Fortune Brands Innovations Inc

NYSE:FBIN

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to Fortune Brands Second Quarter 2019 Results 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 second 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 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 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; Nick Fink, our President and Chief Operating 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.

[Christopher Klein, executive]

Thank you, Brian, and thanks to everyone for joining us today. In the second quarter, our teams continued to execute at a high level in a soft market. I'm proud of the progress we have made, particularly in a market that looks as if it will now grow only in the 2% to 2.5% range in 2019. Although we anticipated a soft first half market, the market overall was softer than we expected in the second quarter, particularly in Canada. Despite the market, we're making solid progress on the business plans we communicated in February, which are centered on delivering shareholder value even through periods of more moderate market growth.

We have shown great discipline on capital expenses, and I'm very pleased with our progress in the first half of the year. By continuing to manage our businesses tightly with investments focused only on those areas needed to support new business and growth, we've put ourselves in a solid position to grow in the second half of the year and into 2020 as the market begins to reaccelerate.

I'm going to first take you through our updated view of the U.S. home products market. Next, I will provide my perspective on our business performance in the second quarter. Then Nick Fink, our President and Chief Operating Officer, will provide some insights into how we are driving our businesses for growth and performance improvement, followed by Pat, who will provide more details on our second quarter and 2019 outlook.

Starting with our updated view of the U.S. home products market. In the second quarter, the market for our home products was softer and came in below even the moderate pace we had planned for. We estimate that the market for our products grew below 2% in the quarter with the repair and remodel market growing around 3%. The construction spending on our product categories was approximately flat as our business typically lags starts activity by a quarter or so, and we continue to feel some impact from the weak industry performance at the start of the year.

In terms of the quarter, we started out with an April that was in line with our weaker outlook, followed by a very wet and soft May. June orders were an improvement from the trend, but overall, the market in the second quarter for our products was weaker than expected. We are now seeing some signs of the building season extending out later in the year and see indicators of stronger consumer demand for housing.

Order rates have been healthier late June and into July, and while the slow ramp-up we are seeing now is one we would have expected to see back in late April and May, the data is pointing to a modest pickup in market growth in the second half of 2019. Solid ramp-up in building product demand will only begin to show up in our results later in the third quarter and should primarily benefit the fourth quarter and set us up for a solid start in 2020.

Now let me provide some perspective on our business performance in the second quarter. In the second quarter, sales increased 5% in total and 6%, excluding FX. On the top line, we performed well given the market, particularly outside of Canada, where the market continued to trend lower in the period. Total company sales growth, excluding Canada, was up 7%. Total company operating margin was 14.1%. This was a solid result in light of: the softer market; continued tariffs at the 25% level; the investments we are making related to our Cabinet business, mostly in Mexico; and incremental expense to support the additional capacity in doors and Fiberon.

Overall, our performance in the quarter was driven by a tough posture on cost management as we work to offset the market. Solid growth in margins in Plumbing and strong sales of value cabinets were offset by weaker trends in make-to-order cabinets and the impact from wet weather on our doors and decking outdoor product lines. Despite the headwinds, we continue to be aggressive with our cost controls, and our pricing and supply chain actions are working to offset tariffs and other inflation.

Now turning to the segments, beginning with Plumbing. The Global Plumbing Group continued to outperform the market with sales growth, excluding FX, of over 6% and margin at 22.6% in the quarter. Growth was driven by above-market POS in the U.S. and continued strong growth in China as we expand our product offering and take share. Continued strong performance in our core markets more than offset the weakness in Canada where sales were down low double digits, excluding FX.

In Cabinets, I'm quite encouraged by the continued progress our team is making in pivoting the business toward growth. Sales in the targeted value part of the market, which is now approaching 50% of our total business, were up low double digits in the quarter and above our expectations as we continue to have success here and take share with our stock products. Sales of semi-custom made-to-order cabinets contracted in the high single-digit range, which is in part the result of our own success in driving simpler, high-margin product solutions to meet the changing consumer demand.

Overall, the trend is as we thought, and we're accelerating some pivot actions in response to a faster-transitioning market, including ramping up additional stock capacity in Mexico as our current facilities are already stretched to their limits and taking more aggressive cost actions by tightening capacity in the semi-custom business.

Margin performance in light of all of our actions is encouraging as we navigate a near-term drag on efficiency due to the large-scale changes we're making to the business and its supply chains in the midst of a soft market, along with some new product launch expenses. While our overall cabinet sales were flat in a market that we believe was also flat in the quarter, it's clear that we're on the right track as we continue pivoting the Cabinet business towards growth markets and reduce the costs and capacity of serving the weaker segments of the market.

In our Doors & Security segment, sales were up 19% and flat excluding Fiberon. In this group, doors continued to perform well, given the softer new construction environment and a challenging comp from last year's retail program wins and inventory loading.

In decking, we've been leveraging our unique Therma-Tru distribution strength and reputation for quality and service to attract new and existing customers to Fiberon. Due to our recent program wins, we are accelerating investment in the second half of this year to capitalize on growth opportunities that will begin to be realized in the fourth quarter and more significantly into 2020.

And in Security, our Master Lock brand is back on track on the strength of significantly improved product quality and service levels following the big product changeover last summer.

Overall, we continue to execute on the plans across the businesses for profitable growth in a modestly growing housing market that we highlighted at our February Investor Day, and I'm pleased with our progress. Although the market so far this year is picking up later than we would have expected, our businesses continue to execute at a high level, and consumers are responding favorably to our brands and other product initiatives across our categories.

So while the softer market and slower ramp in housing activity this year prompts a reduction to the high end of our full year 2019 EPS outlook, I'm encouraged by our performance and the continued strong fundamentals underpinning our market, given prevailing low interest rates, moderating new and existing home prices and continued strong consumer jobs and wage data. The impact on the aggressive actions we are taking across the company to position ourselves for growth will be better reflected in our financials as we move into the fourth quarter.

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 July, we had spent $50 million on share repurchases or about 1.1 million shares at an average price of $47. We plan to continue to use share repurchases opportunistically as a vehicle to generate attractive returns, consistent with prior practice.

We also continue to evaluate a pipeline of potential acquisitions. Any potential acquisitions in the balance of the year are more likely to be bolt-on opportunities within our core business categories, focused on plumbing and outdoor living, while we continue to evaluate select larger acquisition opportunities. Sellers of larger companies, for the most part, appear to be waiting, which could change next year when the market reaccelerates.

With our strong cash flow and balance sheet, we continue to 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 over time. As a reminder, over the next 3 years, we continue to believe that 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 Nick who will provide more detail on how we are driving performance across the segments.

[Nicholas Fink, executive]

Thanks, Chris, and good afternoon, everyone. Since March, I've been working closely with the operating teams to execute on the plans we highlighted at our Investor Day to deliver long-term shareholder value by driving unique strategies for profitable growth, all in the backdrop of a modestly growing U.S. housing market.

Our actions are driving significant improvement across the company and are positioning us to capture more predictable growth as we head into the back half of the year and 2020. As I work with the teams across our businesses, I'm impressed with the aggressive actions we are taking, specifically: the ongoing steps we're taking to build out the brands, capabilities, product portfolio and partnerships in our Global Plumbing Group so it continues to leverage competitive advantages and lead the industry from both a sales growth and margin perspective; the pivoting of our Cabinets business towards innovative products at value price points, primarily through the expansion capacity in Mexico to support growing sales in stock cabinets that have run ahead of projection; the launch of Mantra, our entry price point product for the dealer channel; and reducing fixed cost and capacity in semicustom so that the repositioning of the business creates more value in the face of changing consumer tastes and competitive threats.

In Doors & Security, the targeted smart investments that we are making in the business such as in Therma-Tru where we are making incremental investments to support new product launches and our continued investment in Fiberon is 0 tariff, 100% made in the U.S.A. business that uses 94% recycled content in its manufacturing. Like Therma-Tru, this business benefits from the accelerating trend towards performance materials and material conversion away from wood, plus the opportunity to grow significantly in channels in which we already have a strong presence.

And finally, the competitive repositioning across our company of some of our supply chains out of China, which helped us assure low cost to supply for our efficient and more automated manufacturing as well as mitigate the impact of tariffs.

About 10 months ago, as we announced the acquisition of Fiberon, we detailed plans to leverage our existing relationships and strong Therma-Tru distribution in order to grow in the outdoor living segment of the market. Since that time, we've added significant multi-site distributors, including Wolf across the Northeast and Leak's Building Products across the Upper Midwest. Last week, we announced that the Fiberon team is set to expand distribution significantly across the West and the Southwest with the addition of OrePac Building Products.

OrePac is a best-in-class, large wholesale distributor and existing Therma-Tru customer. This partnership has been instrumental to our Western U.S. growth in fiberglass doors. We're looking forward to deepening our relationship with OrePac through the addition of Fiberon as both of our companies seek additional opportunities for growth in outdoor living.

In addition to the segment-specific initiatives, we are also working harder across the company to better leverage customer distribution opportunities; e-Commerce expansion initiatives; connected home product innovations; and stronger, scale-driven indirect spending initiatives.

In summary, I've been in my role a short time, what I've seen so far is exciting. And our planning and executing remains solid. I see many opportunities for profitable growth across these businesses, which position us well to continue to outperform the market and our competition.

So with that, I will turn the call over to Pat.

[Patrick Hallinan, executive]

Thanks, Nick. 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 second quarter results. Sales were $1.5 billion, up 5% from a year ago and 1% on an organic basis, excluding Fiberon. Consolidated operating income for the quarter was $212 million, up 1% or $3 million compared to the same quarter last year. Total company operating margin was 14.1%. We remain on track to achieve our goal of around 50 basis points of full year operating margin improvement despite a softer market and the increased tariff rate of 25% on inputs from China.

EPS were $1.03 for the quarter versus $1 in the same quarter last year, an increase of 3%. EPS were in line with our expectation, and we are pleased by our team's continued ability to grow sales and earnings during a period of softer market growth, the persistence of a challenging trade environment and while navigating significant supply chain transitions within most of our businesses.

Now let me provide more color on segment results. Beginning with Plumbing. Sales for the second quarter were $506 million, up $22 million or 5% and marked the first $0.5 billion quarter in Plumbing's history. Excluding currency, sales were up over 6% in the quarter, which was above our expectation given the 9% organic sales growth rate during the same period last year. Mid-single-digit U.S. POS and continued strong growth in China drove the quarter, with reported sales results muted by Canadian housing market weakness and unfavorable FX.

Plumbing operating income increased 13% to $114 million. Operating margin was 22.6%, an excellent result, driven by cost discipline and sales leverage in the U.S. and China. 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 with operating margin around 21%.

Doors & Security sales were $366 million, up $58 million or 19% from the prior year quarter, driven by Fiberon. Sales in the base business were flat, driven by Doors, which was impacted by a soft second quarter U.S. new construction market and having to comp the inventory load-ins associated with 2018 retail distribution gains, which drove 20% growth in the prior year quarter.

Operating income increased 5% to $50 million. Income growth was muted by a price-to-tariff lag in Security that will be resolved during the second half, atypical doors mix associated with the retail inventory rebalancing and a strong comp to last year and new capacity ramp-up inefficiencies in doors and decking.

We remain on track to deliver high teens sales growth in the full year with segment operating margins of around 13.5% in 2019, driven by incremental distribution and capacity investments associated with Fiberon distribution gains. We expect our base Therma-Tru and Master Lock businesses to grow organic sales in the mid-single-digit range in 2019.

Turning to Cabinets. Sales for the second quarter were $635 million or roughly flat versus the prior year quarter. Sales of stock cabinetry in the U.S. were up 12%, including entry price point in-stock product up mid-teens and builder-grade product up mid-single digits.

U.S. made-to-order cabinetry sales, which includes semi-custom and premium product, were down high single digits, and Canada was down high teens. Sales in the segments of the cabinet market to which we are pivoting our business grew stronger than expected as demand for simple bath and kitchen remodel projects continues to be strong. The successful launch of Mantra, our new entry price point product for the dealer channel that Nick referred to earlier, is on track to contribute materially to full year growth.

Operating income in the second quarter was $67 million, down $14 million or 17% versus the prior year. Operating margin was 10.6% and in line with our expectation for the quarter as we navigate temporary transitional inefficiencies associated with the pivot and new product launch, specifically new facility ramp-up costs and tariffs associated with the safety stock as we complete and exit from Chinese wood products this year.

For the full year, we expect Cabinets sales growth in the low single-digit range or roughly in line with the cabinet market. Full year margin is expected to be around 10%.

For the company, to sum up consolidated second quarter performance, sales increased 5%; 6% excluding FX. And EPS were consistent with our plan at $1.03, demonstrating our ability to execute and drive growth and strong margin in a slower market. Our total company operating margin was 14.1%. The financial discipline and expense control we displayed in the first half will continue into the second half as we position ourselves to accelerate our financial performance in a gradually improving market.

Turning to the balance sheet. Our June 30 balance sheet remains solid with cash of $276 million, net debt of $2.1 billion, and our net debt-to-EBITDA leverage is 2.4x. We continue to have the capacity and flexibility to fund potential acquisitions and share repurchases as we delever naturally during the second half of the year and over time.

Year-to-date, we repurchased 1.1 million shares for approximately $50 million. Our approach to share repurchases 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 adjusted the top end of our 2019 EPS outlook to reflect the softer market. We now expect EPS within the range of $3.53 to $3.67 versus the prior range of $3.53 to $3.77, driven by the market and incremental distribution and capacity investments associated with Fiberon's distribution gain. We expect most of this EPS guidance revision to impact the third quarter, given the soft second quarter permits and starts in the U.S. and expected continued Canadian market softness. The updated midpoint of $3.60 represents 8% EPS growth versus the prior year.

We now expect full year sales growth of 5.5% to 6.5% versus the prior range of 6% to 7.5%.

While the market is recovering more slowly than we initially anticipated, we are encouraged by the improvement to, and stability of, demand drivers critical to the U.S. housing market, in particular, housing affordability, employment and wage growth; and by our business performance, specifically the momentum of our Plumbing business in the U.S. and China; the demand strength in the market segments to which we are pivoting our Cabinet business; and Fiberon's distribution gain.

We expect 2019 free cash flow of approximately $480 million to $500 million, which includes the accelerated investments in capacity and inventory to support new composite decking customers. We anticipate a cash conversion rate at or above 95%.

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

In summary, our businesses are executing well in a soft market and continuing to deliver structural improvement that will better reflect as we move into the fourth quarter and next year. During 2019, we anticipate our balanced approach of cost management, supply chain changes and price will fully offset tariff and other inflation within the year. We will improve our overall margin by approximately 50 basis points and drive 5.5% to 6.5% sales growth or approximately 4% growth on an organic basis in a market growing 2% to 2.5%. Our teams continue to execute well and manage expenses tightly while making rapid progress on our strategic initiatives.

I will now pass the call back to Chris for some closing remarks.

[Christopher Klein, executive]

Before we begin the Q&A session, let me build on Pat's closing comments and leave you with a few high-level thoughts as well.

We are operating at a very intense level right now across our company, transforming supply chains, executing pricing actions, simultaneously ramping up and taking down capacity to reposition businesses, launching innovation, expanding and growing categories and channels, integrating acquisitions and partnerships and winning new business. Over the past 9 months, we've been doing this in a decelerating market with tight controls on expenses and capital.

As we turn the corner and move into a gradually accelerating home products market in the latter part of this year and into 2020, we will see some significant leverage and an even higher degree of impact from all of the actions we've taken to position the business for the next wave of growth.

And while I'm pleased with our first half results, I'm even more excited about the growth and margin opportunities in front of us.

With that, I will now pass the call back to Brian.

[Brian Lantz, executive]

Thanks, Chris. That concludes our prepared remarks in the second 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 the line of Tim Wojs from Baird.

[Timothy Wojs, analyst]

So maybe just to start off first on the market. I guess I'm curious kind of what you thought Q2 was really representative of. Is it just kind of a delay from some of the weakening metrics that we've seen in housing over the last couple of quarters? Or do you feel that just the underlying R&R market is maybe just a touch softer? I'm just kind of curious if it's more of a timing issue in your mind or if it's something that maybe that growth curve is maybe just a little less steep.

[Christopher Klein, executive]

Yes. I think effectively, the second quarter was softer and delayed because of the reacceleration we expected. We're seeing that now. I think we lost a quarter along the way here. So I think where we would have expected the kind of activity that we're feeling right now in late April and May, that's what we're experiencing. So that'll lead to, we think, a healthy fall building, both new construction and R&R, but we've incorporated that -- kind of that lost level of activity in the second quarter and slower ramp into the third quarter into what we're guiding.

I think the market's still healthy. If you look at overall demand, both for new construction, especially at the entry level point, and R&R, it's still strong. I think there are parts of the country that it was tough to do R&R work, especially outdoor R&R work in late April and all of May. And that hasn't -- didn't start picking up again until June. So that impacted things like decking and doors and other outdoor activities. But we think that 3-plus percent R&R growth for the year, accelerating into kind of a normal 4% to 5% in the next year, it's a healthy market.

Clearly, the existing housing stock, turnover was a little softer. The impact of lower rates will eventually help that as housing price appreciation has moderated, both in new construction and in the existing housing turn. So all those things set up for better second half and we think a pretty healthy market. We're not calling for an enormous acceleration here. We're calling for a modest acceleration into the second half, and that's what our guidance has indicated. So...

[Timothy Wojs, analyst]

Okay. Okay. Great. That's helpful. And then just maybe I'm curious to your view, just on a high-level view on inventories, just kind of what you're seeing with your customers. You did note pretty good POS in Plumbing. And so just curious in some of your stock businesses, how you feel your customer inventories look right now.

[Christopher Klein, executive]

Sure. I'll have Nick address that.

[Nicholas Fink, executive]

Sure. Tim, how are you?

[Timothy Wojs, analyst]

Good. You?

[Nicholas Fink, executive]

Okay. Yes. I would say if you look across the inventories, it's pretty much leaned up. In the first half, I think as people are prudent and pull back a fair amount. So way we see it, it's pretty lean. We're now tracking some POS I would say that's been ahead of shipments, which makes us feel encouraged about the underlying market and they're pointed up to some really nice acceleration. As it picks up, we'll get some leverage up of inventories coming back on.

[Operator]

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

[Justin Speer, analyst]

Just a couple of questions. One on -- in terms of the guidance revision. How much do you estimate that revision was from tariffs and how much from slowing growth? And with what apparently is a List 4 tariff on the table, how should we think about that in the context of this guidance as well?

[Patrick Hallinan, executive]

Justin, it's Pat. Our guidance adjustment is virtually 100% market-driven. We have adjusted our market outlook to 2% to 2.5% versus the original 2% to 4%, so roughly by 100 basis points and have adjusted our top line by roughly 100 basis points. And we're flowing it through at a leverage rate of about 21%, which is consistent with the leverage rate we had for our full year plan and outlook. So -- but the adjustment is really a market adjustment. The range around it reflects a little bit of the timing uncertainty with some of the OrePac distribution gains and when inventories will or won't flow into that new distributor. But that's really what's driving the change to our outlook.

In terms of the List 4 tariffs, which reemerged onto the radar screen this afternoon, it's obviously something we've been tracking for a couple of years now. We've been dealing with tariffs of one form or another consistently since 2017. We've been attacking them very actively and aggressively with a balanced cost-out and price approach. The List 4 tariffs, I'm sure there'll be more emerging in the coming days in terms of specifics, but our tracking of them heretofore is that anything coming out of List 4 would be smaller than the amounts we've dealt with, with Lists 1, 2, 3 and with plywood tariffs. We would expect to manage them as effectively as we've managed previous tariffs.

We've -- in 2018, we offset roughly $45 million, $50 million worth of tariff expense in total inflation. This year, we'll have about $60 million of total tariff-only inflation, and we'll offset this year and navigate it. There's no change to the guidance that's driven with tariffs.

The 25% tariff uptick on List 3 was something we obviously were aware could happen this year. It came about probably a bit more abruptly than we would have thought of, but we're dealing with it with cost-out and with pricing.

[Christopher Klein, executive]

Yes. I'd say just to echo what Pat said on our approach here, we've taken a very methodical, balanced approach to move our supply chains and deemphasize China. We think there's a long-term trend. And so we've been working this for the last 2, 3 years.

And then we've talked before about our incremental approach to pricing. So we take frequent smaller price increases. And that, combined with our supply chain changes, have offset the tariffs and positioned us well in the market to continue to grow. So we're competitive in our market. We're growing ahead of our market while, at the same time, offsetting the impact of the tariffs. We think that's a really competitively sound approach, and we've had a lot of success with it.

[Justin Speer, analyst]

Okay. And one follow-up question from me if I can get -- sneak one in. On the Doors & Security business, how much of that headwind to the margins from investments, I don't know if you can unpack that, was from investments in the business versus the tariffs and the mix drag in terms of the full year expectation? Just thinking about the phasing of these new investments and then maybe the actual revenue benefit. Maybe help us think about how you think that phases in this year and next year.

[Patrick Hallinan, executive]

Yes. I would say that really, we've tuned up the margin expectation on that business only slightly due to both some of the weather losses in decking, we don't fully expect to recover this year and some of the investments in decking, we expect to make at the end of the year. When we came out with our original guidance for that whole segment, we signaled roughly 100 basis points of margin improvement versus '18, which was roughly 14%, and we'll be in the 13.5-ish-plus percent for that business. So call it 50 basis points. But it's really driven by a weather-softened second quarter and some of the investments we're going to be both making in capacity and field sales and marketing as we roll out some new distribution agreements.

Going forward, that segment in total should be tracking to 15-plus percent over the next 3 years, with the decking business swimming along right at the average of the whole segment.

[Operator]

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

[Michael Dahl, analyst]

My first question is just around the Cabinets business and understand the comments around the guide. But just specifically related to Cabinets, this is an area where, as you've pivoted, there have been some concerns about the ability to really ramp both growth and margin. It was never going to be quite linear. You had tough comps here as well. But can you just give us a little more detail about what you're seeing that gives you confidence that the plans that you had laid out in the Investor Day are still on track here?

[Christopher Klein, executive]

Yes. I'd say we're pretty excited about where the Cabinet business has gone the first half of the year. The stock value part of the market, which is now for us about half of our business, grew 12% in the quarter. That's much stronger than what we had anticipated, and it's the success of our positioning in that market. We're taking share, executing well. That's not just in-stock in the home centers; it's also through dealers, that's the builder market.

So where we're going to is accelerating faster. The soft part of the market, which is semi-custom, premium, special order, declined high single digits, which is consistent with where we think the market was overall. That's our plan, right? So we called that out a couple of years ago. That part of the market was decreasing. That decrease in the softer market overall accelerated a bit.

So our reaction to that is we're investing more capacity in Mexico and in our DA system in the U.S. to support that stock business, and we're moving even faster to take capacity out in the part of the market that's not growing in that semi-custom part of the marketplace.

So directionally, everything is consistent with where we've been driving this business for the last 2 years and, if anything, accelerated in the second quarter, and we think it will continue to move into the second half.

One thing I've noticed, we talked a bit about the China imports. We think the impact of some of the tariffs that are already in place are slowing that, and we await the ruling of commerce on the antidumping, and we think that's beneficial as well. So we've noted in the market that less of that product's coming into the market and that'll work its way into less relevance down the road.

So I'd say everything we've laid out, including everything we talked about at the Investor Day, is in line. I kind of look at it like a teeter-totter a little bit. In the part of the market, that stock value part, teeter-tottered up a little bit more and the semi-custom premium teeter-tottered down a little bit more. And we have responded in kind and are accelerating. So we're getting to our end state on a rapid pace, and I like where we're positioned competitively in the market.

So I think the margin coming in at 10.6% was consistent with our plan and where we're going to see the year. There was some inefficiency in the quarter as we're managing through fuller capacity down in Mexico and carrying a little bit of excess capacity in that semi-custom premium and as we're speeding up the ramp there. So we're still going to come in 10% at least on the margin side in Cabinets, and we're still going to come in positive in the low single digits on growth. And that's, I think, better than the market overall, and we're positioned well for the future.

So I think as you said at the beginning, it's a little messy, but the Cabinet business has been a little bit messy for a little while. But we're real comfortable with where we're managing it to. So I think it was just an acceleration of those trends in this second quarter.

[Michael Dahl, analyst]

The comprehensive answer, Chris, that was helpful. And then my second question, just if I broaden it out a bit. Nick, I think this is your first time on the call. You outlined in your prepared remarks a number of different initiatives. I think some of them have been underway. Some of them are newer. But just can you talk a little more about, as you've gotten deeper into your new role, what are a few of the initiatives that you highlighted where you'd look at those and really point out some that are real needle movers? And then what are some of the other things that you've seen over these past few months that maybe you'd do differently moving forward?

[Nicholas Fink, executive]

Sure. Happy to talk about that. I'll step back for a sec and just say being in this role and looking across, it's hard not to be excited by how well our teams are executing across the businesses in a softer market while they're also moving some really big growth initiatives forward and making significant supply chain transition. So if you look at all of that happening in the results they delivered while they're really moving those big initiatives, that sets us up to accelerate really quickly as the markets accelerate, right? And so that's just the great backdrop, so a lot of time spent on that. But then as you mentioned, in addition, we're also working on a number of initiatives across Fortune Brands, right? So we're spending more time talking to customers together. We're sharing insights. We're leveraging the relationships that we have across business to open up new points of distribution, new types of programming.

We're also, I think, doing a better job leveraging our know-how across the business in doing things like developing our e-commerce capabilities, which we've grown up in different parts of the segment, geared towards different parts of the market that are very leverageable capabilities. The same applies also for connected home products. We've built that up in different parts of Security and Plumbing. Those teams are now working more closely together to develop the next gen of products, leveraging the capabilities that we built.

The costs side, we're also working. We're driving incremental value here by really leveraging our indirect spending power much better across the entire enterprise. And then you put those against the backdrop of just working hard at the strategies we articulated during our Investor Day in Boston, which I think has proven to be spot on, team's working hard against those but constantly looking for opportunities to enhance and accelerate those strategies, spending a lot of time there. And then as we move through the strategic planning cycle, really working on what is the next horizon of growth.

And so you kind of sum all that together, really encouraging to have kind of really solid performance in the soft market while building on these initiatives, which set us up to accelerate really nicely as the market picks up.

[Operator]

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

[Philip Ng, analyst]

Can you give us a sense where you are with your price increases for the full 25% tariffs? The reason why I'm asking is because a competitor of yours reported, it seemed like they saw a bigger lift on margins with costs associated with the tariffs not really coming in later in the year, and they got pricing now. Not sure if your approach of smaller increases had an impact.

[Patrick Hallinan, executive]

Phil, it's Pat. There's a few areas where we're working price increases in on the 25% range, but our approach is balanced. And so we have been aware that 25% was a potential outcome for the year. We've been working across all of our businesses on a mix of cost and price. And there's a few areas where people have some second half pricing coming in, but it's not the only way we're addressing the 25% tariff.

And consistent with our guidance at the beginning of the year and our guidance coming out of the first quarter, we're going to address inflation, inclusive of tariff, with a mix of cost and price. The total amount of inflation for the year, inclusive of commodity inflation, tariffs and logistics is around $100 million, and we'll address it with, as I mentioned, a balanced cost and price approach by the end of the year.

[Philip Ng, analyst]

Got it. Okay. That's helpful color. And just given the pivot -- given the success you've had in the pivot in Cabinets, Pat, I think if I heard you correctly, you're expecting growth for cabinet -- your Cabinets business to track more in line with the market. So one, did I hear you correctly? I would have thought the pivot would have helped you outpace the market. And given how strong the value side of things have been, are you planning to make an even larger pivot going forward?

[Patrick Hallinan, executive]

Well, we're certainly accelerating the pivot, as Chris was mentioning on both prepared remarks and some Q&A response. I think we've been surprised this year at the strength and demand of the segments to which we're pivoting as a softness in the custom and semi-custom arena. So we're pivoting strongly to address both of those dynamics.

We've said all along that our focus is, first and foremost, on driving margin improvement and growing with the market, and that's still our strategy. We expect the cabinet market to be in the low single digits this year, and we expect our Cabinet business to grow 1% to 2% this year, somewhat is being muted by Canada. But we feel like that's broadly in line with the markets in which we play, and we're going to be focused on margin improvement.

And we signaled, both at the beginning of the year and on the second quarter call, which we usually don't try and signal too much quarterly guidance, we knew in the middle of the year, we'd be going through transitions as we ramped up new capacity in Mexico, as we brought in a new entry price point product line in the dealer channel and as we transitioned a big chunk of supply chain out of China and had to address some inventory build associated with that.

So all those dynamics are coursing through the margin in the middle of the year. It's in line with our expectations. And a business that generated first half margins around 9.3% will generate back half margins in the 10.5%, 11% range and finish the year around 10%. And we've guided people to think of our cabinet progression more in half year increments than in quarterly increments. And I would say that's going to be the case, not just in fiscal '19, but even as we go through fiscal 2020.

[Operator]

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

[Michael Rehaut, analyst]

First, I just wanted to try and get maybe a little bit of a finer point around, from a segment level, what's driving some of the changes in consolidated guidance. Because, overall, I believe when you think about the segment top line guidance, seems like you reiterated Plumbing on the top line as well as Doors & Security. Maybe Cabinet's now up 1% to 2% maybe versus prior, maybe up 3% to 4%. Are we also to take it that in terms of just backing into the overall consolidated sales growth going down by about a point or so, that in Plumbing and Doors & Security, that high teens growth for Doors & Security, the mid- to high single digits for Plumbing, maybe that's skewing a little bit more to the lower end?

[Patrick Hallinan, executive]

I think, Mike, there's been adjustment across all of the segments. It's a bit less pronounced in Plumbing just because Plumbing competes in China, and China has remained strong. But I think you're generally in the right direction. I think you should think of Cabinets for the full year in the 1% to 2% range. Plumbing, you should have in the 5.5% to 6.5% range. And Doors & Security, I would say you're in the 15.5% to 16.5%, maybe 17% range, depending again on how some of the distribution gains play out, and that's going to get you in the 5.5% to 6.5% range for the enterprise in total.

But it's -- there's no single big adjustment in one chunk of the market. I think we're acknowledging in the decking world, where you have an ultra-rainy second quarter, you don't get that back. And Plumbing doesn't adjust as much as maybe some of the others because it has China exposure, but other than that, it's pretty much across the board.

[Michael Rehaut, analyst]

That's helpful, Pat. I guess, secondly, just wanted to focus in on some of the investment and the new distribution sign-ups for Fiberon. I'm just trying to get a sense, number one, what type of drag that might represent on the Doors & Security segment in terms of the investment, if that's had -- what type of drag that might have been if it has had an impact on 2Q and the second half of the year. And then conversely, in terms of the new customer or distributor sign-ups, how should we think about what that impact -- how that might impact the segment's growth prospects for 2020?

[Christopher Klein, executive]

Sure. Happy to address that, Mike. The Fiberon business, we've owned for, I guess, about 10 months now. And when we bought the business, we said it was a very solid operating company, but they didn't have a strong presence at all in wholesale and didn't have a strong brand and could use some help on innovation.

In the last 10 months, we've done some extraordinary things there. We have signed up a number of new distributors and really leveraging the Therma-Tru distribution system. And so it's not just -- we announced one last week, which was of significance. But if you take all the new business that we've contractually signed up in the last 10 months, it ramps to over $100 million incrementally on a business that we bought that'll do about $200 million this year. So it's a 50% increase over the next 3 years. So it's massive.

As it sits here today, we are blown away with the success we're having at Fiberon. It's a big deal. So we're having to put more capacity in to support business out West, some business in the East, expansion of the product line. And so it, I'd say, had modest impact in the second quarter. It'll have a little bit more impact in the second half. But we're going to start ramping a lot of this product distribution coming out of -- into the fourth quarter, but more importantly into 2020. And we'll give full detail of that when we give 2020 guidance.

But this is not incremental and kind of interesting. This is setting up to position us as we thought all along as a really strong #2 in the market overall. That's why we bought the business. We've had more success than we thought. So I think that's kind of the general -- I don't know, Pat, if you want to give any more detail on the incremental impact. But the context of, I've said all along, the best investments we make with our capital is into organic growth, and I haven't seen this kind of tremendous opportunity in organic growth in our company in a really long time. So every incremental dollar I can put into capacity in this market right now, I'm going to vector into it. And so it seems to [ just ] have a little bit of a drag. It's a great drag. I love it. I am usually enthusiastic if you can't pick that up.

[Patrick Hallinan, executive]

Yes. I mean, Mike, to put it in context, for the year, we'll spend an incremental mid-single-digit millions, but we're doing it to take a $200 million business and make it a $300 million business in the course of 3 years. And as I said, we would expect in that time frame for it to be driving an OI margin north of 15%, if not on the high side of that percentage range.

So we feel like these are wise investments with short paybacks. We've signed up some great channel partners, and we fully anticipate supporting them with capacity inventory and field resources so they can be successful.

[Michael Rehaut, analyst]

That's great to hear. And obviously, these types of investments that you've made in the past, it's played out very well.

[Operator]

Your next question comes from the line of Michael Wood from Nomura Instinet.

[Michael Wood, analyst]

Wanted to ask you about ad spending in Plumbing in second quarter, just how it fared relative to your normal cadence and how that might look in the second half relative to the current run rate.

[Christopher Klein, executive]

Sure. Ad spending in the second quarter for Plumbing, that was the question?

[Patrick Hallinan, executive]

Yes, yes. I don't know that I can say the number with precision. All of our businesses have been focusing their expenses thoughtfully, and the Plumbing business has been prioritizing innovation and ad spending on the hero for water campaign. We tend to be, on a full year basis, spending in the tens of millions, less than $50 million. And there was nothing about the second quarter that was higher or lower than what we typically expected throughout the course of the year.

[Christopher Klein, executive]

Yes. What I will say though about that is that I hear the hero for water campaign is it has driven some really impressive results and millennial and female consumers. And so we will continue to invest behind that campaign, that it really is moving the needle, particularly then when coupled with some of our innovation, which really drives holistically to support the brand and its reappraisal as we kind of move this thing forward.

[Michael Wood, analyst]

Okay. And also, you talked about the direct impact that you're managing well from tariffs. How are you thinking about the cumulative impact that's having on the consumer and how that might impact housing demand later this year and into next year?

[Christopher Klein, executive]

Yes. I think there is a limit on pricing that you can push through, and that's why we've taken a balanced approach over the last couple of years, both aggressively moving on supply chain and then incrementally taking price so that you're not overwhelming the consumer with big price increases. I think our channel partners are taking an equally measured approach.

So I think, effectively, we're kind of working through it. You've got to balance it in terms of affordability as well with lower interest rates. There is wage inflation that's increasing, so the consumer is taking home a bit more, especially with the lower taxes. So in terms of overall affordability, those metrics look a lot better this year than they did at this time last year. And so I think we're moving through it. I don't think this latest round is going to have us toward a tipping point. And I think for us in particular, we're going to remain very competitive, given the measured pace that we've taken on pricing.

[Operator]

Your final question comes from the line of John Lovallo from Bank of America.

[John Lovallo, analyst]

First question is there is a lot of talk about Canada on the call today. I was curious if you see the market kind of in a similar light to what's going on in the U.S. where some of the data on the new construction side, at least in Canada, seems to be improving a bit. And if you think that it's just a matter of a quarter or 2 before we start seeing a little bit of improvement on the R&R side.

And then maybe along those same lines, if you could just help us kind of dimension the exposure you guys have to Canada in each of your segments.

[Christopher Klein, executive]

Yes. Just the macro part, the Canadian government now back over a year, put in place some measures to discourage foreign investment in the housing market and really try to suppress the bubble that they saw emerging, especially some of the -- in some of the hotter markets. And it's worked. So they've been very effective at taking the housing market down. And so that'll eventually annualize. And so we'll see some signs of improvement there as it annualizes, those actions we're kind of looking at it as it's kind of onetime actions to deflate the market. So we'll live it for the balance of this year, but then it'll stabilize as it annualizes.

I don't know, Pat, do you want to give any more information on that?

[Patrick Hallinan, executive]

Yes. I mean, John, we have about 10% of our total enterprise exposed to Canada. That has driven a 15 to slightly more than 15 in Plumbing and a little bit more than 10 in Cabinet. So it's really driven by Cabinet and Plumbing. And for Plumbing, it's a big, important market for us. We have a very high share in that market, every bit as high as our U.S. share, if not higher. And in Cabinet, we participate particularly in new construction and particularly in the Western part. And as Chris was mentioning, their housing dynamics have ebbed and flowed more with foreign buyers and natural resources, in particular, oil. So we don't read the Canadian market as a proxy for the U.S. market. They have their own set of dynamics. I do think we'll start comping those much more easily by the fourth quarter of this year, but I still expect them to be low growth in the fourth quarter and into next year and with a really tough in the third quarter. But I think Canada will work its way out of its housing market situation based on how it navigates foreign buyers and based on the price of oil and other natural resources. I think it's not analogous to the U.S.

[John Lovallo, analyst]

Okay. That's helpful. And then maybe just one last one here. You took the top line expectations in slightly and also the EPS expectations. I didn't hear anything on EBITDA. Was there any update there?

[Patrick Hallinan, executive]

It's proportional. We would have guided you to around 9 50 at the start of the year and 9 30-ish now. But it's all proportional to the sales and the EPS adjustment.

[Christopher Klein, executive]

Thank you.

[Operator]

Thank you for joining today's conference call. You may now disconnect.