Q3 2021 Fortune Brands Home & Security Inc Earnings Call
Good afternoon, My name is Holly and I'll be your conference operator today at this time I would like to welcome everyone to the Fortune brands third 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.
I'll ask a question simply press Star then the number one on your telephone keypad to withdraw question press the pound key as a reminder, today's conference call is being recorded now I would like to turn the call over to Mr. Dave theory, Senior Vice President of Finance and Investor Relations. Sir you may begin our conference.
Carl.
Good afternoon, everyone and welcome to the Fortune brands home and security third quarter, 2021, investor call and webcast.
Hopefully everyone has had a chance to review the earnings release issued earlier.
The earnings release, and the audio replay of the webcast of this call can be found in the investors section of our F. B 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.
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 or 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.
Thank you to everyone for joining us on the call today.
Our teams once again rose to the occasion to deliver an exceptional quarter driving outperformance, while facing tremendous supply chain headwinds, including challenges in labor freight and material availability.
Demand for our products remains very strong and we're working tirelessly to serve our customers while combating the global supply chain challenges facing most industries.
The perseverance shown by our team members across our World class brands has been nothing short of remarkable.
Our third quarter results demonstrate that we can deliver even in the face of significant challenges.
We remain firmly on track for a record year with exceptional growth and margin improvement.
To reach the long term goals for fortune brands that were communicated earlier this year.
For the third quarter company sales increased 20% in total and 14% organically with all segments driving strong growth.
This past quarter marked an all time record quarterly sales as we near $2 billion.
Operating income increased 20% and earnings per share increased 25% incredible results, especially given the current external environment.
Demand for our products in the quarter was and remains robust and we expect growth to persist as consumers continue to invest in housing.
Our leading brands are well positioned to capitalize on these tailwind and our teams continue to drive share gains across the portfolio.
Our mid teens organic sales growth was complemented by Washington, which is exceeding our expectations in terms of both performance and synergies.
I am proud of our team's ability to integrate this asset and drive performance notwithstanding the challenging supply chain environment.
Headwinds from supply chain, particularly in labor availability and freight and materials inflation increased both during the quarter and relative to previous expectations.
We are addressing these challenges by leveraging our fortune brands had vantage capabilities and.
Through incremental price.
Across the company, we are diligently working to meet continued strong demand, while keeping our customers served and employees safe.
As global supply chain labor and other inflationary pressures all remain dynamic we've updated our 2021 financial guidance as was highlighted in our earnings press release earlier today.
Pat will provide additional detail later in the call importantly, we remain on track to achieve exceptional growth and margin improvement in 2021 as well as towards our long term targets communicated earlier this year.
Notwithstanding these external challenges, we continue to increase investment to drive the long term growth and margin progression of the company.
In the quarter, we furthered our strategic agenda and made more than $30 million of incremental investments behind our digital journey.
<unk> innovation and fortune brands advantaged capabilities, while also delivering an operating margin on par with prior year.
These investments were made in addition to the incremental investments made throughout last year.
For the full year, we expect to make operating margin progress of around 50 basis points versus a year ago, while continuing to invest in our strategic priorities to drive long term stakeholder value creation.
Our strategies are delivering in this environment and those incremental investments should only accelerate our performance with the current pace of challenges moderates.
The company continues to generate high levels of free cash flow and our balance sheet is strong we're committed to efficient and effective capital deployment by investing in strategic capital projects executing disciplined M&A transactions and returning dollars to shareholders via dividends and share repurchases.
Leverage remains very healthy we have plenty of capacity to deploy additional capital for more value creation activity.
We recently chose to accelerate capacity investments and Mullen and the house of ROHL furniture and fiber on brands and expect excellent returns from these initiatives.
Additionally, we repurchased $114 million of shares in the third quarter and our year to date share repurchase total currently stands at over $380 million.
As the company celebrated its 10 year anniversary of its spinoff from public listing in early October.
Of capital returned to shareholders through repurchases alone surpassed $2 $5 billion.
Importantly.
Throughout our 10 years. We've also worked to serve all of our stakeholders from developing sustainable innovative products and processes to our best in class safety records to our commitments to advance diversity equity and inclusion ESG has long been a part of our culture.
This past quarter, we made some exciting advancement in our ESG journey and unveiled a new website with an enhanced focus on ESG.
We continue to receive recognition for our best in class safety record, including multiple awards for the work, we do keeping our employees safe.
In honor of our 10 year anniversary.
Not meaningful partnerships with two outstanding affordable housing organizations.
I can't think of a better way to celebrate our milestone anniversary.
This commitment to help make the dream of home more attainable for many families and our communities.
While there's more work to be done I'm proud of what our team has accomplished.
Over the past decade, we've proven our ability to execute in any environment and to drive sustainable long term shareholder value creation.
This is possible because of the team of exceptional people across our organization, who continue to make a different putting safety first going above and beyond to serve our channel partners and customers and operating with a commitment to excellence.
They are the flag carriers of our culture, which drive our resiliency and results.
Thank you to all who work so hard each day.
Standing probably behind our world class brands that make an increasingly positive impact on People's home safety and community.
Turning to the remainder of my remarks today.
First I will discuss what we're seeing in the home products market.
I'll, then highlight key takeaways from our third quarter and 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 updated guidance to our financial outlook for the full year.
Now turning to our view on the housing market.
Long term fundamentals for housing and home products remained very favorable.
The significant deficit of homes available for sale and the structural underbody. It has contributed to the current housing situation has been elongated by increasing labor supply chain and material availability headwinds.
While these challenges have made global headlines it will take time to normalize it will take much longer years in fact to accrue the significant under supply of up to date homes relative to demand.
We saw some moderation in the pace of home sales versus Q3 of 2020.
We view this moderation is a net positive as it allows for a more sustainable long term expansion of housing products, while still driving very strong demand.
Notwithstanding some moderation.
For our products continued to persist ahead of supply. We also experienced some rebalancing of demand across channels and between the rebalancing and the very strong, but moderating home purchasing market. We believe the overall marketplace is on an even healthier footing for long term sustainable growth than it was this time last year.
Within both the new construction and repair and remodel markets, we continued to see consumers focusing investment on the home.
Demand for larger ticket and pro oriented projects remains elevated which squarely aligns with much of our product portfolio.
These product categories is sold mostly through the trade.
Wholesale and builder channel and have experienced strong.
Stained momentum since before the pandemic.
With our excellent relationships and preferred positioning in those channels, coupled with market leadership for our premium brands. We expect this momentum to continue and demand for our products to remain robust.
We also saw consumers continue to spend up the price spectrum into premium offerings.
We've seen this multi quarter trend in both plumbing and cabinets and I'll also seeing this trend play out within our premium offerings in decking and doors.
This sign of continued consumer confidence to invest in the home reflects both the health of the consumer and household balance sheets as well as consumers growing aspirations for what the home can become.
Whether it be new construction or repair and remodel markets. We believe we're optimally positioned to capture accelerated share leverage by the best home product portfolio in the U S and have leadership positions in all of our brands.
Driven by the advantaged set of channel positions significant growth capital to deploy and supported by a world class people, we could not be more excited about the future.
With that market backdrop, some thoughts on the recent quarter.
We had a stellar quarter, even in the face of incremental supply chain headwinds.
And with robust through the quarter and remains strong today across the whole portfolio.
Our teams are working tirelessly to offset the numerous supply chain and labor constraints and we're taking incremental actions to deliver both near term results and long term growth and margin objectives.
This is Lee labor shortages and freight constraints, where are most acute pressure points across the portfolio and there are more challenging than even 90 days ago.
We are responding with stronger measures and human capital attraction and retention strategies.
At the same time, we're also leveraging our fortune brands advantaged capabilities to reduce complexity and minimize dependents on labor.
We're also utilizing our scale and capabilities in global sourcing and logistics to optimize freight efficiency.
We're further developing and deploying our fortune brands with vantage capabilities and our funding strategic investments in key growth priorities, including in our digital journey brand building product innovation as well as in capacity and distribution expansion.
These investments are contributing to our resiliency and as conditions normalize we expect to continue to increase sales and margin, allowing for stronger capital deployment and investment, which would drive our perpetual outperformance engine for the long term.
Now, let me turn to our individual businesses and how were positioning for long term growth starting with plumbing.
Our global plumbing group once again significantly outperformed the global and U S markets. This past quarter, taking share in every geographic region in which we operate.
The business continues to fire on all cylinders with sales growth of 26% or 23% excluding FX.
Our strong plumbing sales drove operating leverage resulting in a 22, 6% operating margin for the quarter notwithstanding increased investment in brand innovation and improved customer service.
Our north American wholesale and e-commerce channels delivered strong double digit growth and we continued to grow in retail despite very elevated comps from the prior year.
We are winning share and generating incremental investment dollars to pursue further above market growth and margin.
In North America, our plumbing business has never been stronger.
We continue to be an industry leader in both innovation and key metrics and brand awareness purchase intent and loyalty among customers.
<unk> continues to lead in innovation and design and push new on trend styles and functionality.
Including the recently launched <unk> by Mountains Quadro product line.
This cutting edge shower gives consumers the power to customize their experience, while incorporating the nearby mountains proprietary water saving technology delivering on our water saving initiatives and ESG strategy.
As our business grows we are also investing in incremental capacity across the supply chain.
<unk>, a new distribution center opening this quarter.
And China Moen achieved strong double digit growth as our investments behind the Moen brand category expansion and innovation continued to resonate with the Chinese consumer.
Given our broad product offering diverse channel exposure and increasingly relevant consumer brand, we see continued growth in China, despite headwinds from the slowing new construction market.
As we've demonstrated in the past our sales growth is driven by our innovation and category expansion efforts is not tied tightly to the overall market.
Additionally, we built the resilient China business with a cost structure that can flex to preserve margin delivery.
While we anticipate that there may be interim slowing of that marketplace. We are well equipped to outperform as we did during the last slowdown in 2017.
Finally.
The house of ROHL sales grew very strong double digits in all regions.
Mentum in the luxury category has remained robust and we expect demand to continue as consumers' willingness to invest and spend into larger ticket R&R remains significant.
To keep up with this demand, we recently approved an investment to modernize and add capacity to our house of ROHL manufacturing facilities.
Turning to outdoors and security.
Sales increased by 30% and operating margin was 15, 6% organically sales increased 6% and were impacted by the very elevated comps due to the shift of sales from Q2 to Q3 last year in doors and decking because our channels reopened following COVID-19 shutdowns.
Cereal and labor availability headwinds increased through the third quarter and continued to impact operations across all brands, including material shortages caused by hurricane either.
Our teams are hard at work to offset these challenges, which have restraint us from achieving targeted output.
Doors delivered mid single digit sales growth in the quarter, reflecting constraints in labour and materials and very elevated comps due to the shift of sales from Q2 to Q3 last year as a channel as we open more fully after COVID-19 shutdowns.
Adjusting for this shift sales increased mid teens protect.
Production interruptions, a key component suppliers caused by hurricane Ida affected supply in the quarter, though we've worked diligently across our supply chain to resolve these challenges going forward.
Underlying demand remained strong across channels and we continue to work to service our customers at a high level.
Turning to decade, five bond sales grew mid single digits off of a very strong quarter last year that also included the shift of sales from Q2 to Q3 due to channel reopening adjust.
Adjusting for 2020 shipment cadence sales increased around 20%.
Our strategy of leveraging our deep customer relationships to partner with the leading distributors in each region continues to pay dividends as we remain in a sold out position.
We will be bringing incremental capacity online before year end, and we expect fourth quarter sales growth to eclipse, 25%.
We continue to leverage fortune brands advantaged capabilities, and other internal synergies to increase output and streamline costs.
Our eco friendly composite decking continued to resonate with consumers and remains in high demand as we take additional share from traditional wood decking.
As I mentioned earlier integration of Washington continues to progress well and the business is performing above expectations.
Our teams across outdoors and security are working together to advance integration capturing planned synergies.
Finally within security.
<unk> continued success and momentum with high single digit sales growth in the quarter as commercial back to school and travel markets continue to rebound.
Our key North American retail market for both locks and space continues at levels stronger than prior to the start of the pandemic.
The business is delivery on the fortune brands and vantage investments made over the last couple of years and is now generating incremental fuel for reinvestment.
Now turning to cabinets.
Our cabinets operations again delivered strong performance in the past quarter with sales growing over 9% and operating margin of nine 7%.
In an extremely tough environment sales grew sequentially. After the strong Q2 and margins performed at industry leading levels.
Demand was equally strong in both stock and make to order with the strongest momentum continuing and our premium offerings.
While labor challenges material and freight inflation increased further although manageable and we continued to take price and deploy continuous improvement initiatives to offset these headwinds.
Cabinets margin performance in such a challenging and fast evolving environment is a testament to how well our pivot plan and fortune brands and vantage capabilities our delivery.
As the pace of challenges moderates and our pricing actions take further hold the business will accelerate this progress towards its long term margin objective.
Labor shortages and freight availability.
<unk> challenges impacting performance and margins in our cabinets business.
Our teams are deploying lean methodologies and complexity reduction strategies to ease the supply chain and labor limitations Cigna.
Significant order backlog exists across the business and will be worked through into 2022.
We remain committed to our long term margin goals with cabinets.
The business simplification progress that we made this year within our facilities will prove beneficial as we continue to solve our labor challenges and price realization catches up during the fourth quarter and into early 2022.
In summary, we continue to see very strong demand for our products and believe this housing cycle is being further elongated by current short term acute headwinds.
We're very focused on overcoming challenges and delivering in the short term and we've built this company and its strong culture to win for the long term.
Our commitment to excellence each other and our brands leveraged by innovation investment and most importantly purpose tribes everything that we do.
Our products positively impact People's lives every day, and we do not take that for granted.
We're committed to growing stronger together and we'll do so in a sustainable way.
As we near the end of 2021 and look to 2022 and beyond the actions that we're taking now and the investments that we're making and expect to make in the future should drive above market growth and a stronger margin profile.
We have a strong balance sheet and the ability to deploy a significant amount of capital over the next few years.
We're excited about the housing market and for the future of our company, we will remain steadfast in our mandate to create value regardless of the environment.
With that I will turn the call over to Pat who will speak to our financial results and updated guidance Pat.
Thanks, Nick and as a reminder, the majority of my comments will focus on income before charges and gains in order to best reflect ongoing business performance. Additionally, all comparisons will be made against the same quarter last year unless otherwise noted.
Let me start with our third quarter results.
Sales were $1 99 billion up 20%.
Organic sales, excluding the Larson acquisition were up 14%.
Consolidated operating income for the quarter was 293 million up 20% or 49 million and total company operating margin was 14, 8% in line with the prior year period.
EPS were $1 49 for the quarter up 25%.
These results reflect our team's tremendous performance in a highly disruptive environment.
Testament to our culture of safety and outperformance across the organization.
Now, let me provide more color on our segment results beginning with plumbing.
Sales for the third quarter were 741 million up $151 million or 26%.
Or up 23% adjusting for FX.
Our plumbing business continues to gain share and drive growth across all major brands channels and geographies.
Plumbing operating income increased 36% to $168 million.
Operating margin for the quarter was 22, 6% despite significant investment during the quarter and our brands strategic priorities and to serve our customers.
Turning to outdoors and security.
Sales for the third quarter were $528 million up $122 million or 30% driven by the addition of Larson and mid single digit organic growth.
On an organic basis sales were up 6% against an elevated comp from the shift of sales from the second quarter to the third quarter of last year in doors and decking as our wholesale channels reopened following the COVID-19 shutdowns these channels experienced.
Doors sales were up mid single digits in the third quarter, driven by wholesale and would've been up mid teens adjusting for the shift of sales from the second quarter to the third quarter in 2020.
Reported results would've been even stronger within the quarter were it not for labor and material constraints. The latter of the result of Hurricane Ida.
<unk> sales were up mid single digits in the quarter as fiber on continued to sell out.
Sales were up around 20% adjusting for the shift in sales from Q2 to Q3 last year.
We expect incremental capacity to come online in the fourth quarter and are also increasing throughput by deploying process improvement.
We expect fourth quarter decking sales growth to exceed 25%.
Security sales continue to trend nicely with high single digit growth in the quarter driven by returning strength in commercial back to school and travel markets.
Outdoors and security operating income was $82 million during the quarter up 24% drew.
Driven by the addition of Larson and operating improvements and decking and security.
Segment operating margin decreased 80 basis points to 15, 6%.
Primarily driven by inefficiencies caused by labor and material constraints in the quarter impacting doors and decking.
Turning to cabinets.
Sales for the third quarter.
Were 717 million an increase of over 9% over the same quarter in 2020.
We again saw strong demand across all price points during the quarter backlogs and lead times have extended during the quarter and demand for contractor led projects such as cabinets remains very healthy.
Operating income in the third quarter was $69 million down, 13% or $11 million operating margin for the quarter was nine 7% down 250 basis points versus the same period, a year ago as price increase realization trailed inflation and labor and material available.
It resulted in inefficiencies.
We expect this relationship to improve significantly during the fourth quarter.
By the first quarter of 2022, we expect continuous improvement and pricing actions to offset inflation fully and our rate of margin enhancement and cabinets to reaccelerate to our targeted objective, we remain well positioned to win in North America versus domestic competitors and imports, we expect to win increasing share and achieve.
Our long term margin objectives.
Before turning to the balance sheet and updated financial guidance and some thoughts on demand supply in the current environment.
Demand continues to be strong across the portfolio.
Increasing headwinds from labor freight availability and certain supply constrained materials are being addressed we are and expect to stay nimble as the situation warrants. We have made significant investments to serve continued strong demand and to increase service levels.
We are also making further progress in deployment of our fortune brands advantaged capabilities to leverage synergies across the portfolio and sourcing and other improvement initiatives.
We are keenly focused on the current dynamic environment contributing towards rising Cogs and freight inflation.
The decisive actions, we are taking will allow us to offset fully these headwinds maintain our long term margin trajectory at all.
Put us in an advantaged position for 2022.
Through a combination of continuous improvement.
And thoughtful pricing actions, we plan to offset all inflationary headwinds during the first quarter of 2022.
And to continue to target around 75, plus basis points of margin improvement during 2022.
Turning to the balance sheet.
Our balance sheet remains strong with cash of $461 million.
Net debt of $2 2 billion.
And our net debt to EBITDA leverage is now one seven times.
We ended the third quarter with approximately $410 million of available capacity on our revolver.
We are advantageously positioned to deploy capital to the highest returning opportunities.
Year to date, we have repurchased over $380 million of shares and have repurchased over $2 5 billion in common stock and 10 years as a public company.
Our investment grade balance sheet and strong free cash flow provide fuel for continued investment into our businesses.
Propelling the flywheel of outperformance on the top line and accelerating common capability building and deployment across our portfolio to achieve higher margins.
I would now like to address our updated market and financial outlook.
Demand for our products remains strong and our sound housing market.
However, increasing headwinds from labor shortages and supply chain challenges and inflation have adjusted our expectations for full year 2021.
Based on the expectation that the global market for our products will now grow 11% to 12%.
With the U S housing market growing 12% to 13%.
And within this forecast, we now expect U S new construction growth of 11% to 12%.
And U S R&R growth of 13% to 14%.
Based on these assumptions our revised 2021 full year sales growth outlook is expected to be 24, and a half to 25, 5%.
For 17, and a half to 18, 5% on an organic basis.
We continue to target meaningful margin progress and expect to deliver around 50 basis points of margin improvement. During 2021. Despite inflation that is almost three times, what we expected at the beginning of this year.
We are tracking to our longer term margin objectives, demonstrating our ability to accelerate value creation, regardless of the environment.
We now expect full year EPS within the range of $5.63.
To $5.73 on a before charges and gains basis.
Or what's the implied midpoint equates to earnings growth of 36% over our record year in 2020.
Specifically our outlook for each business as it relates to our updated guidance includes.
Plumbing net sales growth of 24, and a half to 25, 5%.
With operating margins at or above 22, 5%.
Outdoors and security net sales growth.
<unk>, 43% to 45%.
Or 14% to 16% excluding Larson.
With segment operating margins of 14, 5% to 15%.
Or approximately a 100 basis points higher adjusting for purchase accounting.
Cabinets that sales growth of 14% to 15%.
With operating margins between 10 and 11%.
We expect 2021 free cash flow of approximately $625 million to $675 million, which includes additional investments in working capital to improve service levels and capacity to accelerate growth.
We anticipate a cash conversion rate of 80% to 85%.
The revised full year EPS outlook includes the following assumptions.
<unk> expenses of about $108 million to $110 million.
Interest expense of approximately $83 million to $86 million.
A tax rate of approximately 23%.
And average fully diluted shares of approximately $139 million to $140 million.
While short term market challenges persist, we have the talent and capabilities to manage and offset these headwinds and we will continue to adjust quickly to the dynamic environment as Meredith.
We delivered a record year in a challenging 2020, and we will deliver a record year again in 2021.
We are doing the hard work and making the critical investments necessary to outperform the market and to achieve our margin objectives.
You can count on us to capture value and effectively manage the business regardless of the speed bumps along the way.
I will now pass the call back to Dave to conclude our prepared remarks.
Thanks, Pat that concludes our prepared remarks on the third quarter. We will now begin taking a limited number of questions.
Since there may be a number of you who'd like to ask a question.
I will ask that you limit your initial questions to two and then reenter the queue to ask additional questions.
I'll now turn the call back over to the operator to begin the question and answer session.
Operator will you. Please open the line for questions. Thank you.
Yes, Sir.
And at this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad to withdraw your question press the pound key.
Our first question will come from the line of Stephen Kim with Evercore ISI.
Yeah. Thanks, very much guys I appreciate all the color and good results.
Particularly intrigued by.
By your comment about the 75 basis points of operating margin improvement in fiscal 'twenty. Two I think you said beginning in the first quarter as well can.
Can you give us a sense for how that kind of how you kind of walk to that how.
How much of that might be from improving cost mix.
How much of it might be from Incrementals.
Incrementals volume Incrementals in and things like that.
Hey, Stephen it's Pat.
Our reference to that.
Full year objective.
We remain on track for our longer term objectives.
In what has been a challenging year and a particularly challenging back half we wanted to be.
Very clear on that and we have as a team have already been working on cost improvement and pricing actions to address some of the back half inflation and when we look to the first quarter of 'twenty, one we could see.
With the actions we have already put in place or are being put in place right now and we expect very much to be in place in the early part of this quarter that were fully covering.
Inflation in the first quarter with cost improvements and pricing actions in the first quarter.
And I would say as we look to.
Not just 'twenty two.
Beyond I would tell you we continue to drive that formula.
Margin improvement pretty equally across three levers, whether that innovation and brand building.
Structural cost change in addition to the marginal cost improvement, we do with fortune brands capabilities, we still have structural levers.
We plan to pull across a number of our businesses.
And then also leverage from volume it is not purely a leverage from volume formula nor is it purely a pricing formula.
Okay. Thanks for that Pat just just to clarify, though the 75 basis points you were referring to was that just from a price mix improvement or is that sort of including these other three leavers as well <unk>.
Those are the three levers.
Full year 'twenty, one to full year 'twenty two.
Got it okay excellent.
Second question I'm sorry.
Sort of evolve.
The longer term margin journey, and so you know we sort of laid out this road map.
Fortune brands about this capability was really helping to drive a combination of margin accretion.
For reinvestment of lot of wish you deployed this year significantly up the investment in our strategic priorities and so it all down 50 basis points of improvement this year targeting 75 basis points of improvement next year, and then staying on track consistent with our long term goals that we laid out earlier.
Yeah. Thanks for that Nick Yeah. It was impressive that you achieved what you did despite these investments you know, particularly in plumbing.
The second question relates to just the general environment I think I was curious if you could provide some color.
As to you know, which categories do you see demand having the most sustained momentum.
And what are the fundamental drivers behind this relative outperformance that you foresee for some of the for some of these for some of those categories.
Sure.
Let me take that.
But two parts out there where we're seeing it and then you know what's driving that performance.
How are you.
At the highest level.
<unk> really been solid across the board both across categories price points and channels I mean, it's probably some of the most consistent demand.
We've seen anywhere and it stalled backed by long term favorable trends you've talked about.
For a long time the demographics.
To drive a lot of people into housing boomers living longer.
The market is significantly under books, you've got an aging housing stock.
And so people are taking record.
Levels of home equity and reinvesting all of that continues to be true and I think as we look through is very interesting through the quarter because there were some lapsed from some really heavy comps.
This time last year as channels start to reopen.
So we never saw.
Stop it had moderated for a little bit as we work through those and then picked right back up and sent them again and so we're seeing it continue to hold very sustainably and we're seeing it really kind of across the board and I think that really speaks to the confidence of consumers have as well, it's just a fundamental need for either.
Our new or updated housing we are seeing elevated demand for our pro oriented projects as.
As well as you know a lot of demand I think for premium offerings. We felt we talked a bit about that I think last quarter. We saw that continue to ring true and again it speaks to consumers.
In the home.
Yeah.
Delivering the sustained.
Gentlemen, outperformance for US I think it's a combination of factors.
One we talked about.
Yeah.
Taking funds and really driving reinvestment, we've set out a number of strategic priorities brand innovation, Fortunately with the vantage.
Incremental investments year to date, we've spent just shy of $80 million, but and so it's not for not that is going to drive.
The top line harder I mean, you see the plumbing results those organic numbers just outstanding we've had that flywheel going for a while.
And then the other part I think is really across the supply chain.
It's been painful.
On ourselves.
But I think the fact that we've continued to perform at these elevated levels and the fact that we continue to gain share speaks to the fact that we are most likely outperforming.
Slide 10 perspective, as well and serving customers and consumers and so I think when you bring those two things together the performance of a pricing level as well as the performance in driving brand innovation category management type capabilities across the top.
Can you give me the results that Youre seeing now.
Great. Thank you so much I appreciate it.
Our next question will come from the line of Michael Rehaut with J P. Morgan.
Thanks, Mark and.
Good afternoon, everyone.
First question just wanted to get a little bit.
Maybe a little bit better clarity in terms of.
Price cost.
Cost timing.
And yeah.
So as you kind of noted before Nick you know despite tremendous incremental investment.
You know the margins that you're putting our strong but you highlighted the fact that you have the further opportunity to better offset.
Inflation in the fourth quarter into the first.
So just wanted to be clear, maybe a clarification that when you say.
In cabinets.
What he said.
Or by the first quarter fully offset.
To me that means flat I don't know if thats a.
Not what you meant but.
And then for the full year of 22, he gets on a consolidated basis as well.
The 75 bps should then obviously result in something stronger than 75 fits in the coming quarters, just wanted to make sure. It's the right way to think about that.
And if that even then provides further momentum into 'twenty three.
Hey, Mike It's Pat.
What I would tell you is.
For the group for our enterprise and for cabinets were more than offset in the first quarter, it's not flat.
Because it will be playing a bit of catch up.
And we had some inflation in the <unk>.
First quarter.
Last year of this year, but we'll be lapping so it'll be more.
Year over year basis were more than offset with cost improvement and pricing actions. The inflation, we anticipate in the first quarter of next year.
And I would say that's true for the full year, but that's not the only lever that's going to help.
The 75 basis points of growth next year will also be pursuing other cost improvement and structural cost improvement initiatives in the business plus will be will be growing.
Better than mid single digits next year I'm not here to give 'twenty two guidance, but we will get some sort of volume leverage.
I would expect and even 75 basis points.
Gross margin improvement each quarter next year, that's not what we're trying to say and I wouldn't interpret it that way I would just say that well end. This year with 50 basis points of margin improvement or thereabout, and then off of that plant will make about 75 basis points of margin improvement through next year, you will see a sound next year.
I would expect next year to be somewhere in the 14% to 15% margin range in the first half.
Ross the first half.
Probably on the higher side of that one percentage point range. There. So that's the way I wouldn't interpret it.
And then absolutely.
To your point about the carry into 2023.
Making long term.
Structural improvements to the business consistently and that is very much part of the strategy that we've laid out starting in 'twenty. That's the fortunate that advantage and so you know.
Those things are sustaining and then continue to deliver for us and really.
<unk> set up to accelerate because as they drive incremental margin and also drive incremental dollars for reinvestment back into the solar program. So you know licenses, we're just getting going on some of those opportunities need to state prioritized and focused in order to be able to deliver consistently.
But it absolutely carries through which room for us to continue to accelerate.
Great no thanks for that.
Secondly, I wanted to just circle.
To circle back to some of your comments on positive mix.
Clearly encouraging and often will be an additional driver of both sales and margins and when.
When that occurs and then you know encouraging obviously amid the.
Some of the demand trends that you guys continue to see I was curious if you're able to give us a sense of.
You know a rough quantification of perhaps how much that might have had been benefiting you at least in the third quarter, either a sales or margin perspective in which segments have you seen. It you said you you highlighted several product areas, but I am just curious if it's certain segments or product categories.
You've seen it more than others.
Yes, Mike a couple of things related to that right. So.
We.
And consistent on this because we think it's an important part of our of our long term growth strategy. As you know, we're driving attractive margins across price points at percentage basis and continue to work there.
Take the margin percentages across all price points.
Insistent as we can across our business, obviously, when you have a premium product that it's bigger dollar margins.
And all I would say is you know.
We have a business.
In plumbing, it's performing.
This year, it's going to be growing in the low 27%.
With a healthy contribution from the house of ROHL and we're seeing throughout this year in cabinets make to order cabinets is growing at a percent that's consistent with the stock business.
And those are those are things, we point to as consumers' confidence and the value of their home and they're willing to invest in their home and they're willing to do contract our products as opposed to if the overall driver of our margin journey.
I would say happened in the quarter as plumbing.
It was particularly strong in the quarter as been particularly strong all year.
And it will be that way in the fourth quarter as well.
Plumbing, having a disproportionate mix in a quarter.
Across our businesses.
Currently helped the margin profile of the quarter, we guided at the end of the second quarter, we would have been.
Down 30% to 60 basis points in the third quarter.
And largely that was offset.
By a really exceptional.
Both sales and margin performance by the plumbing business, but that's I think speaks to the strength of plumbing inclusive of high end premium brands.
I wouldn't guide our journey this year next year or beyond is a journey that's predicated on the mix of premium brand that is not where we're going to get the portfolio to the <unk>.
<unk>, 17% margin percentage by 2023 that we laid out.
Kind of irrespective of golf.
The customer mix, we just referenced.
Product mix, rather we referenced it as a sign of consumers' confidence in the value of their home or their willingness to invest.
I'll just add that I think you can take from that that the portfolio is positioned at the heart of the market like this we talk for a couple of years, how we've really positioned the portfolio very well to capture the I'm sure all of our homebuyers saw that first sort of wave of millennials coming in and had that there and then over time, we've built out the hospital, we've maintained a premium offering and cabinets with all that.
More second.
Second from entry price point up not too.
So much more than the special order.
It's a product from the sub.
Suffolk Larson and.
After it and security have launched as well positioned as the portfolio really well to meet the consumer where they are as Pat said, we worked very hard to make sure that the margins.
Our.
Exceptionally strong across all of those questions.
And our next question is going to come from the line of Mike Dahl with RBC capital markets.
Hi, Thanks for taking my questions.
I was just wanted to follow up again about the.
That cost dynamics as we think about that.
Next year, obviously as you've experienced and continue to experience.
It's a fairly dynamic environment. So things moved against you in the second half so I guess, what when you're when you're talking about kind of offsetting inflation or more than offsetting inflation next year. What is your underlying base assumption for incremental inflation in 2022.
Kind of a part too.
It would also be could could you just clarify kind of or quantify how much the labor and freight issues affected cabinets in the in <unk> and in your <unk> Guide.
Our approach to both of those at.
At a higher level on the second of your question.
So Mike first of all I would start with this year because I'm not we're not here today to give you a 'twenty two guidance, especially not at the top.
A piece of pipe level, what I was referencing was the first part of 'twenty, two and our outlook for that first part of 'twenty. Two just to give people a sign of where the run rate is so when I look at 'twenty one.
Fiscal 'twenty, one, we're probably approaching about 7% inflation last year's card space.
Which is starting to get almost a $300 million.
Predict pretty extraordinary.
We're <unk>.
The last call, we would've said around 6%.
And so we've had a pretty appreciable increase.
Since the second quarter call.
You know what I'm speaking here I'm speaking too material freight and tariffs only like this is not even the labor part of things between we largely offset with continuous improvement.
And some of the bigger searches in the back half has been.
In particular ground freight <unk> the mix of having to use.
Spot freight containers.
Select metals in particular aluminum.
Copper zinc and then hardwoods and a few select residents that were affected by the golf.
And those are the things that surge in the back half more than we would've anticipated, we probably had about $40 million of that inflation.
Impact in the back half since our second quarter guide.
It really affected all of our businesses.
Businesses like Cabot.
Cabinets and therma true and decking were.
You don't build up big.
Inventories of components and or finished goods in the and the inflation tends to course through your income statement in real time, a bit more that's why you're seeing the pressure in our updated guidance showing up and slight margin refresh on cabinets and doors and security.
Because unlike plumbing it doesn't really go onto the balance sheet, but there is inflation happening in plumbing and things like copper that are just going on to the balance sheet and so we are taking incremental actions to offset them we would.
Told you in the second quarter, we were positioned to offset everything within this year, but given the back half surge it'll take through to Q2.
And we're confident we're going to offset it in the front part of next year and as next year plays out.
We will provide you with updated inflation guidance and offsetting inflation guidance as part of our 22 guide all I would say about 22 inflation instead of getting to the specific levels of it as we are expecting inflation in 'twenty two.
We are not expecting deflation, we are expecting an inflationary environment. We're prepared for that we do think it's going to be much more moderate.
Then.
The middle part of this year. When you know you had in a very short period of time.
Trillions of dollars of government funds flowing into the economy and driving demand also fixed.
Cost base, our supply base and already stretched.
Global freight environment.
Even if the government does pass some measure of additional stimulus that's going to be over multiple years.
And so we've had a considerable surge.
In the spring and summer of this year.
Government funding into consumer demand that has really pushed inflation, we don't expect that level next year.
So we expect to be able to offset it.
And like I said.
Yes.
The challenges that you are seeing in our margin outlook for cabinets and for O&M in the back half of the year has to do with that inflation that also has to do with the fact that.
Labor, both because of the Delta variant.
And just because of the tight labor market, you have more labor turnover or more new employees and that ramp rate.
Both of them, bringing new people on and getting them trained.
With some inefficiencies in.
And our outlook as well.
Got it.
Inflation is a challenge we can understand that but it's really been the pace.
And in the back half because it just takes time to get resolved in place and it takes time to get the pricing in place and we're going to do our very best not to blow up our customers along the way. So you know we wanted to do our price increases respectfully.
It always agree, but we are but we're trying to do that and so there just is.
Our pace to getting it done the right way, that's going to be sustainable and allowed us to continue to gain share.
And I think the pace at the back half of this year was a pretty.
Pretty extreme.
The deflationary environment, the pacing of it may allow for a little bit more time to resolution.
Between when inflation hits, when we put something in place.
That's really helpful. Thank you for for the detail there and then Nick My second question you made some interesting comments about China and obviously, that's been top of mind for a lot of people given some of the headlines around housing both on the new construction side and on some of the mortgage side impacting.
Just overall home sales there.
Can you just go into a little bit more detail about whats, giving you kind of conviction in your outlook for <unk> continued growth.
In that market and maybe talk about whether it's the.
The existing project backlog or some more detail around kind of the expansion that you've got there sure absolutely.
Firstly, starting with Evergreen I mean, we've long had our eye on evergreen and sorry.
Haven't been exposure.
Very very very tremendous for us.
And so that's not been a concern so we really look for the whole market.
You had some talk of China, we've got a phenomenal homegrown team that is furthest along on time and until we really understand the cycles of that market.
It's just like one of the 2015, we went through a cycle in 2017, and if you go back and look at those numbers Youll see new home sales plummeted in yet.
It continues to grow and so why is that well, it's a couple of things firstly it just starts with our footprint.
Our footprint is very focused on tier one and tier two cities.
Ever over expose ourselves to the more speculative construction in tier three and tier four.
Where do you see that kind of a ghost towns the begun skyscrapers.
And so what are you having to answer Kevin you have various other cities, where you kind of have a mixed fleet, especially if you've got a big mix of R&R and you look like.
Shanghai, where we have a very substantial share.
And you've got an aging housing stock so you're not just going to have the new construction development business, you're going to have a lot of turnover.
In that space and so we're.
Continue to see growth.
Just from a redecoration in R&R.
In addition to.
More sustainable new construction.
That's our footprint. So therefore less exposed to some of the speculative. So the second piece is we.
Started with 30 plus years ago with kind of the core moen business and have all of our businesses is the one that both the greatest category Adjacencies.
The number one brand in China, we bought the sanitary Ware, it's been a resounding success and yet not penetration.
As in the single digits.
Hum market penetration of sanitary ware, so a lot of room to kind of grow that over time.
And so that those category Adjacencies, we're going to need a part of the business and then.
There are also channel adjacencies as we've shifted between the developer to E Commerce channel.
Several position continues to be very strong we've made sure to.
Two years ago, not really focus on adding showrooms, but really improving the quality of showrooms and so that's really been our focus over the last couple of years.
And so those are good drivers and finally to have a team that's running.
Running a profitable business that have really built out their pricing.
And Ci capabilities over the last I'd say two to three years and have much greater ability to flex the P&L.
To reinvest as they had been over the last couple of years, but then it went to be able to flex it to continue to drive margin. So you take those three things are kind of our footprint, our adjacencies and other capabilities that we have there we're feeling confident that while the market may slow and I think frankly is actually now going to start to.
Migrate to being a more kind of stable slower growth with more stable over time market.
We're actually quite enthusiastic about that shift our exposure is really good and we will continue to grow with it.
That's great. Thanks, Kurt.
Sure.
And we have time for one final question. Our last question will come from the line of Chairman Patterson with Wolfe Research.
Hey, good afternoon, everyone and thanks for taking my question or questions.
Just wanted to follow up on the evergreen situation in China, Nick I believe in your prepared remarks, you mentioned a platform in China, where you could flex the cost up and down to relatively maintain margin I was just hoping you could elaborate on that a little bit.
Yes, so I'll give you some perspectives and Pat maybe you have some color to add.
We've had this business in China.
Normal growth and.
Really great team and culture, there and this part we interact with them very frequently and work on the stripes together.
Years ago, we sort of challenge them that notwithstanding all the great growth that they were putting up that they really needed to take.
As highly disciplined business operators and have the business on.
Continuous margin improvement journey really so they could generate their own fuel for growth.
So we hired and capability we've got much of the revenue growth management. There are continually see I am looking at.
The whole supply chain and that team did exactly that they start to push up the contribution margin.
Margin and actually free up a lot of incremental dollars to reinvest we've been reinvesting in growing the moen brand and in building that brand.
And creating more and more of a pull environment and so that just gives you a lot more optionality in P&L management.
Don't have to invest as heavily I think if the market were to slow we probably wouldn't invest in brand building there as heavily as we have over the last couple of years you know that.
Gives us a lot of options as seen that brand building come through as we've talked about sort of the incremental spend that we've had here on strategic projects.
And then also just means that you've got the skill set in the business to continue to be able to chase to chase.
Offsetting our Cogs inflation.
And be able to pull levers came out to deliver continuously I'm sorry.
Glad we put those in.
But it's really predicated on having a strong discipline in the business because we want the business to be sustaining over the very long term.
Yes.
Okay. Okay. Thank you for that and then.
All had had some pretty nice growth in the quarter, despite facing the supply chain issues that everybody's facing right now Nick as well you mentioned some of the internal actions that you all took during the third quarter I'm, hoping you can discuss those a little bit more in depth, whether it be getting more.
Suppliers approved finding alternative materials.
Proving to an extent labor availability, just hoping you could dig into that a little bit more sure.
It's a little bit all of the above I mean, we've had some to work across many many fronts.
This kind of performance I mean, I'd say first and foremost it just starts with safety and the safety measures and investments that we've put into our facilities that have allowed us to manage through the pandemic and then also hopefully be attractive to continuing to attract and retain talent and I think that's been well appreciate it.
We have continued to work hard I mean.