Q3 2020 Fortune Brands Home & Security Inc Earnings Call
At this time I'd like to welcome everyone to Fortune brands third quarter 2020 earnings Conference call.
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Please be advised that this conference is being recorded if you require any further assistance. Please press star zero. Thank you I'd like to turn the call over to Mr., Brian <unk> Senior Vice President of Communications in Corporate Administration, you May begin our conference call.
Good afternoon, everyone and welcome to the Fortune brands home and security third or 2020 Investor Conference call and webcast.
Hi, everyone has had a chance to review the news release issued earlier the news release and the audio replay of the webcast of this call can be found in the investors section of our F. Phs Dot com website.
I want to remind everyone that the forward looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
These risks are detailed in our various filings with the SEC such as our annual report on 10-K and our most recent form 10-Q.
The company does not undertake any obligation to update or revise any forward looking statements, which speak only to the time at which they are made and.
Any references to operating profit margin.
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 are Nick think our Chief Executive Officer, and Pat Hallinan or Chief Financial Officer.
Following our prepared remarks with allow time to address some questions that you may have.
I will now turn the call over to Nick for his remarks.
Thank you, Brian and thanks to everyone for joining US today, we hope that you know up once all names you won't stay safe during these challenging times.
In the quarter total company sales increased 13% over last year operating margin was up 90 basis points to 14.8%.
This performance is the result, excellent operational execution and exciting market.
Managing a pandemic environment and prioritizing our employee safety.
I'm extremely pleased with the strong sales and profit results that we delivered in the third quarter, which built upon an impressive year to date performance in the face of unprecedented challenges.
It's a strong across our businesses our teams delivered efforts to keep our people safe.
We're working hard to show our customers needs as a fundamentally strong housing market is accelerating freighters consumers indefinitely.
[music], we're delivering ahead of expectation for sure.
We're also making long term investments in our brands innovation capabilities.
Capabilities and supply chain capacity.
Able us to capture future opportunities and accelerate our share gains.
[music] corporate take all of our dedicated team members to continue to work so hard to keep people safe and their facilities operated.
And so part of our teams were not only cared for each other but you're doing so while serving increasing demand for home products.
In the third quarter all of our businesses saw impressive double digit growth and we drove overall margin improvement for the company.
Switching efficiencies enacted since the second quarter as what was delivered progress against their plant efficiency roadmap for the year.
Oh frequency initiatives to create fuel for increased investment as we continue to see overall margin profile a fortune bridge.
How about expectations on these efforts should accelerate share gains at higher margins over the next few years.
Through our operational agility and strict focus on safety.
We were able to generally sort of a customer's needs, which resulted in significant shrinkage.
In many cases the best.
Heavily keep customer supply these accelerating market.
Oh partners continued to coalesce around our strength and those deepen partnerships are leading to further opportunities to grow profitably.
[music] turned into the remainder of our remarks today.
First I will discuss what we are seeing in the home products market.
I didn't highlight key takeaways from the third quarter results as long as the stuff that we took for rest of initiatives and how we expect to evolve over time.
And Pat will provide highlights of our financial results balance sheet strength and liquidity as long as possible in the future financial performance in this environment.
Now turning to our view on the housing market.
Are you a phone parts market is underpinned by robust fundamentals security very favorable demographics, well inventory and attractive affordability, thanks to low mortgage rates.
As noted in prior calls we saw strong demand across the board in the first quarter.
It was followed by very robust security in open channels in the second quarter.
Encouraging to us, but there's other trends will be paid in the third quarter. The module products continue to increase in fact, we continue to see strong retail Pos even as wholesale and builder activity bounced back in the second quarter shutdowns.
[music] consumer trends have been expedited, but which.
Which appears to have accelerated <unk> the key millennial generation towards household formation suburbanization and investing in the home.
These trends, which were already in place prior to the pandemic should drive new construction repair and remodel demand, especially at the entry price point part of the market, where there's a short supply thats available homes for purchase.
The core Department is also cover the trends for the large baby Boomer generation.
Weve long identified that more and more seniors prefer to thrive in place in their homes.
Specter academics disproportion impact on senior living facilities.
That's true.
[music] repaired remodel activity during the quarter remained elevated as home purchasing activity was hot and cuts.
Sure for smokers to do.
Additionally, as more people work from home and entertainment.
Considered an upgraded their homes to accommodate an expanded set of meat.
Existing home sales accelerated aging housing stock and U.S. homeowners sitting on near all time highs in home equity levels, we expect that the on air market should continue to benefit from these underlying trends.
Most of the single family New construction also remains fundamentally strong inventory is low.
I just wanted your exposure to new construction I got to tell with her group with strong fundamentals such as high household formation affordability component supply at or near record lows.
We expect this momentum to persist over the next two years.
We believe our bonefish mix and exposure to the stable repair and remodel market combined with the pork strong housing construction market gives us an unparalleled opportunity to add long term value for our stakeholders.
Demonstrating our ability to capture the upside 40 by new construction exposure and manage the downside there for when it materializes.
Given the market fundamentals very favorable demographics, low inventory and aging housing stock, we feel very positive multi year tailwind prior years housing markets back to consistent mid single digit or not.
Hi single digit single family New construction.
Consistent with our long history, we tend to outperform the smoker and continued to gain share.
Based on our view of the sustaining positive backdrop for U.S. housing, we will continue to position fortune brands for long term profitable growth.
Okay.
Hello and welcome.
Served as a catalyst for the consumer to focus on the critical importance of the home, which is only emphasized unlocked this fundamental housing market stuff.
That market backdrop, she thought to recent quarter.
As I mentioned total company sales increased 13% over last year and operating margin was up 90 basis points to 14.8%. This.
This performance was the result of excellent operational execution in an accelerating market like team worked tirelessly to prioritize employee safety and our customers needs, while still managing to pin down the confirmed.
Its operational performance across the company is leading to accelerate the church, because we'd be rewarded with additional opportunities as consumers gravitate to trusted brands customers coalesce around the most dependable supplier partners.
We drove solid margin accretion that you saw that really benefit other efficiency efforts. It's.
That's it for the best strategy a portion of those efficiency gains we're used to best accused strategic initiatives, including the bone brain.
Capacity and distribution rollout.
The post cabinetry capacity.
We also continue to invest in kind of a core competencies across our businesses and keeping innovation category management and global supply chain management.
So moving to best meet your most critical parties as we position the business for 2021 and beyond.
Last quarter I mentioned, the cost fortune brands initiatives that we're taking to create some efficiencies in our business to free up additional funds for investment in our key priorities and to drive incremental margins.
As you can see from our performance effective March accretion are being felt in our 2020 results increasing margins quarter over quarter and year over year for the total company.
We continue to take further cost reductions in the quarter as we re platformed. The company isn't there some sort of capabilities and a unified approach to fuel growth and leased it up based cost structure for the long term.
Our teams have delivered ahead of expectations, but we're not gonna restaurant level.
We'll continue to position our company to generate increasing value through sustainably higher top and bottom line performance increasing investment in core strategic initiatives.
Now, let me turn to our individual businesses.
Positioning to be even stronger long term.
Starting with <unk>.
During the third quarter, a global plumbing group continued to outperform the global and U.S. markets third quarter sales of 15% compared to last year and operating margins of 20.8%.
On double digit growth in both U.S. retail and E commerce in China during the quarter.
This quarter, we continued to invest heavily at rents that concern me let intubation.
We also incurred meaningful one time cost items, such as air freight and employee recognition to meet increasing needs of our customers.
Even with the incremental investments and costs.
On track to deliver approximately 22% operating margin for GPG 2020.
That's it should probably continue to deliver results.
In addition to our continued share gains as north America's number one, possibly it won't continue to record market, leading sports and brand awareness purchase intent and customer loyalty, particularly with our key millennial consumers.
I bought one is its ability to pursue growth in both core and new segments Sheep's opening up new opportunity sets for this business to continue to outperform the market.
Our sustained investment in new channels, such as E. Commerce, and then on trend innovation sets GPG up for long term profitable growth.
We also experienced solid growth in China in the third quarter.
<unk> continues to outperform smoker through channel and category expansion driving excellent leverage to the bottom line.
The Chinese Academy of stabilize quickly and is continuing to show strong support for housing.
Turning to doors and security.
Sales increased 14% over this quarter last year and operating margin increased 190 basis points to 16.4%.
These exceptional quarterly results redefined our operational outperformance in decking indoors and returned to growth for our suite of security products have to prove it impacted second quarter.
Importantly, our Fiberlan decking brand grew by over 40% in the quarter. It continues to benefit from our distribution wins and execution as we position the brand for long term growth the market fueled by trends in housing outdoor living and long term material conversion from wood.
The higher performing eco friendly recycled materials.
Pandemic has accelerated since she was spoken after living and we are seeing continued strong demand for products our distribution wins in capacity expansion plans remain on track and weve incremental capacity coming in the fourth quarter and through 2021.
Surely doors experienced strong growth as retail remains robust and homebuilders accelerated activity that began in the second half of Q2 and continued through the summer months and into the fall.
Both the wholesale and retail channels recorded double digit growth in the quarter.
Synergies and scale mergers were shirt wholesale channel distribution for doors in decking, it's been particularly advantageous to address.
Turning to security.
Jos returned to more normal mid single digit growth rate for the quarter. Despite an expected softer back to school and commercial markets.
Continue to innovate in their security pipeline Hutchinson connected products for residential and commercial applications.
Finally, turning to cabinets.
In the third quarter, our cabinets team delivered excellent performance as they after a strong market and continued to deliver on our margin initiatives.
This year the business has demonstrated how does it plan can produce outperformance in philosophy different market environments.
After more than two years and address a repositioning. This business is now squarely centered on the head of the market and its proven it can be defensible when the macro dictates, but can also grow above market in times of strong activity with excellent leverage.
Charles versus a year ago increased 11% with value priced products continued to drive strong growth, we saw improving trends in a make to order business.
Operating margin expanded to 12.2% increase over last year or 200 plus basis points.
Strong demand in retail big box and further momentum in our bunch dealer network drove the results.
Victor order showed stabilization in the quarter it was up in September.
Initiatives are driving scale efficiency in our made to order operations through communization of key components, which is contributing nicely to our cabinets business performance.
Our team has been aggressive in capturing operational efficiencies across the operating platforms driving margin improvement and while we've made progress weve plans to capture more opportunities in the future.
So our focus and value price point cabinets, we continue to gain share from both domestic players and from the absence of Chinese suppliers to exit the market over the past few months <unk> has been in place to a lesser extent other importers higher costs and longer lead times.
What we saw imports increase from certain southeast Asian countries. They are well below 2018 highs and more importantly are at a higher cost and come with longer lead times and the directly subsidized Chinese cabinetry that was in the market prior to the anti dumping case.
Although cross country supply chain is equipped to compete in this environment and we are winning sure on a more even playing field.
[noise] role on our journey to drive this business towards our long term goal of mid teens margins.
We have the ability to not only grow value cabinets at above market, but expect to do so at higher margins.
Outperformance initiatives or Chris I make to order business are delivering and we're being rewarded with incremental business from advantage dealer network.
We continue to further optimize operations and had more network flexibility to prepare for additional sales upside at higher margins over the next few years that's.
This includes adding capacity and flexibility to a bunch of low cost global supply chain.
As well as adding a comedy Cisco that's variability in product configurations, and more consistent packaging solutions across our offerings.
In summary, we continue to outperform strong home products market driven by long term fundamentals.
Dependent that can serve as a catalyst for these strong fundamentals driving renewed consumer interest in household formation and renovation.
Well the <unk> economic outlook remains uncertain.
We expect housing will continue to benefit from demographic tailwinds in the long term.
By increased consumer interest in investing in their homes.
In the meantime, we will continue to operate the business with agility managing costs in an uncertain environment, while investing in key strategic initiatives to deliver excellent long term returns for stakeholders.
Our teams yet again delivered excellent results in a challenging environment.
They focused on keeping our people safe and serving our customers.
We're investing for the long term and continue to demonstrate that this business and management team can deliver exceptional results in a variety of market environments.
I could not be prouder their performance.
With that I will turn the call over to Pat will speak to our financial results.
[music].
Thanks, Nick as a reminder, the majority of my comments will focus on income before charges and gains.
Her to best reflect ongoing business performance.
As Nick mentioned, we are very pleased with our team's performance they.
They prioritized safe operations addressed accelerated demand and delivered exceptional results.
Last quarter, I mentioned, our priorities to build an even stronger company remain including protecting the health and safety of our teammates.
Servicing our customers and positioning our business for share gains.
Delivering strong margin performance this year.
And accelerating progress on our profit objectives, while investing to sustain competitive advantages.
And maintaining a strong balance sheet.
Our teams executed against these priorities across the board in the third quarter, which led to exceptional sales and margin performance.
The high level of execution positions us to continue capturing share and increasing margins for the balance of 2020 and beyond.
Now I will cover the specifics about third quarter results.
For the quarter sales were 1.65 billion up 13% from a year ago, we experienced double digit sales growth in every business segment, a sign of a widespread consumer interest in our in our <unk> and new construction.
Consolidated operating income for the quarter was 244 million or.
20% or $41 million compared to the same quarter last year.
Operational excellence and volume leverage drove this strong income growth.
Total company operating margin was 14.8% up 90 basis points over the same quarter last year.
Building on the efficiency gains initiated earlier in the year, we continue to accelerate our margin improvements and are on track to exceed our original margin plan for 2020.
We expect to deliver full year operating margin of approximately 14%.
S were $1.19 for the quarter up 25% versus the 95 cents in the same quarter last year.
Now on to segment results.
Plumbing sales for the third quarter were 591 million up 15% versus the same quarter last year strong U.S. retail and E commerce sales as well as continued growth in China drove the quarter.
Wanting operating income increased 10% to $123 million for the current quarter.
Operating margin for the quarter was 20.8% reflective of investments in brand innovation and customer service to enable continued market beating growth.
Full year margins for plumbing continue track to approximately 22%.
Turning to doors and security.
Sales for the third quarter were 407 million up $51 million or 14%.
Importantly, decking sales grew over 40% during the quarter.
We continue to sell every board, we can produce with additional capacity coming online during this fourth quarter.
They open doors grew mid teens as trade channel and new construction activity, we accelerated during the quarter.
Sales and security grew mid single digits. Despite headwinds caused by this year's quoted challenge back to school season, and continued softness in commercial markets.
Doors and security operating income was 67 million during the quarter up 29% over the same quarter last year segment operating margin for the quarter increased 190 basis points over last year to 16.4%.
Doors and decking operations ran with exceptional efficiency during the quarter and our security operations moved beyond the most challenging pulled it in efficiencies.
Now turning to cabinets.
Sales for the third quarter were 655 million showing a year over year increase of 11%.
We continued to experience strong interest in value priced products in all channels and our ceding share gain opportunities make.
Make to order sales for the quarter were almost flat and have started the fourth quarter with sales up low single digits.
Operating income in the third quarter was 80 million up 21 million versus the prior year.
Operating margin for the quarter was 12.2% up 220 basis points our.
Our cabinets team continues to elevate its strong execution. The team delivered continued cost structure improvements and leveraged volume effectively more opportunities lie ahead, and we look forward to continued competitive sales performance and margin improvement.
Our cabinets business is deploying a winning value proposition with a business model and cost structure designed to capture share in the marketplace and deliver attractive margin.
Our supply chain is positioned advantageous need to compete with domestic and non subsidized importers and we are delivering.
Turning to the balance sheet.
Third quarter results have enhanced our already strong balance sheet.
At the end of the third quarter, we had cash on the balance sheet of 465 million.
Net debt of 1.6 billion and our net debt to EBITDA leverage stood at 1.7 times.
We now have $1.35 billion total liquidity available between our wandered a quarter billion revolver and supplemental $400 million one year revolver.
We have the ability to make investments and deploy capital to accelerate growth and stakeholder value creation and are assessing opportunities to do so consider.
Consistent with prior practices, we will remain opportunistic as opposed to programmatic and we'll be mindful of pandemic uncertainties.
Turning to the topic of financial guidance.
Well, Colin and macroeconomic uncertainties remain we are re initiating 2020 full year financial guidance.
We expect full year net sales growth between 4% and 5%.
And earnings per share all $4.03 to $4.11 with a full year operating margin of approximately 14%.
We expect full year free cash flow.
590 million to 620 million, reflecting a cash conversion of approximately 105% to 110%.
This EPS outlook includes the following assumptions.
Interest expense of 82 million to 86 million.
The tax rate between 24% and 25%.
Average fully diluted shares of approximately 140 million to 140.5 million.
We expect the new phase of demographic driven housing growth to result, and prolonged market's ripe with market growth, averaging five plus percent per year over the next few years.
Assuming the current level of unemployment continues to stabilize that improves.
We expect our sales to continue outperforming the market and our margin progression to remain accelerated.
Averaging annual improvement above 50 basis points in 2020 and each of the next few years.
Well overall uncertainties remain we will continue to prioritize associates safety and manage expenses thoughtfully, our balance sheet strength supports capital deployment and.
And we will continue to assess opportunities to deploy capital.
We see promising value potential ahead.
I will now pass the call back to Brian to open the call for questions Brian.
Thanks, Pat that concludes our prepared remarks on the third quarter.
We will now begin taking a limited number of questions. Since there maybe a number of you would like to ask a question I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.
I will now turn the call back over to the operator to begin the question and answer session.
Operator.
Thank you at this time I would like to remind everyone in order to ask a question you will need to press star one on your telephone if you need to withdraw your question press the pound key.
Your first question comes from the line of Michael Rehaut from JP Morgan Your line is open.
Oh, Thanks, good afternoon, everyone and congrats on the results and hope everyone has a safe and.
In healthy.
First question I had was on the cabinets division.
We see continued growth.
Great progress year solid progress and you know your comments around gaining share from both domestic and international.
Competitors I think is pretty important obviously, you guys still concern or question that we receive a lot around.
Import competition.
I was hoping if you could.
Delve a little bit deeper into you know where you feel you are gaining share from domestic competitors and which channels and.
And perhaps new products.
As well as what you're seeing on the import market since the Chinese.
Ports have had diminished.
With that.
Stand right now in terms of a percent of the market and and you're saying that you're much more competitive with the remaining set of importers as as you talked about non subsidized with higher cost structures.
Sure I'd be happy to happy to talk about that so it's sort of a high level thoughts here first question I mean, the share gains really are across the board and you'll see that come through with 11% sales in the quarter and so building backlog in certain elements of the portfolio.
You know you look a one sided value cabinetry that performed really well across all channels.
Continued double digit growth rate that we've seen for a while.
But that as we said in the prepared remarks, you made to order really slow recovery in the quarter, and then actually returned or growth and I'll tell you is coming into the fourth quarter with some crackpot book, there as well and is performing that part of the business is performing very very well for margin perspective.
Excellent capacity utilization. So we look at that and go well you know pretty confident that the share gains across now you know why well go back to me we've talked for a long time about the profit plan. The plan is are we reaching this inflection point I mean, it is now delivering for us and part of that.
A replay of its not just a rebalancing of capacity. It really was to launch a suite of products at the heart of the market right. So all the anti dumping case is ongoing we weren't sort of sitting alone or what this happens volume will flow back to us, we're really watching products at that sweet spot.
The place, where we had to work whether that case was successful or not right and as we've done that we've really found that a lot of volumes falling back to us and here whether it be in.
Box retail or through our 4500 dealer network. They really are looking to us for your price.
Price quality value.
Valued service right and it's it's all of those things and you know as we've progressed here through the year you know we have seen increased imports.
For places like Northern Malaysia, those levels are still materially below.
Where they were at 28 team so.
More importantly than that those.
Those products are coming in at higher price points.
Longer lead times are without a full assortment. So it's a different competitive picture it whether that's because actually produced in those countries, whether there because people are cheating and shipping stuff around the cross docking it it's adding enough cost and complexity to that market to put us in a much much better.
Physician and as we've always said you know our.
Supply chain, which has.
Cost country kind of componentry supply plus I would manifest.
[noise] comes together the U.S. and that is the network through our distributed assembly. We always felt that that was a very competitive footprint that would be successful to get in to see or any kind of low cost country set up and we're seeing that come through and even has a those imports have increased I think they've been high priced enough long enough.
Lead times is funny.
That we continue to see share gains or whether that's you're coming through big Bucks or in our dealer network and you know you you asked about new products for me.
You've heard us talk about Lontra, yes.
We launched that last year in the North East, we're really together at this part of the market hugely successful or not rolling out into other parts of the country, but dealers are asking for it but beyond that there's an entire suite of products or whether it's you know throughout okay brand, whether it's through Oh crush spread.
That are really geared at this part of the market, where we're getting a lot of reception as well as innovation that we're driving into our retail partners are those for really one of the markets. That's the entire portfolio approach.
It's backed by I think a much more efficient network or within the the cabinets business its Oscar Longhorn network flexibility to move things around and I. Just say overall, we're really really happy with the performance both on the topline and particularly with that margin accretion coming through notwithstanding the fact that there's still were in effect.
She sees in Q3 that we think are going to get beyond this we moved into Q4 into 2021.
That's great. Thank you Nick for that run down it's very helpful.
I guess secondly, just to switch to plumbing, obviously, another a very strong topline results are the margins continue to be plus 20, but I'm a little bit down sequentially.
Still kind of on track as he alluded to around a 22% full year margin goal, but.
Are you talking about a little bit about some onetime costs impacting the third quarter. You know I was hoping you could give a little bit more kind of numbers around that what what the what was the rough impact and you know, but also bigger picture.
Should we expect this 22% to persist then you just have just continued strong reinvestment into growth.
Sure why not triggered off or just a prospectus and they're not all going to have the capacity to do some more particulars around the numbers.
But I would start you know obviously are really pleased with the with the topline continued top line performance and you know not just <unk>, but I mean this business is now into its fourth year of you know this kind of market, beating performance and we saw that you continue to gain share.
And you know a credit to the Sri five front our team I mean, working so hard.
ER to satisfy our customers and to.
Meet the demand and you know it will be a while before we've kind of fully into rebook customer inventories and so you know other than the backdrop now notwithstanding that when when you know we have a business that can perform at this kind of level as consistently as it has and we have seen that start to come through.
Really even in the latter part of Q2 into Q3, and what we see ahead of US we're going to take the opportunity to invest in and drive the business and so that you know is.
The starting point another office some inefficiencies we can touch on effect to give you a bit more color, but we saw an opportunity to accelerate investment in this business because we want to continue to drive that top line growth and we did material increases investment.
In sales and marketing investments in a in capabilities, particularly on E commerce, some supply chain capabilities and some things that you know you're going to see us do around a <unk>.
On the innovation and ER and we expect those to deliver and to be able to make you know the step up in investment that we did and still deliver a 22% margin for the year or is something we're really pleased with it. So that's what really focus is kind of the landing point for the year and the direction that the businesses putting going forward.
Well, we're really investing heavily to continue to drive.
That top line and you know just before you know they were also seeing you pretty big returns on those investments I mean, low and you for a long time has been the number one brand in the market in terms of awareness purchase intent oil.
Even now seen a step change higher in our data on the brands performance, particularly as we drove the refreshed to really focusing on the key millennial consumer and so we're really pleased with those investments and it gives us confidence to cool even further.
Yeah Yeah.
I'd like to speak a little bit to that number but I'll come back to the key point is you know we still call that we're positioned to deliver 22%. This year. That's after delivering 21.5% last year and we do think we do think the business is positioned to drive above that 21% we've been talking about for a while so I.
Thank you should expect that the margin of that business remained strong healthy and consistent you know about the various the 22% in the quarter was roughly $7 million. That's the delta between 22 and 20.8, you know can look at one time items things like air freight all that work.
According to support our Carole park or or things, we're doing to recognize our associates.
During this call that period that a wall and there was more than a $7 million and then if you add all incremental.
Incremental increase of brand investment during the quarter, you're more than two at the $7 million the cost structure very much intact in absorbing some onetime items in this quarter and increased brand investment up very much position to deliver 22% to have that kind of cost structure in place.
Our profit structure in place going forward I think the other thing I'd I'd say that the pan out a bit and you look at quarterly performance from the beginning of 2018, all the way through the third quarter of this year 11 quarters or roll when you look at that performance, we basically bad performing every single.
Between 20, and 25% operating margin in every single quarter for those 11 quarters. So when you look at the consistency of the performance of this business.
It's absolutely breathtaking because you know over that 11 quarters. We've had multiple pair of waves. We've had a border shutdown between the U.S. in Canada, Mexico and without global pandemic. So I think the team has done just an exceptional job well.
Not just driving industry, leading margins, but delivering it with unbelievable consistency in the base, Oh really really astounding macroeconomic challenges over the last.
Almost three four years.
Great. Thanks, so much good luck for the rest of the year.
Sure.
Your next question comes from a line of Phil <unk> from Jefferies. Your line is open.
Hey, good afternoon, everyone. Congrats on a very strong quarter topline.
Topline was clearly really robust. So my question is just from a capacity standpoint, as well as inventory. If we see continued momentum and actually saw a spike in 2021. How are you guys set up from a capacity standpoint, I think what are the areas that a little more concerned about would be decking and maybe even cabinets, but any color there would be helpful.
[noise] Oh for your you're asking specifically he said spikes or your continued a covert spikes or just capacity generally.
[noise] spike in demand if we see really strong continued the mentioned the demand do you have that capacity got to meet that it ended it from inventory standpoint are you are you well set up because I.
I heard you if I heard you correctly, 40% growth in decking sounds pretty impressive and obviously you've done some restructuring on the cabinets thoughts just want to make sure you guys had enough supply to kind of meet that demand that continues.
You know it depends a a critically where you look I mean as we as Pat said in his remarks mean infecting capacity or really stretched for the third quarter, but you know more capacity coming online here in the fourth quarter.
Oh, you know what I'd tell you is we certainly have the capacity to get the guidance that we just gave.
And you know, we're working very hard to add capacity and supply chain flexibility right. It doesn't just have to be sort of big capex investments, it's a lot of supply chains that flexibility and making our network more agile as we go through here into 2021, and I think that with the work that our team has been doing.
And I'll tell you our supply chain team has been nothing short of her ROIC. This year in both managing a co that keeping people safe and building capacity. So I'm pretty confident that we will have the capacity to manage what comes at us and 2021.
Okay, Great and then plumbing or really shrunk gross you called out you know the retail channel, China, and I think E. Com in particular are you starting to see momentum rebuild in D., a trade channel as well as the builder side of things and have you seen any restocking as of Threeq, you and maybe potentially in the fourth quarter as well thanks a lot.
So we were I'm sorry. This is I mentioned they are very strong growth in those three areas or U.S. retail E commerce and in China.
The wholesale channel and you know a lot about Boulder business goes through all of that book of business goes through the wholesale channel.
Really did start to pick up and so we saw a come back and then accelerate as we went into the quarter not quite at the pace of.
Retail for E commerce, but what was really encouraging was as wholesale opened up and as well, there's really sort of got to work.
We didn't see a much let up in the retail channel at all or E. Commerce, you know one of the questions. We have put ourselves in 32 is as channels. We opened up was it you're just going to see a lot of trouble sit back and forth and though we saw a a really sustained amount of performance in retail which was really encouraging as the.
The wholesale and trade channels open back up you know we were able to meet the bond and I you know probably so a little bit of the inventory hole Oh that have been created but I think by no means was there a big inventory build in the quarter, you know to be honest suits from customer service [laughter].
We'd like to be able to help our customers go back, but I think you know as I said on the last call, it's probably going to be a few quarters and you know I think you all the way through Q1, it's not into Q2 of next year to really broke back inventories that were pretty severely depleted and so and I think it's going to happen.
Pretty steady pace versus a spike and so you know we work hard to really track to point of sale growth that weve been satisfied with our ability to do that.
And keep people tracking to their point of sale and then we bought that inventory slowly over time as our supply chain permits.
Yes, so that sets wholesale was probably.
Mid single digit Pos to give you kind of a feel for kind of where they were running for Neal Watson All North America shipments like all brands all channels work.
Approaching the team so all the health was across the business or just being led by retail in China.
Okay. Yeah, that's really encouraging you still have that opportunity on the retail and the builder side are coming back and some restocking. Okay. I got it. Thanks, a lot [laughter] much more confident you really are seeing a very strong wave of both homebuilding and renovation because I mean, you've seen the stuff from the homebuilders and you'll see that pull through the wholesale channel.
But you're still seeing consumers.
Cause come into.
Book wholesale channel and other channels and they're doing projects. It you know at a level, we haven't seen in a long time.
Your next question comes from a line of Ken Zener from Keybanc. Your line is open.
Afternoon gentlemen.
Hello, how are you.
Good.
I would like you to perhaps because you have obviously D. A wide product, let's say climbing at home depot, but you also have the higher ticket project costs that require labor and comfort with Kobe to to have things installed like cabinets.
Can you talk about you know the.
The nation started shutting down in March Hi, It's now October we have seven months can you talk to your experience here about how that cabinet good man.
And the dealers being open is reflecting customers and contractors ability to actually.
Yeah.
Never the product into the customer's house 'cause it seems like Theres, a large tailwind building not only on the inventory that you talked about funding, but really just not these deferred projects.
Cabinets as you know.
Not a better category to 10 Centsfive. So can you talk to the comfort of customers as opposed to the macro trends that drive demand like home appreciation.
Yeah sure I'll give you a couple of perspectives on that too and it's actually a fascinating question as you till the day that apart.
Yeah, I'll tell you.
Perhaps in a a kind of a maybe except for maybe or a week or two and in March and I'm not even sure. It was that much we really didn't see cabinets sale, let up and open channels and so if you go back to kind of earmarked for everyone. In the first wave of what happened we had.
Dealer channel shutdown we.
We had a lot of desire shutdown, even within retail and so you were getting orders through kind of the big the order part of the business and as you suggest there probably probably quite a bit of backlog, but we were seeing.
Our in stock cabinetry, or really fly off the shelves and so you know that told us that notwithstanding.
Does the shelter home Eric.
There are some I guess, some very positive our wires out there or a lot of consumers that we're figuring out how to get contractors into their home safely and what we heard back through the channel is you know there were figuring it out they were like Okay. You go work over there and by the way the tricks up to be comfortable to and we're trying to say look I'm going to be the picture for the next seven hours don't.
Come in here you know this is kind of part of your house is now off limits, while my work and so we really saw some some continued strength.
Which suggests to us that people were comfortable with problems and I think way more comfortable and a lot of people may have expected a fairly early on and they figured out how to make it work that however did not change. The fact that a lot of designers are set down and a lot of dealer for shutdown and as those started to open up.
We saw that business kind of flowed back into dealers and we saw slip back into the.
Retailers in there a make to order desks as they brought their designers back.
And you know I would agree with your sentiment there that you know a lot of those projects that required as long as you're probably had an air pocket in Q2, where they just didnt get done and are probably a backlog because people now have to sort of not just coming to get the design work done get the manufactured in through the whole supply.
The next year to get people to be able to commit installed.
Got any other perspective or something like that I mean, I'd I'd say in the case of cabinets that you picked up that it was.
To pull complexity, because you have to sit down with the designer Oh, that's all in closer proximity done a contractor and so the cabinets business had to work through both of that but we could really see the acceleration now and the interest a make to order, especially as you've seen you know.
Two months are really really strong existing home data existing home sales data so to your point you know.
That existing home sales data stays strong that persist as a great tailwind for the cabinets.
Great and just the next question for fiber on given years basically selling out obviously a lot of the large competitors, you're adding capacity. How are you balancing this secular growth with the execution risk. Thank you.
Yeah, I mean, we and we are up and saying you know for the last couple of years as we were and still are working to get that business to 300 million by 2022 or sooner, which is then the game plan, we've been talking to for the better part of the last two or so years since we.
Acquired fiber on we already had a capex plan in place that was pretty significant we've talked about $35 million to $45 million a year of capex.
As early as 18 plus months ago, we're probably a accelerating that considerably being at the 50 million plus a year. So I think it marginal acceleration fall on an aggressive plan, we already had to support the businesses grow but you're seeing this year.
The business outperformed its annual plan, a and do so in the face of a pandemic all that was quite disruptive or.
To.
Absenteeism and plants and so forth. So I know, it's always non trivial to grow a business at that pace, especially when you have to layer in the capex to do so but I think this year demonstrate the team's ability to do so and do so you know facing quite a jolt had done it.
Well, that's a sad that you know we've talked a lot about the synergy.
Synergies that we've unlocked from the shared route to market between doors and decking and the power of a putting those two things together it weve talked less about the synergies that we've unlocked by putting that operations team together and the doors you know the doors team are absolutely best in class with their consumer phenomenal at what they do and I think that's proving out the mark.
Replaced by bringing those two teams together and having them work together, we've been able to unlock additional capacity out to what we had in addition to the capital that we're putting in to add kind of more extrusion capacity to the business and so you know it's operating at a hadn't even more efficient level, while we add more to it and so.
You know, we're feeling pretty good about our ability to execute and you know the because the sweet spot of the market of which this business was built here, which is that sort of entry level [noise].
Opposite that board is what fiber have really been built on and so it's something that we do very very well and we've done for a long time and you know we've been able to continue to supply the market with the products are industry, leading lead times, even throughout this is pretty disruptive a few months.
Thank you.
Your next question comes from the line of Steven King from Evercore ISI. Your line is open.
Yeah. Thanks, very much guys. Appreciate it just a one quick question here on the commodities I think last quarter you suggested the commodity headwind might be in the neighborhood of 25 to 30 million. Just curious if you could give us an update on that and then in answer to I think Mike's question about it.
I spent I thought I heard you mention airfreight employee recognition.
Throughout $7 million and $15 million.
Together that would be about 370 basis points to the margin. So I was just wondering if you could just clarify that I thought maybe I.
It out of context or something.
Yeah Steven.
For for inflation in total we're still consistent our full year off with is still consistent with where we were for the last call, which is we have about a one percentage point.
For your inflation, which is still in that the Codell thirtyish million dollars that you referenced I say this year turning out to be predominantly driven by a tariff annualizing and logistics cost I'd say no there lack puts and takes inside of commodity separate frontera.
That are relatively neutral a hobby.
Yes, Lee anybody watching copper and zinc hopefully well see its up about 10, 11% over prior year at this time, but you know that costs, where we are a tad more next year I called that in the present, a income statement, but we'll we'll be able to handle that with a combination of cost and price actions like we always do.
So I would say Oh this year, we're managing that level of inflation.
Including some of the recent logistics inflation very handily with a mix of supply chain and.
And pricing actions as we typically do in terms of your cabinets margin. Our plumbing margins that you are pursuing yeah with you know like we always know whenever one millimeter below 21%, there's lots of interrogation on the plumbing margin side.
Hi to do what's simply say if you do the simple math on a 590 ish million dollar sales quarter.
The variance to 22% was about $7 million of expense and we had more than 7 million of expense.
For things like airplay and things were doing to keep our employees safe and recognizing that you know we did have as we will for the year have a investment increase in brand of that when you put those two things together, it's over $14 million. So yeah. I mean, you're you know you're talking over 200 basis points I don't know that I'd get.
Quite a 300 basis points, but after that.
Okay got it yeah I just wanted to clarify that I. Appreciate it and then you mentioned the doors and security in the security segment had a.
You know back to school effect, which obviously makes sense I was curious if you could quantify that anyway in terms of the sales impact and or the profitability impact.
Yes that is moving part you know what I would say, we're not that because that we start breaking stuff like that we end up having to do it in perpetuity is well that's a business we would expect that business to grow mid single digit a full year basis and in most quarter and it you know it grew in that mid single digit range in.
At quarter end.
And that was with back to school being a less than half of its normal cell and the commercial business, which is our safety and security and inside of mostly factory being negative for the rest of that came from retail growth that was not back to school.
Hello.
Okay, well that's impressive thanks, a lot guys appreciate it.
Thanks.
Your next question comes from a line of Adam Baumgarten from Credit Suisse. Your line is open.
Hey, guys. Thanks for taking my questions I, just curious if lower promotional activity played a role in the margin performance in cabinets the score.
[noise] no [noise].
I don't know that there was I don't think it was an overly promoted quarter, particularly given a no safety concerns about driving.
Resilient people into the stores and then be.
The fact that the topline has been so strong I think you know the channel probably feels less need to promote but that know that you know the driver has really been all the work that we put into the business plan around getting the portfolio center that the right part of the market, we're getting our benefit.
The scale across the entire portfolio communization of the sassy and the ability to then kind of shift volumes around and so we saw a lot of that come through which really excited by its by no means done there was a.
A lot of opportunity ahead of us and today and his team have gotten out of that to have an accelerated pace, but what we're really feeling is the benefit of all of that work over the last couple of years really starting to deliver and bear fruit now, but identifying more yet to go and you know it's it's not you know inconsistent.
You know some of the work that we're doing right across the entire portfolio now if you look at you know how we're taking an approach on I'd say, a leaner a more choiceful operating model at the core and then in a rolling out some core capabilities across the entire portfolio to drive.
Things like global supply chain management category management business simplification, you know those are being applied at cabinets, but they're actually being applied across the entire portfolio and as we do that it will continue to free up incremental margin some of which will be reinvested to to take share and drive top line.
Consistent with our strategy.
Some of which will be delivered to the bottom line, but you know it's a that's it's really paying dividends at at at cabinets, but it's it's a consistent approach across the entire portfolio.
Got it that's that's helpful. And then just on the acquisition pipeline, maybe what that looks like your appetite to do deals going forward, if you're focused in any specific part of the portfolio that'd be helpful.
Sure.
As Pat mentioned, the you know the on cash flow and the health of the balance sheet.
For one year.
At us in a position to really manage the business prudently and to weather. The storm is as we've gone through it but the cash generation.
And free cash flow you also does create the opportunity to accelerate shareholder value. No. You know our priorities have not shifted and we will continue to focus on capex.
Capex and investment within our own business those tend to drive the highest returns.
Next we'll look at accretive M&A.
And third we will return cash to shareholders you know what.
I will tell you is that.
Never kind of predict a on a single single thing, but you know we do look at the pipeline and sort of judge the activity and you know it was it was dead.
In Q2, we have seen in the pipeline.
She'd up quite a bit as we come towards the end of the year here and what's interesting about it is it really does give you some insight into how businesses perform in a variety of circumstances. You know not you know kind of hold that against our own portfolio revenue not portfolio has performed well I think we're demonstrating that no.
That that portfolio and this management team can deliver in.
ER markets, where a log volumes coming at us and we can deliver in markets that are more anemic and as we look at the M&A pipeline are you know, we're not able to see how companies have performed through some pretty challenging quarters. I'm. Sorry. This is eating up you know I won't predict or whether we get something or not.
We will be disciplined about it and we have to do it.
On the right terms and as to whether you know there's a particular area. You know we will look across the portfolio and in addition to having to get a business at fair value. The other standard we hold ourselves to is we have to be able to create value with it it's not enough just to get it and so you.
You know, we look across the portfolio and say where do we think we can leverage.
Further our brands our routes to market or these common core capabilities to drive value and you know I think the most recent one is this fiber on and that's a great example of you know having taking something that was actually somewhat adjacent to what we were doing but in a shared route to market.
And by I'm, bringing it in sharing that route to market share some ups capability in other core capabilities, we've been able to create a lot of value for shareholders and we'll continue to look for other opportunities like that.
[noise], we have reached our allotted time for questions. Thank you for joining today's conference call you may now disconnect.
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