Q3 2019 Earnings Call
Let's turn the call over to Mr., Brian Lantz Senior Vice President of Communications and corporate administration, you may begin your call.
Good afternoon, everyone and welcome and what kind of branch Homeland Security quarterly Investor Conference call and webcast.
We used to be here today to provide an update on progress through the third quarter 2019.
Oh, yeah, but when it had a chance to do the newly issued earlier news releases. The audio replay the webcast of this call can be found in the investor section of our EFT DHS Dot com website.
I want to remind everyone that the forward looking statements we make on the call today, either up or prepared remarks were in the associated question answer session.
Based on current expectations at a market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
These risks are detailed numbers filings with the FCC such as our annual report on that.
The company does not undertake to update or revise any forward looking statements, which speak only took time in which they remain.
Any references to operating costs and earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified.
With me on the call today, or Chris Cline or Chief Executive Officer.
Next thing, our president and Chief operating Officer.
Hi, Allen, our Chief Financial Officer.
Following our prepared remarks with a lot from time to address questions that you might have.
I'll now turn the call over to Chris.
Thank you, Brian Thanks to everyone for joining us today.
In the third quarter, our teams continued to execute against our growth strategies and manage the effects of tariffs.
We delivered solid results in sales grew 6% and operating margin improved.
I'm, particularly proud of our team's performance year to date.
In 2019, we have experienced a housing market that was slower recovery than we initially planned.
Well as a variety of other external pressures most significantly higher levels of tariffs.
Yeah, we've been overcoming these challenges are delivering solid performance with year to date sales also growing 6% and operating margins expanding.
Growth initiatives across probably probably price cabinetry, and ducking had been top priorities and the funding of these areas is delivering top one girl today and will fuel 2020 as well.
And multi disciplined offered across our supply chain teams. Our legal teams are pushing teams is working to offset the ever treaty terms landscape.
Taken together the performance this year is truly impressive.
So first thinking through our view of the U.S. home products market.
Next I'll turn the call over to Nick or President and Chief operating Officer.
Well sure highlights of the war aggressive actions he's taken across the business to strengthen the company for next phase of growth, especially as you propose to assume the CEO role in January .
Then you will share his perspective on our business performance in the third quarter.
Finally, Pat will provide more detail.
Third quarter results and 29 do you know.
Starting with our updated view of the goes home products market.
As I mentioned in the third quarter the market continues to be slow.
Dan to pick up in September and there's no probably October .
Currently we are seeking more sustained momentum from both new construction and repair and remodel markets.
The data no pointing to the modest pick up in growth that we had expected earlier in the year.
With help your order rates in September and into October that shouldn't continue.
In the third quarter, we estimate that the market for products grew 2%.
With the repair and remodel market growing around 2% to 3%.
Your construction spending our product categories was approximately flat to down slightly.
The ramp up in new construction activity, though starting now.
With a modest pickup in existing housing sales should translate into a healthier market over the next year.
These market dynamics combined with the Tailwinds in cabinets from the recently announced anti dumping duties against Chinese cabinet manufacturers gives us optimism about the fourth quarter and 2020.
In a moment I'll turn the call over the next like our incoming CEO on January 2020.
As I said before the board I have confidence in him as a great partner leader.
He has a proven track record of success with leading brands both here and in previous roles.
Nick built out our global warming group platform to be a multi brand channel and geography powerhouse.
A platform has consistently delivered above market growth at industry, leading margins.
He built strong iconic brands, including the rejuvenation of the core mode and brand and the establishment of a house liberal while bringing innovation to the market through acquisitions and strategic partnerships.
Since becoming president and COO earlier this year he's been focused on bringing is what are your approach to our other businesses working closely across our segments in leadership teams to identify areas of opportunity.
He was also loved the successful navigation of a challenging tariffs period.
Repositioning supply chains, and managing pricing strategies across all segments of the business.
I'll now turn the call over the next who'll provide some additional color on his efforts across the businesses and discuss our third quarter performance.
Thanks, Chris.
As Chris mentioned, we have many opportunities ahead of us.
We are laser focused on investing in capturing.
Most promising these opportunities.
Additionally, we worked hard [laughter] diminish the continually evolving environment, which is required us to allocate supply chain and cross functional resources temporarily away from our plant efficiency improvement efforts.
We continue to both when I talk about global plumbing.
No more than half of our total company profit.
Well continue to be successful reenergizing, the core TPG bright wallet, Bobby Garcia refer beautiful water campaign, which is already showing remarkable results.
We're driving consumer relevant innovation in corpus and in certain categories as well as new categories.
We're leveraging channel partnerships and key customer management.
Good.
You know krogers, China, digital water and M&A and partnerships.
You know outdoor living.
We are focused on expansion of Piper on packing.
We're building a strong consumer brands and competitor in the market.
We're investing in the business and additional expansion opportunities.
And we're executing against substantial win today.
Early in the third quarter, Reno, Fiberlan, well expand distribution.
Differently across the West and South West Ward Peck bowling products. In addition to other significant multistate distributors such as for the northeast weeks parse products across the upper Midwest and coastal Forest Park in the southeast.
There were two sisters, who orpic provides an opportunity for fiber and to leverage the strong existing relationships as both of our businesses conditional opportunities for growth and outdoor living in 2020 .
In New York.
We're also making continued progress on a more aggressive cabot's patent plan to transform this business.
Let me take a minute to tell you about the latest big step in our cabinets transformation.
Plant retirements cabot's person, they bridge and orderly transition to a new incoming president David Beard on November 18.
We're incredibly excited the date better [laughter] come on board to lead this business into in Euro growth.
We are impressed with his accomplishments in his tremendous passion for tours for me businesses in delivering improved <unk>.
I, sometimes getting to know Dave and his leadership style approach to business and deep level of integrity are great, but for our culture and our teams.
Additionally.
[laughter] Walt the global manufacturing operations in commercial leadership experience.
Coupled with a proven track record of executing we believe he will be successful in capturing growth and margin improvement in this business.
Our teams are exciting prepared for his first day, a few weeks I know you'll hit the ground running.
We wish they ran its all about and thank him for his over 12 years and service with a company, including a lot seven years I've lost rent habits, where he significantly group and transformed the business.
So now let me turn <unk> results for third quarter, where we continued to execute against targets is.
Solid sales and profit results.
In the quarter total company sales increased 6%, an operating margin was up slightly to 13.9%.
This was a solid result in light of a softer market than we expected.
Her mother external pressures and investments we've made for future growth.
Overall, our performance were quarter was helped by the results of reversing suppose control across the businesses. All we continued to make investments supporting our growth opportunities.
We will continue to protect step to outperform a more moderately growing market and also tariffs and other external pressures, including transforming our supply chain.
Taking part watching innovation.
Spanning a growing categories and channels and integrating acquisitions and partnerships.
So turning to the segments beginning reporting.
In the third quarter, a global warming group continued to outperform the market.
Sales growth, excluding FX of over 12% and operating margin of 21.8%.
Growth was driven by about market Pos in the U.S. and strong double digit growth in China, where we continued to expand our product offering and picture.
Continued strong performance in our core markets more than offset continued softness in the Canadian housing work.
Our reenergize Mowbray, showing increased awareness well team and purchase intent as well as continued share gains.
Well also continue to build momentum through product innovation and partnerships such as you buy more full by Boeing and okay.
These innovations and partnerships are helping to expand our portfolio and our allowing us to convert customers and drive games and distribution.
In cabinets sells for about 2% flatten the U.S. and operating margin was 10%.
So the targeted value price part of the market, which is now approaching 50% of our business.
Up mid single digits in the quarter, because we continue to have success and take share.
Sales of higher price point made to order cabot's contracted in the mid single digit great.
As part of the more aggressive pivot, we're accelerating customer initiatives by continuing to ramp up our value price capacity and tightening capacity for semi custom products.
We are leveraging our Mexico, and other low cost country supply chain to deliver even more value priced products, while maintaining the service and quality are valuable feeling network expects from us.
And anti dumping duties come into effect. In addition to an existing three or whatever we have been aggressive we watch and consumer facing innovations no more truck, he arista crop and or bottom lines, a 4500 industry, leading kitchen and Bob dealers.
This new higher margin its value price reader products addresses increasingly strong them on our customers are seeing from consumers. We will fill the void and take next year is Chinese products to pull back from a market. It turned out to continue through 20 toward.
Our retail popping kitchen in stock programs also expanding in home centers, along with more significant public present.
[noise] margin performance in light of all of our actions in card.
Even as we continue to navigate the near term inefficiency due to the large scale transformations to the manufacturing footprint and the supply network.
In the quarter doors and security sales increase.
Operating margin was 14.5%.
Doors Pos performance was Oh imagine for a significant retail inventory rebalancing versus a strong hope last year the lag to recently improving your construction activity.
That's in.
Due to our program was earlier linear we continue to accelerate investment to capitalize on growth opportunities that will begin to be realized in the fourth quarter and more significantly into pointing toward.
And insecurity and team continues to work towards closing the cat litter Finpac custom perfection.
The most loved brands is on track with improved product quality and service levels and we expect seems stronger growth beginning in the fourth quarter as price increases taker, but in order to help offset tariffs.
To wrap up.
As I look across our businesses.
I'm incredibly pleased with our results.
I'm impressed with the challenges we've overcome the progress we made a strategic initiatives this quarter and throughout the years.
Outperforming the market.
As we've talked in the past take even more resolve and teamwork. This environment we're bucket.
I see our teams to break these challenges and passion and ingenuity every single day.
Well, yeah your boss opportunities both.
Across the businesses initiatives undertaken investments made in 2019, which are delivering results set us up to accelerate your posture as gross returns in 2020.
We continue to collaborate innovate and leverage our stores. All these efforts that was up to win and create even more.
I'll now turn the call over the past.
Thanks, Nick.
As a reminder of the majority of my comments will focus on income before charges and gains in order to best reflect ongoing pilots.
Let me start with our third quarter results.
Sales were 1.46 billion up 6% from a year ago, and 3% on an organic basis, excluding fiber I'll add that backs.
Consolidated operating income for the quarter was 203 million up 7% or 13 million compared to the same quarter last year.
Total company operating margin was up slightly a 13.9%.
We remain on track to achieve our goal of around 50 basis point of full year operating margin improvement.
By market softness and tear pressures that have been more challenging than those in our plan or in our by second quarter guidance.
Yes were 95 cents for the quarter versus 93 cents for the same quarter last year.
We are pleased by our team continued ability to grow sales and earnings during a period of softer market growth.
Assistance of a challenging trading environment, and while navigating significant supply chain transitions in a number of our businesses.
Now, let me provide more color on our segment results.
Beginning with plumbing.
Sales for the third quarter were 514 million up 53 million or 11%.
Excluding currency sales increased 12%.
When also excluding the top last year's Hurricane impact sales were up over 8% in the quarter.
Continued strong double digit growth in China, and solid U.S. pls filled the quarter.
With reported sales results slightly muted by Canadian housing market weakness.
Holding operating income increased 20% 212 million.
Operating margin was 21.8%.
Next on result, driven by cost discipline and sales growth levers you up in China.
We continue to be on track with our full year outlook in plumbing with sales up in the mid to high single digits range, and where the operating margin around 21%.
[noise] door and security sales were 355 million up 45 million or 11% for the prior year quarter driven by fiber on.
Door sales were flat and impacted by a lag to the soft at improving third quarter U.S., new construction market and a significant inventory rebalancing, especially in retail.
Security sales were down in the quarter due the international market softness and commercial channel timing.
We are expecting security sales to increased double digits in the fourth quarter due to commercial project timing and favorable comps the last year services.
Operating income was flat at 52 million.
Income performance was muted by quite a terrible Wigan security.
The mix associated with the retail inventory rebalancing and a strong comp to last year.
And lack of volume leverage indoors Terry.
Versus the prior year, we expect doors and security operating income to improve considerably during the fourth quarter due to cost actions taken during the third quarter.
Security tariff pricing going into a frac.
Volume leverage as new construction demand, Brazil's and comps the securities 2018 service issues.
For the segment, we're on track to deliver mid teens sales growth in the full year, an operating margin above 13%.
Turning to cabinet.
Sales for the third quarter were 590 million or down 2% versus the prior year quarter.
Sales in the U.S. were flat as Nick said sales of value priced products in the U.S. were up mid single digit while sales of mid to higher price point products were down mid single digit.
Operating income in the third quarter was 59 million down 6 million versus the prior year.
And operating margin was 10% consistent with our full year target.
We expect cabinets operating margin improvement in the fourth quarter, driven by incremental cost actions taken during the third quarter and market driven volume improvement.
For the full year, we expect total cabinet sales to be flat.
<unk> slightly in the U.S.
For your operating margin is expected to be around 10%.
For the total company.
To sum up third quarter performance sales increased 6%.
EPS grew to 95 cents, demonstrating our ability to execute and drive growth and margin improvement in a slower tariff challenged market.
Our total company operating margin was up slightly to 13.9%.
We should benefit from the financial discipline and expense control, we executed year to date as the housing market gradually improves.
Before turning to the balance sheet I want to take a moment to provide perspective on our numerous tariff recovery efforts and the impact on the business.
We continue to mitigate the impact of current parents do a mix of supplier cost sharing ships and geography and other actions including pricing.
Through this combination of action, we were able to walk that roughly 15 million of gross pair up exposure in the quarter.
And expect to offset around 55 million for the full year.
Turning to the balance sheet.
Our balance sheet remains solid.
With cash of 336 million net debt of 2 billion and our net debt to EBITDA leverage at 2.2 time.
We continue to have the capacity and flexibility to fund the potential acquisitions and share purchases.
As we de lever naturally during the second half and overtime.
During the quarter, we price and offering of 700 million of senior unsecured notes maturing in 2029 at 3.25%.
And maintain our solid investment grade ratings.
The company refinance its 1.25 billion revolving credit facility in September .
With a longer duration across our desk trucker at attractive interest rate, we have the liquidity to invest for growth both organically and inorganically.
During the quarter, we repurchased 1 million shares for approximately 50 million, bringing the year to date share repurchase total the 2 million shares for approximately 100 million.
We have 314 million remaining on our current share repurchase authorization.
Turning to the details of our outlook for 2019.
Based on the market for our products growing two 2.5% we've tightened the range of expected full year sales growth of 5% to 6%.
As a result, we now expect EPS within the range of 353 to 363.
As we've seen the market begin to pick up in September and October . We're also encouraged by the momentum of our plumbing business and the U.S. in China. The continued demand strength in the market segments to which we are pivoting, our cabinet business and fiber on distribution gains.
We expect 2019 free cash flow of approximately 480 to 500 million, which includes the accelerated investments and capacity in inventory to support new composite decking customers, we anticipate a cash conversion rate at or above 95%.
At yearend, we expect net debt to EBITDA to be 2.0 times versus 2.4 times in the prior year.
The annual EPS outlook includes the following assumption.
Interest rate expense of around 94 million a tax rate between 25 and 26%.
And average fully diluted shares approximately 141 million.
In summary, our teams are executing well in an improving market are making progress on our strategic initiatives.
Which had better reflect in our results in the fourth quarter and next year.
I went I'll pass the call back to Chris for some closing remarks.
Thank you bet.
Before we begin to feel they session I have a few final thoughts.
It early 2009, I begin, leaving the home and hardware divisional fortune brands.
Eight years ago in October of 2011, we spun off as our own independent company have phs.
Over the past 11 years, we've restructured businesses greatly expanded through innovation and penetration in new markets and made changes in the portfolio of businesses we operate.
Most significantly we feel great teams around are unique and powerful culture.
As I look out into the balance between 19 to 2020, I see is improving home products market.
We are positioned our businesses with enhanced supply chains and cost structures that funded growth opportunities to ensure we prosper in this improving working.
January of 2020 isn't ideal time for me to transition from CEO to executive Chairman.
And for the thing to take the range as our new CEO .
He did here, it's a great team and a great set of businesses and opportunities and I know the transition will go smoothly.
I am excited for this next chapter of our company's growth.
With that I will now pass the call back to Brian .
Thanks, Chris.
That concludes our prepared remarks on the third quarter of 2019.
We will now begin to take a limited number of questions.
Since there maybe a number of you would want to ask a question I'll ask that you limit your initial questions to too and the reenter the queue to ask additional questions.
I will now turn the call back over to the operator to begin the question and answer session operator.
Thank you at this time I would like to remind everyone that in order to ask your question. Please press Star then the number one on your telephone keypad. She would like to withdraw your question. Please press the pound keep your first question comes from Mcdonald with RBC capital markets. Your line is open.
[noise] good afternoon, thanks for taking my questions.
First question I guess just.
Big Picture you guys have had.
Oh lot of change Chris with your transition and now the change in cabinets and I guess I want I focused specifically on cabinets and [laughter], Dave coming in and transition there and I. Appreciate your comments around the moving pieces, but from the outside looking in.
I think a lot of people see these last couple of quarters sales growth stall out a little margins backtrack, yeah, clearly, there's some investment going on underneath all this and the pivot, but now you have a new you know a change in leadership.
Yeah. It causes a lot of their drives a lot of questions right. So just hoping you can elaborate a little more on.
The changes that you're making their dave's dave's goals coming in and just what you know what.
What you can give us as far as just incremental confidence that the cabinets pivot will ultimately pay off in terms of margin progression and getting the gross back on track.
Sure.
Yeah, there's a lot there [laughter] in that question I'd say you know the putting the progress of the plan overall is on track and if anything we accelerated this year in terms of investment in capacity in our supply chains are supporting the value part of the market and there we put up consistent growth.
You know single digits high single digits, a low double digits growth really throughout the last four or five quarters on the other side of the market. We've been talking about and you know Cross case, you made and then you know candid about a week or semi custom premium volumes in the marketplace. So.
You know that is all going to plan I think our restructured capacity is on track all have Nick is a little bit more detail in terms of Dave's transition.
Don't frankly my transition we.
We focus on succession, a pretty rigorously if you look across kind of left by the Irrs. The transition my leadership team has been pretty continuous is as people have have retired or moved along and we've brought in new talent and so there's no real inventor catalyst around day rendition David.
Done an outstanding job.
Indicated his desire to retire and.
And so we began looking for.
His replacement so I understand there's a lot of moving pieces, but terms of where the cabinet business is going well actually they were at a pretty interesting inflection point right now and I'm pretty optimistic and so even if you could give a little bit more detail im not sure I'd be happy sort of course, if there's a good start we're just maybe even for.
For the summer quarter, you're flat in the U.S. into deploying markets or you're seeing sure games come through your asset types are harder to do exactly what we're targeting for the year and you know Buck for inefficiencies that we had as we ramp I sort of value capacity, even faster than we expected.
At a margin or even higher than that and so you know all that sort of report.
So really positive momentum and then I think you layer on that some new products that we're bringing to market that are exceeding our expectations at that value price for both through our hum sort of partners such a second and for dealer partners hopes or you are so just yesterday a home depot.
With our key retail partners.
I recognized us by many us as their kitchen Abbas supplier partner of the year circuit it to what they're seeing us do and dealer.
Employs a new product in Missouri.
He as well as a first across the Nirvana lines, all targeting that are part of the marketplace.
MCCSR, surpassing our expectations by quite a quite a month. So yeah. It's by no means done but a lot of the changes are really well underway or and then you know that's it that's up their British is there was probably 12 years 70 years leave this business, you're indicating the springer desire to retire.
Which kicked off for us a a succession plan.
We're delighted that we were able to attract for Canada is outstanding as they've been here who's going to come here and bring his passion for cios worried businesses and delivering improved performance to us at a time, where are you know, we really think that we're going to see incremental growth come as they try to.
These manufacturers retreat, we're already seeing that pretty significantly through the import a numbers and you know were targeted right at that sweet spot.
In the market.
And with a 25% share position into your UBS isn't to homes that are very well situated to to pick up incrementally.
Okay. Thank you both thorough answer to what was your so the question. There My second question and I get it off to get at all [laughter]. There's there's always there's always more [laughter] second one shifting gears [noise].
Plumbing clearly another standout quarter are there and a especially where I think we've seen some other indicators. So it's just the market growth was somewhat subdued and in the quarter.
So just a you know I guess I heard the comments about China, but which is a little more detail on you know what exactly is driving the significant outperformance on the the topline was there any load in benefit how should we think about the next couple quarters, particularly.
Yes.
I think the fourth quarter <unk> fourth quarter guided.
If if you're really going down to the 21% operating margin for the.
Full year might suggest some deceleration, but maybe just clarify that.
Sure I'd be happy to Okay, let's start with overall performance there. The group grew over 12% of Justice FX added 21 for put 8% margin. So you know obviously, some some pretty stellar performance.
What I'll say is we're continuing to build upon that group.
Which now represents more than if off of a couple of profit.
With more to cool.
So if you you know the questions or what's driving that you're not step back and say, we're now a couple of years into reenergizing the core lower grade.
And it's really firing on all cylinders.
Spreads being powered by twin engines or brand building and innovation. So our here for beautiful water campaign, which we launched last year is driving increased awareness weltzien purchasing type assuming those metrics come through really strongly that's translating into continued share gains ever seeing some great results there.
And then we've watched and Lilly consumer relevant in the Golden innovation, both in the core as well as some new categories and that's driving excitement with other consumers and our customers. That's true both across the core market in the U.S., we're outperforming and our business in China and through that.
Turning to level leverage of our channel partnerships are a key customer management.
Larry I'll cover that were sold but we got more growth engines, China digital water luxury plumbing and through our partnerships and so I would say just where we feel about it it's like multiple years of market leading performance at these margins.
We're confident we're still just getting rolling in probably the best is difficult.
So we're continuing to invest behind the brands.
And.
As far as the quest about inventory is concerned I would say, it's actually pretty lean and spin lean.
Throughout your ears, you've seen our wholesale partners navigate a pretty conservatively and sorry, if anything we think a plumbing would be Portuguese for acceleration as the market comes back and that pipe what has to public service.
Great. Thanks, Thank you very much.
Your next question comes from Tim lease with Baird. Your line is open.
Hey, guys good afternoon.
So I guess, maybe first question just on on the cabinet market. Just just trying to think of how you think it evolves next year with with the terrorists then that dumping duties on China just.
How much of the Chinese share do you think actually can come back to the U.S. manufacturers.
Well I guess, how how are you kind of thinking about it from a planning perspective, yeah. So you know probably in the range of 12, 13% I think is where most industry analyst estimated at and it's really dried up so well you can see an import data, but we're on the ground and have moved all of our.
ER suppliers out and the shipments out of China have really stalled. So I think it opens up the market for those who are leaders in the market today.
Nick can talk to little bit about some of the things that we're positioned against but we're one quarter of the market and where the powerhouse and dealer and a lot of this was flowing right through dealer and so our business plan has preserved those dealerships and you know summit suggested we could have gone faster. They say, we could've gone faster and we could have blown up our deal.
The relationships, but we Didnt go to gone faster is going to diminished our service levels for the home center, but we didnt and so now as volume comes back a and trying to drives up we're at a terrific positions to capture it we're trying to estimate it we've got capacity to be able to service it.
And nickel talked about a lot of the products that we've launched in are coming into the market well quantified in in January but suffice to say, we're pretty optimistic about it and you know in the core market through new construction are picking up in addition to some of the Chinese or really a good part of the journey.
These manufacture volume coming in drying up were bigger spot.
So maybe can you just talk a little bit about the things that we've launched and really what we're anticipating sure sure.
Let's start by noting in of these tariffs and duties are already in effect right and so.
The Chinese manufacturers have to be occurring because I think that's why you're seeing starts or precipitous drop off in these volumes all that being said.
We're not dependent and government action and so independent of that we've been building out our Mexico and love Cross country supply chain everything.
Washing product into this part of the marketplace, where we believe we could succeed.
Duties are nodes.
And month trying to success as much as a great example of that.
All that said no. It does vary very occurred with imports dropping off we had to supply chain place. We have a suite of products right at the heart of this market already in market and accelerating more law change. So we think are really well position that you know were 25% share we've got to rectify changed every believes competitor.
But anyway, and the right a suite of products and so.
As we sort of turned the corner here into 2020, we think this could be are really material tailwind.
Okay. Okay. Thanks, I appreciate all that color and then on tariffs just is there a way to just talk about what your exposure to list for looks like it and maybe what you know kind of looking out to 2020, if you snap the line what the total gross exposure to tariffs looks like next year.
Yeah.
Our exposure to care this year and this is a tariff expense.
Is.
55 million this year and we would expect to fully offset that you know next year as we go forward. We're always working cost actions to try and take things off the list, but of course will be anniversary next year, you know more months of list for and a more bonds.
Of list three being at 25% and we would expect next year Kinda also have about.
50 million of tariff expense exposure.
But I would say you know the increase of list three was about as they can impact as the addition of list for and plumbing is about 60% of the total tariff picture.
Okay. Okay. So it's about a 50 million dollar kind of incremental gross expense next year that you think you can offset I.
I wouldn't call incremental it's just a continuation I again again I'm, giving you this year will pay terrorist of about $55 million yet [laughter] next year. If there is no further cost actions, which of course, there will be some more further cost actions, where we sit right now we would expect to pay about $50 million a pair of expense so.
Actually go down a little bit year over year, you'll think of it as run rate neutral.
Okay, Okay great.
Appreciate the color you look on the rest of your guys.
Thank you.
Your next question comes from Phil Ng with Jefferies. Your line is open.
Hey, guys.
Fishing aren't aren't housings being little Choppier, but I guess on your last call kinda indicate a market conditions firmed up in June July the topline was actually a touch weaker how confident are you in terms of the trends you saw in September and October provide you a good line of sight things are going to pick up in the fourth quarter no positions you well for 2020.
Yeah, So I'd say coming out of July Yeah. We are we're hopeful things would would accelerate into August they really didn't September a there was a noticeable difference. So our performance in September which is in the numbers. We just reported third quarter was much stronger than July August and.
In October order rates are continuing at a in a much improved rate and that's across the whole business I think not surprising we are a pretty exposed on new construction, which is a good thing when new construction starts picking back up again, so you saw <unk> public builders and we see the private <unk>.
Order rates that are increasing significantly.
That started to translate through permits and starts and we've got pretty lean inventories across most of the channels. It were settled into so given our share positions in plumbing.
Cabinets entry doors are exposed to new construction or we're starting to see that pickup flow through and aren't our is is improved this fall relative to where we were in the spring or summer.
And do you get a little bit Uh huh.
I'm kind of what we're seeing inside of the businesses like yeah, let's say a.
You know through the spring there were a couple spurts, but.
But ultimately the summer was very quiet here, it's not surprising given the weather that sort of Q2 sources sort of Q3 for US September was noticeable step change in that and it was very consistent across all areas, where we saw across all of our businesses. We saw a particularly are also in the wholesale channels, which is a great Dol weather.
For the health of the market as is wholesalers and to start to serve but inventory in the parts of the business that are serving the construction market as well.
And you know it really dovetails with what we're seeing a in in the macro data you know even and she was most exposed to and your construction Mercer businesses, we saw positive point of sale or across the quarter and that was largely through a big pickup in September . So you know this feels like they much.
More a solid step change than some of the spurts.
Linear.
Got it.
And then you results in your door and security business more secured indoors had been a bit uneven last 18 months or so you know how confident you and get back on track on the fourth quarter and you know cherish, obviously has been a headwind for security you know, how we're going to plan to manage it a little more effectively going into next year, because you still have some incremental.
It's coming in.
Yes, fair that that business does need to perform more evenly or that would be consistent with its demand portfolio demand profile first of all the operating challenges that we had last year had been fully behind us this whole year and so now it's a matter of two things one regaining the.
Confidence about customers, which are on a path to do and a this is the one part of our business that has lagged a in performance relative to tariff inflation, so that business going into the fourth quarter does have tariff pricing in place.
That's a good progress it'll have a about $7 million a favorable comps.
As we head into the fourth quarter alike calm.
And then as it goes into next year, it's about regaining the confidence or of customers to put that's been back on the topline. There's good commercial project heading into the fourth quarter of this year. So our confidence around the fourth quarter of this year is around incremental cost actions taken in that business tariff pricing and.
Project timing in the commercial part of the business, but we're confident going into 2020 that that business will continue to to leverage its strong brand and the doors business has performed well you know I think theres. There is a channel inventory leaning out across both retail and wholesale that business is heavily exposed to consume.
Direction, if you factor those two things it continues to perform very well at the market level as we see inflection up in new construction on therma Tru side, we're going to see the benefit of that in fourth quarter, It's got pretty good momentum going into the year. So.
We're pretty happy with where that businesses and of course fibrin is also in that segment. So you'll see the effect of us investing in that ER segment are ahead of all the man that we've got coming at us through our distribution expansion. So.
That's going to roll together.
Got it thanks for the color.
Your next question comes from Justin Spear with Zelman and Associates. Your line is open.
Good evening, guys and congratulations to you, Chris and Nick on your new roles. They do.
I I had a big picture question for you, Nick and just kind of stepping back.
In thinking about your view of the portfolio your midterm targets.
If you could step back in any given appraisal and where do you think the largest areas for value creation or that maybe aren't well understood by the marketplace.
Sure I'd be happy to they sort of question are you not supposed to start I'd, just say your mother or the opportunity to continue to be part of building or what is really great company.
If I step back you know in this role a CR even since March a the work here across the segments and looking at additional Ers optune exactly that and what I'm Gonna do continue to ensure that reinvesting and capture the most exciting of those opportunities.
I'll start with GPG, where as I said earlier in the work is going to continue to drive that growth in both our core North American loan business as well as new horizons like whole home water and continuing to in a build upon our China. This isn't very sustainable profitable way.
So huge opportunity there and more portfolio opportunity as we do things like putting in new a house wall concept to market with it. So that's all that stuff here. The other very exciting spot I you know I think that we haven't quite captured <unk> is a is outdoor living opportunity you know, it's it's enormous and we're really focused.
On the expense or the Fibra business as a reminder.
Share of what is still 82% and so the opportunity out there is really big and we're really set on building a strong consumer brand in a competitor in this marketplace that will benefit from these conversion pellets as they come on you know as as you think about it we start from a really exciting physician yeah.
We are stressed as in value priced product and so we have an opportunity to move actually up the price spectrum a it we're supporting that through our expansion into wholesale.
Which will support not just the whole so terrible, but it also supports special order retail because especially to resell. It served through through wholesalers and so you know that's I'd say second big area, where we can the really continued to execute upon us substantial.
Today, and you're going to see us investing in adding capacity in order to serve that and then I you know I am excited about the progress I Cabot's. Other players we touched on earlier you know we're sort of in the back off of that.
The steps or while they remain you know many they're actually well underway and we are moving though to a set of growth initiatives, you're coming off of this about their supply chain and we've already seen progress against those and growth initiatives in the marketplace and so you know those are three.
Big areas.
From a stepping back a little bit I'd say, there will continue to execute.
Upon the strategies, we talked about a at Investor day in February and as we always have we're going to continue to pay a step ahead up I really evaluating the marketplace and the changes that are coming at us and developing new strategies, a overtime or and then finally sort of add to that or what Pat.
Talked about with a pretty robust balance sheet and opportunities for capital deployment symbol that together and we're feeling pretty excited about what we're coming into in 2020 of Europe .
That's helpful and I guess, that's a follow up to that and just thinking about these growth investments you got some investments and pivot the pivot strategy that you're saying is accelerating and then you have some growth investment for the doors and security business and then that I look at your your full year guidance implies kind of an atypical.
Yep up or maybe sequentially stable margin from the third quarter, which is it typically you'd see that kind of a pull back and I'm. Just curious how much growth investment took place. If you could maybe unpack that for us were doors and security. They may be was under utilized or that maybe doesn't repeat as we think about the go forward plan.
Yes.
Justin I I'd be easier to get your head wrapped around it first thinking about the fourth quarter, then I'll come back to the.
Third quarter, because it's as much about third quarter investment as it is about some of the transition efficiencies you look at the fourth quarter, you're right typically our margin profile throughout the year as a business and this is typical of building products is the second in the third quarters are the highest margin percentages in the shoulders, our though.
Lower margin percentages and and your math is correct. This year the fourth quarter will be among our stronger quarters and you know be a typically high relative to the second to third quarter to hit the midpoint of our guided takes a bit more than 28 million a pretax operating income.
And you know right away, we get about 10 million of that Comping against.
Both fiber on purchase accounting and security service issues from last year. So you get 10 million on comps you get about 5 million from plumbing continuing its performance momentum very much in line with the order rate it seeing and the cost structure, it's been deploying and then the balance of the.
Performance.
Bowl from cabinets, and the doors and security segment and you you look at what those businesses are doing all three of those businesses are door security and cabinets took incremental cost actions in the third quarter that'll play out in the fourth quarter security got tariff pricing and you have new.
Construction coming back which benefits the volumes in indoors and cabinet.
Then you have some commercial project timing and security.
So we're feeling good about where the fourth quarter plays out and you're right. It's an atypical rhythm to the quarter. Yeah. We always knew that this year, we'd be absorbing some things in the second in the third quarters that were not typically in our margin profile you know, we're pivoting our wood products.
Supply chain completely out of China. This year, that's forcing us to digest, some supply chain inefficiencies and some bolt tariff and duty goods in the cabinet business as we do that we're ramping up three plants in cabinets as we work to both of them.
For the growth of them Entre product line and prepare for some plant.
Rationalization going forward and so those are the types of things that we're digesting in the middle the year that put pressure on our second and third quarter market. So yeah. We feel good about where we are in the fourth quarter. Yes. It's a you know it's the south corridor by corridor, but we're all focused.
On delivering it and we we could see a pathway there.
Very helpful. Thanks for the detail.
For a big picture it away.
Of course, the you're in the way we're purse.
Like generally as we're here to create long term shareholder value and so as we came into this year you know refocus I'm really really rigorous expense control.
While prioritizing investments that we're going to deliver growth.
Over the medium term and so you know you've seen that come through in the top line, there's three or 6% you know 3%.
Organic and improving margins, which is up and make it easier the tough market with all sorts of external pressures like theres coming at you right through that prioritized investments like mode brick like fiber and expansion like value price for Cabot all things that are going to continue to drive growth as well.
Come into the next year, particularly we've got a little bit a tailwind from the market with this yes, or rebased or expense base that we have with these are concentrated in these investments a couple of really really nicely to deliver growth for us.
Your next question comes from Michael be hard with JP Morgan Your line is open.
Thanks, Good afternoon, everyone and congrats Nick on the promotion and Chris It's been great working with you.
Right now either.
Maybe taking a step back from the more public rural you know I had one more granular question and one bigger picture question, maybe just to start on the granular side I know.
Yeah, I had a couple of questions around this yeah earlier, but just wanted to try and drilled down if I could you get a little bit more specific if you're willing.
Yeah in terms of the you a little bit of you know growth deceleration from Twoq to Threeq you.
No.
We saw you know organic growth.
Around 6%.
In the second quarter going to 3% in the third.
And then re accelerating a little bit in September October .
Yeah, Chris I think you described this September pickup as noticeable.
I'm, just trying to get a sense given the triangulation of the full year guidance.
Sure on five 6% total if if we should be thinking about you know getting back to that you know five 6% growth rate in the fourth quarter and really what I'm getting at is.
How much of a pick up really did you see and and if you could even go month by month, just to give us a sense of Oh of of the magnitude that picked up and how we should be thinking about fourq you.
Kind of across the businesses I'd say it was a significant pickup was noticeable in each part of the business as we transitioned out of August into September and you know that the channels are still pretty lean. So were Pos was moving or order rates were flowing and that has continued through October .
So we feel quite comfortable as we sit here right now and looking out to the full year guidance.
Pat maybe give a little bit more detail in terms of how it paced out yeah, I mean by the fourth quarter, Mike We will have a fully anniversary vibrant fiber and then or is in the organic sales number for the fourth quarter and we would expect in the fourth quarter to be seeing.
Reported sales at or above, 4% and organic sales at or above 4% decking business is really performing strongly as we got through the wet spring in early summer and as not only we see just the native demand but.
The distribution gains and some of those some of the loads that come with those distribution gain it would be a continued a strong performance in plumbing. Both U.S. Pos has than mid single digits. It finished the quarter stronger than mid single digits and then we would expect China to stay.
Double digit ER and then you know cabinets will be flat to down slightly remember, they're comping against the 50 Threerd week. They had in the fourth quarter last year, but we would expect a fourth quarter organic sales to be around four plus percent to deliver a year in the range that we.
Yes, the five to six range.
I appreciate that thank you Pat and Chris.
I guess, just secondly, you know the bigger picture question.
You know <unk>.
And again I think you know there's question earlier about this but the the cabinets a leadership change.
Appreciating or you know succession plan then and.
And they desire to retire but same time, it's interesting.
Questions. We've received around you know a prior you know, bringing someone there was as a CEO of a public company.
The lead the division.
And you know from that I guess really two things that I think most people are trying to understand.
Around this number one.
Nick as you look at it it Dave coming in what are the things that you really are hoping to get out of the segment over the next year or two both from a top line in margin perspective, given you know this may still be considered somewhat of a transition year, although you still gaining momentum.
Yeah on the value side into you know maybe you could address some of the investor questions around.
Potentiality of this as a as a spin or you know whether or not.
<unk> over the longer term is something that Youd, you know see potentially as as is not being part of the overall portfolio.
Obviously has been changes around your you know the cabinet industry in ownership of some of the bigger.
Participants Oh still forthcoming.
And so should we be thinking that.
You know this leadership transition is a signal that that you're kinda read you know.
As part of your overall portfolio, you know, how you're thinking about whether or not that this is a a permanent fixture.
Sure sure I'd be happy to address that yeah, I'd start by saying and reiterating we're really excited that they didn't come aboard you've got to an executive here Who's got a blue chip Danaher and Roper manufacturing experience a proven track record at Dublin Creek.
Cash flow at Myers, and so somebody that we think we've been.
Incredibly fortunate to attract was good.
I think it also speaks to the opportunity in the cabinets business you know you don't track.
Like that so business that doesn't have real opportunity ahead, and so I'd start with that as as a baseline.
You know what would we expect more we would expect to see a day bed or bring us.
External view not from the cabinet industry, so he's going to bring some external view on some best in class a manufacturing and commercial leadership from his experience and we're gonna man marry that with the deep cabot's experience that the rest of our team has and you know from that you know we expect to see.
The weighted a pivot and results with that as we push towards a higher margins coming out of the business.
And we expect to see us really taking advantage, where we believe are significant growth opportunities in the marketplace coming from that value segments to which we believe we're incredibly well positioned now having both at the capacity, which will continue well and having these are these new product launches.
Them into the market, which are really seeing up you really really lower season. So we think it's actually an incredible time.
To happen you eat or come in perhaps give us a bit more fresh perspective, and then drive to kinda performance that we've seen a they've been a drive in other businesses is what across his career.
So all that is is a great backdrop now you know what I'll say.
Rest. The question is now we have great set of businesses and we worked very very hard.
And again that we were seeing some increasing for sex success in the market improves or see more success and that's being in the back office for the plan you know we expect to see results both on the cost fees and on so the growth initiatives. We're really excited about those opportunities ahead.
It is deeply embedded within our DNA at fortune brands to drive shareholder value and we have always or we will always continue to assess all avenues to create value when the right opportunities arise and so we will see ourselves rewarded for driving value and improving this.
Business or we will file the cost to do so.
That is all the time, we have for questions. Thank you very much for joining today's conference call. Thank you may now disconnect.
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