Q2 2021 Fortune Brands Home & Security Inc Earnings Call
[music].
Yeah.
Hello, My name is to Wanda and I'll be your conference operator today.
At this time I would like to welcome everyone to Fortune brands second quarter 2021 earnings conference call on.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there would be a question and answer session.
And who asked the question during the session you will need to press Star then 1 on your telephone.
I would now like to turn the call over to Mr. Dave Berry Senior Vice President of Finance and Investor Relations. Sir you may begin.
Good afternoon, everyone and welcome to the Fortune brands home and security second quarter 2021investor.
The conference call and webcast.
Hopefully everyone has had a chance to review the earnings release issued earlier the.
The earnings release, and the audio replay of the webcast of this call can be found and the investors section of our S. P. H S 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 are 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.
And our most recent form 10-K.
The company does not undertake any obligation to update or revise any forward looking statements, except as required by law.
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 Fink, our Chief Executive Officer, and Pat Hallinan, Our Chief Financial Officer.
Following our prepared remarks, we've allowed time to address some questions I will now turn the call over to Nick.
Thanks, Dave and.
And thank you to everyone for.
On the call today I hope that you are all enjoying your summer, while continuing to stay safe and healthy.
Our teams once again delivered an exceptional quarter driving outperformance on both the top and bottom lines.
Our second quarter results demonstrated that we are delivering market, beating growth and margin progression even in the face of.
Of numerous external challenges.
We remain on track to achieve both our near and long term performance objectives across all metrics.
For the quarter, our company sales increased 41% and total and 32% organically with all segments driving strong growth.
That includes organic growth of 21.
For joining us versus 2019 and over 9% sequentially versus our excellent first quarter of 2020.1.
Current demand for our products remains robust and our teams continue to drive accelerated share gains across the portfolio.
Operating margin increased 110 basis points to 15, 4% and.
1% per share increased 66%.
Headwinds from inflation and supply chain constraints were significant in the quarter, making these results even more remarkable.
Across the company, we are diligently working to meet demand and keep our customer served with our industry leading brands on.
On the back of the strong market and are accelerating the.
And the earn events, we are again, increasing our full year 2020, 1 sales and EPS guidance on maintaining our operating margin goal of around 15%.
Pat will go into further detail on our increased guidance later in the call.
Oh this quarter provided an easier comp given the COVID-19 related shutdowns in North America, and Europe last year each segment.
Outperformed also delivered sequential sales growth and operating margin improvement versus the strong first quarter of 2021.
We now expect full year organic sales growth to be on the high teens as favorable demand trends persist.
We continue to deliver on our strategic agenda, including accelerating our margin improvement and growth initiatives by our.
Segments and brands of advantaged capabilities, while also investing for future growth to drive the increasing stakeholder value.
These outstanding results would not have been possible without our exceptional team of people who continue to make the difference putting safety first going above and beyond to serve our channel partners and customers and operating with.
The <unk> excellence.
Thank you to all who work hard each day standing proudly behind our world class brands that make and increasingly positive impact on People's homes safety and communities.
Turning to the remainder of my remarks today.
First I will discuss what we're seeing and the home products market.
And the cultural and highlight key takeaways from our second quarter and to provide additional color on what drove the results.
Finally, Pat will provide highlights on our financial results balance sheet strength and liquidity as well as thoughts around our increased guidance to our financial outlook for the year.
Now turning.
In terms of you on the housing market.
The long term fundamentals for U S housing and home products remained very favorable.
The U S housing stock is under both by millions of homes and builders of currently pacing orders and managing backlogs to alleviate constraints on labor commodities and affordability, while completing communities under construction.
The demand remains extremely robust this pacing of result, and a further elongation of demand and will provide the long term momentum to many of our leading brands, which are the preferred choice for builders and the trade.
Our strong positioning across all channels, including the wholesale and dealer channel, which service pros and builders is.
Is differentiating us and gives us exposure to the additional torque from new construction growth.
With low inventory and builders pacing supply homeowners of buying existing homes from the very aged housing stock requiring repair and remodel investments.
We've seen the strengthening of larger ticket R&R is the channel to.
Historically, serving that demand have more fully opened.
Within the retail channel, there's been some market commentary regarding demand normalizing and consumer spending shifting to other categories as the economy opens further.
While the retail channel, maybe showing some recent signs of normalization for certain product categories demand.
On the shifting back towards the trade channels that were largely closed at this time last year.
We are still expecting robust activity for the remainder of the year as reflected by our increased market and financial guidance.
As we continue to make progress on our objectives and it's important not to lose sight of the long term demographic tailwind supporting.
And this prolonged housing growth.
The 2 largest segments of the population millennials and baby boomers.
Both have significant need for housing and home products.
Millennials the largest segment of the population will be of Great force for years to come in for me and upgrading households, accelerating the need for homebuilding and driving investment.
<unk> and new homes and R&R.
This demographic is still and the early stages of fueling housing growth.
Meanwhile, Baby Boomers are retiring of large numbers with record equity and their homes and retirement accounts and are upgrading and adjusting their homes for the next phase of life.
Given the sheer size of these demographics and severity of the U S. Under bulb. We expect these fundamentals to play out over many years to come.
Our portfolio is excellently positioned from a product mix price points and channel exposure standpoint to take advantage of the long term secular trends and new construction and R&R.
We intend.
For them this market consistent with our long track record.
With that market backdrop, and some thoughts on the recent quarter.
As I mentioned, we had an excellent quarter, our leading brands continue to resonate with consumers who are looking for world class products, driven by purpose and the innovation.
When consumers buy our products.
To out of spec more than just functionality the buy our brands because of our brands are built with purpose.
When they buy more and they are buying a brand the continuously innovates to advanced water efficiency and conservation.
When they buy fiber on decking, thereby and eco friendly composite boards that are over 94.
They made from recycled materials.
When they buy master brand cabinets, they're buying quality craftsmanship using responsibly sourced materials.
Our third the true door systems, our energy efficient and their security products keep people and possession and safe.
The sense of purpose and greater good for all of resonates from our.
Our amazing and employee base.
The recent ESG report has received accolades from investors and I am very proud of the contributions our brands and people make the environment and our communities. We are committed to doing even more and the future.
Operationally, we continue to execute our fortune brands advantaged capabilities.
Percent of fund investments and key growth priorities, including and our brand building and product innovation.
It'll initiatives and capacity and distribution expansion.
Those capabilities are contributing to our performance and the first half of 2021 and will continue to accelerate in the years ahead.
Inflation.
And <unk>, whether it be from material freight or labor increase as we move through the second quarter. However.
However, as you can see and from our strong performance, we're pulling every lever available to us to offset these headwinds and serve our customers.
We prioritize our continuous improvement and supply chain programs to offset inflation and then turned to price.
And sorry.
We've been thoughtful about where and when we take price so as to maintain constructive customer relationships.
As we have demonstrated over the past few years, our brands and products are desired by consumers and are capable of sustaining price increases while growing share.
Our ability to mitigate and overcome challenges.
And so the demand supply or inflationary in nature has been proven true our consistent delivery of results.
We will continue to be laser focused on execution driving stakeholder value across the organization no matter of the environment.
I mentioned at the last quarter and I will state it again we.
So our net debt to offset any inflationary and supply chain headwinds for the full year.
With an even stronger 2021 outlook, we are accelerating investment behind our core strategies to continually deliver of market, beating growth and margin expansion over the long run.
Now, let me turn to our individual businesses and how we are positioning for long.
We are committed and.
Starting with plumbing.
Our global Plumbing group continued to significantly outperform the global and U S markets. This past quarter, taking share in every geographic region, and which we operate.
The business is firing on all cylinders with sales growth of 38% or 33% excluding FX.
Term restaurant plumbing sales drove operating leverage, resulting and a 24, 3% operating margin for the quarter, notwithstanding increased investment and brand innovation and customer service.
With this margin performance into context, we delivered this results inclusive of increased brand investment of low double digit millions over last year.
And significant expenditures related to improving our service levels to our customers.
We achieved very strong double digit sales growth across all brands channels and regions, we are winning share and generating incremental investment dollars to pursue further above market growth and margin and both North America and and China.
In North America, our plumbing business has never been stronger.
We continue to be an industry leader and both innovation and key metrics on brand awareness purchase intent and loyalty among customers.
Our momentum and the smart home plumbing market, including continued adoption by builders insurance companies and consumers of our flow.
Here on technology is driving further core growth propelling the flywheel of top and bottom line performance.
And China, now and achieved double digit growth on a very tough comp to Q2 last year as the Chinese market was reopening and this quarter a year ago.
We continue to invest to position known as a leading brands with Chinese.
And these consumers and are increasing our total addressable market by expanding our product adjacencies.
We are also making incremental investments and capacity and distribution.
Finally, the house of ROHL sales nearly doubled globally and increased double digits sequentially in all regions.
The brands achieved these results.
And despite many showrooms for many of appointment only.
We're seeing a clear uptrend and premium and luxury demand not only and plumbing, but across our entire portfolio signaling consumer demand is strengthening for big ticket R&R.
Turning to outdoors and security.
Sales increased by over 60% and operating.
<unk> margin was 14, 7% organically.
Organically sales increased 26%.
These exceptional results were driven by strong double digit decking and security growth and double digit growth in doors.
Supply chain and labor availability continue to impact operations across multiple brands within the segment.
And our teams are hard at work to offset these headwinds, which held us back from achieving full capacity production.
Integration of Lars and continues to progress well and the business is performing as we expected.
As with the other operations the license team met the supply chain and select material availability constraints and the quarter head on.
Teams across the outdoors and security of working together to advance integration of capturing planned synergies.
Turning to decade.
Fiber on grew nearly 30% for the second quarter versus a strong quarter, a year ago, and we continue to operate and the sold out environment.
Incremental midyear capacity will be utilized quickly and we continue to take.
Take price and accelerate capacity expansion plans.
Market share conversion from lumber to higher performing eco friendly composite continued to trend higher.
Sales and doors experienced double digit growth and the quarter and would have been even better had operations not been constrained by labor and materials.
As the leader in serving.
On the new construction market activity remained robust as the head for much of the past year.
Similar to the decking operations, we're currently and near sold out conditions and are working to optimize our supply chain to meet this high level of demand.
Turning to security sales accelerated this past quarter growing strong double digits versus.
A year ago, and led by U S retail P O S and the continued recovery of commercial and international markets.
Our key North American retail market is back above 2019 levels and we continue to leverage fortune brands advantaged capabilities within security to drive on momentum.
Finally, turning to cabinets.
Our cabinets operations again delivered excellent performance and the past quarter with sales growing 31% and operating margin of 10, 9%.
Even when compared to a very strong first quarter the business achieved sales and operating margin growth. This now marks 4 consecutive quarters of double digit above market growth as the market leader.
Leader demand was impressive and both value and make the order.
Our current record backlog and cabinets is a clear sign of the strong demand for our products.
Our advantage deal and network has continued to drive increasing sales and margin progression for much of the past year. Additionally.
Additionally, our new facility in Georgia is fully open and ramping up production.
And to serve the month.
Monster continues to perform well and is demonstrating the competitiveness of our low cost global supply chain.
In addition to strong demand both fortune brands advantaged capabilities and a culture of continuous improvement of churn cabinets performance. We are on track to continue margin progression this year.
And in the future as we progress towards our goal of mid teens margins as the market leader in the industry.
In summary.
We continued to see very strong demand for our products driven by fundamentals and demographics.
Our performance has been accelerated by the strength and culture of our company.
Brand building and.
The consumer led innovation expertise and channel development, and our relentless focus on people execution and continuous improvement.
The operating environment has been quite challenging in 2020.1, but it was also challenging a year ago. We have faced these challenges head on and the plan for future scenarios with our eyes wide open.
While there may be other short term obstacles and bumps and this long term multi year housing expansion. Our team has proven its ability to overcome and emerged stronger and time and time again.
In addition to outperforming operationally, we're also well positioned with the strong balance sheet to continue to pursue future growth whether organically or inorganically.
Our stakeholders can count on our experienced management team to continue to create value regardless of the environment, we expect to capture the upside of the long term expansion and housing as we continued to build a great company for our stakeholders.
With that I will turn the call over to Pat who will speak to our financial results and updated guidance.
With that.
Thanks, Nick.
As a reminder of the majority of my comments will focus on income before charges and gains in order to best reflect ongoing business performance let.
Let me start with our second quarter results.
Sales were 1.9 and 4 billion up 41% from a year ago organic sales.
The growth excluding the loss on acquisition was up 32%.
Consolidated operating income for the quarter was $298 million up 51% or 101 million compared to the same quarter last year.
Total company operating margin was 15, 4% up 110 basis.
<unk> over the same quarter last year.
EPS were $1.56 of the quarter up 66% versus 90 for the same quarter last year.
And it's important to note that our associates' focus on safety and a culture of outperformance drove these outstanding results.
And point demand has remained strong and cross product categories with growing strength and larger ticket and tracker of installed products.
Headwinds from increasing material and freight inflation as well as supply chain and the labor and efficiencies are being addressed head on.
As reflected in our results we are taking additional.
And during the second half and our teams are working tirelessly to address these challenges.
Our advantage business model of leading brands and channel positions across the portfolio of products and providing a synergistic benefits as we navigate this environment.
We are executing above market.
It'll act and our fortune brands advantaged capabilities enable us to deliver strong results for the company and our stakeholders.
Now, let me provide more color on our segment results.
Beginning with plumbing.
Sales for the second quarter were 695 million up of 119.
$90 million or 38% or.
Or 33% adjusting for FX.
Second quarter growth was up very strong double digits across all major brands channels and geographies.
Plumbing operating income increased 37%.
The $169 million for the second.
Okay.
Operating margin for the quarter was 24, 3% despite significant investment during the quarter and our brands strategic priorities and the service our customers.
We expect 2021 margins to be above 22% for the full year.
Turning the outdoors.
And security.
Sales for the second quarter were $536 million up $203 million or 61% driven by the addition of Larson as well as strong double digit growth and security and decking and continued double digit growth and doors.
On an organic basis sales were up 20.
Quarter on a percent.
Door sales were up double digits, and the quarter driven by consistently strong retail Pos and and accelerating new construction market.
Reported sales results would have been even stronger within the quarter, if not for labor and material constraints the ladder of fading impact of the.
26 storms.
Decking sales were up strong double digits and the quarter as our distribution gains and wholesale continued to drive results.
Demand continues to exceed production capacity and we are selling every board we can make.
We expect this will continue as additional capacity comes on line in the fourth quarter.
The tax and we are accelerating future capacity expansion plans.
Security sales significantly rebounded with over 40% growth and the quarter with continued strength in retail and of welcome pick up and the commercial market.
Outdoors and security operating income was $79 million.
The quarter up 64% over the same quarter of last year, driven by the addition of Larson and operating improvements and decking and security.
Segment operating margin increased 30 basis points versus the same quarter of last year to 14, 7%.
Turning to cabinets.
Sales for the second quarter were $706 million and increase of 31% over the same quarter in 2020.
We again saw strong growth of value price products and sales of higher price make to order products accelerated in the quarter.
This positive signal for big ticket R&R reflects consumer.
<unk> increased desire and ability to invest in their homes.
Operating income and the second quarter was $77 million up 74% or $33 million versus the prior year on.
Operating margin for the quarter was 10, 9%.
The 270 basis points versus.
And period a year ago.
Before turning to the balance sheet and our updated financial guidance I would like to address the topic of increasing inflation as well as inefficiencies and supply chain and labor markets as we continue to execute and this period of long term sustainable housing growth.
The sale of inflation headwinds were anticipated they continued.
Moving to strengthen throughout the quarter.
As I mentioned earlier, we are taking incremental actions during the second half of the year, the offset increased inflation.
We always first challenge ourselves to drive enhanced cost savings.
And then when necessary we utilized.
Right.
As inflation has intensified we remain thoughtful regarding price increases.
We seek to keep our channel partners and products competitive and to minimize disruption if and when off cycle pricing becomes necessary.
That said our brands and products continue.
And to demonstrate their ability to drive share gains.
While commanding additional price.
Through this combination of cost and thoughtful pricing actions.
We plan to offset all inflationary headwinds this year and expect to deliver 2021 operating margin improvement.
We remain on our <unk>.
The 1 and long term margin improvement trajectory.
Turning to the balance sheet.
Our balance sheet remains strong with cash of $460 million.
Net debt of $2.1 billion.
And our net debt to EBITDA leverage is now at 1.7 times.
<unk> ended the second quarter with approximately 430 million of available capacity on our revolver.
We are on a strong financial position to continue to deploy capital to benefit our company and stakeholders.
We have made and will continue to make significant investment both on our core 4.
Fortune brands advantaged capabilities as well as into our brands through continued innovation production capacity and distribution enhancement.
We also recently announced and additional authorization to repurchase common stock.
The new 2 year authorization allows for the purchase of up to.
We incremental $400 million of common stock.
We have purchased approximately 156 million through the first half of the year.
And as always we'll be strategic and opportunistic when purchasing shares we remain focused on deploying capital effectively to accelerate stakeholder value creation.
And the I would now like to address our updated market and financial outlook.
Given our continued outperformance and a strong home products market, we are raising our market and financial outlook for the year of 2021.
Based on the expectation that the global market for our products will now.
10% to 12%.
With the U S housing market growing 11% to 13%.
And within this market forecast, we now expect U S. New construction growth of 11% to 14% and U S R&R growth of 11% to 13%.
Grow and these assumptions our revised 2021 full year sales growth is expected to be 23% to 25%.
Our 16% to 18% on an organic basis.
Our full year operating margin is expected to remain around 15%.
Based on we expect second half operating margin to average around 15%.
Similar to the 15, 1% achieved during the first half.
The third quarter is expected to experience modest margin compression, while fourth quarter margin is expected to expand as mid year actions reflect more fully and.
The statement.
We continue to target meaningful margin progress during 'twenty, 1 and are tracking to our long term margin objectives, demonstrating our ability to accelerate value creation, regardless of the environment.
We now expect full year EPS within.
And the range of $5.65 to $5.85 on a before charges and gains basis.
And of which the implied midpoint equates to earnings growth of 37% over a record of 2020.
Specifically our outlook for each business as it relates to our updated guidance includes.
And our income plumbing net sales growth of 21% to 23% with operating margins above 22%.
Outdoors and security net sales growth of 44% to 48%.
Or 14% the 16%, excluding Larson with segment operating margins.
<unk>, 15% to 16%.
Or approximately 16% to 17% adjusting for purchase accounting.
Cabinets net sales growth of 13% to 15% with operating margins approaching 12%.
We expect 2021free.
Also of approximately 675 million to $725 million.
Which includes additional investments and capacity to accelerate growth.
We anticipate a cash conversion rate of 80% to 90%.
The revised full year EPS outlook includes.
Free cash flow assumptions.
Corporate expenses of about 104 million to of $106 million.
Interest expense of approximately 83 million to $86 million.
The tax rate of between 23% and 24% with the second half tax rate more in line with our longer.
Longer term rate of around 25%.
And average fully diluted shares of approximately 140 million to of $141 million.
Our increased forecast represents the outperformance of our business and our strong market, including continued share gains and positive operating leverage.
In addition, our relentless focus on internal improvement and driving synergies across our portfolio will enable us to extend our continued best in class track record.
Our fortress balance sheet will continue to allow us to pursue internal and external growth and we are actively assessing opportunities to do so.
We expect to outperform our long term housing expansion and cannot be more excited about the opportunities ahead and I will now pass the call back to Dave to conclude our prepared remarks.
Thanks, Pat that concludes our prepared remarks on the second quarter. We will now begin taking a limited number of questions since.
To be a number of you who'd like to ask a question and I will ask that you limit. Your initial questions to 2 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.
Thank you ladies and.
Since the mid reminded you asked the question you will need to press Star then 1 on your telephone.
To withdraw your question press the pound key again Thats star 1 to ask the question.
Please standby, while we compile the Q&A roster.
Our first question comes on the line of Michael Rehaut with.
And at the Morgan Your line is low.
Thanks, Good afternoon, everyone and congrats on the results.
Sure.
First question I wanted to.
And perhaps get a little bit more color, if we could on on the back half margin outlook.
Appreciate.
The J pack that you know in a it sounds like and increasingly inflationary environment you continue to to offset.
I was hoping to get a sense of you mentioned that you're pursuing some incremental actions.
To offset the incremental inflation in the back.
And the fact I was hoping and you're always kind of talk about balancing cost savings with price increases and I was hoping maybe to get a sense of.
When you think about the incremental headwind that youre seeing and the back half.
How much.
Or are you expecting to offset through cost vs.
Versus price.
And also perhaps more broadly if you could talk about perhaps on the cost side and operational excellence productivity, how some of the fortune brands advantage.
Programs and initiatives.
You know are contributing to 2 of that ability to offset.
Okay.
And Nick I'll start and and give you some thoughts conceptually on them.
Packaging filling some of that.
The detail, but you know as.
And as you'll note and as you've noted I mean, not the business.
The continued to perform and demonstrated its resilience.
And notwithstanding the environment and so.
Yeah.
We're seeing that.
And really strong market and we're seeing yes.
The very large inflationary pressures as well as just the supply chain disruption of the continues.
And the that's been widely reported and if you step back for a second ago of how the business continues to perform.
Yes.
Lot of expenses from the fact that we.
Yeah.
On a.
Margin improvement journey, and we're doing a very programmatically and very deliberately and we're leveraging of the across the whole business and so I think if you take us and we're just static and we're just trying to hold the line and then you might see in a buffering from.
Outside forces, but since the business is so geared towards a continuous improvement mindset and taken these fortune brands with oxygen and deploying them.
Throughout the business, we're able to see those benefits come through even in the challenging environment and so.
If I take Fortunately they wanted.
And you know you've got 3 big poach business simplification and <unk>.
Category management, and you've got global sourcing right and and 2 of those business simplification of the global sourcing.
Really do drive I'd say both business resilience.
And cost improvement and so.
So coming into the year.
And we had significant plans.
To take those and leverage them throughout the business and different places and in different pockets.
And you know it goes down and the desires of said before I mean this is backed by investments we've made and building the capabilities and building. The teams. So for example, just this year we hired a.
Fortune brands in the center of excellence and the Globe.
And the sourcing.
Fairly material number of people that were continuing to build out that team.
And so by doing that we had the business on the trajectory.
And we're able to drive cost improvement as well as improve the quality of the supply chain.
And taking complexity.
And what you find is that suppliers that are able to work with us to meet the sort of input costs that we're looking for are actually tends to be the better suppliers and so where we put these progress the place.
She's on the business is actually more resilient.
At lower cost versus less resilient and.
And so that that is a big underpinning.
Of the progress that we've been able to make.
And then of course, if that day.
Doesn't cover everything as we've said, we do look to take price and I'll be trying not to do it outside of our regular cadence, we certainly had to this year.
What price has spoken to is the <unk>.
The.
<unk> brand and.
And the strength of our channel management, because despite the fact that we've taken price we continue to gain share which is telling you that the value equation. So that's very much in favor of the consumer you know we're innovating.
We're adding a lot of value of our products and building brands and so.
You know, we're able to take price and where we'd have the.
The price is kind of on and I'm sure you guys and your channel checks and you've seen that and it's being well received we're just time doing and the way that is constructive as possible and notwithstanding the headwinds that we're facing so it's that really programmatic approach and I think the.
And that we've taken a more programmatic approach.
And on paying off now.
And I'll tell you is particularly exciting about it is.
And my perspective, and we're just getting started and these are investments that we've made over the last couple of years, we're just pulling out these teams.
And we're just getting rolling and that momentum will build over time and so you know we expect it to continue at the liver after the business for a very long time to come.
And there is really.
And anything.
Yeah, Mike and I was hearing the question I'm trying to get to the numbers of at all when we talked at the end of the last quarter, we talked about.
Commodity freight and tariff and inflation in the range of 4% to 5% of Cogs, So probably in the range of 6.
The percent of Cogs and Youre starting to talk.
Dollar amount that's approaching $250 million.
What's going on with all components of tariffs are pretty minor part of that are pretty static year over year.
But both freight and commodity is the big chunk of that.
And.
We don't break down.
What chunk of cost versus what chunk is price, they're both contributing very significantly.
2 but offsetting that and we totally we plan to totally offset that this year.
Kind of point us to the margin journey, we're on.
And as Nick said.
We're we're pointing still towards 16.
16% to 17% margin by 2023, which is 75 basis plus points of year plus of margin improvement and we're tracking that this year. This year, we'll use cost and price on the variable.
Syed.
To get after the variable inflation and will lever the structural cost savings.
We made the last couple of years, especially and cabinets and a few other of our businesses.
And the continued to make and our businesses and volume to lever towards.
The margin improvement this year.
They'll both be driving the margin improvement this year.
And you know what I'd say is we're 8 quarters in a row of year on year over year quarterly margin improvement.
And we expect to keep marching on that though the third quarter.
We will present some challenges.
This year of that 6% margin of inflation about 70% of it will hit during the second half.
With the disproportionate chunk and the third quarter and so the back half will be about of 15 ish percent margin to accomplish.
Complement the front half to deliver somewhere around that for the full year, but will probably be <unk>.
And 30 to 60 basis points of down and operating margin for the third quarter, but then probably 30 to 60 basis points of margin up in the fourth quarter to deliver of back half that's right.
And around 15% and and go into next year solidly on on the ground of keep making progress towards our longer term goal.
And then.
Great and I appreciate all of the.
The.
The quantitative color there and that's really helpful.
And I guess maybe picking.
Step back and strategically.
You mentioned in terms of your free cash flow of deployment you know as always.
You evaluate a combination of share repurchase and and bolt on M&A, obviously and the last couple of years.
It's 4 years, you know you've you've really bolstered the outdoor and the security segment.
And that follows before that kind of building out of rounding out a little bit on the plumbing side of.
How should we think about the opportunity set over the next 2 or 3 or 4 years across your different segments.
The 2 portfolios.
You know it seems like cabinets and certainly been on the quieter side I think the last major 1 was more craft way back when you know plumbing you know you've obviously made some very nice add ons with the house of ROHL now rolled up into that.
I'm just curious if there's anything.
The thing that you know perhaps to think about what we expect on the plumbing side or is it really more of just you know building out opportunistically.
And the outdoor portfolio and specifically on the outdoor and I'm, particularly curious if theres any.
Product categories that perhaps we should be thinking about.
Sure I'm happy to give you some perspectives and.
And Iraq or not and where.
Well aware of the the.
Strong cash generation and.
And are being very thoughtful about ways in which we can continue to create value.
Of our stakeholders here.
And.
And and our priorities remain the same I mean on first and foremost and everybody.
So the all of our own business.
Next up in the periods to gross.
And the strategic priorities and I think you know at the slowing of growth.
The opportunities there to continue to invest behind it.
Which we're pretty excited and.
Okay.
M&A, and then where you won't find good M&A opportunities.
Remain.
The focus on returning cash to shareholders.
The only M&A I'll say the pipeline is robust.
And.
And as robust as I've seen and and Ah.
And if not ever.
And so there's a lot of stuff out there we're going to remain disciplined and look for places where we can say that's the bar, we hold very high growth.
Sure.
And the areas.
Our interest remain the same certainly that growth and security were very.
Excited about opportunities.
And the outdoor space.
Yes.
Our focus on.
And that where you know things that you know you historically think of in terms of fortune brands, where we believe we can take brands, where there can be structural advantage, where we can leverage our channel.
No.
On the areas of which the perfect the other areas.
The work that we've looked at that and we've decided on and more commoditized and not.
The worth pursuing.
Is that space becomes increasingly broke out and we're continuing to look at opportunities there and we think there's some stuff that's pretty interesting and I can add to the portfolio and really working.
And on an integrated way I mean, when you think about even.
And.
And the doors, when we looked at Larson and 1 of the most interesting thing that Pops out.
Yes.
And that screen door to let of light or air and to their homes and it really was to create and access point to the outside and so you know of combining that with the leading exterior doors.
Yeah.
And the U S small kind of your door system.
1 of them could be very interesting kind of indoor outdoor living.
Thing, which is certainly a trend of everything that.
And that is that is an area. We do remain very focused on plumbing opportunities and they're not easy to come on.
And there you know there are things out.
And out there that are of interest and particularly and as our plumbing group continues to such a phenomenal job of building out to me Adjacencies and the areas of Richard compete and opens the aperture of the types of things that we can add to the group and the you know really moved the business into kind of residential.
The water management and crew.
The great experiences for our consumers with water and so as you open the aperture and more opportunities can can flow through.
Connected home.
And it's very interesting.
The have acquired flow as you're well aware of.
And that is.
It's very very exciting for us.
And it's being well received by builders.
By insurers by consumers and.
And.
And there is little question on mind that there is an inflection point at which that really becomes integrate all of that sort of.
Digitize all of home.
As a management of water becomes the standard and homes when when the when it comes on.
We're not that familiar that we can call. It but you can see that really becoming something of a so much value.
And then it becomes undeniable so what other spaces are there and what other adjacencies are there in the connected home where again.
And create value.
And now you asked a little bit earlier about fortune brands of apartments, and it certainly helps.
As we go out and look at what's in the pipeline because we have both of the skill sets out.
And category management and Gulf of supply chain management ambitious simplification hopefully that we can look at other businesses and see how we can deploy.
And those capabilities against those businesses to create value and.
And it becomes a very powerful tool.
And our quiver, when we think about clean and value for stakeholders and so we're excited again.
No.
On the bar, we hold the high end.
Okay.
And we want to think of it where we are we cannot.
And we could.
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And at worst.
Thank you.
Our next question comes from the line of Susan.
Mcclary with Goldman Sachs. Your line is open.
Thank you good afternoon, everyone and congrats on the great quarter.
Sure.
Hum.
And is around here.
And have been really impressive I mean, they came in well ahead of where we were for the second quarter of in a row and even understanding the investments. There you were about flat year over year, and so I guess 2 questions.
And there 1 is you know can you talk to you of what's driving that outperformance in there and the sustainability of it and and the grade and you know 22 plus percent for the year suggest a pretty decent deceleration sequentially, which I know that there is some inflationary pressures and those kinds of things can we do but still.
It feels like on a relative basis at the big move down to can you just talk a little bit about how we should be thinking about that and and what the drivers and there are.
Yes.
You know I think the first of the team there is doing a great job of managing its business the simultaneously drive growth and.
And margin, but makes the.
The right investments, but youre right in observing the second quarter of was particularly strong.
Part of that was FX driven.
And that we had.
About $7.5 million of.
The benefit to O I.
And that is almost all and plumbing width of the strength of the Chinese currency vs.
Versus the U S currency.
They still have a very strong margin without that.
And they've made double digit brand investment up in the quarter year over year.
But theyre going to be also accelerating our brand investment outside of the back of the year back half of the year and what happens and the back half of the year of the currency of neutralized. So you get the effect of the kind of on the currency benefit fades away and the back half of the year and the investment goes in.
And so therefore, you end up with the back.
Hap.
And where they are planning out closer to their longer term.
Margin trajectory and what should be 22 plus percent.
And so I would just add them and conceptually you know.
We've got a business, that's gonna grow organically and a 21% to 23% with margins of about 20.
We're going to look for ways to invest to.
And the continued to drive the top line and the fact that the bids.
And it's produced these types of margins with double digit millions.
Increasing investment.
And brand on top of the <unk>.
Last year, where actually you may recall in Q2 of last year, we've actually increased.
2 are bringing the best friend on 19th of.
And so it's kind of compounding investment level, but really driving the topline and a phenomenal pace and so you know that.
The quite well that were kind of keep going here and.
And we'll keep going on.
Okay.
Alright, that's very helpful color and my question is a bit higher level, you talk to your expectations for our and our spend to be up about 11% to 13%. This year for the industry. Overall, you know clearly some of our channel checks of pointed to some deceleration on the consumer side and the second quarter I guess.
Can you talk to what you're seeing kind of across the business across the different channels and and what gives you the confidence around that 11% to 13%. When you do think about the full year.
Yeah, I'll I'll, I'll start and Pat and I have some color to add on.
We see the same noise that you're probably seeing on.
And the commentary around the deceleration.
And I think without a doubt and the big box retail we've seen some deceleration as the other channels have moved up but we've got a pretty broad.
Do you over the housing products and when you when you.
And what are the portfolio and you know this is the question that we have.
Past the deeply with our teams and we're not seeing deceleration at all you know and Texas were still seeing and of course at a level and excess of capacity and we're seeing backlogs that are growing.
And our team is working unbelievably hard to try to meet our customer needs and get.
Product out the door and we believe it's driven by the fundamentals, which remain to be true that you know people need housing. The the market is fundamentally under book and there's not enough new construction and that there isn't extremely aged housing stock is in dire need of renovation.
And you add to that but yeah.
Home equities of high and you know people, even if it's off of a little bit of which isn't actually a bad thing because we believe it allows for sustainability of the marketplace.
You know of houses continue the trade, which is of good catalyst and so you know with those things in place and we do our checks across all of our portfolio of streetcar teams and our customers.
We're seeing and continue to be very robust and.
And believe that it'll continue to be robust as people need to renovate and you know very HIV the stock so I don't know.
So I put the context and what our expectation on U S. All of our specifically going beyond the DIY.
Centric channel is that we're going to see mid to high single digit growth.
Across the back half of the year.
And the reason that helps support our full year at a 11 of 13 as what we'd probably and you can always got a judge the thing is that approximately.
When you're the close to the end of the first half, but you know we buy our best estimates of things that the first half was and the high teens to low twenties right. So there's been a really strong first half of growth for the second quarter was stronger than we would've anticipated and the back half is very much within the expectations, we had even a quarter ago.
Which is you know strong mid to high single digit growth of total R&R.
Okay. Thank you very much for the color and good luck.
Thank you.
As of right.
Our next question comes from the line of Tim Weiss with Baird.
Your line is open.
Hey, Yeah, Hey, guys, good afternoon, and and nice job.
Yeah.
Hey, maybe just.
Starting big picture.
You mentioned several times and in your prepared remarks, Nick that you're operating your capacity in several areas of your business.
Could you just talk about.
Kind of your capacity availability as you kind of think about growth over the next 2 to 3 years and.
And where you might need to add kind of incremental fixed capacity versus maybe adding labor shifts.
Sure well to a degree and the capacity has been constrained and are less.
Sort of.
The assets, but it was sort of labor.
Strength has been a real challenge transportation has been a real challenge.
And that is just sort of capped at what I call sort of shorter term capacity and now we have seen some labor start to flow back, particularly as.
Unemployment benefits of lessen and certain states and so.
We're very interested to see what happens in the fall and that starts to go away.
And we're seeing a little of and easing up on on logistics and transportation of the continent, but those are sort of appropriate strength that we do believe.
The ease up over time on.
On the longer term.
Kind of capital journey, and as we look at capacity and are there areas, where we're investing and I'd say fairly across the board, obviously and cabinets. We just opened a new facility. That's that's fully up and now, but it's still ramping and so that brings me on more capacity online and.
And we'll continue to look as we fine tune.
And I'll say that that team is doing a phenomenal job getting more out of its existing footprint and that's part of their margin journey is as they simplify that business and actually freeze up and capacity inside of the existing footprint and saw it and I think will create more headroom, there decking and where we're at.
And capacity.
Perhaps the online coming that's the back half of the year, we think that'll be laptops immediately we're looking to accelerate you know on multi year plan to see if we can bring some more and a little bit sooner and we'll continue to add there and you know that product is such a value for consumer.
Most of our whether it be at.
The current.
The.
The lumber prices or lower lumber prices you know the the.
Pairing of product that is innovative branded.
And really sort of consumer desired versus something like the commodity.
That is going to run for a very long time, and so there'll be capacity there.
And plumbing, we've invested and a new distribution center as well as and our global supply chain, that's going to give us some headroom, but whats kind of growth.
We got you know we continue to work very very hard.
And then the doors is also kind of nearing kind of capacity and we're going to look at incremental.
There you know pack and speak to and from a Capex journey perspective, I would say it's fairly.
In line with the historic maybe a bit more investment but from you now.
Headroom perspective, what I'd tell you is we look at our capacity.
Capacity very.
Seriously with the teams and every quarterly review and have a multiyear plan.
And to add it and so really the constraints and I'd say now of more shorter term in nature, but we will have to add of hard capacity over the next few years.
Now a demand that we're seeing now and we expect to see into the future.
Yeah Tonight, I'd say just put the numbers around it the last year was kind of like a low capex year for us out of $1.50, as you know, it's mostly been and the kind of on 175 to 200. The prior 3 years to that and we're probably hitting this year.
That's gonna be somewhere and the 225 of 250 and next year, that's and the.
And 250 to $2.75 range and that uptick is gonna be going disproportionately the places like decking.
5 of the class fiberglass doors per therm of true ups.
Plumbing distribution.
And luxury of plumbing capacity those are going to be the the disproportion of things, but to Nick's point.
Right now all of the pinch points, we're feeling kind of for the next.
3 to 9 months are mostly around labor and logistics and then.
Some.
1 of the things that we're working with our vendors on whether they were forced majeure things coming out of the spring storms or their capacity needs.
Okay. Okay. That's great. Thanks, Thanks for all of that and then I.
And I know, it's early but.
Is there a way to think about the carryover impact of inflation next year and then just if we.
You shouldn't do you see and put start to moderate I mean could you talk about your ability to kind of keep the pricing and the productivity offsets that you're using this year, we did see the moderation.
Yeah, I don't know that I'm prepared today to make a call on next.
And next year the inflation.
Certainly.
And I would say.
We would of thought early this year.
And that may be inflation would be and the 2 and a half the 3 and 5% range. So.
And go to logic, just you know with us conveying 6 plus percent, we're probably carrying and 3 points of inflation.
And the next year that we werent anticipating and our strap plan, but.
And we're managing that now and we'll manage that well.
We'll manage that next year I think in terms of.
Our ability to hold pricing and our drive margin.
And we're confident and our margins.
And.
And we.
We will be mindful and managing.
Prices as inflation, maybe changes on the downward as we were.
And managing it on the uptick we were very thoughtful.
With our channel partners to keep our products competitive.
<unk> for them and to keep them competitive and the end markets for our consumers.
And so we will use that that same logic as we manage any dynamics next year that might be deflationary and let's hope so that's a little bit of of the problem basically and the good news is it does seem to be stabilizing a bit right now.
So you know that.
And that is 1 favorable dynamic that is playing out right now.
Okay, great and when I sort of nice work and good luck on the second half.
Thanks.
Thank you.
Our next question comes from the line of Adam Baumgarten with Nelson Your line is open.
Hey, guys. Thanks for taking.
My question, just curious on the <unk> margin decline any.
The segments impacted more than others or is it pretty much across the board.
And so it's pretty even across the board.
Adam I Wouldnt call out I mean first of all the team is focused on avoiding that right. We just want.
To be signaling some realistic expectations and I think thats all kind.
Kind of pretty manageable, given the sense that they're experiencing almost 40% of the year, the inflation and the and the third quarter.
Got it Okay, and then just and decking. It sounds like you guys are sold out the man's really good.
And you are hearing on the DIY.
In terms of weakness I know theres, a fair amount of exposure and overall composite decking to DIY, just curious with kind of the lumber decking read through as being fairly negative if youre seeing any signs of that and composite decking.
I wouldn't say.
The negative by any means.
And looked at.
The.
Growth rates, a year ago and prove the backup of the year there astronomical.
And I think it was like 40% So you know the.
The comps are pretty huge and against that and see more modest growth but.
It's still been healthy and then on the wholesale side and on our distribution gain.
<unk> continued to take place and so as we've invested in that channel and really both of them from scratch on the back of our very strong very mature relationships and best in class home and was there we were taking a lot of share and so the growth on the wholesale side, it's been very very strong and really opened up a new.
The channels and new geographies.
Got it thanks and good luck.
Thanks.
Ladies and gentlemen that concludes our call for today. Thank you for participating you may now disconnect everyone have a wonderful day.
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