Q2 2020 Fortune Brands Home & Security Inc Earnings Call
That's true.
The conference operator today.
I would like to welcome everyone to be Fortune second quarter Twentytwenty earnings Conference call.
On top of placed on mute to prevent any background knowledge. After the speaker's remarks, there will be in question and answer session. If you would want to ask a question about tone.
Let's start the number one on were telephone keypad. If you would want to withdraw your question first the problem to breakeven.
Let's turn the call over to Mr., Brian.
Your Vice President of Communications and corporate administration.
To begin your conference.
Good afternoon, everyone and welcome to the Fortune brands Homeland Security second quarter, 2020, Investor Conference call and webcast.
Hopefully everyone has had a chance to review the news release issued earlier the news release of the audio replay of the webcast of this call can be found in the Investor section of RF Bhs Dot Com website.
Well to remind everyone that the forward looking statements we make on the call today either in her prepared remarks or in the associated question answer session or based on current expectations in a market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
These risks are detailed in our various parties with the FCC such as our annual report on 10-K and her most recent 10-Q.
The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they were made.
Any references to operating profit earnings per share or cash flow in today's call will focus on our results on a board charges and gains basis unless otherwise specified.
With me on the call today, our next thing or Chief Executive Officer, and how long it our chief Financial Officer.
Following our prepared remarks with allowed some time to address questions that you may have.
Now I'll turn the call over to know.
[music] Brian.
Everyone for joining us today, we hope you and your loved ones for all things they truly extraordinary in challenging times.
I'm very pleased that we delivered strong so we probably results historically turbulent corridor.
Against the backdrop.
Weve resilient housing market excellent operational execution by our teams resulted in our businesses operating at a high level of efficiency in the face of inordinate.
[music] first of all or nothing over dedicated team members, who worked so hard and such a challenging environment to keep our people say no facilities.
So.
We've been able to continue to serve our customers central products. This family sheltered at home.
It's a children's place orders to coal, we saw noticeable shift in consumer behavior towards home purchase and home improvement.
Discuss in more detail.
[music] given very impact of the shutdown nurture supply trends, we saw strong support for that product offerings ahead of expectations.
Parts performed as we had anticipated.
<unk> operational performance and agility, we were able to generally sort of customers as needed.
Insignificant triggers for a company.
Our true partners are coalescing around it.
Lucky strike.
Deepening partnerships are leading to further opportunities.
In addition to positioning us to capture for sure gains on the topline our teams focused on driving.
She sees throughout the businesses.
These benefits are intended to sustain the recession integrate recovery to free up additional dollars to drive investment as well to improve our overall margin profile.
We've made progress ahead of our expectation.
But the margin performance.
Border.
They sleep better what we communicated in the last earnings call.
In addition, we expect a real long term benefits will be felt he returned to growth sales.
You see basketball is operating leverage higher margins.
I will be sufficient initiatives and hard work.
Oh, the commercialization regardless of environment.
Sure.
<unk> overstate holders only drew.
[music] turning for the remainder of my remarks today.
First I'll speak to our company's responds to cope with my team and how are people keeping a stake in open we continue to outperform.
Yeah.
I will discuss what we're seeing no products market.
I will then highlight key takeaways from a second quarter results as was discussed our before this acceleration initiatives.
Expectable overtime.
I will provide highlights in our financial results balance sheet strength and liquidity as well as ball Bonder future financial performance in this environment.
Let me start because number one priority.
Second quarter.
Challenging in recent times.
Let's take your about people are number one priority.
That's an excess of w. retro and CDC guidelines.
We were able to keep people thinking or facilities.
I'm proud that our covert 19 incidence rate is only about a third of the national average materially below infection benchmarks.
<unk> rapid response.
Situation, we're also able to keep this at least open.
The quarter periodic shutdowns in certain places, where we saw risks can be spread.
The Jody has been key safety is to keep your customer supplied with our Central Park.
Look a lot by continuing to remain open and operating in are continually adjusting and premier approach to operating safely cobot 19 environment.
Well on mergers have significantly contributed to complete safety. We've also caused some inefficiencies, but what we call.
There's always going to efficiency is experienced during the quarter.
<unk> operating below optimal variable production levels as we were like cousins requirements.
This is a fewer hours and production per day ownership changes occurring it would be query.
Comedy temporary shutdowns from time to time more extensively toward community spread into accommodate any short term government orders.
The net result of our efforts that we were able to keep people say install operates and the coordinating Barton.
We did not experience large scale shutdowns rooftops and the disruption but that would cause.
Rather we operated albeit somewhat inefficiently gonna continuous learning in a prudent mode and feel well prepared to weather the storm should the virus research further.
No.
Sure Mark if you take ways from or second quarter performance.
Oh products market was clearly stronger than many other industries.
Very neutral the pandemic and the shelter, whom orders have led to research and some interesting housing.
We Google search data truth in mid July searches for home improvement up 51% versus this time last year in searches for new home sales [laughter] themselves are each up over 30% over this time last year.
Recent purchase mortgage applications data, that's been up strong double digit versus this time last year as well.
During the quarter was encouraging for us, but its economy open back up the would accelerate quickly in fact.
The 20% decline built in April as many channels, we shutdown, we saw orders accelerates or being flat year on year they'll come true.
This trend has continued into July and appears to be stronger than a catch up from the ship.
<unk>.
You construction activity and product close largely hope that the beginning of the quarter.
Resumed at midnight, you accelerated into June and July, but would you expect increasing confidence about the balance of beer.
Our nor activity during the quarter was largely to find by true <unk> retail and E commerce, showing the most or.
By both the travels being open end consumers increasingly focus in home improvement.
Wholesale and dealer to close for the first part of the quarter and accelerated more quickly in the second quarter no into July.
Driven by rebounding you construction activity.
Since June quarter entered into July aren't or new construction activity continues to improve.
Well that market backdrop, some thoughts with recent quarter.
Hi, good quarter total company sales decreased 9% Overwatch or an operating margin was up 20 basis points to 14.3%.
This performance was meaningfully ahead of our own expectations.
Excellent operating execution of our teams.
Stronger than anticipated demand for products and delivery of our cost realignment initiatives ahead of schedule.
Our operational outperformance across the company, let accelerated shirt.
We're be rewarded with opportunities for customers.
Most importantly, as we drove our cost realignment program.
We continue to invest in common core competencies across all of our operations, including strategic spending or revenue management in supply chain.
We're also investing teach teacher growth initiatives, including the board breed.
Capacity and distribution rollout and value priced cabinetry capacity.
Hi.
We continue to see stability in the back half would be or we will accelerate further investments until most critical priorities as we set ourselves up to 2021.
Before I delve into each individual business I would like to mention across four different initiatives that we're taking to create permanent efficiency in our business to free up additional funds for investment in our key priorities, it's driving incremental margins.
At the beginning of the year, we started a fuel for growth and marching towards maturity predicated upon finding permanent efficiencies in the business and building core capabilities that we are leveraging across your chest.
I took over 19 crisis took hold we accelerated our costs out cash generating initiatives by targeting fixed cost supply chain less productive as to that.
We're taking permit cost reductions as we read platform the company easier common set of capabilities and a unified approach to reset our base cost structure for the long term.
As I mentioned our teams have delivered ahead of schedule and we know stated to pull our margin accretion gold support by year because volumes return to growth.
Now, let me trigger individual businesses and how repositioning to be even stronger long term.
Starting with plumbing.
During the second quarter or global warming group continued to outperform the global U.S. markets second quarter sales roughly flat compared to last year and operating margins of 24.5%.
Strong double digit growth and booked U.S. retail into China drove the quarter.
Our Pos well exceeded sales number its customers reduced inventory room in the quarter.
I really Transmode Britain continue to report top scores and brand awareness purchase intent customer loyalty.
So margins this quarter continue to create more fuel for growth because we continue to invest in our friends in consumer lending the base.
Our ability to pursue growth in both core and your segments within the global <unk> has never been greater.
Our continued investment in new channels, such as E. Com is on trend innovation.
GPG up for long term profitable growth.
We experienced strong return to growth in China in the second quarter of having borne the brunt of the <unk> during the first quarter.
That's it continues to outperform smart channel in category expansion enjoy excellent leverage the bottom line.
Chinese economy, it's stabilized quickly it was continuing to show strong support for help.
[laughter] Norton security.
Sales decreased by 9% over this quarter last year operating margin increased by 70 basis points to 44%.
Importantly, our fiber in second grade grew mid teens in the quarter. It continues to benefit from long term material conversion.
Higher performing eco friendly recycled materials.
The pandemic has accelerated the consumer spoken.
After living.
We've seen continued strong demand for products.
Our distribution wins and capacity expansion plans remain on track and this is a priority for us going forward.
Our doors business experienced an abrupt slowdown in the first part of a quarter as humbled to stop work.
It will be stopped.
The six weeks were followed by rapid acceleration in the second half of the quarter because the market open back up in new construction to move significantly accelerate.
Despite the volatility the business operated at a high level of efficiency throughout the quarter is we delivered continuous improvement initiatives ahead of expectations.
Finally, turning to cabinets.
In the second quarter I kept his team demonstrated excellent performance is our because it has reached an inflection point up to two years of aggressive repositioning which has intensified in the last six months.
Sure increasing resilience through the downturn and has the opportunity to accelerate as conditions improve we continued to take share in value product.
So versus year ago declined 15%.
He puts products declined by only 7% during the quarter.
Operating margin was 8.2%, which was very respectable given the pullback volume.
Had we been operating in a more normal environment standard lead times.
Orders that would've resulted in sales only being down approximately 10% a wall and value product sales would have been roughly flat through the quarter.
It depends dentek accelerating your mix shift to value price, we products, which benefits us as Mark leader is we're best situated to catchy supplements and given all of the positioning of supply to work we've undertaken over the past two years as part of our publicly.
Beginning sure from both domestic players come from the absence of Chinese players from exit the market over the past few months or had been replaced at lesser extent with other importers with higher costs, one could lead times.
Our work to add further value Cabot is not over because we continue to drive this business towards our long term goal of mid teens margins.
As the rest leader in cabinets were continuing or efficiency journey, we're pleased to capture more opportunity.
We continue to further optimize operations and had more flexibility to prepare for digital self upside at war accretive margins.
I was a pandemic.
This includes adding capacity and flexibility talked blankets low cost global supply chain.
As well then economies of scale.
That's very Bolivian product configuration.
More consistent packaging solutions.
We have the ability not only grow value cabinets at above market, but expect to do so.
<unk> margin profile.
In summary.
Well the second quarter of 2020 will be noted it's one of the most challenging in a generation the U.S. home products market is a merger you're relatively good shape.
The nature of the pandemic disturbing home improvement in the short term it was causing would you consumer interest in household formation and renovation.
Well the economic outlook remains uncertain, we expect housing will continue to benefit from demographic tailwinds in the long term.
<unk> increased consumer interest in investing in their homes.
Overall, well our strong second quarter results were executed very well business climate.
They do demonstrate that the strategies remain intact, we're delivering for us.
Our businesses are reacting positively to the accelerated efficiency actions, we're taking and we think those actions very seriously.
Please to do more.
In this environment.
Positive we have the business is positioned to grow drug strong operating leverage.
[laughter] Sloppier, Sean do you have a high quality diversified portfolio underpinned by common core competencies that can grow above market and take advantage of a healthy new construction backdrop to outperform the time to strike.
As we did in the first quarter.
It seems like quality portfolio of leading brands and advantage positioning within our channels also provides resilience in a downturn as evidenced by our exceptional result in the second quarter.
The work that we've done over the last few years to reposition the core of the portfolio to the most attractive parts of the market. Its expanded our true exposure have paid off well its strength has allowed us to focus in our key priorities of keeping people say.
Customers.
Operating with excellence and reinvesting in our business.
In addition to our business is being well positioned we also have a strong balance sheet with ample liquidity.
The strongest in our sector as Pat will describe in more detail.
With that I'll turn the call over to Pat will speak to our financial results.
Yeah.
Thanks, Nick as a reminder, the majority of my comments will focus on income before charges and gains in order to best reflects ongoing business performance.
As Nick mentioned, we're pleased with our team's performance, both and prioritizing and operating safely and in delivering solid financial result, amid unprecedented circumstances.
Our priorities to build an even stronger company remain.
Protecting the health and safety of our teammates.
Servicing our customers and positioning our business for share gain.
Delivering strong margin performance this year and accelerating our profit objectives without compromising the investments required to preserve competitive advantages and gain share and maintaining a strong balance sheet.
Our teams executed against these priorities across the board in the second quarter with led the sales and profit performance that was meaningfully better than expected.
The high level of execution positions us to deliver to the current uncertainty and to accelerate performance as economic conditions improve.
Now I will cover the specifics of our second quarter result.
Well performance throughout the quarter went from the extremes of down 20% in April to flatten here.
April appears to have been the demand trial late June in early July demand have demonstrated meaningful improvement and hold promise for the balance of the year should this level demand persist through the high unemployment and reason uncertainty.
Sales were 1.38 billion down 9% from a year ago.
Validated operating income for the quarter was 197 million down, 7% or 15 million compared to the same quarter last year.
Total company operating margin was 14.3%.
Up 20 basis points over the same quarter last year.
Second rental margin performance with 12%.
Our efficiency actions, both permanent and temporary are running ahead of expectation.
Our decremental margin performance was aided in the quarter by items that maybe onetime in nature.
Such as lower healthcare expense.
Even adjusting for non sedating item, our decremental margin performance was roughly 20%.
At the favorable end of our for your objective and well ahead of expectations for the second quarter.
EPS were 94 cents for the quarter.
9% versus the dollar three we earned in the same quarter last year.
We are encouraged by our team continued ability to compete and achieve our aggressive financial performance expectations.
Next to segment result.
Plumbing sales a second quarter were 505 million roughly flat versus the same quarter last year and up 1% adjusting for at that.
Strong U.S. retail and E Commerce channel as well as a return to growth in China drove the quarter.
Plumbing operating income increased 8% to 124 million for the current quarter. Our strong profit performance in a flat sales environment is representative of the aggressive efficiency actions taken during the quarter.
Increasing low and brand investment year over year.
Operating margin for the quarter was a robot, 24.5% showing our continued ability to generate the strong margins that fuel brand building and market leading innovation.
Complementing our strong your operations during the quarter was not yet a strong rebound the sales in China, but also favorable leverage from our operations in China during the quarter as the expanding product. So in China produced favorable fixed cost leverage as strategically intended.
Turning to doors and security.
For the second quarter were 332 million down 34 million or 9%.
Our decking business grew mid teens and experienced Pos performance meaningfully above this level.
It was also our door business, we're above expectations as well given 80 plus percent of its rather news flow through trade centric channels that were shut down for a meaningful portion of the first half of the second quarter.
Further we experienced high operational efficiency in our government business throughout the quarter driving that segments impressive year over year margin improvement.
Our security results were impacted during the quarter at post first quarter supply chain challenges from cold at 19 in China as well it second quarter inefficiencies associated with safety protocols in Mexico significantly constrain capacity.
Our security team is in the process of resuming full capacity production safely.
And we expect these challenges to be temporary.
Operating income indoors and security was 48 million during the quarter down 4% over the same quarter last year.
Segment operating margin for the quarter increased 70 basis points over last year to 14.4%.
Due to cost efficiency initiatives decremental margins for the quarter were better than expected at 7%.
The business has seen further stabilization of demand and increasing activity into July.
Now turning to cabinet.
Sales for the second quarter were 539 million a year over year decreased to 15%. We continued to experience strong interest in value priced products in all channels.
Sales of higher price products were softer during the quarter impacted heavily by channel shutdown, including our advantage dealer network.
Operating income in the second quarter was 44 million down 23 million versus the prior year.
Operating margin for the quarter was 8.2%.
Down 240 basis points versus the respective 2019 period.
What would compare favorably with that anyone volume quarter as we typically experience during the first quarter of each year.
Decremental margin percentage for the second quarter was approximately 24%.
Well ahead of expectations, and particularly noteworthy given the inefficiencies associated with implementing safety protocol and other inefficiencies absorb while servicing customers during a period of unprecedented challenges and volatility.
Operating income results were driven by resiliency and value priced cabinet volume and the benefit.
Or pivot strategy efficiency improvements associated with higher price and Canadian product.
We continue to advance our strategic.
Yes.
Hi chain flexibility and capacity associated with a value priced product experiencing continued strong demand momentum.
We expect to continue to enhance our competitiveness in cabinet during and beyond this pandemic.
Turning to the balance sheet.
Our balance sheet remains strong.
Our solid second quarter results.
[laughter] management has our liquidity position ahead of expectation.
At the end of the second quarter, we had cash on the balance sheet of 398 million.
That of 1.8 billion.
And our net debt to EBITDA leverage stood at 2.0 times.
We now have 1.2 billion total revolver liquidity available.
Between our 1.25 billion revolver.
That's helpful metal 400 million one your revolver.
Along with safety liquidity remains a top priority, we will continue to manage our liquidity proactively.
Turning to the topic of financial guidance.
Due to the continued economic uncertainty associated with the high unemployment.
And a recession caused by the pandemic, we are maintaining our suspension of 2020 in future periods financial guidance.
Our teams remain focused on continuing the strong market share and margin performance delivered during the first half of this year.
Demonstrating our ability to succeed before and after corporate 19 impacted the economy.
A range of potential for your sales outcomes remain a possibility for this year.
So for your sales result, ranging from low single digit growth.
To low single digit decline appears to be the most likely spectrum at this moment.
If this were to be the sales range, we experienced during point 20.
We would expect to produce a full year operating income margin a roughly 14%.
13%.
With our margin performance range tracking with the sales outcome.
Further we expect cash conversion of net income to be strong in the range of 105% to 115%.
We will continue to pursue permanent and temporary efficiency objected.
To maintain strong liquidity and to accelerate operating margin improvement sustainably.
We are committed to strengthening our share positions and our margin performance during and after this pandemic.
I will now turn the call over the next person wildfire.
[music].
We are facing a pandemic that we have not known them often times.
We are acutely aware that we will be managing volatility as long as the buyers and the resulting economic damage persist.
We had been we will continue to be aggressive and keep your people safe and driving the optimal outcome through this period.
The manager piano and balance sheet prudently inactive urgency to respond to whatever challenges we face.
We will continue to stay laser focused on execution.
Well, we've known the demographics heavily February industry endemic is driving a renewed interest in the home as we continue to execute our strategies and develop new growth initiatives, we will be well positioned to benefit to the sector Tailwinds.
Our accelerated coffee basically the business is freeing up incremental investment dollars help further drive profitable growth.
We're investing in strategic initiatives and a common set of Efuture capabilities also pretty Marty can do this for years to leverage strongly into recovery.
I couldn't be prouder of the work that our team has done over the quarter to keep up people say support our customers and deliver stellar results for our shareholders in the tough environment.
I'll now pass the call back to Brian to open the call up for questions.
Ryan.
Thanks, Nick that concludes your prepared remarks in the second quarter. We will now begin taking a limited number questions since or maybe a number if you would like to ask a question I'll ask that you limit your initial questions to too and they reenter the queue to ask additional questions I'll now turn the call back over to the operator to begin the question and answer session.
Operator.
Sure. This time that you would like to ask your question. Please press Star then the number one all your telephone keypad.
You pause for just a moment molded you're going to want to start.
Your first question comes from along the whole Shimon.
But what are you from Goldman Sachs. Your line is open.
Thank you good afternoon, everyone.
[noise] I.
I guess you know for my first question I guess do you know how much you you noted that you're pulling forward your margin accretion goals by year.
Wondering if you can kind of walk us through what that will mean for the second half how to think about some of that flowing through and maybe what speaking in order for you to achieve those goals.
Oh sure I'm versus the cover pasta pass and why we can take you through what our assumptions are and how we're thinking about that of course.
It's pretty volume dependent and that's why we express it as volume returns over the period, but Packer took you through every premier yes, yes, do we have a last call we reiterated.
Decremental margin objective for the year.
Turning to 30% colorful here, let's say you know that has improved considerably I'll get back to that or second, but what we're trying to do a poll for long term value creation and.
To produce optimal result.
During this pandemic is cannot have 2020 be last year.
And so far sales performance is beat to be in the range that we described in his script count low single digit up the low single digits down and we were to deliver in the 13% to 14% range of alive, we would make progress year over year ROI margin and not have this be last year and then.
If the housing market returns to the mid single digit or better growth that we would've expected over our strategic plan horizon.
We would effectively no problem in our margin progression during 2020 and probably would be.
Yeah, so basis points ahead of where we otherwise would have been had 20 twond, even a year though.
Oh, you know in dollar terms, you know, that's something more like $30 million to $40 million of fixed costs.
But our real objective is to invest and grow the business.
And have the fifth cost they'd just be that much more efficient. So that pointing 20 is not a last year and where are your head around margin progression or we otherwise would be had 2027 or operating margin.
Okay. So that's a little perspective over the longer term if you rewind the clock even back to January a pre pandemic. We started on a multi your fuel for growth and margin enhancement journey as a team and really the goal is twofold, one is to drive efficiency.
Since it's a business.
And to was to re platform the company for common set of capabilities.
Sure platform. So that we could you are further drive efficiency and fuel and creates additional fuel to investors as well as dr. Mark So that was caught in a playbook that reset we were having now.
My team has become an accelerant to that strategy.
And if you go back about calling over 70 intended to come out this pandemic stronger than we came into it become even higher performing business that was very much of a goal and we've come through the quarter, even ahead of an expectations.
I'm trying to accelerate the margin progress, we're making as volume it turns business.
Okay. That's that's very helpful and then and as a follow up I'm. Just wondering you know given that you have an interesting perspective across some of the bigger ticket outdoor products much fiber on as well the indoor you know projects as it relates to cabinets and plumbing and those things can you perhaps give us just.
Your thoughts on what you're seeing in terms of those two demand trends. We are seeing consumers focus. It has there been any shift there as we've kind of come out of the real kind of core of their shutdowns in the shelter in place situations and consumers need be perhaps start to get out a little more dealer channels are opening those kinds of things.
Sure.
Yeah. So overall, there's no question I think you know the market was more resilient than anybody.
My last year, it and so you know we even talked about that on the first quarter call. As we had early April data or we could see that even while wholesale and dealer or shut down their consumers. We're leaning heavily on retail and E. Commerce and really are then I think there's more than doubled since we got data.
You know, what's really driving a renewed interest.
In home at home renovation as people shelter, we've seen that continue to play out across the portfolio.
And it's lumpy, where we've had channels that have been close where they were required proto coming through our house, but you know you have seen.
The strong consumer interest we see continued very strong performance in retail and E commerce channels and again, it really seems like it's not even more and more backed by data that you know covisint, an accelerant to people's interest in housing no.
So the thing about outdoor when we look at our decking business. There's no question is being fueled by jewel tailwinds of material conversion and outdoor living.
Sales were up 15% a fish in a in the quarter for decades, but Pos was well ahead of that and so you know that was a category that is very very strong and benefiting from some tailwinds.
But to the ability to do work outside the home lends itself to the continuing to work through the quarter or other big ticket items.
I think were.
Inhibited by channel close and make it harder for consumers to get in there and purchase but are we saw from the lower April things come back pretty strongly particularly as a dealers for example, cabot starter to reopen we've seen volumes come back to life.
Somewhere around flat even in the made to order a semi custom custom side of the business for cheer gives us confidence that we're volume traveling through that part of the business, while we see even stronger interest in the value part and then you know the smaller for the suffers.
And particularly strong.
There was perspective.
Again less visible into the sales numbers.
They were challenged close you're dealing with some early de stocking.
In the quarter, but has that has come back and those channels of Riocan, we're really encouraged from overseas.
Okay. Thank you good luck.
Thanks.
Your next question comes from the line just engineer from Zelman <unk> Associates. Your line is open.
Hi, Good evening. Thank you guys just a couple of questions on cabinets. So just wanted to see if you get unpack that a little bit more detailed between the value versus the non value.
Trends in the quarter, and then maybe even a splicing, but the dealer versus the home center channel trends I know due to summer congrats there, but if you get unpack that force.
Sure I want to give it a little color that I've ever but more on crop but.
Start where.
Your overall sales were down 15% had we been able to shipped to our normal lead times that would have been more like 10%.
Really was very disrupted as we.
Safety ahead of everything else and at times are either had some short term shutdowns are certainly a lot absenteeism in the facilities and so that do not take seven.
At a time is as kind of the run rate.
Value temperature then that was.
Seven but would have been about flat had we not had the supply chain interruptions that we hadn't so no. We saw valley Coventry really hang in there with very strong.
Just on.
The retail side as.
The dealer channel is really close on special order on the nice order size was close.
As those reopened I said, we saw strength in value across.
All of our channel and are really encouraged by that the as opposed to that make the order size has also come back in the not quite the construct that Ah that's about it. So that's that has come back as towns of open closer to flat I'm, which is really just encouraging given uh huh.
Bob is that we're in and the fact that it is a big ticket items and requires installation.
So they have done it made to order was flat to conclude the quarter or the overall cabinet business was flat.
Coming through July and that would be about the run rate yeah.
With that value.
Cabinet back to high single low double digit growth in that right.
Got it and then and then all that I'm not actually cost reduction efforts just the accretion goals that you mentioned.
I appreciate the color there, but you mentioned some health care Tailwinds was there were there any other than temporary tailwinds in the quarter that explained.
The the the better than expected trends beyond that annualized 30 to 40.
Materials roll off.
Well I'll, just Ah, yes, or no I think there were a retail rents are also.
Some pretty big headwinds in the quarter I mean, what we spent on safety what we spent on a two year very best customer satisfied and in stock.
It's a pretty substantial as well and so.
They are rip out from calculate each each piece, but you know they kind of start to weigh against each other so that's how we're initially thinking about it for passengers.
And just when we talked is in the script and then when you just look at our reported decremental operating income margin 12%.
There were no what favorability from health care, and some variable or some other true up like that that you would expect.
Some of it was a building a component inventory where.
Rather than going into inventory it was about 10 million in the quarter you adjust for that you're more like on the decremental margin performance in the quarter adjusting any kind of onetime favorable items that will sustain or a 20%, but that independent of our long term objective to make progress.
This year.
Coffee and our overall margin progression, we're just trying to be clear in what was a more sustainable level of detrimental margin performance.
Hello.
To kind of have the same things driving our governmental or and then as Nick mentioned lots of puts and takes across the cost structure.
All the way through.
Great job by everybody to both lean into a permanent cost structure change and temporary cost structure change to deliver a really exceptional result in a very challenging quarter and part of why the leverage with several favorable relative to expectations in the quarter as we work and uncertainty.
It could be seeing a quarter down 20, plus percent that we started driving cost action and grow it.
With that level of challenged and then our team is really a bolt on the sales on the operation side delivered a great quarter of down 9% you know so about half as bad as you were preparing for the cost side.
That obviously its flows into a nice proper wall.
And Uh huh.
I mentioned earlier Sue you know we started on.
Margin enhancement journey back in January and so we were pretty well down the cost of developing a playbook.
And understanding where we wanted to go into team that allowed us to move it a lot of agility as called <unk> and accelerate our actions we weren't started from a.
Yeah.
Makes sense I appreciate it.
Sure.
Your next question comes from along with Michael We know from JP Morgan Your line is open.
Thanks, Good afternoon, everyone and congrats and the results in a in a very tough backdrop.
Wanted to get a sense I appreciate all the granularity of course, and Oh as always with with a wall Street, we asked for more granularity so.
With that being said.
You know you found the progression obviously, you talked about consolidated sales down 20% if I if I got that right in April two flattish in.
June.
You know just wanted to get a sense. If that's the type of flattish number that you're continue see in July and as you look at the different.
You know segments.
Obviously, it seems like plumbing had a good amount of tailwinds coming out of the quarter you know.
It would seem that that would you know result in some positive growth in Threeq you just trying to get a sense for you know kitchen, you know for the cabinet indoors and security segments as well how to think around that's flat number you know maybe continuing into July or perhaps even a little bit better in July.
And how to think.
About that across the different segments, yeah, having things like it's better in July and spend as well. So we started from you know negative 20.
April as things both open back up you know got there kind of flattish in June.
We are anticipating growth in July and a feeling pretty good about it at this point and you know that.
Across the portfolio in varying degrees, depending on the segment but across.
We're folio so that you know that strength and real consumer interest that we're seeing and investing in the home seems to be continuing to play through and work what I'll tell you is interesting is.
Even as a channels open back up we didnt see so those are really strong performance. We see in for example, retail which you know.
Got it opens up wane a whole lot. So one of the questions. We had early on was.
For with everything driving there, but just trying to wrap up projects and then once it was done it was done and that's not what we're seeing it all.
There's been through July.
Remain strong and.
I do anticipate Cocos portfolio.
Yeah.
Michael I think I'd add to that is it's a fourth and across our three reporting segments cabinet plumbing and doors and security Theyre, all 20% to 19% as part of progression from April to June.
No as you can imagine plumbing.
Going down in the in the mid teens in April and progress.
Or high single digit growth by June and then the other two you know kind of danced around the average for the portfolio of cabinets a little below.
And you know, finishing our June and of that a low single digit.
Our mid single digit decline in June, but as Nick said.
The latter part of June with strong.
July the momentum is sustained and.
Assuming nothing disrupt the momentum in the marketplace.
We would expect all of our segments to perform water often the core.
Oh, that's that's that's really helpful. Appreciate that.
You know second question I guess, just around the margin side <unk>.
You know the I'm kind of framework you laid out was very helpful. In terms of maybe how to think about the full year understanding there's still a lot of volatility or uncertainty left but you know that framework was was pretty helpful.
You know by all accounts, obviously, you know it seems like.
You know the lower end of that.
Sales range down low single digits. It almost seems like they would need to be some type of.
Slowdown potentially let's say in Fourq versus Threeq you.
To hit that lower ended the range if if.
If I'm understanding your comments correctly about the momentum you have right now going into Threeq use I wanted to make sure that I'm thinking about that right and then also on the margin side.
No to hit that lower end up 13% mean here you are doing 14, plus or you know little over 14 into Q.
On down nine.
I know that you know you might have some temporary cost come back.
That would push your decrementals closer to 20% as you said.
But is it just that amount of lower deck, you know decrementals getting a little higher.
Or you know or is it also just kind of perhaps some cost creep or some some other factors or maybe the environment again started a weekend again for you.
That would push you towards that 13% a lower into the range.
Michael It's all fair set of questions is trying to triangulate, it's all about the uncertainty with the market.
And a channel inventory in the fourth quarter drive all of that and there's no cost creep up you know if I give you that kind of first half numbers I know, we don't typically talk and have them. These calls and a lot of what.
Stations are in half were down 2% net sales for the first half and our operating income margin is a little more than 13 at 13.2, So you're right in order to be down for the full here.
The high end of the low single digits you'd have to have some.
Decline in the fourth quarter, because we're we're starting the third quarter with momentum, we don't know that will happen and certainly the momentum would not indicate that right now, but it certainly is within the rommel possibilities depending on how.
The next.
Government package unfolds around.
And where.
The virus imagining go up and then if if we were to start going down towards 13%. It would just be a we have the outside of that volume market I I would say, we're in a flat to down scenario, we're expecting our decremental market performance to be 20% plus or minus five point and if.
For a growth scenario, where we're kind of on all the off low single digit we would expect our margin to be our incremental margins to be better than our gross profitability, probably yelp towards 40% are better just because we're going to hold onto the cost progression, we may and so we're going to be delivering.
Our gross profit margin plus pop progression. So I think thats the way you need to think about it at all or trying to signal about before quarter is you know all we can do is control.
Our position versus the competition at how we manage our cost structure in the committee and the market and channel inventories are going to unfold as downfall and that's what's going to drive the variability in our results.
Since that point about holding on to others.
A critical point you know as I said earlier I mean, the Susan this is a step in a in the long term journey that our team is really committed to and we are going to further efficiencies is going to reinvest a big portion of those even as we did in the quarter and we will for the rest of your and we're going to accelerate our March injury.
So what we're dealing prudently with a a very and we're seeing set of circumstances as being kind of cautious as we proceed and one of the level of Oh opportunity, we see while managing for the risk that we see a real real.
Focus for US is on the long term ability to accelerate margin, while investing for growth and drug shareholder value creation that way.
Great. Thanks, so much.
Sure.
Your next question comes from along the home shopping Clark from Deutsche Bank. Your line is open.
Hey, good afternoon. Thanks for your question.
Can you just remind us of your long term margin targets by segment.
You know given that the 24% Mark do you use printing and plumbing and the traction you've done on the value price side, and when you say you're pulling them slower by year.
Are you sort of move that around a little bit since your Investor day. So just addition to the segment color.
Can you sort of help contextualize what type of volume growth you would need to get to those targets and what you see on that more company specific caustic outside whether it be.
Faster growth in your side, Ron business or any more structural costs that you've identified just helping bridge the time to needed to get to those targets would be helpful.
Yes, so shelf and what all I would say as you know the last couple update.
We've had to go to the Investor day, which of course, we're technically Polish specific guidance, but we're on the same progression to get our total portfolio performing above 15% until a lot of what we've talked to investors about the last couple of years is basically taking the total portfolio from around 13% to north of 15.
First that we're still committed to that all the fact that plumbing had a very strong quarter. It just consistent with the overall polio set of actions, where we were all expecting a very significant downturn and this quarter, we managed our cost structure, both permanently and temporarily down.
I'll.
And you saw that plumbing had of roughly a flat quarter and it was managing for a down significant quarter. It had a very strong margin that environment, we have not changed our long term strategic objective and plumbing to keep at around 21% and as we've said in the path, we get bouts of 100 basis points around that.
There are more from any given quarter. This obviously was a an incredibly volatile quarter over just the outsized results for cost management relative to sales and all I would say is that our three or margin progression, where we've been talking about making 50 to 100 basis points of margin improvement each year.
With that based on the pivot strategy and cabinet.
Oh role in doors, and decking margin improvement in security and maintaining that high industry, leading margin in plumbing and all of those strategy remain the same at all we're saying as.
We as long as we end up with a market that allows the sales results plus or minus low single digit.
We're not going to have 2020 be last year.
We're going to you guys, Nick that talking about drives the permanent improvement in our business that allows us to keep leveraging even in a soft here and we could stay on our three year progression trial without having a disruptive year like 2020 throws off that path.
And shop I've ever you know with respect to plumbing specifically.
That business has taken aggressive cost actions such as this year, but last year as well as a real purpose, where it was to free up incremental investment dollars to drive growth because it's a business.
Credibly powerful brand.
Suite of brands and channel position and we see a lot more growth ahead, as we're able to expand.
Leverage those assets and so you've got that compounding you've got investment regarding our investor them on bread up year on year, both for the quarter and the Hot and you know if we get nothing else at TPG large wouldn't actually dropped off.
We're choosing to invest it sensibly, but aggressively to drive the topline well above the market. We now have a.
Your next a three year track record of doing that we think there's a massive opportunity ahead. So we're going to continue to do that works for keeping target around.
The 21 five the business itself is.
Our operating very efficiently and benefiting from the scale its bulk over the last few years. Its just an exciting place to be where you know it's it's got the flywheel, calling in its generating investment dollars over to put to work.
Okay. That's helpful and then.
And just switching gears. Your second now that you have a more established position in the value price cabinets market I think.
Going back to you know late last year, you're talking to that being a 200 300 million opportunity.
You know over the next couple of years. So could you just give us an update on the size of this opportunity or help contextualize. How you think your market share is trending.
Relative to your position in the broader cabinets industry.
No I think that's I think that's still about right you know as we kind of looked at the opportunity. Following the dumping suit kinda sizes and size you know what parts of that market would actually be attractive to us and then what our fair share would be that 200 to threw that number is is about right.
And we're seeing a lot of interests.
Pulling on that part of the portfolio across all channels.
Channel segments, and so it is really encouraging and even as a some imports from low cost hundreds of.
Come back in.
They are you know tends to be higher priced longer lead times and fewer selections, which is consistent with what we always said, we always said our supply chain was very well set up to compete with low cost countries and fair somewhat source look our surface. It wasn't set up to be with illegal subsidies. So now that were not as opposed to leave if that's the or.
It is set up in his computing really really well and so I think that is.
A good sizing I think we'll get here over the next few months as we come out of.
Such a disruptor quarter, where we've had channels closed and bear in mind loose supply chain disruptions you want coming out of some of the low cost countries as well as I've got to settle out, but we're feeling very Kurt.
Continuing to invest and didn't invest strategically.
Building on a capacity there because we believe it or whether it's going to be very flexible kind of sort of across the marker very efficiently.
Okay, great appreciate the time.
Sure.
Your next question comes from Milan Show Me from Jefferies. Your line is open.
Hey, good afternoon, everyone. Congrats on a really strong quarter in a tough environment.
When we look at the KC may data for cabinets are covered pretty nicely in June just curious how your sales are progressing that June July timeframe, and why did get a little more comfort around what are you guys are done around John if the capacity realignment at this point, so does that kind of free up some.
Ability kind of meeting we're not done that and Pat did I hear you correctly, you're you're talking about with low single digit growth in cabinets in the back half.
Okay, well I start.
Well, Thanks, I'll start and then a a ticket the pet.
As you saw me, we track pretty well in line with that data and you know I'll tell you the.
Actions for parties I was at a lot coming up and in this quarter and they were simply heroic.
And I personally operating safely and keeping people in spaces, we did which turned out to be inefficiency play as well I mean, because we prioritize safety, we were able to keep operating and as they did that I mean, that's a work hard to move stuff around to try to full the demand where we saw it and so that's why.
So it gets back to the ourselves were in line with it takes a numbers our orders coming in.
Actually better than that and then there is tied to the kind of improved by about three percentage points as you moved through the quarter.
Continues to improve into July.
The.
The value Park is a is very strong and the semi custom made to order part or closer to flat bridge or frequency was given the volatility we're very happy with just because it.
Through the system.
From what it doesn't mean capacity standpoint.
We're now couple of years into our per plan is really reaching an inflection point.
Yes.
Really delivering for us and that is predicated on.
Commonize in a lot of platforms and developing much much more of a network effect around our facilities. So that we do have that capacity flexibility.
We.
Has benefited from some of that and you know we're very pleased.
With the margin delivery of a quarter never here with the business suffered route.
But there is plenty road ahead to continue that journey and they've been doing this team has done a phenomenal at getting offered very very aggressively embedded continuing to identify more opportunity.
For further commercialization further kind of competitive network goals that we think four year old some really great margin for the business over time.
Yes, and sell all eligible as answering my question about the early third quarter momentum it.
Central outcome of the third quarter, I would say across all of our businesses.
At the current momentum stayed and would not disruptive.
Third quarter be a growth quarter, obviously with a level of uncertainty out there it's difficult to say what that would be.
Precisely as Nick.
That said accurately about the made to order chunk of a business, which again is now at this point roughly half the business, that's kind of return or flat.
And the of the value price point part of the business, which is roughly flat returned to growth in.
June and is growing now in July.
So if that persisted cabinet would be in a growth mode.
For the quarter as well, we're not trying to buy business.
Projects that specific growth rate for the whole back half of the year, but all the businesses right now are growing in the quarter would be set up to be a growth quarter, assuming nothing disrupts the momentum.
Got it and that's Super helpful. And then demand was particularly strong in your retail channel and Nick I think you mentioned, you're seeing that shrink continue. So just curious what's driving that outperformance is just a function. There open in wholesale may not be open or more guy what my work and are you starting to see that wholesale channel converge going forward he will that have any.
Mix impact that we should be mindful of thanks a lot.
It's a great question and the shut off that's kind of my where we were wondering.
Open I think it's now cleared out it's a combination of what you saw them as they were open to the plot.
Just looking like it's a really good times going out.
Because as the other channels have opened up volumes bought back into our wholesale in New York Trail.
And we told me not be tracking astronomical numbers, we saw edge really really really strong with.
Converges nicely with the consumer data, we're seeing around the researchers around home innovation preservation and purchase and they're just is you know a lot of interest in a home and you know what work where we were as you know, we're well positioned coming into this is a sector ever got supply and image.
Story with low record levels of home equity.
Low interest rates go even lower you've had people experience really russo here, how pricing through something that's been very volatile elsewhere, but then see more now.
And your from consumer research is yeah. This is pushing people to think more about comfort live in their shelters are they the right.
Once projects, what they're doing I think you may see another tailwind.
Boomers choosing to stay in their homes.
He is in place.
And that will drive some renovation so.
There is something more there that just they were open you know, there's there's double digits driver.
That's kind of continued through.
Retail from a Pos perspective, while wholesale deal, if a doctor or looks pretty healthy so.
I think it's starting with the sector recognizes that a quarter ago was fundamentally healthy going into this and I think is one of them. We're fortunate sectors that were just dry.
Real interesting at home and housing at a time that fit place for people to put that money and when you take that and then you take our portfolio, which we've done two years of core portfolio repositioning to the most attractive ports in the market exposure that we now have to where we need.
To be to capture those consumers is so much wider so we're really seeing benefits.
Thanks, a lot great color.
That concludes our long term <unk> Jude management for closing remarks.
That concludes today's conference call you may now disconnect.
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