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Fortune Brands Home & Security Inc  (NYSE:FBHS)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Home Security Fourth Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

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

Brian Lantz -- Senior Vice President of Communications & Corporate Administration

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 fourth quarter of 2018 and provide our 2019 guidance. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and the market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC, such as our annual report on 10-K. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

Any references to operating income, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis for continuing operations with the exception of cash flow unless otherwise specified.

With me on the call today are Chris Klein, our Chief Executive Officer; and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we've allowed some time to address questions that you may have.

I will now turn the call over to Chris.

Christopher Klein -- Chief Executive Officer

Thank you, Brian, and thanks to everyone for joining us today. In the fourth quarter our sales growth and the overall market slowed. Despite the market, we made clear progress in our cabinets business and our continued strong results in Plumbing and Doors.

In general, however, consumers and channel partners adopted a more cautious stance at year end and did not order at a typical rate heading into the new year. Concerns over trade wars, interest rates and the housing market itself had a clear impact on demand, while we did not factor in the magnitude of the second half housing market pause earlier in the year. We now understand the key drivers and expected to pass through the system over the next six months and project a modest increase in second half growth. I'll have more to say on the market and our outlook at the moment.

In 2018, our teams executed at a high level during a volatile year. Sales grew 4% and our operating margin was 12.8%. Are these results were below our initial expectations, we made significant strides across the company to address market and industry challenges and consciously increased our exposure to the more stable and predictable segments of our markets. These actions reduced our fixed costs, significantly reduced our exposure to a potential 25% tariff and set us up for improved financial results and growth in 2019 and beyond. Using more detail on these actions directly from the Division President and our Operations Leader at our investor event in Boston next Wednesday.

On top of the changes, we made inside of our businesses, we also delivered incremental growth during the year as we spent $470 million on the Fiberon Composite Decking acquisition. We purchased $695 million of our shares and again increased our quarterly dividend by 10%.

All in all, our teams have continued to execute well against our strategy. We remain confident in our ability to outperform in a market that continues to show signs of strong underlying long term demand based on the number of newly forming households, the aging housing stock and underlying consumer confidence.

Importantly, our product and brand positions remain strong and the changes we have made and the businesses we have acquired set us up well for continued growth in 2019 and beyond. We first take you through our fourth quarter results and my thoughts on our full year performance in more detail. Then I will discuss our view of the US home products market. Our 2019 outlook for sales and EPS growth and our thoughts on capital allocation.

Beginning with the quarter. Overall sales increased 3% with continued strength and coming into our products, partially offset by general market softness across categories. Importantly, our cabinet business saw stability and sales with priority segments performing well as the significant changes we are making in that business began to show tangible results.

Total company operating margin performance was 12.7% led by a strong result in plumbing, our margins increased a 150 basis points. Our two other businesses were more impacted by the flow through of lower volume and higher commodity and labor costs. Additionally, Doors & Security had a few non-repeating items and security as we reposition parts of that business which Pat will cover later.

Turning first to the Plumbing segment. Plumbing sales were up 4% in the quarter. This was solid performance against two years of very strong fourth quarter comps and softer market this year. The growth was driven by high single digit growth in our core US wholesale business driven by solid POS and some shipment timing capability from Hurricane Florence in the third quarter. Broad based strength internationally in Latin America and China with sales rising double digits in each region and the successful integration of our latest Plumbing acquisition. The premium freestanding tubs we sell under the Victoria and Albert brand.

As we've seen in China, we view continued category expansion and selling of our room as a path to continued market outperformance in our Global Plumbing Group. In 2018, and the GPG performed exceptionally well in a tough environment and has delivered on our high expectations through its first two and a half years. The 22.3% operating margin we delivered in the fourth quarter as a signal that we can maintain are roughly 21% target operating margin and deliver above market growth even in a slower market with significant input cost pressure.

As we look into 2019, the GPG is bringing a lot of innovation into the market. Some of this is our normal cadence of style and finish refreshment. In addition, we have a wave of adjacent category products coming through supported by a number of strategic partnerships that we have entered into in the second half of 2018. You'll hear more about these partnerships next week. I look forward to introducing you to Nick Fink in Boston. He'll provide greater detail on how his team has delivered the exceptional results they're posted thus far and his team's plans for the future.

Turning next to the recently formed Doors and Security segment, sales were up 7% for the quarter. Sales of door products grew double digits again as the furniture team continues to innovate and drive growth even during a time of lower housing starts in the back half of the year.

The combination of wholesale growth through innovation and share gains plus the continued success and expansion of our doors and the R&R program at retail, which has meaningfully increased our R&R mix within in door products, offset the market related headwinds. We expect this trend to continue in 2019 as the furniture team maintains its industry leading ability to manage input costs and realized price.

Sales of Security products were down double digits in the quarter driven by a decline in international sales due to softness with key European retailers and several non-repeating prior year fourth quarter promotions in our US retail business.

While non-repeating items caused sales of margins to slip in the quarter. The good news is that we have completed the product upgrade to the more secure ball bearings locking technology for our core padlock lines. And the operational and manufacturing challenges of the summer are now behind us. Prices addressing material inflation and tariffs as we entered 2019 and under the new leadership of Brett Finley we are implementing some of the same success drivers in Master Lock that has significantly accelerated furniture results over the past three years.

You'll hear more about these initiatives to simplify, focus and grow the business directly from Brett on Wednesday during our investor event. In composite decking our Fiberon unit added about a point of growth in the quarter, but Q4 being the seasonally slowest period for deck sales.

Fiberon was slightly dilutive to EPS given deal cost some incremental investments and lack of seasonal leverage during the short time we have owned it. The integration is progressing rapidly and smoothly. As we get deeper into the category and its potential overlap with our existing portfolio and distribution we remain excited about the opportunity to grow in the outdoor living segment of the market.

In our Cabinet segment, sales were flat in the quarter and up 2% excluding strategic business exits. Similar to recent quarters, sales of value products were stronger than the overall market and sales in our in-stock cabinets and vanities and builder direct businesses were both up high single-digits in the quarter. Sales in our largest channel dealer grew low single digits led by value product lines. Sales were lower in Home Center special order and in Canada when the market continues to trend softer than what we see in the US. Our Cabinet business is reversing the negative sales trends we saw earlier in the year, even after including the headwinds from the exited business. Although the middle of the market remains somewhat sluggish. Our margin associated with these products is trending positively, as we have successfully increased price, reduced our levels of motion, move forward with two fewer plants and continue to aggressively migrate our supply chain. With direct result of the aggressive actions, our margin reflected some improvements. A tangible sign that we continue to be on the right track and pivoting the business.

Regarding our candidates pivot, it's clear we are parts of the business that are performing very well, particularly the value of products, where we have over $1 billion in sales annually. Margins associated with these products, continues to be very attractive, despite the low price points. Since we have access to a large, low cost production platform specifically designed for these products, it doesn't come with a cost or complexity associated with more custom, made to order products. Our unique capabilities in Mexico facilitate this business. As we continue to execute on our pivot actions, we're reopening the path to margin expansion beginning in 2019, even as the share value of products grows within our overall cabinet mix.

From middle of the market from my custom cabinets, we continue to undergo a complete transformation that began in the second half of 2017 and will continue into this year. In 2018 with close two facilities invested in capacity for lower priced products, migrated our supply bases footprint and took headcount and spending reductions across the Board. In 2019, we'll take even more actions to balance the cost structure. And at the same time launch a broader range of values semi-custom products.

So to sum up cabinets, sales growth in the quarter improved and that good margins despite inflation and continued tariffs on plywood. As we look forward, we see growth in 2019 for our cabinets business in the mid-single digits, inclusive of the market dynamics we see and repositioning actions associated with our pivot.

In addition to improving our financial results, our actions have increased our exposure to areas of more stable and predictable growth within the cabinet industry. Lastly, as we enter 2019, we're covering inflation with price and supply chain initiatives.

Next week you will hear from our Cabinet center, the advantage, who go into greater detail on the industry, the progress on our pivot point and our 2019 and longer term outlook for this business.

Turning to our total company performance for the full year. In 2018, we execute well against our strategies in a volatile and uncertain year. We grew our sales and earnings despite the softer market and also deployed a significant amount of capital in an opportunistic way and added exposure to the outdoor living market in a way that we believe will create significant value for shareholders moving forward. There're solid performance in the face of a much softer second half housing market, a spike in inflation tariffs and interest rates, a severe hurricane that shuttered our US plumbing operation in some cabinets plants for several weeks and persistent uncertainty on trade policy.

In the full year 2018, we grew sales by 4%, reduced by 8% and delivered total company operating margin of 12.8%. Importantly inside each business we made significant progress in our strategies to enhance our sustainable competitive advantages and achieve profitable growth.

In plumbing, we proved our GPG strategy can perform through a volatile and softer demand environment while maintaining a strong operating margins for the segment. In Doors and Security our continued share gains with doors gave us a broader platform to build upon, and our 2019 plan now includes investments to accelerate even more growth with the acquisition of Fiberon.

We expect solid margin improvement in 2019 as our leadership and new focus on security takes hold and we introduce new electronic products particularly in the commercial channel. And in cabinets, we stay disciplined and focused on profitable growth on navigating the promotional environment, continued trade labor constraints, plywood tariffs and elevated demand for low price points and simpler projects. With our disciplined strategic approach, we're committed to accelerating sales and profit despite the challenging market backdrop and some changes in mix and we are focused on leveraging our industry leadership, supply chain and scale.

Now let me turn to our full year outlook for 2019, starting with our view of the US home products market. Our outlook for 2019 for modest US home products market growth of 2% to 4% with a slower start to the first half. This industry growth rate is slower than we were predicting last year and incorporates the consumer reaction to the interest rate environment, which is stabilizing. The home price inflation which is moderating higher levels and more modest economic growth in the US economy.

We are bouncing these forces as constraints to underlying fundamental demand which would otherwise support higher growth rates for housing and home products. Within that overall assumption we anticipate the pace of repairing remodel will be more resilient but will show somewhat as well to roughly 4% versus 5% in prior years. New construction is assumed to grow at 2% to 3% in 2019. Single family is expected to continue to grow a bit faster than multifamily and single family entry level activity is expected to remain stronger.

Our total global market which includes assumptions for the US market as well as our other international and security markets is expected to grow at a combined 2% to 4% rate for 2019. Based on that total global market assumption, continued internal improvements and the recent Fiberon acquisition we expect solid top line growth for 2019, with our full year sales increasing 6% to 7.5% over 2018 or approximately 3% to 5% on an organic basis.

With this market and sales growth, our teams are focused on delivering full year EPS before charges and gains in the range of $3.53 to $3.77. This is an outlook we have linked tightly to the softer market we saw in the second half of 2018. We're also soon we will address tariffs and continued inflation with expense control, supply chain actions and pricing. In order to deliver on our plan.

So in summary, our 2019 outlook is based on more moderate market growth assumptions. We'll continue to execute on our growth strategy and I feel good about the momentum that our teams are carrying into the year. On top of the improvements we made to our core portfolio, 2018 was a solid year for capital deployment. Required Fiberon who purchased $695 million of our shares, and again increased our quarterly dividend.

Additionally, I'm very pleased with the timing of our $600 million investment grade bond deal and the rate we were able to secure on the financing.

We'll continue to focus on creating meaningful incremental shareholder value by using our strong free cash flow and balance sheet to make strategic acquisitions and return capital to shareholders. In 2019, however, we anticipate the overall pace of M&A activity to be quieter in the first half and for the year you will likely see us balance continued share buybacks, modest M&A and some natural deleveraging given our plan to EBITDA and cash flow growth. We currently have $440 million remaining on our existing authorization for share repurchases.

Regarding acquisitions, we continue to look for long term opportunities that make sense strategically with the focus on Plumbing and Door (ph). We have a strong pipeline of opportunities, but sellers may be apprehensive in the current environment especially in the first half of the year. If market growth improves throughout the year and there is more clarity on trade, M&A activity could pick up.

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

Patrick Hallinan -- Senior Vice President & Chief Financial Officer

Thanks, Chris, and good afternoon. As Brian mentioned, the best reflect ongoing business performance. The majority of my comments will focus on income before charges and gains from continuing operation. Let me start with our fourth quarter results. Sales were $1.4 billion up 3% from a year ago despite a softer second half market which impacted all of our businesses.

Consolidated operating income for the quarter was $181 million down $5 million or 3% compared to the same quarter last year. Consolidated operating margin declined 70 basis points to 12.7% as lower volume, inflation and onetime items in security impacted margin. EPS were $0.86 for the quarter and grew 8% versus $0.80 the same quarter last year.

For the full year, EPS were $3.34 versus $3.08 last year increasing $0.26 or 8%. These results were below our plan and expectations and reflect a market that was significantly softer in the second half of the year than we anticipated even 90 days ago. As we enter 2019, all of our businesses are prepared to manage expenses and capital tightly during what we expect to be a soft first half.

Further they are focused on growing in the most promising portions and their respective markets. Our 2019 expectation is to grow above market and drive margin improvement and we are well-positioned to do so. Now let me provide more color on segment results. Our plumbing sales for the fourth quarter were $488 million up $19 million or 4% driven by strength in US wholesale and China. Acquisitions and FX roughly offset each other with each having roughly a one point impact on sales. Operating income increased $11 million to $109 million up 12%. Operating margin for the segment was 22.3%, an extraordinary result driven by excellent management of inflation and expense as the market softened throughout the second half of the year.

For the full year, plumbing sales of nearly $1.9 billion increased $163 million or 9%. Operating income of $396 million was up $30 million or 8% versus the prior year. Operating margin was 21%. Again a great result given the extreme inflationary pressure throughout the year. The global plumbing group is continuing to deliver on our strategy of growing sales of our market while maintaining an operating margin around 21%. In 2019, we expect plumbing sales to grow mid- to high-single digits, the plumbing group continues to target operating margin of around 21%.

Turning to Doors & Security. Sales were $307 million, up $20 million or 7% from the prior year quarter. Sales growth was led by another double digit increase in doors and the Fiberon acquisition, partially offset by a double digit decline in security. Throughout the second half of the year, we moved decisively and aggressively to reposition the security business around its best growth opportunity and set up margin expansion. These actions have included upgrading the leadership team, improving manufacturing and service level, discontinuing some non-core business and low margin promotional events and recognizing onetime charges, as we reset the business and position it for a strong 2019.

Excluding the non-repeating items and seasonally low Fiberon stub period, operating margin was 13.3%. For the full year, doors and security sales increased 8% to $1.2 billion, operating income was down 5% to $155 million and operating margin came in at 13.1%. The security product upgrade we made during 2018 presented greater operational challenges than anticipated, extreme inflation exacerbated the situation. New leadership has improved operational performance and service levels and is addressing price commodity more effectively. We expect the security business to return to growth and margin expansion in 2019.

As Chris mentioned, the president of this group Brett Finley, will address these efforts next week in Boston. In 2019, we expect total doors and security sales growth in the high teens, inclusive of the Fiberon acquisition. We expect mid- to high-single digit organic growth as doors complete its retail rollout and security reignites growth. Operating margin next year is expected to improve by 100 basis points, reflecting the operational and commercial improvements in security and a full year of production from and lapping of the acquisition cost associated with Fiberon.

In Cabinets, sales for the fourth quarter were $625 million or flat versus the prior year quarter. Excluding business exits cabinet sales were up 2%. Sales of in-stock cabinets and vanities grew high single digits on continued solid demand for these products, excluding the exited US homecenter business.

Dealer sales increased 1% and saw high single digit sales growth and stock products primarily sold into new construction as we took share with builders in certain parts of the country. Builder direct sales were also up high single digits. Homecenter special order sales were down in the quarter but lesser than earlier in the year. As we apply targeted promotions offer higher price base.

Cabinet operating income in the quarter was $62 million, down 7%, an operating margin was 10%. Operating margin was 11.3% adjusting for an additional week this year. Our operating margin continues to demonstrate sequential improvement and in the fourth quarter our operating margin exceeded the prior year on an apples to apples basis. In Cabinet, the year of transition was expected. The market was weaker than anticipated with second half. However our in-stock and stock product lines continue to pose solid high-single and mid-single digit growth respectively even in a softer market. We continue to make progress in expanding the share of these product line, so the balance of our cabinet portfolio, we continue to improve the cost structure to enable margin expansion in 2019 and beyond.

In 2019, we expect cabinet sales to grow approximately 3% to 4% and margins to improve by approximately 70 basis points.

To sum up consolidated fourth quarter performance, sales increased 3% and EPS were $0.86. The results were below our plan and expectations. However, we are well positioned to deliver a solid 2019 and what is expected to be a softer market. Our Plumbing and Doors teams continue to outperform the industry and our cabinet business -- has a starting 2019 with an improved cost structure. Importantly, we have taken the price and strategic steps necessary to deliver improvement in 2019.

For the full year, sales increased 4% and EPS grew 8% to $3.34. Total company operating margin was 12.8% or 80 basis points lower than the prior year.

Now turning to capital deployment. During 2018, we repurchased $695 million in shares. We spent approximately $470 million on the Fiberon acquisition and approximately $115 million on dividend and increase the 2019 dividend rate by 10%. 2018 free cash flow was $465 million reflecting a conversion rate of 95%. Even after meaningful capital deployment in 2018, our December 31 balance sheet remains solid. Cash was $263 million, debt was $2.3 billion and our net debt to EBITDA leverage was 2.4 time. Additionally, we have significant flexibility to finance investments and deploy capital to drive incremental value. Our proven ability to generate solid free cash flow allows us the flexibility to continue to deploy capital to create shareholder value or to deliver naturally over time.

Turning last to the details of our outlook for 2019. Based on our assumption of the US housing and global market growth, both in the range of 2% to 4%. And continued solid performance by our Plumbing and Doors team that continue to outperform the market. We expect full year 2019 sales to increase 6% to 7.5% inclusive of the Fiberon acquisition. Excluding Fiberon, we expect 2019 organic sales growth between 3% and 5%.

Our resulting outlook for 2019, EPS are in the range of $3.53 to $3.77. The midpoint of our EPS outlook reflects an increase of over 9%. This 2019 EPS outlook excludes any incremental capital deployment and includes the following assumptions. Interest expense of around $94 million, a tax rate between 25% and 26%. An average fully diluted shares of approximately $142.5 million.

For 2019, we expect the first half to present a soft start to the year. We expect first half market growth of 2% to 3%. For the first half we expect EPS growth of roughly 6%, 7%, and sales that are roughly 5% to 6% reported and 3% to 4% organic.

To sum up, fourth quarter and full year EPS were below our expectations, but our overall business model is more flexible and resilient as a result of the changes we have made in response to a softer market and inflation. Accordingly, our 2019 growth projections are based on modest market assumptions. The momentum we have created with the global plumbing group and the new growth avenues we have opened in outdoor living with the Fiberon acquisition, give us confidence in continued solid growth and margin expansion in the coming years.

Accordingly, we are targeting a 50 basis point consolidated operating margin increase in 2019, you will hear more about our long term operating margin target for each business next week.

I will now pass the call back to Brian.

Brian Lantz -- Senior Vice President of Communications & Corporate Administration

Thanks, Pat. That concludes your prepared remarks in the fourth quarter of 2018 and our full year 2019 outlook. We will now begin taking a limited number of questions, since there may be a number of you would like to ask a question. I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Questions and Answers:

Operator

Certainly. (Operators Instructions) Your first question comes from the line of Susan Maklari from Credit Suisse. Please go ahead. Your line is open.

Susan Maklari -- Credit Suisse -- Analyst

Thank you. Good afternoon. I guess, to start out with given all the sort of perspective that you have, can you just talk to what you guys are seeing in the market. We've, obviously, had a lot of crosscurrents as it relates to the new home side of the market, the consumers. So I think maybe your perspective in terms of what you've been seeing could be really helpful?

Christopher Klein -- Chief Executive Officer

Sure. On the new construction side, I'd say, we saw some softening in the third quarter and when we last talked with you 90 days ago, we obviously revised down the outlook. It fell off more significantly in November, December, which I think is pretty widely understood now. And I think, we just saw a consumer pullback out of the market both on the new construction side and on the existing housing stock turnover side of the market. And if you look back and if you look at where interest rates were coming into September from that point up through middle of November, they moved up an incremental 50 basis points.

You saw a cumulative impact of a lot of housing inflation really hit kind of tipping point into October, November. And so, you saw the consumer pulling back, equity markets pulling back. It hit that side of the marketplace. R&R bridges that remain somewhat resilient, although it came off as well. So I'd say we say R&R weaken in the quarter as well.

So we took all that, and as we were building our plans for '19 given that we lag especially new construction side, we approached the marketplace for '19, I'd say in a -- I don't know if I'd say sober or conservative way, I'll chose sober. So I think we kind of came into the year and assume that some of the carryover effect of the new construction side will carry over into the first half or especially the first kind of three, four months of '19. So, really kind of a flat very modest growth in the construction side.

R&R probably continues to be a resilient, but at little softer pace 3% to 4% for the first half. And then, we think the market will pick back and get its kind of see underneath it and move back through in '19. So that's how we build our plans. We were tight on costs. We got a lot of growth coming through. But we just said, we're going to be looking at sober start to the year and then roll it through.

And I'd say, OK, we're sitting at the end of January which is about soft as it gets in terms of December, January are the quietest periods in the construction market. But market is about as we thought. And so I'd say, you look across landscape and there's certainly is activity that's starting up again. But it's kind of still early in the year. So our outlook as we kind of projected out for the year looks pretty good as I sit here at the end of January.

So things summarize it, surprise that it got quite a bit softer in the fourth quarter, the underlying fundamentals of the market where still comfortable with in terms of the drivers of housing activity, household formations, the age of the housing stock, disposable income, even consumer confidence, although, the overall consumer confidence index tick down the housing-related portion of that was positive.

So I would say, we're optimistic long-term and we're optimistic second half, but I'd say we kind of want to come into the year and just be realistic about how it might start out. So I hope I answered what you were looking in there?

Susan Maklari -- Credit Suisse -- Analyst

Yeah. That's very helpful. And I guess just as a follow-up there, you made a lot of progress in 2018 in terms of the pricing really kind of across all segments of the business. As we think about this lower growth environment, how or what do you think your ability is the kind of retain and hold onto a lot of the progress that you made last year?

And then, I guess within that to, can you talk to some of the benefits that maybe you can see as we move through '19, as it relates to some of the commodities coming off? And could that possibly be somewhat off an offset?

Christopher Klein -- Chief Executive Officer

Yeah, I'll take the first part and then I'll let Pat give you a little more detail. I think we talked about pricing last year as, again, taking a lot of small bites of the apple. And so that served us well as we brought it through. And I'd say, it was pretty sticky what we've taken on both in terms of pricing and reduced promotional levels. And so, not concerned -- Pat will give you little more detail on our outlook on commodities.

I think, we are in a very good sport a relative to the pricing we took the cover off on the communities we saw. On tariffs, we've planned for and absorbing the 10% level and we're planning on having to address -- the 25% level. Obviously, it's been suspended for now, but again back to our real sober look at the marketplace we are anticipating, if it's going to hit us on March 1, then we will take actions to offset that even in the slower-growth environment. So Pat, maybe you want to give a little more detail on commodities in general.

Patrick Hallinan -- Senior Vice President & Chief Financial Officer

Yeah. One, on pricing, and then I'll go to the commodities. I would say, as we addressed the inflation of 2018, we did with supply chain and price and the pricing most of that was not per se tied to tariffs scenario. So we don't expect pricing to erode as we ahead into '19 in any way shape or form.

As I reflect on '18, we had roughly $90 million of inflation hit our P&L in '19, about $70 million of that was material inflation inclusive of tariff pressures and not just the 10% 301 tariffs, but plywood tariffs and steel and aluminum tariffs earlier in the year and that the balance of that about $20 million was freight and logistics. And we covered it with apply chain actions and -- supply chain actions actually offset considerable parts before that will hit our P&L. Like, just for example at 10% tariff has roughly on an annualized basis of $50 million impact to our P&L, but we offset three-fifth of that for the supply chain action before it ever came out.

As we look into 2019, you have a wide range of potential inflation scenario depending on what happened with any additional tariffs. So I would say without, a 25% tariff, we're looking at $55 million to $60 million of inflation, or call it roughly $0.30 of EPS with $20 million to $25 million of that be in freight and logistics and probably $10-plus (ph) being just continued adjustment to the realities of the new plywood market as we shifted materials and supply base and then the balance of being all other inflation, so all other bucket relatively modest inflation without other tariffs.

If they were 25% tariffs, the estimate is still consistent with where we where in the third quarter, we would say the net hit to us on an annualized basis of 25% tariffs is around $45 million. Of course, we don't expect a full year of that, but all of our teams are prepared to address, if it materializes and they would address it with a combination of supply chain and pricing and all of our teams have scenarios prepared for that to happen. And of course, as the first half of the year unfolds we can update you on how that plays out.

Susan Maklari -- Credit Suisse -- Analyst

Okay. Thank you very much for the color.

Christopher Klein -- Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Phil Ng from Jefferies. Please go ahead. Your line is open.

Philip Ng -- Jefferies -- Analyst

Hi, guys. Appreciate seasonally slow to start the year, but after soft patches you saw on the second half, have you seen any signs there's in a pickup, have the customers come back and restock in the inventory? I know you're expecting things we accelerate it bit in the second half, is it easier comps or are there any initiatives you have in place that kind of gives you the confidence things will pick up?

Christopher Klein -- Chief Executive Officer

So. Thanks for highlighting. The inventory issue kind of hit us in parallel with the softer market. So in the fourth quarter softened, our channel partners pulled back on inventory as well. So the ordering rate was below POS throughout fourth quarter. So, it was kind of (inaudible) effect on sales overall. That likely won't persist. So, as the market resumes and grow, you will see inventories matching at a minimum POS and if there's an acceleration, they typically will buy in a little bit more to cover with anticipated had some growth.

So the first half, second half, it really comes down to carryover effect from the way we exited last year. Our categories lack the overall construction cycle and R&R doesn't really start to pick up until March. So we just -- let's say brought forward what we saw as we exited the year in the first part of this year and accounted for a slower start. And I think the back half of the year, it is more of our performing against the market. We've got a lot of initiatives irrespective of market. But we are assuming that there is some modest level of growth that resumes in the second half of the year. So, -- and it went up looking for a huge spike risk -- we're looking for more like 4% to 5% growth in the second half if the first half is 2% to 3% growth. So, kind of, that's the range we're operating in.

Reasonably consist R&R, but the big swinger is softer, new construction in the first half which then picks up and obviously, there's going to be a bit of a softer comp in the second half too. So, I think it ties up.

In general, we're not making any big leaps of think. We're looking at market in a very conservative way. And saying OK, we're run our business against that and we're going to grow EPS at midpoint 9% and we've built our plans, cost structures, and CapEx and otherwise in a way that can deliver on that, so that's little bit of logic to flow through all that.

Philip Ng -- Jefferies -- Analyst

Okay, that's really helpful. And with the investments you made in Cabinets, can you give us a sense how you're thinking about growth and just incremental margins into that business? And how do you seen any new wins on the value side offering that you have out there? And should we think of any overhang on the margin front, because it sounds like you still had some initiatives you're trying to work through in 2019? Thanks.

Christopher Klein -- Chief Executive Officer

Right. I think on the markets side, we continue to perform really well in the in-stock cabinet and vanity side of the market as well as the soft part of the business that goes into builder and simpler R&R through dealer. So, that part of market we are picking up share and we expect we will continue to pick up share. If I look at the overall pivot plan cabinets, a lot of it is, we're just going to emphasize the places we've had success and continue to have success. So, we expect that will continue and continue bringing new products in that part of the market. Pat can tell you off second part of that question.

Patrick Hallinan -- Senior Vice President & Chief Financial Officer

Yeah (inaudible) to add onto the sales and the growth perspective of it. The part of the value segment of the market that you're referring to where we traditionally have been very strong in home centers and in-stock cabinets and vanities. We are taking that supply chain and bringing it to our broader set of the market and as we talk about next week or day will from our Cabinets group deploying that cost structure and capability into our product launch that takes place in April.

So, we plan to leverage the capability we have to grow that business. But we do expect Cabinets industry to grow a bit slower than the rest of the overall building products industry just as consumers' trade to a different price point of Cabinets and you use fewer boxes in their design. So, that's why we're targeting Cabinets growth of roughly 3% to 4% and we think that's roughly going to be the dollar growth of the US market over the near to medium term.

In terms of margin percentage, we felt like we did all of the cost structure things this year we wanted to do. Volume was little bit softer in the back half. We didn't see it as much, that's why we talked about it on an adjusted basis. And we feel like we left the year with a nice cost structure. We do expect next year, to finish next year with a 70-plus basis point increase, would get us into that 10.3% range for the year. And we expect to start seeing that right out of the gate in the first quarter, not a 10% in the first quarter, because first quarter is seasonably low, but obviously a big improvement off of a very soft 2018 start to the year.

And then as Chris mentioned, and you referred to, we do have more change coming, but we're going to pace that change thoughtfully. We know investors want to see as a drive both sales growth and margin improvement in that business, and so we are going to be pushing to do that consistently each of the next three years, while also absorbing some of that change and not letting to change swamp out the growth. So you should expect us to grow that business then in the low- to mid-single digits and to drive 70-plus basis points of margin improvement across each of the next three years.

Operator

Your next question comes from the line of Justin Speer from Zelman & Associates. Please go ahead. Your line is open.

Justin Speer -- Zelman & Associates -- Analyst

Thanks, guys. Just a point of clarification on the tariffs within your guidance. Are you embedding a 25% or a 10% tariffs in your kind of segment margin assumption?

Christopher Klein -- Chief Executive Officer

We're embedding expected increase to 25% in March. So we're assuming that that's going to happen and that we have to recover that, both through supply chain actions and pricing actions. Supply chain actions are, frankly, well under way and well under way to address 10%, and so that's just full on and it's going to recover that portion of it, which is substantial.

And then, the pricing piece of it will take effect when we know for certain when that's going to kick in. So there's a little bit of lag, but it's covered off and anticipated in our guidance. So our guidance, just to be clear, some 10% tariff through March 1st and then pick up to 25% March 1st and for the balance of the year.

Justin Speer -- Zelman & Associates -- Analyst

So if we end up being at 10%, let's say, the thing is extended and it's a 10%. And then potentially, if there's a resolution, does that change the calculus in terms of your margin assumptions for the balance of '19?

Christopher Klein -- Chief Executive Officer

Yeah. Back half, I mean, because the recovery actions on pricing are back half weighted, it changes some back half math. So it'll be interesting to see how it transpires as the 10% go away. I mean, we're not assuming that would necessarily happen either, and resolution could be that there is some tariff remaining, I think the market still waiting. I think markets are waiting for the tariffs to follow off, assuming aluminum coming out of Canada. But those are still picking up there. We just reacted to the stuff that's going on and I'd say are being very clear eye, and our plans are constructed for '19 that way.

Justin Speer -- Zelman & Associates -- Analyst

One follow-up in plum -- I'm sorry, in plumbing.

Christopher Klein -- Chief Executive Officer

Go ahead. Justin.

Justin Speer -- Zelman & Associates -- Analyst

All right. In Plumbing, is there any risk of mix now in the business? And if so, what's the margin risk from that potential dynamic? Is that in your calculus at all?

Christopher Klein -- Chief Executive Officer

Yeah. Within Plumbing, it's interesting, because the market has been reasonably stable for us. I think for us, it's a mix between wholesale and retail. And so, our strength, frankly, over the last 18 months has been stronger on the wholesale side. And that is not just a construction depended. That's just stronger performance on that side of the marketplace. So that tends to be richer mix.

Within the construction, consumers still trade up off of where the base package has been even through the second half of the year. So the mix is, I'd say the one piece of the market has been weaker is at a very high end, luxury part of that market is a little softer. But that's a small part of the overall. So I would say, we are not making any heroic improvement in mix. I think we are just being realistic by segment of what we see coming out of it.

Justin Speer -- Zelman & Associates -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Steven Kim from Evercore. Please go ahead. Your line is open.

Steven Kim -- Evercore ISI -- Analyst

Yeah. Thanks very much guys. Just I had another point of clarification here, I think you talked about on the margin side in couple of your segments, in Doors & Security you talked about the Fiberon's stuff impact and the nonrecurring cost being in total 460 bps, I think -- to margin. What was the just the Fiberon's stuff portion? And then in your Cabinets business, I think you talked about the 130 basis point impact from the 53rd week. I was wondering, if you could just elaborate a little bit more what that was? And why did that just hit the Cabinets and not the other segments?

Christopher Klein -- Chief Executive Officer

Well, we have 53rd weeks of Cabinets first. We had 53rd weeks in most of our businesses -- because most of our businesses with the exception of doors 13-week quarterly calendar underneath our corporate umbrella which is on a fiscal month-end calendar. But we have to keep all of the businesses inside of fiscal close week of one another, and so we have to take a 53rd week every once in a while. And Cabinets it's particularly, owners could you have a fixed cost structure where you're paying out those fixed cost for that week but you're shipping almost nothing because it's a holiday week. So specifically in Cabinets it was around $15.5 million of sales in the week that was incremental because of the extra week, but it was actually about a $6.6 million hit to profitability. So that's what going on there.

All of our businesses take them and we try not to talk about them. In particular, with cabinets the reason we wanted to call it out here is we wanted to give people of viewpoint of how the business was really exiting the year on a run rate performance given all the cost take out it did during the year.

In the case of Fiberon, Fiberon was about 100 basis points of that adjustment that you referred to. It was in the quarter about -- I want to say, $29 million (ph) in sales and maybe an unfavourable $2 million in profits based on some of the cost associated with acquisition like inventory step-up amortization and so forth. We expect that business to be accretive to next year.

Steven Kim -- Evercore ISI -- Analyst

Got it. That's very helpful. Thanks for that. And then, I guess my second question relates to sort of the outlook for this year. I think you painted it out pretty well. I think you have been very clear, you think the first half of the year is going to be slower to back half you're anticipating sort of a normalization. You're being conservative in incorporating the tariff assumption in there as well.

I guess, I was just wanting to clarify a little bit, are you -- is it also your view that 1Q is going to be within that softer first half, that the 1Q would be particularly softer and then maybe 2Q would be ameliorating a bit?

And then also, I was wondering if you could lay out what if anything you have seen or incorporating in our outlook for the government shutdown, maybe on back pay for -- for load workers through coming through along with tax refunds in the near future, anything related to the shutdown or tax refunds in your outlook?

Patrick Hallinan -- Senior Vice President & Chief Financial Officer

I would take -- the second of that two piece question. We don't have any specific assumption in our plan for the government shutdown or for a tax reform as it affects consumers. I would...

Christopher Klein -- Chief Executive Officer

One thing that was beneficial was, throughout they said the tax refunds wouldn't be impacted and new attractive data, as well as we do, tax refunds turn out to be a source of R&R funding. So that was good news. So it could have impacted it, but hopefully it did not, but Pat you can take the second part of the question.

Patrick Hallinan -- Senior Vice President & Chief Financial Officer

And then -- yes, we do expect the first quarter to be at least from a US and Canadian new construction. We expect the first quarter to quite possibly be negative, because of just the starts momentum that was playing out through the back half of 2018, in particular the starts momentum that all of us saw in October or November. None of us have yet seen December, but if December's anything like October-November, it kind of drives through a negative new construction scenario for Q1 in both the US and Canada modestly so, because we would kind of take a combination of starts and completions across that horizon.

And then, we think the second quarter get us back to flat to slightly below flat for the whole first half on the new construction front. And we would expect R&R to be reasonably resilient, kind of 4% bouncing, plus or minus 50 basis points throughout the year. So R&R, the linchpin kind of prevents whole things from going negative in the first half.

Steven Kim -- Evercore ISI -- Analyst

Got it. Thanks very much. Appreciate it.

Operator

Your next question comes from the line of Timothy Weiss from Baird. Please go ahead. Your line is open.

Timothy Weiss -- Baird -- Analyst

Hey. Good afternoon, everybody.

Christopher Klein -- Chief Executive Officer

Hi.

Timothy Weiss -- Baird -- Analyst

Maybe just going back to cabinets and the margins, I think that the midpoint of the growth in margins gets you to maybe a 30% incremental. You took out some fixed costs in the year in '18. How much of the profit improvement next year is really that from cycling through a lot of that fixed cost versus what might be volume related? Just trying to see how much visibility you have for the cost lines in cabinets this year?

Christopher Klein -- Chief Executive Officer

Yeah. I'd say, it's half the benefit of fixed cost low forward, and then half the fact that -- while we covered off in cabinets, actually cabinets is a division where they covered more than their total inflation during 2018. Much of that happened in the back half of the year, because they will hit very severely in the first half of the year with plywood tariffs, initially hardwood plywood, and then soft plywood was added to that. And so they are going to be about half price commodity, about half fixed costs as they manage through all of the supply chain changes related to plywood. But that business is still good and you're close. I want to say the incremental leverage maybe more like 28%-ish 29%-ish year in the ballpark there.

Timothy Weiss -- Baird -- Analyst

Okay. I rounded up. Okay. And then that's good. And then on Plumbing just on the inventory reduction, was that in also end retail or was it one of the two channels? And do you expect that to happen again in the first quarter, I just want to be cognizant that the comp in the first quarter Plumbing is kind of particularly tough?

Christopher Klein -- Chief Executive Officer

Yeah. We got a across channels. There was probably a little bit more retail than in our wholesale, but it was across channels and it kind of unfolded throughout kind of November, December. It was twofer as the market was -- demand was coming off -- they were already, even had a weaker rate than that.

I think it had a stable rate right now. There is a point where weeks of inventory falls below -- with stocks out and other situation that isn't good for either of us. So I expect -- there couldn't be a little bit, but I don't expect there'll be a significant move up, I think you're going to run it above POS.

Timothy Weiss -- Baird -- Analyst

And POS (inaudible) 6%-ish in US performing?

Christopher Klein -- Chief Executive Officer

Yeah.

Timothy Weiss -- Baird -- Analyst

Great. That's helpful. Good luck and I meet you guys next week.

Christopher Klein -- Chief Executive Officer

Okay. Thank you.

Operator

And that concludes our conference for today. Thank you for joining.

Duration: 57 minutes

Call participants:

Brian Lantz -- Senior Vice President of Communications & Corporate Administration

Christopher Klein -- Chief Executive Officer

Patrick Hallinan -- Senior Vice President & Chief Financial Officer

Susan Maklari -- Credit Suisse -- Analyst

Philip Ng -- Jefferies -- Analyst

Justin Speer -- Zelman & Associates -- Analyst

Steven Kim -- Evercore ISI -- Analyst

Timothy Weiss -- Baird -- Analyst

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