prepared remarks. We have some significant investment in both new product and capacity in both the Doors and the Fiberon decking business for growth initiatives that will be taking place in the latter part of this year and into 2020 and beyond. It's a very exciting growth initiative that we'll talk about more during the latter part of this year. And then also in the Doors business, specifically last year, they had a very unique comp that was driven by a new product launch in the wholesale part of the business that was very successful and involved a product load-in. And what you saw last year in the Doors business was a first quarter operating margin that was roughly at 80% of its full year operating margin when it's typical that the Doors first quarter operating margin is usually 50% or less of its full year operating margin. So you just had a unique dynamic with the Doors operating performance in the first quarter last year that we knew was not going to repeat this year. And that's why atypically, we don't give guidance in anything less than a full year. And that's why we gave enterprise-wide guidance for the first half that have EPS growth in the 6% to 7% range versus the full year of 9-ish percent. So...

[Operator]

And your next question comes from Michael Rehaut with JPMorgan.

[Michael Rehaut, analyst]

First, I just wanted to hit on the full year guidance. And in your prepared remarks, you talked about some better-than-expected trends and encouraged results, I think, in Cabinets and Security, where it was a little bumpy in the past year and in the last couple of quarters in particular. It seems like, if I'm hearing it right, that you're holding guidance at this point. Obviously, you said you want to see how the spring and early summer still plays out. But there's definitely -- it sounds like there's some encouraged results at least in the first quarter. Just trying to get a sense if those better-than-expected results or some of those positive turns continue, would we expect to see any upside driven by Cabinets and Security? And just trying to get a sense of -- it looks like you reiterated not only your full year EPS guidance but segment-by-segment where we might see some of that upside. Would it be more in the cabinet top line and margins or a little bit better on the Doors & Security margins? Just trying to get a sense of where the upside might come from given, again, sort of the positive commentary description around the first quarter.

[Christopher Klein, executive]

Sure. I'd say, obviously, we exited the year as an industry in a pretty volatile way. And the first quarter we considered would be soft. And I'd say the market overall was pretty soft. As we sit here, all those things that drive the market, as we look at it, are trending positively. And so we expect that over the next quarter, things will improve. We lag the new construction cycle by a quarter or 2. So as it picks up, we'll really feel that in the second half of the year. So I'd say the best way, I guess, that we've been talking about it is, what's unfolded over the last 90 days has increased the probability that we will achieve the guidance we've given. We've obviously given a pretty wide guidance range. So there's a -- they're at a range above the midpoint. But at this point, let's see how things unfold over the next couple of months before we try to quantify that. I think that's kind of the best way that we thought about it. So a lot of moving pieces within the marketplace. And then within our business, we're really encouraged by the progress that we've made, especially in those parts of the business that there had been a lot of change going on. So as you say, in Security, we corrected some operational issues, and that is back on track and operating really well. In Cabinets, you're seeing evidence of everything we've done over the last 18 months. That's operating well. And we did a significant acquisition in Fiberon, and that's coming along well. So I think you kind of think about those pieces where there's been more significant change, and the performance is good. And now if the market continues to unfold the way it looks like it's going to, it's going to be a good year and we'd say consistent with our guidance. But we felt that given the volatility, we want to wait until the next couple of months to unfold before trying to lay that out.

[Michael Rehaut, analyst]

No, I appreciate that, obviously. I guess, secondly, just going back to Cabinets. You had mentioned that the value cabinets generating low teens margins. But you also have other initiatives in -- with regard to profitability for the other parts of your portfolio. So just trying to get a sense, number one, if you think about the next couple of years, and obviously, you're shifting more to that value part of the segment, where would that go as a percentage of your portfolio, let's say, 2019 versus 2021? As well as with the remaining parts of your portfolio, what type of margin improvement are you trying to drive from a basis-point standpoint? So again, it's kind of a 2-parter, but where -- what could your value cabinets be as a percent of your portfolio? Where could that go, from what to what over the next couple of years? And what are we talking about in terms of the margin improvement in other parts of the segment?

[Patrick Hallinan, executive]

Yes, Mike. Last year, we finished '18. If you include our new construction products like the Aristokraft brand and the broad range of value products which is dominated by the cabinets and vanities we sell at home center but not limited to that, it was in the 35% to 40% of our business range at the end of fiscal '18. It is growing mid- to high single digits, right? So it's growing kind of above, I would say, overall U.S. building products market. Like I said, it's a bit like our Plumbing. It's a project that consumers have a great desire for, so it won't be surprising to us if over the next 24-plus months, it's more than 50% of our business there. We're working to get all of our businesses across that whole portfolio, though towards that 13-ish percent operating margin. And we talked about at Investor Day of getting the portfolio to 12.5-plus percent by 2021, and that's still our objective, working across the brands to keep driving that.

[Operator]

And your next question comes from Susan Maklari from Crédit Suisse.

[Susan Maklari, analyst]

My first question is just can you give us some sense of the inflationary trends that you've seen? How have those changed maybe as we're approaching the second quarter? And how we should be thinking about them maybe relative to some of the pricing initiatives that you've put in across the business?

[Patrick Hallinan, executive]

So we expected at least again take out kind of tariffs from the picture and just clean it up. We expected inflation non-tariff or at least non-301 tariff commodity inflation of roughly $50 million and freight inflation of around $15 million. So think of it as total $65 million of non-301 tariff inflation for the year. And our forecast following the first quarter actual results is virtually right on top of that. We've had some favorable items like particle board and plywood and freight, where we faced a lot of uncertainty as we were switching vendors in particle board and plywood out of China, as part of that tariff scenario that's not a 301 tariff scenario. And that turned out better than we expected. But copper and zinc had been a bit higher than we have expected. But I'd say across the portfolio, you're talking inflation that's very much within the bounds of our start for the year expectations, and we don't see that changing our pricing scenario for the year.

[Susan Maklari, analyst]

Got you. Okay. And then coming into the year, with the uncertainty in the operating environment, you kind of had talked to a more cautious or more defensive approach to your capital allocation. You're definitely stepping away from M&A at least for the first half of the year. And now with things maybe appearing to come together a little bit more and we're a little further into the year here, is there any change to how you're thinking about that? Can you talk a little bit to what you've been seeing in terms of the M&A pipeline and how we should be thinking about the second half of the year?

[Christopher Klein, executive]

Sure. Yes. I think our caution was really reflective of the M&A marketplace, where we saw it get kind of quiet in the fourth quarter and anticipated that would continue, and it has been kind of quiet, really, on the part of companies wanting to sell themselves. I think most companies in our sector would have felt the effect of the fourth quarter, the first quarter market and would rather get a couple of good quarters under their belt before they come forward and represent their financials to us. So I'd say it was more of the hesitancy on the part of the sellers than on our side. Having said that, we've been engaged in a number of discussions that have been going on for a while. And so those continue, so I think, at the point when companies may be open to be selling, we haven't stopped talking to a number of opportunities. All those are within the sectors that we're in, so broadly, outdoor living, exterior, continue to have a number of discussions in the Plumbing area. And so there's -- yes, I think I can never project or predict things, but I'd say if market continues to improve and the results of some of the businesses that may want to sell themselves improve, certainly, second half of next year or second half of this year or into next year, you could see some things, and I think we'd be prepared to take some action.

[Operator]

This does conclude our conference call for today. Thank you very much for joining, and you may now disconnect.