Q1 2021 Fortune Brands Home & Security Inc Earnings Call
Good afternoon, My name is Jason and I will be your conference operator today at this time I would like to welcome everyone to the Fortune brands first quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
Ask a question at that time. Please press Star then one on your telephone keypad.
To draw your question press the pound key.
Thank you I would now like to turn the call over to Mr. Dave Berry Senior Vice President of Finance and Investor Relations and maybe get our conference call.
Good afternoon, everyone and welcome to the Fortune brands home and security first quarter 2021, Investor Conference call and webcast.
Dave Barry and I recently became senior Vice President Finance and Investor Relations at Fortune brands.
We're spending the prior six years and our plumbing segment, most recently as Chief Financial Officer.
I'm excited to be here and I look forward to working with you all and my new role.
Hopefully everyone has had a chance to review of the earnings release issued earlier the earnings release and the audio replay of the webcast of this call can be found and the investors section of our SBA Chegg Dot com website.
I want to remind everyone that the forward looking statements we make on the call today, either in our prepared remarks, and the associated question and answer session.
Just 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.
These risks are detailed in our various filings with the SEC such as and our most recent form 10-K.
The company does not undertake any obligation to update or revise any forward looking statements.
As required by law.
Any references to operating profit margin and earnings per share or cash flow on today's call will focus on our results and a before charges and gains basis and.
The otherwise specified.
With me on the call today are Nick Fink, our Chief Executive Officer, and Pat Hallinan, Our Chief Financial Officer.
Following our prepared remarks, we've allowed time to addressing the question and I'll now turn the call over to Nick.
Okay. Thank you and welcome.
Thank you and everyone for joining us from the call today I hope that you and your loved ones for all of things, Texas parts of the world against three of them.
I couldn't be prouder of our first quarter results, which reflect the broad based acceleration of our remarkable 2020 performance.
Our business performed very strongly across the board for the quarter.
Our total company sales increased by 26% over the last year with each business delivering double digit organic growth.
Operating margin increased 270 basis points to 14, 8%.
And the earnings per share increased 68 per cent.
This performance was the results of the exceptional execution of our teams and the housing market, which we believe is and the early stages of a period of long term sustainable growth.
The stellar first quarter results from meaningfully ahead of the storm worker and the lack of a very good Q1 of 2020.
And importantly, we continued to drive market, beating growth, while advancing our strategic agenda, including accelerating our margin improvement initiatives.
Our focus and execution efficiency and safety drove share gains and favorable operational leverage with.
This focus allowed us to continue the service our customers and consumers with our industry, leading brands and innovation, while also increasing investment and the business.
These best in class results cannot be achieved without our wonderful people.
They drive what we call the fortune brands advantage, which I introduced to you one year ago.
The powerful combination of a common set of capabilities, including category management, and global supply chain excellence and complexity reduction and skills.
Cross Fortune brands will continue to provide lots of investments for sustained above market growth and also.
The margin improvement into the future.
Our performance continues to demonstrate the fortune brands among the most reliable provider of store channel partners delivery of high levels of service and the high demand environment, while proactively working to keep people safe.
The pandemic moves into its next stages. We've continued our efforts to keep our employees safe by working tirelessly to secure.
The access to the vaccines for our workers.
Through the efforts of our local teams who are.
Pulp or planning on holding nearly 20 onsite vaccination of events of Costco locations, where all of.
So working with local communities to help with their local of extra students and are engaging and educating our employees to ensure the highest vaccine and adoption rates possible.
I'm proud of our safety track record during the pandemic, which continues to be ahead of the manufacturing of national benchmarks debt.
We've learned a lot about operating in this type of environment, and we'll apply those lessons to continuously improve and the fortune brands stand out among employers.
And the Bachelor of continued outperformance and the housing market with long term sustainable growth momentum, we have increased the global and U S market of expectations, probably new brands and our financial guidance for the year.
Pat will go into greater detail later, how we are successfully navigating demand driven challenges to be able to pursue higher rates of growth margin earnings and cash flow of for our stakeholders.
We will leverage our fortune brands of brokerage and the favorable market to accelerate operating income improvement and continue to free up incremental cash to make strategic long term investments and our brands innovation and digital strategy and supply chain capacity.
And this will enable us to capture more of opportunities and continue to increase of share gains over time.
Turning to the remainder of our remarks today.
First I will discuss what we're seeing and the home products market.
And I will then highlight key takeaways from the first quarter and provide additional color of what drove the results.
Finally, and Pat will provide the highlights from our financial results balance sheet strength and liquidity as well as my thoughts around increased guidance start for the trial, but for the year.
Yeah.
Each of our views on the housing market.
Long term fundamentals for housing and home products remain very favorable and the rate of demand has further accelerated after a strong second half of 2020.
And so it's been widely noted the U S is currently millions of homes and adult with growth of housing supply has not kept up with household formations.
This dynamic is growing over a long period, and we expect the unworthy to persist for a long time.
Discipline and balance has reached the point, where even at the current rate of new construction starts it will take several years for supply and demand to come into the balance.
The severely under both the environment impacts, both new construction and repair and remodel activity as consumers are faced with the choice of purchasing of new home or updating very aging housing stock.
As a result, we're uniquely positioned with our leading brands and channel positions.
Take advantage of the tailwind of long term housing activity.
A differentiated exposure to new construction combined with a powerful channel strength and R&R will remain the levels of growth well into the future.
Additionally, demographics of enforces supporting the needs of this expansionary housing and apartments persist.
The millennial generation continues to move into their home buying years, one of the baby Boomer generation is choosing the age in place and ease of adapting their homes accordingly.
The pandemic has accelerated the favorable trends that were already in place and there's increased focus on the value proposition of Oklahoma.
Even as vaccine distribution expense and the majority of the U S population of the spectrum and the sheer broken.
Players and employees who've seen the benefits of more flexible workplace of Richards.
This result, and shift away from the full work week and the office will create continued demand for workspace and the home and a lot of employees the optionality of living further from your offices.
Moreover, we have also seen purchases of second homes rice.
Brands and products are well positioned to capitalize on the slightly to be locked the movement.
Turning specifically to new construction.
Activity remains robust driven by these very favorable demographics, low inventory and attractive mortgage rates.
Current pace of activity seen only to be governed by the ability of both of the source of land labor and materials effectively.
Although the inventory and rising home prices might create the uneven growth trajectory. We strongly believe the favorable demographics will fuel a multiyear sustainable who was the expansion.
And as I mentioned repair and remodel activity also remains very strong and has expanded into 2020, one as consumer spend on home improvement projects to refurbish and the aging housing stock.
Demand for homes that pacing supply all the inventories being purchased leading to significant R&R projects is home to the modern brands.
For example, we saw strong double digit growth and the premium price per each segments of our cabinets and plumbing businesses and.
The Katy and the strength of large ticket R&R.
Current home owners are also driving investment is rising home prices and increased home equity levels to all time record of more than seven trillion dollars.
The significant driver of R&R activity is amplified by the fact the consumers today are sitting on two trillion dollars more in February of kids and for the start of the pandemic.
This combination of favorable demographics severe under building attractive interest rates high and home equity levels and up.
Focus from the home is the place from multifunctional and toilet gives us confidence and the increased market forecast for 2020, one and the anticipated persistent housing tailwind, we expect for years to come.
Much attention and the first quarter of the sheer has been paid to material and other cost inflation as well as pressure and global supply chains.
We're pulling every lever available to us to service our customers.
As we have demonstrated our ability to mitigate and overcome challenges where the demand supply were inflationary in nature has been proven true our consistent delivery of results.
As we speak to you today, having once again delivered exceptional performance and having increased our financial outlook for the year for both the sales and margin. We will continue to be laser focused and driving consistent stakeholder value across the organization.
Matter of the environment.
But that market backdrop, and some talk from the recent quarter.
We further executed on our margin accretion of objectives and the quarter because we saw the continued benefit from our efficiency programs, which began in early 2020.
Consistent with our strategy the execution of our fortune brands of advantaged capabilities created fuel for growth that allowed us to invest and key growth initiatives, including and our brand and product innovation digital capabilities and capacity expansions.
Importantly, these cross company initiatives to drive long term growth and margin improvement as well as to free up additional funds for investment and our key priorities are ahead of schedule and have contributed to our growth and margin improvement in the quarter.
With an even stronger 2021 outlook, we're accelerating investments will hit our core strategies, while also delivering margin improvement above our prior expectations.
At the same time.
We will maintain investment discipline.
And that the pandemic is still ongoing and expansions do not always unfold and the linear way sort of to deliver consistent performance for our stakeholders.
Now, let me turn to our individual businesses and how we are positioning for stronger and long term future.
Starting with plumbing.
The global Plumbing group continued to outperform the global and U S markets.
The business accelerated through the first quarter of this year with sales up in excess of 30 per cent and the quarter.
The eastern sales drove operating leverage, resulting and a 24% of Oi margin.
Standing increased investment and brand innovation and customer service.
We experienced very strong double digit sales growth across all brands channels and regions.
Even if we exclude China to isolate the first quarter of 2000, Twenty's COVID-19 impact on the business plumbing sales still grew in excess of 25 per cent.
I'm the one brand continues to win and its core products and Adjacencies, our leading brand awareness purchase intent and loyalty metrics show low and persistently resonates with the key millennial consumers.
Marketing is winning accolades and we are investing more behind our powerful care of paid.
The combination of advanced Smart technology, and untrimmed designs and drive share and profit growth as non needs and defining the way humans interact with water now and into the future.
We made significant progress as our flow of my mom and technology rollout into of key Boulder partner and we also increased our retail distribution.
We also further expanded the non smart home network without Flo by Moen, and digital sump pump monitor, which one of accolades and see us and the prestigious cable show.
Our sustained investment in innovation and brand and channel with unrelenting focus from product delivery of the service levels. We will continue to perpetuate the cycle of outperformance for North America's leading plumbing break.
Additionally, low and China continues to outperform its mark of two channel and category expansion, while providing high levels of product quality and service to our customers.
All of our channels grew double digit versus their first quarter 2019, pre COVID-19 levels, we've rolled out increased brand investment and China, and we're seeing a very strong response to our campaign.
Finally, the house of ROHL grew in excess of 25 per cent globally.
The continued restrictions and showroom capacity and the U S and while we walk down from Canada and Europe the true.
And here of these branches of authentic luxury plumbing collections resonates with consumers, who are leveraging their own the strong balance sheets to elevate and customize the kitchen and bathroom designs.
Turning to our doors and security.
Sales increased by over 45 per cent and operating margin increased over 300 basis points to $13 five per cent.
Organic sales, which exclude our recent Washington acquisition came in at an impressive 15% growth.
These exceptional results were driven by very strong double digit decking and doors growth continued growth and security and exceptional execution across the segment.
With respect to wash and our teams are hard at work of integrating the business and capture the expected growth and synergies the.
The loss from team is proving to be a wonderful fit with our fortune brands family.
More work to do but we are ahead of schedule and our expectation of synergies from this addition to our portfolio are as good or better and we thought at the time, we announced the transaction.
And Kentucky five.
Fiber and grew in excess of 40 per cent and impressive feature of the winter period. The door. We included some seasonal slowing.
Momentum and our decking brand is not only continued but it's true.
Similar to other companies of Port makers, we continued to take increasing share from lumber decking products.
Our investment thesis continues to be confirmed as distribution expansion, coupled with leveraging of our fortune brands of advantaged capabilities positions fiber on for long term growth and the market share trends in the housing outdoor living and long term material conversion from wood to higher performing eco friendly recycled materials.
We remain on track to add capacity and mid year as we drive double digit top line growth across the library.
With inflationary pressure on lumber over much of the last year, the price differential between commodity wood and Brandon the engineered decade, it's negligible contributing to a greater number of customers choosing engineered materials.
That said.
And if lumber pricing moderates the cost benefit of equation will continue to weigh heavily and pay.
Engineered materials and the value proposition will continue to improve through branding and innovation.
Sales and our legacy doors brands experienced strong double digit growth and the quarter and.
Including robust demand and retail P O S and increased wholesale activity because of new construction ramped up during the quarter leveraging of deeply developed true.
Our advantaged single family New construction exposure of is driving results at the Richard and our team is working hard to supply and increasing demand and navigating cost and supply chain challenges.
It looks like of fiber and consumers are increasingly realizing the benefits of engineered products of a more traditional materials used in exterior doors and outdoor living.
These conversion tailwind will continue to power of doors business well ahead of the market.
Our new design tools, and innovation and performance and functionality and.
The ability to customize their technologically driven skins, and coatings and have expanded the opportunity set and this product category, where we have deepened our position as the number one exterior doors right.
Turning to the security sales grew further of this past quarter as commercial and international markets continue to open.
Lots of luck is continuing to demonstrate improved performance as it progresses its transformation under its new leadership.
We are employing fortune brands and vantage capabilities within our security operations to drive growth and operating margin improvement.
In fact, just curious performance of this past quarter contributed to the success of overall margin progression in the segment versus a year ago.
Finally, turning to cabinets.
Our cabinets team again delivered excellent performance in the quarter.
Sales grew low double digits for the third quarter and a row of single family, New construction and bigger ticket R&R increased.
Strong growth across product lines at all price points operating margins expanded by 180 basis points over prior year to 10 eight per cent.
And impressive margin improvement.
Off of a strong Q1 last year as new construction activity the seasonally strong results a year ago.
Our cabinets business continues to demonstrate how our hard work over the past few years produces market, beating topline performance and increasing margins.
And considerably changed the way, we look at both our current operations and view our future opportunities.
Our work and our global low cost supply chain, because adding flexibility and resiliency to the business.
Moving a scalable and cost effective network across our platform with the increased simplification and communization driving both the operating leverage and best in class service.
And we can share against the fragrance of domestic market and against imports, which are coming in at higher cost with longer lead times.
We're seeing growth of both ends of the price spectrum.
Our cabinets pivot plan now and the Lady and these positions our business extremely well to capitalize wherever demand materializes.
And the first quarter, we delivered double digit growth and both of them make the order and value price categories and.
And I'll make the order business, we're seeing strong trends and this past quarter and the U S led by premium price points and a nice return to performance and Canada, because that housing market reaccelerate.
Our best in class dealer network continues to deliver for us.
Currently our cabinets team is exploring new omni channel opportunities and is accelerating investments and ecommerce.
And our value price of <unk> cabinets, we continue to gain share while optimizing the operations and optics.
During the quarter demand was widespread and value of cabinets and cross builder dealer and retail channels.
Made considerable progress and capacity and distribution with investments in the quarter and Mexico as well as the on time opening of our new South east facility sort of searching demand and mantra and other value priced products.
We expect another breakout year for our mantra line in 2020, one which serves the market previously addressed the importers stylish short lead time product.
Our cabinet team, whose increase share of by continuing to win and the market and is doing so under the advantaged re platform the cost base.
The more opportunity that lies ahead and the team is pursuing it with the same vigor and tenacity and they have demonstrated over the last few years.
We're well on our journey to drive our cabinets business to our long term goal of mid teens margins.
In summary.
Our teams worked tirelessly to the laboratory purpose fulfilling the dreams of home and we take great Pride and our impact from the quality of People's lives within the home.
The world is not without challenges of risks health and safety or otherwise the home provides comfort protection, where spice and it's the central from human connection whether it be work school entertaining or general the appointment of deeper relationships between claims and family.
We are central to the role of the home and I'll try it and that role comes through and our brands innovation and people every day.
In addition to the selling of the Dream of home. Our company is committed to doing its part to help and putting the lives of those around us sort of environmental social and governance efforts.
It is through our environmentally responsible products, leading safety record core of diversity equity and inclusion of initiatives. We are continually challenged of yourselves to raise the bar.
I encourage you to visit our website to see our recently released ESG report.
Combined with attractive demographics strong demand and low supply of homes, we expect the long term multi year tailwind fantasy.
As the market experienced the full the severe GAAP and housing supply we expect the scale of how does that demand and continue to take share consistent with our long track record.
Alright, and then the portfolio of products is targeted at the heart of the market and as broad of channel exposure than ever before.
Hello, and beating our own actions to continuously improve the business and a proven resilience, we intend to capture the upside of the multiyear expansion, while managing any volatility that may come our way.
With our exceptional team leading brands strong channel positions and the powerful balance sheet, we're uniquely positioned to continue to drive accelerated value creation for our stakeholders.
Got it and then the crude 2021 outlook reflects the strength of our business with low.
Bus growth translate into the operating leverage and increased margins, while we continue to invest for the long term.
We expect to continue to outperform our markets and 2021 and beyond.
And while fully offsetting inflation and supply chain challenges to produce even stronger results.
In addition of powerful balance sheet positions us to continue to drive the incremental value creation.
We are excited for the World class brands and people can accomplish.
With that I will turn the call over to Pat who will speak to our financial results Pat.
Thanks, Nick.
A reminder of the majority of my comments will focus on income before charges and gains in order to best reflect ongoing business performance.
Let me start with our first quarter results sales.
And for one seven and 7 billion up 26% from a year ago organic.
Organic sales growth, excluding the Larson acquisition was up 19%.
Consolidated operating income for the quarter was 262 million up 54 per cent or 92 million compared to the same quarter last year.
Total company operating margin was 14, 8% up 270 basis points or the same quarter last year.
EPS for a dollar of 36 for the quarter up 68% versus 81 set of the same quarter last year.
Our associates' focus on safety and outperforming the strong market and all of these outstanding results.
Total momentum of activity and our markets was strong throughout the quarter and remained strong.
While we are working hard to serve with the robust demand across the portfolio. We are also taking action against the material and freight inflation and supply chain of imbalance and we expect to offset these challenges fully to deliver higher growth and greater profitability than we planned.
Our high performing business model of leading brands and channel position combined with further deployment of our fortune brands advantage drives both incremental investment and increase value to the bottom line for our stakeholders.
Now, let me provide more Colorado segment result.
Beginning with plumbing.
Sales for the first quarter were 622 million up 153 million or 33 per cent.
We're up 30% adjusting for FX.
First quarter growth was up very strong double digits across all major brands channels and geographies.
Plumbing operating income increased 43 per cent to 149 million for the first quarter.
Operating margin for the quarter was 24%.
The strong volume leverage despite significant investments during the quarter and our brands and strategic priorities and to maintain service levels. We expect 2021 margins to be at or above 22 per cent for the full year.
Turning to the outdoors and the security sales for the first quarter were $462 million up $148 million or 47%.
And by the addition of Washington, as well as strong double digit growth indoors, and decking and continued growth and security.
On an organic basis sales were up 15%, we expect all product categories to drive 2021 growth.
Doors sales were up double digits, and the first quarter driven by consistently strong retail sales and and accelerating new construction market.
And decking sales were up strong double digits and the quarter and our distribution gains achieved new performance level demand and retail and wholesale channels remains strong and we're selling every board. We can make we are on pace to bring additional capacity online and the middle of this year and are looking for options. The pull forward capacity plan from.
2020 two and beyond.
Security sales continued single digit growth from the quarter with strength and retail and international markets commercial markets showed improvement throughout the quarter and are poised to continue to perform better throughout the remainder of the year.
Outdoors and the security segment operating income of $62 million during the quarter up 91% over the same quarter of last year driven by the addition of Watson and performance improvement in doors and decking and security.
Segment operating margin increased 310 basis points versus the same quarter last year, the $13 five per cent.
Turning to cabinets sales for the first quarter were 688 million and increase of 11% over the same quarter in 2020.
We continue to experience strong growth of value priced products and.
Sales of higher priced made to order products returned to double digit growth in the quarter.
The positive signal for big ticket R&R reflects the consumers' increasing desire and ability to invest in their home.
Operating income and the first quarter was 75 million up 34% or $19 million versus the prior year.
Operating margin for the quarter was 10, 8% of 180 basis points first and at the same period a year ago.
We expect cabinets to deliver and average second half operating margin of 13% of our greater as we benefit from our efforts to streamline operations and invest to capture additional share gains.
Before turning to the balance sheet I want to take a moment to provide perspective on material and cost inflation and the face of elevated demand amid a backdrop of and accelerating housing market.
We continue to deploy a multitude of tools to mitigate or offset inflation within our businesses.
We do this through continuous cost improvement two out of operations.
Enacted and major programs during the past year and are furthering those initiatives in 2020. One we also of employee cost sharing with suppliers, where appropriate and finally when necessary and we ask the of price.
Through the combination of actions, we plan to offset fully all of inflationary headwinds this year and expect to deliver 2021 margin improvement and remain on and increasing margin trajectory over the next several years.
Turning to the balance sheet.
Our balance sheet remains strong with cash of $356 million net debt of $2 3 billion.
And our net debt to EBITDA leverage is now two one times.
And we ended the first quarter with approximately 755 million of total available liquidity.
We have made and will continue to make significant investment.
We are continuously assessing opportunities to deploy capital strategically to accelerate growth and stakeholder value creation.
We will also look to continue to return capital to shareholders the opera.
And I think buybacks and our dividend building on the over $1 billion of capital deployed during 2020.
I would now like to address our updated market and financial outlook.
Given our continued outperformance and strengthening of home products market, we are raising our market and financial outlook for the full year of 2021.
Based on the expectation that the global market for our products will grow 9% two of 11%.
And with the U S housing market growing 10% to 12 per cent.
And within this market forecast, we now expect U S. New construction growth of 11% the 14 per cent.
And U S R&R growth of 10% the 12%.
And just on these assumptions our revised 2021 full year sales growth is expected to be 20% the 22%.
The 13% of 15% on an organic basis.
Our full year operating margin is expected to be around or above 15%.
We now expect full year EPS within the range of $5 45 and two.
And two $5.65 on a before charges and gains basis.
Of what's the implied midpoint equates to earnings growth and excess of 30% over a record year in 2020.
Specifically our outlook for each business as it relates to our updated guidance include.
Plumbing net sales growth of 15 per cent to 17% with operating margins at or above 22%.
Outdoors and security net sales growth of 43 per cent to 47 per cent for.
Our 11% the 13% excluding Larson.
But the segment operating margins of 15 per cent to 16%.
Approximately 16% to 17% adjusted for purchase accounting and one time integration expenses.
Cabinet net sales growth of 11%, the 13% with operating margins at or above 12%.
We expect 2021 and free cash flow of approximately 650 to 700 million, which includes the accelerated investments and capacity and inventory to drive growth across all of our segments.
We anticipate a cash conversion rate between 85 per cent and 95 per cent.
The revised full year EPS outlook includes the following assumptions.
Corporate expenses of about 100 and for two of $106 million.
Interest expense of approximately 82 to 86 million.
Tax rate of between 23 per cent and 24 per cent.
And average fully diluted shares of approximately 142 of 141 million.
We expect a long runway of fundamental of housing growth to result, and prolonged the market strength for our products.
We expect our sales to continue outperforming the market, which will accelerate our margin progression.
Our strong balance sheet allow for us to continue to assess further opportunities to deploy capital strategically.
We see multiple paths of future value creation to pursue for our stakeholders.
Company has never been better positioned to capture these opportunities.
Our teams remain committed to driving market, beating sales performance and continued operating margin improvement.
Our revised 2021 guidance is solidly on the trajectory of the three year outlook reflected and our updated investor presentation.
This outlook contains the compound annual sales growth rate of eight per cent to 11%.
And of 2023 operating margin target of 16% 17 per cent.
Relative to a global market growth CAGR expectation of six per cent to eight per cent.
I will now pass the call back to day to open the call up for questions Dave.
Thanks Pat.
That concludes our prepared remarks on the first quarter.
We will now begin taking a limited number of questions.
And so there may be a number of you who'd like to ask the question.
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 will you. Please open the line for questions. Thank you.
Suddenly the.
I would like to remind everyone in order to ask a question. Please press star from the number one on your telephone keypad and we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line fill and from Jefferies. Your line is open.
Hey, guys. Congratulations on a really impressive results and just broad based strength across your portfolio and last quarter. I believe Pat you may have mentioned debt by spring you should have better line of sight and the back half of this year in terms of growth I think previously you were baking flattish sales just given the tougher comps.
And on your thinking of now and essentially what are your customers are saying in terms of the outlook.
Yeah. So we definitely expect growth from the back half and we expect the outperform that growth.
Plus the market and the contacts by half of the year you heard our updated.
The market guidance, which as you know call it roughly 10 per cent for the full year.
And I'd characterize the first half is kind of mid teens or better and the.
Back half of it.
The mid single digits or better from a market growth perspective, and then and you.
And you think about what that means for our sales across the halves of the year.
And thinking about reported sales growth and the first half averaging around 30%.
And reported sales growth and the back half averaging around 10% of both first half and bath back half strength versus the market and then even on an organic basis.
You know, our first half organic growth around around 20%.
And of back half organic growth of around high single digits versus the mid single digit market. So we are we are expecting back half growth. So we just see the strength of the housing market continue and we expect to continue to outperform it.
Probably further clarify Larson, probably 450 ish million and there was about 250 million of that coming and the first half just the kind of give you the.
And we see the year unfolding right now.
And you.
I do think you know at least it seems like it's tracking this way for the first half, but it seems also likely the attractive way for the back half of the year, where a lot.
Quarter by quarter basis, looking at it and stack margin versus those averages are and a couple of ways to look at these.
Yeah, that's really helpful. Good.
Good to see demand and really bounce back and your made the order cabinets Jayson and I was curious to get your thoughts on how you're positioned and with some of the reshuffling of Jonathan on the capacity side and then appreciating from a dollar margins perspective value is higher but on an EBITDA dollar contribution of think semi custom is probably pretty additive, but just wanted to help us think about you know.
And what this bounce back and big tick and what that means for you and and obviously on the value side as well.
Sure.
Yeah, we're we're equally encouraged to see that and I you know I mean.
You stated, it's true for cabinets and it's true for the entire portfolio I mean, the strength of interest.
And so broad based across all products.
Panels and geographies some of it was really impressive really nice to see it come through and make the word cabinets side and really being as we said in the prepared remarks really what bye bye premium, which I think tells us something about how the consumers thinking about investing and their house you know the confidence that they have and in home values and and the law.
Quiddity and so that's rolling through very nicely now and as we've talked about previously I mean, we've got a lot of work around the supply chain. We've talked a lot about the work that we did on the value side to create you know the art.
And the highly competitive.
The global supply chain and we've also done a lot of work on the make the order side, the kind of take out unnecessary complexity and simplify wherever we can hear of Communize, where we can and that is helping compound.
A lot of of the margin accretion of the business. The work is far from done and.
Dave and his team continue to identify more and more opportunities to go after that.
It's well underway and it's well understood and so as you start to see volume flow through that make the order.
You know, we'll see benefit there certainly as you pointed out on the dollar perspective, and then also have plans to.
The drive the margins further.
And I think the thing I'd add Phil is.
I think it's a great sign for housing in general and per our business right that when people are buying more premium priced cabinetry and just shows the confidence.
They have and their homes and the home values and their willingness to invest in their home. So I think it's of great overall kind of market strength and say no I think when we talk about percentage is the cabinet. The team is trying to drive both the made to order and the stock business to the mid teens margin of the whole cabin.
Portfolio as you point out, though you know and.
And the make the waterside yourself and the boxes that to the three times and sometimes even more of the three times the.
The cost of the stock boxes, so the dollar profit.
You know.
Substantially higher and which allows you to leverage.
SG&A are much more significantly so yeah to the extent of the level of strength. We're seeing continues it will be of powerful SG&A leverage and kind of upside too.
The next couple of years.
And do some of them of the streamlining of you guys have done on the made to order side of things just lead times, just really like standard for everything but is that kind of gives you an advantage just.
Service, your customer and better and that it helps you finish and gain.
And sure Oh.
Over time for sure you know because you're you're just removing unnecessary complexity and at the end of the day you have of network are that.
And that allows you to move things through the network and and and I put.
Put it in different places and I mean today it has risks.
And today you know the the whole system is it's pretty strained and that's the high quality problem and so you know you have seen our lead times for the whole industry extend out you know we worked very hard to keep our lead times inside of competitors lead time. So that we can catch any of the claims share, but as you know we sort of the build out the system your absolute.
Right.
And as a very powerful business system, where you're leveraging the whole network not you know one facility at the time.
Super helpful guys. Thanks, a lot share picture.
Your next question comes from the line of Stephen Kim from Evercore ISI. Your line is open.
Hi, guys. This is Joe all of ours Meyer on for Stephen Kim Thanks for taking my questions.
Sure.
Good so a great quarter.
Just wanted to further discuss your prepared remarks on capacity within composite decking, youre, saying youre selling everything you can make today, which is great and probably supportive of a positive pricing of which the industry traditionally hasn't seen and certainly the investments you're you've previously made and distribution are helped.
And yet with that but how much additional breathing room do the investments that you expect to come online mid year give you. This year given that it sounds like you're already sort of eye and additional investments could you just go into a little more detail on the runway you have and the plans to support.
The growth in the category that doesn't seem to be showing any signs of slowing down.
Why don't I I'll start off and give you a kind of a couple of different perspectives around it and and a pack and can help lay out for you know how that comes on line, but you know the first thing I'd say, yes, absolutely.
And are pushing hard and getting everything we can out the door, you know and you're not wrong on pricing I think although if you find you know as we build out the fiber on brands.
We are really trying to work on leading and pricing I think that's important.
High value proposition for consumers and it is one that is driven both by brand and by innovation and so you know, it's taking from and a commodity.
Commoditize unbranded wood with a much of our value proposition and that deserves a premium and so and I.
I think there's that equation and keeping the equation rights of the value of always sits and favorite of the consumer but I think there's a pricing opportunity and I think you'll see us start to develop a really good track record and driving that and then as you know and you think about the capacity.
Yes, we do have more coming online and you know, we're looking to pull more into 2020, one from 2020 two and into 'twenty two from 23 of the way we've been able to approach it.
Has been fairly incremental a you know of investing to get more capacity and more efficiency out of the assets. We have I think you know under fortune brands ownership were getting a far greater efficiency level of out of those assets and you know I have.
Plans to continue to increase debt and then as we add capacity and a price it's sort of a extruder out of time and so it's a very manageable approach are.
To manage adding that capacity you know the these.
And are not giant try and big bikes that we have to take that said you know there may come a time, where we do want to add.
And corporate and the larger footprint, but that's also something we know how to do I mean.
We hope and facilities all the time and so you know I think we are we feel we can do that fairly efficiently and so you know we feel good about what were adding this year.
That said you know I'm I'm pretty bullish and sounds like you are too on the category. So I don't expect that we'll find ourselves of overcapacity.
And anytime this year or next year, you know our planes are to meet the market, but as we continue to gain share and are continue to sell out of the capacity we have.
Okay and color you would add from a timing.
So the point I would like of.
Echo your sentiments I think first and.
And we've stated we're working to get the business the 400 million by 2020 three that's the we're pretty much on that track if not ahead of that track.
I think the Nick's comments signal if anything we wish we are putting in more capacity faster.
And the last year. We grew this business about 25 per cent selling every board and we can make and we're probably got a call of this business this year, 2025% selling ever and importantly make and.
And we're just gonna be constantly constantly working to get more out of the assets, we have and and raised new assets to the forefront I think to Nick's point.
Most of our stuff is.
Adding a modest increment of assets out of time there digestible.
And are you.
And obviously slow things down as well if that were to be.
Needed and it doesn't seem like that's going to need to be the case and so we're not at this point and time, where and we're going to end up and an overcapacity as the industry the.
And the choices.
Yeah, Fantastic, obviously of business with with the great great prospects just a quick one if I could fit in and here on the acquisition of Larsen the head of the tailwind and the quarter sort of implies that it was a little bit more than 25% of of the run rate sales that was discussed around the acquisition is there anything I mean, I know there was the accrued.
All of the account for kind of the last couple of weeks of 2020, but it still doesn't really seem large enough to explain the the.
The sales and the quarter. So was it just the stronger spring selling season, and the and the doors category or how should we think about I guess the cadence of the the tailwind through the rest of the year.
Yeah, I think as of as I said in my remarks to the.
Phil just before this I think it would be a business that's at about 450 million or more for the full year. It was a bit of under 400 million last year.
And it's probably going to be about 250.
Or thereabouts for the first half and then about 200 million for the back half and it is it's about people and just kind of recovering on inventory and you know a busy busy first half of the year across the industry.
And I've added to try it and it just fits so well into the outdoor living envelope you know as we looked at this business and sort of.
First of all the question of what what's the primary use of.
Of the Larson doors, you know the first answer is to let light and and the second was to let Eric and you know.
I mean, it might be a category of that kind of of originated and installation, but it's really moved into letting the outdoors into your house and so we see that you know that trend just attached to the trends that we're seeing and people wanting to eat better and the quality of their kind of outdoor indoor experience and the outdoor living spaces, and so you know as <unk>.
And the prepared remarks.
And the acquisition spend even better than expected the team.
Is fantastic and they're integrating really really well and and the business is performing.
At a really high level, while we're still going off to sort of the value creation synergies that we had identified so we're feeling very good about Washington.
Thanks, Good luck guys Victor.
Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open.
Hi, Good afternoon, guys and thanks for taking my questions I appreciate it.
The first wanted to talk touch on Fortune brands advantaged now you mentioned that there were a handful of major initiatives there.
To help offset some inflationary pressures that are that are flowing through.
Could you just elaborate on what day you know.
A few of those initiatives are and maybe one from each segment.
Sure I'm happy to do that and then plus the patent and give you more particulars on it but you know we saw because we look across the portfolio and really because this is a team late 19 early 'twenty. We've you know we've.
And so do you know what can we do from a business model perspective of cross fortune brands to really elevate the whole and as we did that we identified pockets of things that we were actually.
Paid doing really well and.
The investing behind them and you know we're not just doing the same.
Got it up and we were doing well because we're putting the dollars and the people behind the building capabilities.
But we were doing it and pockets of it yet.
The things that were easily leverage of all across the whole business and so we really organized hasn't hasn't our whole executive team.
Against the fortune brands of advantage to leverage these capabilities.
Capabilities, and so things like kind of category management, and if you look at our categories right, where you know with very few exceptions were the leader of.
And in those other exceptions were the top three.
And all of our categories and so as such we should be able to bring category insights understand her shelf sets out how we engage consumers what works best for them, where the innovation of lives.
And price elasticity and so how do we become really of category management leader and and pulled that out you know the other is global sourcing I mean, you know we're a manufacturer of global source or we have a very complex global supply chain, there are sourcing skills and capabilities.
And that can really not just improve the cost basis and they can do that and a very big way, but also the quality of the resiliency of of the sourcing base and our business and so you know we've invested quite.
And quite heavily and centrally to build out our teams to go off of those opportunities and when I say invest and you know this can be single digit millions, but really driving double digit millions over time and then you know the third.
One today is really around the business simplification and leveraging tool.
Likely and like 80, 20, but doing it and the more consistent way across the business consistent training speak the same language understanding the value chain, and and where we're going to get value and so the vision.
And as we really drive these you know over time. These will just be the language speakers will be the sort of skills. We have the capabilities will embed them into the business and then be able to kind of germinate a new capability inside of the fortune brands of Banca come Perella that'll help you Gotta helped drive growth right and you know, we're looking really hard right now.
At the investments, we're making and digital we have unique insights across the very broad portfolio of that we have about what's happening and the housing market that we can draw down to every.
The bulk of data like across all of our products, we can see P O S.
And everything that we do and start to fair it out trends very closely. So we're very excited about this and I I think we wanted to start.
<unk> and get some wins on the board and then really bold momentum behind.
This business model over time.
Okay. Thanks for that and then in the prepared remarks, and I don't believe I heard the stage could you give an update.
Either one of percentage basis, or a dollar of headwind your raw material inflation expectations across the portfolio and the cadence and which it you know of.
Hit your P&L and then.
You know finally.
And I believe you all said that you would be able to offset it either through pricing or other.
Some of the these initiatives that you're working on will that be more real time or do you think that you'll be trailing some of these cost pressures before kind of making it up at year end.
Yeah, it's true and.
Inflation has been and tests across across the materials and freight you know for us for us specifically it's.
Things like the metal.
Hardwood.
And freight the private and the most extensive but certainly petroleum based resins event and challenges as well.
From the Texas storms as from the channel placement perspective, so and intense amount of last year.
2020 of our full year Cogs base.
It's about $3.9 billion.
And I'll tell you that inflation this year is gonna be and not.
Kind of four and a half the.
5% of cards range.
And much of that yet to come and we probably had less and 20%.
Of that flows through our Q1, P&L and much of it and therefore, you talk and.
More than 80% is going to flow through the balance of the year and we are working to offset it.
With the combination of of cost actions, and and where necessary price over the balance of the year. I think you should expect that across all four quarters will show a measure of margin improvement and it'll be tightest during Q2 and part just because.
The freight really surged again kind of at the very end of last year and in Q1, and we're gonna be doing things.
To expedite the <unk>.
Pone and <unk> and other products for our customers will be absorbing and such unique levels of freight inflation and the and the second quarter.
What we do.
Expect to make the borrowing margin progress from the second quarter and make margin progress for the full year.
Wow that's the.
Sorry go ahead.
And I was just gonna fan and I'd be remiss, if I didn't call out how heroic or supply chain teams have been I mean, the you know everything from kind of being able to secure the freight and you're able to secure the raw mats being able day as Pat referenced and the resins and ready from a resin suppliers get them tested and through the the system really quickly and get that behind us.
Remarkable and I think as you see the.
The.
Market.
GAAP to our performance and you see the outperformance of our business increase and in environments. Like this you know a lot of that is really attributable to the team and their ability to keep our customers supplied and you know they've been out of it for a long time now and then you go back to the plywood tariffs and you know 2017 of them or we have to change out of hundreds of millions.
But the buy and out of China and to other geographies and do it very quickly they really become a world class experts at managing this and and.
And so you know the they're just excellent and the that's what gives us the confidence to basically say you know what we'll manage the US yeah I think the.
And as an incredible as Nick referenced I mean, I think since the second half of 17 and they've been facing some extreme challenge whether it's you know tariffs.
The pandemic disruption of Asia or the latest surge of.
Inflation and and.
I'd say, even labor inflation is the more challenging and it typically is as well given the it's the demand dynamics and the government program.
Program dynamics, we're going to offset it as I said this year and I can do and.
The hero of jobs and.
Cost of the big part of it.
And he didn't just on price cost of contributing.
Contributing equally to that equation.
Because we want to keep our products competitive and want to keep our channel buyers competitive.
And that's very encouraging.
And for taking my questions and good luck on the upcoming quarter.
Take care.
Your next question comes from the line of Susan the claim from Goldman Sachs. Your line is open.
And let me add my congratulations as well on a great quarter.
And my first question is really around thinking about the second quarter of appreciating the guidance that you've given us for the year, but when we think about the upcoming quarter, specifically and you know given the fact that the comps are just so abnormally low given the shutdowns that we had last year. How are you thinking about that coming together is there any color you can give us.
On it.
Yeah.
As I said all of it earlier in the call. So I think I think stacked growth quarter by quarter will be.
Pretty helpful way to look at things So if you recall.
Last year, we were down about 9% top line and the second quarter.
And as I said.
We're gonna be averaging about 30% across the first half in terms of reported sales growth.
So you know stack and that up that means you know down nine last year second quarter of that and talk about you know high <unk> approaching 40.
This year getting to that stack up 30% from the second quarter, and then and then similarly on the organic basis kind of averaging about 20% across the.
The first half of the year.
Yeah, and one thing I would point out as last year, and while we were down 9%.
And the second quarter, we had really good expense and cash management and that down quarter and our operating margin last year.
Net sales down was 14, 3%. So we we managed our bottomline very effectively during the second quarter, we'll still make a margin progression this quarter because all of our teams are working very hard on driving the business forward and contributing to the full year margin expansion of around 100.
Basis points, but it'll be it'll be.
The 50 basis point sort of lap during that cycle of quarter I'd say in terms of margin expansion.
Okay. That's very helpful. Thank you.
My second question is is it a bit more of long term in nature. It seems like you know across the business you are seeing a positive mix shift you talked about cabinets, you mentioned that rolls off 25 per cent growth and the quarter can you give us some sense of the positive mix shift what role that's playing in the margins that youre expecting and May.
The not just for this year, but as we think about the three year targets that you outlined and the slides.
And youre thinking about mix within that and is the potential that we actually get some lift if the mix ends up shifting slightly more positive and what's your base case assumption is.
Yeah I'll take it then maybe Nick could give some color I'd start with what does the mix signal about the market and.
And you know I think as of.
Especially as you've seen.
The housing activity and suburb.
And the North East and mid Atlantic Upper Midwest, where you know you have.
The people moving from cities out in the suburbs.
And housing price points that are relatively high and having a lot of confidence.
And the ability of both housing values to sustain and their desire to invest in their home because they are going up.
And he's spending a bit more time, there than they than they expected to be it gives a lot of you know.
<unk> signaled that the the housing market in terms of people investing and a larger single family homes and doing it and our premium fashion is well underway and it's nice to know relative to the last housing expansion. This is this is really not happening with unsustainable of home equity loans or something like that this is people and for the.
Most part using cash to do it. So I think it's of great signal for the market I think in terms of the.
Mix and how to think about it from our business we've been working as we.
As we've been preparing for the millennial generation to make entry price point of mid price point product on a percentage basis every bit as attractive as premium price products. So we've been trying to make across our portfolio or our ability to.
Increased margins are.
The possibility even if it was a lot of millennials buying opening price point products and we tried to not overplay net.
But as we've talked about with some of the questions I think we got to with Phil on an absolute dollar basis, you know if you're selling a one.
Dollar faucet of instead of a $200 fob the even at the same percentage margin. Obviously, it's a lot more dollars and so I think the upside of that you're pointing to sue is it really allows you to leverage your fixed cost base and.
And so if we were to see you know a pronounced and sustained mix and premium.
And there probably be upside to some of the figures we've given out there 'cause it it'd be reasonable to assume it's kind of new news and therefore, it's kind of not and our multiyear assumptions of massive mix shift and if that if that does perpetuate and sustained at the levels of spend and recently it would be upside just leveraging.
Fixed cost base off of higher absolute dollar contribution per unit.
And so I'd just add as you think about it you know what we're seeing is.
Sure.
The term and and in terms of AR and.
The fact that it's the total and how it comes together, but it's really added the so we're not seeing any abatement and the.
The trends and kind of the core portfolio. All of this is coming in addition to which is really positive and you know where you look at where it's coming from out of <unk>.
Pat referencing some of those markets are a lot of healthier of home equity levels are high and there's a degree of confidence of some of our broker partners of pointed out you know where.
Whereas the sort of first two years of the millennial buyer was really focused on that entry level price point and you're not having some first time homebuyers for millennials, but you know a fairly deep into their careers and the buying of homes that were previously considered kind of a secondary upgrade type homes.
And sort of coming in and and really building out those houses are sort of.
Every option available and so you know that I think combined with.
Some of the value of that Youre seeing.
And the Boomer generation of Gen X kind of put back into homes of their you know their confidence has increased and the home is really really generally of very aged.
And the housing stock is as you know.
The more and more confidence around the opinion and of that portfolio. So it's sort of et cetera, and that's it and our margins are fairly comparable but certainly and our dollars are higher and a lot of design cues and come out of having that portfolio of that'd be leveraged across everything.
Got you. Okay. That's very helpful color. Thank you and good luck with everything sort of thing.
Your final question today comes from the line of Keith Hughes from Charles Your line is open.
Okay.
Yes, Hi, this is Dennis Colombia, and Chile and for keeps us how are.
And that's how many of them.
Great. Thank you.
Excuse me and so.
I just wanted to ask a quick question on fiber and specifically pricing.
Just wanted to ask whether you'd be anticipating doing a midyear price increase or something along those lines and.
And just one of them and one in cabinets. If we've seen some imports come back is that having an effect on your business. Thank you alright.
Alright, guys and I'll give you some color on the first thing you know we don't comment on.
The other timing of price increases kind of on a product by product basis, and I would refer you. The my comments earlier that you know you have seen fiber on and start to really take a leadership position on pricing and the category and you know this is the product that you know when we purchased it and it really had built out its business at the entry level of.
Debt board and our opportunity was really the move up the price spectrum.
And as we broke out the wholesale distribution that supports that not just in all of a cell, but also in retail which fills the special order through our wholesale partners and so you know, there's both a pricing opportunity and decking as well as a really good mix opportunity and decking and you know just to kind of in the earlier.
The conversation that we're having here. This is this is an area, where you see better margin and assumed.
And about the price spectrum and so you know we think that that is a nice opportunity and so you know I think on and both are you may see some tailwind.
With respect to the imports and if you look a couple of things I'd point out one is you know it's <unk>.
And the stabilized from a volume perspective, and from a volume perspective kind of comparable to where it was you know per.
Free there was a big run up and imports after the anti dumping cases filed is the importers trying to bring a ton of inventory and.
You know, where it's stabilized now is well below that of sort of you know the volume of the dollar levels, where it was running previously.
A couple of things that are different though while the all levels of the same.
Read on pricing and the market is that it's.
Significantly higher than it was kind of clean and so.
And what we believe the volume there's a lot of less than it was.
And secondly, you know, we make up of greater share of those imports of our global supply chain.
And we did and then and so on the volume perspective, while the dollars have stabilized and have been coupled to the appeared volume.
We think this is.
Quite a fair amount of town, but the really important thing about it.
And why it isn't impacting us as.
While the degree it's been replaced it's been replaced.
By importers, who have product with the longer lead times.
And what SKU availability and more cost and whether it's more cost because they own the chairman like competing or whether it's more cost because they're trying to ship and it doesn't really matter, it's adding enough cost because of the system and we always said that we were going to pull the global supply chain and it didn't rely on government intervention. It was going to be cost competitive no matter, what and so it's proving to be very tough.
Okay.
And we find that the dealers are continuing.
Continuing to come to us looking for a replacement product at an accelerating rate. The other thing I'd call out is.
Customs is really a ramping of enforcement against.
And the trans shippers and I think that's going to even have a further dampening effect on imports as we go for it so.
The.
The combination of that anti dumping case, but more importantly, the work that we did the.
The re platform our whole global supply chain has had the intended effect and you're seeing that come through and both the topline and and March numbers now.
Okay. Thank you.
Sure.
At this time I'll turn it back to management for closing remarks.
Okay, well I would just say thank you everyone. I appreciate the questions very thoughtful please stay safe out there and the look forward to talking to you soon.
Thank you everybody for joining today's conference call you may now disconnect.
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