Fortune Brands Home & Security, Inc. (NYSE:FBHS) Q2 2019 Earnings Conference Call - Final Transcript

Aug 01, 2019 • 04:30 pm ET

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Fortune Brands Home & Security, Inc. (NYSE:FBHS) Q2 2019 Earnings Conference Call - Final Transcript

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Q & A
Executive
Nicholas Fink

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
Operator

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

Analyst
Justin Speer

Good afternoon, guys. Thank you. 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 four tariff on the table, how should we think about that in the context of this guidance as well?

Executive
Patrick Hallinan

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 four 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 four 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 four would be smaller than the amounts we've dealt with, with Lists one, two, three and with plywood tariffs. We would expect to manage them as effectively as we've managed previous tariffs. 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 three 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.

Executive
Christopher Klein

Yeah. 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