Q4 2021 Fortune Brands Home & Security Inc Earnings Call

February 2, 2022

Yes.

Okay.

Good afternoon, My name is Holly and I'll be your conference operator today at this time I'd like to welcome everyone to the Fortune Brands' fourth quarter and full year 2021 earnings conference call.

<unk> have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session to ask a question. Please press Star then one on your telephone keypad to withdraw your question press the pound key.

I would now like to turn the call over to senior Vice President of Finance and Investor Relations Mr. Dave Barry Sir you may begin the call.

Good afternoon, everyone and welcome to the Fortune brands home <unk> security fourth quarter, and full year 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 FBA Jess 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.

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'll now turn the call over to Nick.

Thank you, Dave and thank you to everyone for joining us on the call today.

That everyone has a safe and enjoyable holiday season, and best wishes for 2022.

Following an extraordinary 2020, our teams once again delivered outstanding performance in 2021.

Our strong fourth quarter results capped a remarkable year of fortune brands, including exceptional sales operating income and earnings per share growth.

I am, particularly proud of how we delivered for our employees customers and consumers. While also achieving 50 basis points of operating margin improvement.

We accomplished these results despite facing numerous external headwinds, including supply chain disruptions and extreme inflation.

Importantly, we also made progress on a fortune brands advantaged capabilities and continued investing in our leading brands to drive innovation expand capacity and to serve our customers.

As a result of our team's outstanding work in 2021. The company is well positioned to continue outperforming the strong housing market in the years to come.

In the fourth quarter sales grew over 18% or 13% organically with all of our businesses delivering double digit growth driven by continued strong peer west demand across all channels.

Operating income grew 7% and EPS grew 6% as operating leverage in the quarter was impacted by labor availability constraints supply chain inefficiencies and inflation ahead of price. Despite these.

Challenges, we made full year operating margin progress and delivered a 37% increase in full year earnings per share versus 2020.

Additionally, in 2021, we increased our investment in the business by $85 million returned over $590 million of capital to shareholders executed capacity expansions across the portfolio and recently acquired solar innovations a leading producer of wide opening door systems and outdoor enclosures that will join us a true fan.

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The pandemic period now into its ninth quarter continues to cause a variety of challenges one constant remains our ability to meet these challenges head on and get results for our shareholders notwithstanding the environment.

Our fortune brands advantaged capabilities leveraged across the portfolio helped offset extreme inflation by reducing cost.

Executing strategic price increases and building stronger deeper supplier relationships.

Are people driven by our culture of excellence continued to position our portfolio of leading brands to capture the upside in the strong housing market. Additionally, we will remain agile in our response to any short term headwinds that may come our way.

We continue to see strong demand for our products and our team is working hard at meeting that demand.

Making progress on strategic initiatives and later in the call Pat will provide details around our 2022 investments, which further position us for profitable growth.

The work that we've done to position the company to outperform extends beyond our exceptional financial results. We continued to advance our key environmental social and governance focus areas.

In addition to our work on safety diversity and inclusion water conservation and recycling. We recently took an important step in mitigating climate change by setting carbon emission reduction and renewable energy goals.

Furthermore, during 2021, we partnered with the W. K Kellogg Foundation, expanding equity program to enhance our comprehensive equity strategy and further our diversity equity and inclusion initiatives, which will have a measurable impact in 2022 and beyond.

We are acutely aware of the responsibility we have of keeping all of our associates safe.

Our safety records are among the best in the industry and we invest to ensure that all newly acquired companies meet our extremely high safety standards as quickly as possible.

This is one of the ESG synergies that we bring to bear when we acquire a business.

Our safety performance as a point of pride for us and our entire team is committed to keeping the bar high.

We look forward to highlighting our full ESG progress in our upcoming 2021, ESG report, which will be released next quarter.

All of our work is being recognized we've seen consistent improvement in our scores by key ESG Raiders for the third consecutive year Newsweek named Fortune brands as one of America's most responsible companies and just today, we have once again been named as one of Fortune magazine's world's most admired companies.

I'm proud to lead a company, where our associates are so passionate about realizing our purpose of fulfilling dreams of home in an ethical and responsible and sustainable way.

As we look to the year ahead all of the progress that we've made over the past two years has positioned us extremely well to create further value for all of our stakeholders.

P O S demand remains strong and our commitment to further expand and develop our fortune brands advantaged capabilities will bolster our operating model and create extra fuel for growth.

We aim to further our momentum in 2022 by identifying additional strategic investment opportunities, including our digital transformation.

This initiative will be the next core competency in our suite of Fortune brands advantaged capabilities and we are developing a digital center of excellence to further enhance brand and innovation accelerate growth and improve operating efficiency. This strategy developed in earnest in 2021 will be executed in 2022 and beyond.

I am very excited to announce that May Russell will be joining our company in the coming weeks as our first ever Chief Digital officer.

He joins us from Ford, where she was a senior technology executive serving as the Chief Technology Officer for Ford Commercial solutions and had global responsibility for the award winning Ford and Lincoln apps, the digital consumer interface for all vehicles vehicle connectivity safety and security products and for the Digitization of fleet management.

Our ability to attract the talent like me speaks to the tremendous opportunity that we have to transform fortune brands into a consumer first digitally enabled growth platform.

We believe the potential for digital transformation within our portfolio is remarkable and I'm excited to speak more about our digital initiatives throughout the year.

Finally, I want to sincerely. Thank our dedicated team members, who continue to work so hard to keep our people safe and our facilities operated I am so proud of our teams were not only caring for each other but who are doing so while serving strong demand for home products. Our people are the foundation upon which our business is built and they drove outstanding results in 2000.

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Turning to the remainder of our remarks today.

First I will share what we're seeing in housing and the home products market. I'll, then highlight key takeaways from our fourth quarter and full year results as well as discuss our key initiatives across the portfolio and how we expect these to evolve overtime.

Pat will then provide highlights on our financial results and thoughts around our future financial performance expectations for 2022.

Now turning to some thoughts on the housing market as I've mentioned demand remains strong due.

The demographic and fundamental trends favoring both new construction and repair and remodel we expect our long term expansion of housing and building products to continue.

New construction activity had a robust year in 2021, it would have been even stronger if unimpeded by labor availability and supply chain inefficiencies.

With all time record low existing housing inventory in the U S inventory is turning over nearly as fast as it is becoming available there are simply not enough homes to purchase.

Our wholesale and building momentum, which persisted through all of 2021 is showing signs of continued strength as we begin 2022.

Our exposure to the new construction industry continues to give us incremental tailwind and a powerful installed base.

Repair and remodel activity remains robust across our product categories and our Pos was strong during the fourth quarter.

With record low supply and an aging housing stock or homes or requiring significant R&R spending.

We saw clear above market growth across our portfolio as our leading brands are centered around the most in focus spending areas of the house, the kitchen bathroom and the outdoors.

R&R has been supported by tremendous home equity well, which has grown by trillions of dollars in the past year.

While we expect interest rates to increase as the federal reserve works to combat inflation 30 year mortgage rates, which currently hover around three 5% remain attractive.

Coupled with compelling demographics. This financial backdrop is supportive of continued new construction and R&R spend.

We continue to believe in our long term runway for housing expansion, driven by demographics and fundamentals and underpinned by low supply and aged homes. This multi year run rate for growth provides a significant long term opportunity for new construction and R&R, we intend to outperform the strong market and we'll stay agile to both capture opportunities and quickly respond.

If short term headwinds arise.

Now, let me turn to our performance in the fourth quarter and full year as well as how we are positioning ourselves to be even stronger across our portfolio.

Total company sales were up over 18% for the fourth quarter capping off a superb year of 26% revenue growth versus a year ago.

This performance is demonstrative of strong demand, but also of our ability to source manufacture and ship and a complex supply chain environment.

Sales were up double digits across all businesses during the quarter compared to a strong fourth quarter last year.

Operating margins were 13, 4% for the fourth quarter and 14, 6% for the full year.

As I mentioned earlier consistent with our long term strategy to deliver for shareholders. We made 50 basis points of overall margin progression in 2021, despite numerous headwinds during the year and investing an additional $85 million and strategic initiatives.

Now turning to our individual businesses starting with plumbing.

Our global Plumbing group continued to outperform its global and U S markets with sales up double digits in the quarter led by the wholesale channel in the U S for both Mullen and house of ROHL brands.

Operating margins were 28%, we experienced sales growth across all brands and regions, including growth in China, Despite the slowing market.

Full year results were exceptional delivering sales growth of over 25% and operating margin of 22, 9% momentum remains strong across the group.

We invested heavily in plumbing in 2021 further perpetuating the flywheel of top and bottom line outperformance from this world class business.

Investments in marketing and innovation, clearly resonate with consumers and continue to fuel our remarkable results.

Additional investments in capacity and distribution will further elevate customer service and provide additional opportunities for growth.

In the fourth quarter, we opened a new retail focused distribution center and in 2022, we expect to invest in our new West Coast distribution center to expand capacity for growth at our U K manufacturing sites.

We're also very excited about the innovation taking place in plumbing today, our Mone Smartwater network was unveiled at the consumer electronics show and is the first step in their mailing consumers to digitally controlled water throughout the home.

We have a strong leadership position and are in the early stages of what we expect to be widespread adoption of smart home water management by consumers builders and insurers.

Our growing smartwater ecosystem will continue to add inventive product and services at an increasing rate leveraging our growing digital capabilities.

Turning to doors <unk> security.

For the fourth quarter and full year sales were up over 40% or high teens excluding license.

Doors decking and security all grew double digits in the quarter and for the full year highlighting widespread strength across the business operating margin was 15, 9% for the fourth quarter and 14, 9% for the year increases over previous year in both cases.

Outdoor living continues to show sustained momentum and we are focused on expanding our presence in this attractive category.

Sales in our legacy door operations grew high teens in the quarter driven by strong wholesale sales.

Our robust distribution network is a differentiator and both our doors and decking brands and we continue to deepen our ties with our key channel partners.

At Larson, we delivered a successful year of integration.

Formed ahead of our acquisition expectations and are enthusiastic about the ability for Larson and thermal true to work together to achieve further synergies in 2022 and beyond.

To further expand our leadership position in entry openings, we recently acquired solar innovations, a leading producer of wide opening door systems and outdoor enclosures.

We're excited to bring their leading product innovations into our door portfolio and to welcome their employees to the fortune Brands' family.

Our fiber on decking brand continues to perform very well growing above 20% for the quarter and the full year.

Our success in decking is the result of the strong channel building and product development that we've executed since acquiring the brand.

Conversion from wood to advanced composite materials accelerated over the past few years as the benefits are increasingly resonating with consumers.

Additional capacity has come online during the fourth quarter, and we will expand capacity incrementally throughout 2022.

To further accelerate our growth we will be developing a greenfield facility with construction beginning in 2022.

This investment will be executed in phases, and we will control the pace of capacity additions based on the demand outlook, which we forecast to be very strong for years to come.

Turning to security strong performance continued as sales increased low double digits in the quarter driven by continued recovery in outperformance in commercial and international channels bolstered by solid performance in our core North American retail market.

The security team continues to make progress towards its strategic goals, including innovation led growth and margin expansion.

As you can see the outdoors and security team executed well across multiple initiatives in 2021 and are set up to achieve even more into the future.

Finally, turning to cabinets.

Sales increased mid teens for the fourth quarter and full year with growth across product lines at all price points full.

Full year operating margin was 10, 1%.

The cabinets industry has been exposed to particularly high levels of variability during the pandemic and yet our team is overcoming labor availability challenges supply chain constraints and extreme material and freight inflation.

While our margin performance was short of the targeted progress that we wish to make in 2021 and is also a testament to how agile businesses become given the challenges it faced and overcame in a very short amount of time.

Demand remains strong and we continue to work through our elevated order backlog.

We are progressing well with our March and Huntsman initiatives and the results will be even more evident as the pace of supply chain volatility subsides.

Our business is well positioned across price points to win this year that we want and we are executing strategies to increase efficiency and to align our growth with the highest returning opportunities.

Within our value price point cabinets, we continue to win versus both domestic players and from importers, who are shipping into the U S had longer lead times and a significantly higher costs.

Our mantra line continues to take share in the sales of this brand more than doubled in 2021.

Demand remains strong and a make to order segment, especially within premium.

So operations were impacted by labor availability and freight costs in the fourth quarter.

We continue to make progress on our strategic initiatives can we expect to drive margin progression in 2022.

The trajectory of this margin progression will be concentrated in the back half of the year as we continue to work through labor and supply chain headwinds and realized incremental price as we reduce our backlog.

Redeploying fortune brands advantaged tools, including complexity reduction to advance our margin progress and we remain on track to achieve our long term margin targets.

In summary in 2021, we celebrated 10 years as a public company.

We have consistently produced exceptional results, while simultaneously investing in key strategic initiatives that will drive the business for the future.

We have the team to continue to deliver above market growth and outperformance and will maintain the discipline agility and execution for which we have become known.

Future looks every bit is bright or brighter as we look forward to the next 10 years.

As noted the U S remains millions of homes short of demand and fortune brands is well positioned to capture an increasing share of that expansion.

We will undoubtedly face challenges in the future just says we have over the past decade. However in the face of those challenges our team will do what we do best leverage our amazing brands innovation and operating efficiency to produce products, which enrich the lives of millions all delivering for stakeholders.

Our 2022 outlook, which Pat will speak to in greater detail reflect our confidence in the strength of our markets and business.

We expect continued top line growth driving leverage through the P&L, increasing margins and creating further value for our stakeholders.

Our investment in Capex outlook is reflective of our burgeoning opportunity set.

With profitable growth levers to pull at each of our brands.

Our balance sheet is strong and positions us to continue to drive incremental value organically and inorganically.

Very excited for the future.

With that I will turn the call over to Pat who will speak to our financial results and outlook.

Pat.

Thanks, Nick as.

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 period last year unless otherwise noted.

Let me start with our fourth quarter and full year results.

Sales were $2 billion up 18%.

And consolidated operating income was $264 million up 7%.

Total company operating margin was 13, 4%.

EPS were $1 32 up 6%.

For the full year.

Sales were $7 7 billion up 26% and consolidated operating income was $1 1 billion up 30%.

Total company operating margin improved 50 basis points to 14, 6% and EPS grew 37% to $5 73.

Our teams continue to overcome pandemic related challenges to serve our channel partners and consumers amid a dynamic operating and supply chain environment.

These remarkable results are a testament to their commitment.

We remain highly focused on driving outperformance, including above market growth and margin progression.

Leaving both in 2021 was an extraordinary accomplishment and positions us to continue doing so in 2022.

Our portfolio of innovative and quality brands with leading market positions continues to resonate with homeowners our value creation journey is fueled by a strong market and deployment of our fortune brands advantaged capabilities.

Driving incremental investment dollars and increased operating margin.

Now, let me provide more color on our segment results.

Beginning with plumbing.

Sales for the fourth quarter were $704 million up $66 million or 10% or.

Or up 9% adjusted for FX.

Fourth quarter growth was driven by U S wholesale and strong double digit growth at the house of ROHL and.

Importantly.

POS remains strong during the quarter, including in retail.

For the full year sales were up over 25%.

Plumbing operating income increased 6%.

$147 million in the fourth quarter.

Operating income for the full year was $633 million an increase of 29%.

Operating margin was 28% for the quarter and 22, 9% for the full year materials inflation and elevated freight cost continued in the quarter and we expect price to fully offset inflation around the end of the first quarter.

Our plumbing business continues to outperform expectations and the team delivered an outstanding year in the face of numerous challenges.

We are carrying strong momentum into 2022 for continued above market growth and strong margins.

Turning to outdoors and security sales.

Sales for the fourth quarter were $514 million up one.

$148 million or 40% driven by the addition of Larson and double digit growth in doors and decking and security.

Excluding larson organic growth was 17%.

Full year sales were $2 billion, an increase of 44% organically sales increased 15% we.

We expect this strong growth to continue in 2022 led by decking and doors.

Door sales benefited from a continued strong new construction environment.

Sales were up high teens in the fourth quarter and mid teens for the full year.

We expect strong sales growth to continue in 2022.

As housing supply remains low favorable demand fundamentals persist.

And new construction completions catch up with orders as supply chain and labor availability constraints ease throughout the year.

Decking sales growth exceeded 20% for the quarter and the full year as consumers continue to prioritize outdoor living and increasingly choose advanced composite materials over traditional wood decking.

We added incremental capacity in the fourth quarter and will continue to increase capacity in 2022 by further optimizing our existing footprint.

Additionally, we will begin construction in 2022 on a greenfield expansion to further accelerate our growth.

We will phase investment dollars and capacity over a number of years flexing with the pace of expected strong underlying growth.

Demand remains strong we expect fiber on to grow above 20% in 2022.

Security sales momentum continued in the fourth quarter with low double digit sales growth contributing to mid teens growth for the year.

North American retail sales remained solid and outperformance in commercial and international led to continued above market growth.

2021 was a strong year for security.

We expect growth momentum and incremental margin progress to continue in 2022.

Outdoors in the security segment operating income was $82 million during the quarter up 41% driven by strong performance across the segment.

Operating income for the full year was $305 million an increase of approximately 49%.

Segment operating margin for outdoors, and security increased 10 basis points for the quarter to 15, 9%.

And was 14, 9% for the full year up 40 basis points.

Turning to cabinets sales for the fourth quarter were $745 million, an increase of 14%.

Full year sales were $2 9 billion up 16% growth was strong in both stock and make to order.

Operating income in the fourth quarter was $67 million down, 13% or $10 million and full year operating income was $287 million up 12% or $31 million.

Operating margin was eight 9% for the quarter and 10, 1% for the full year.

Cabinets margin performance, especially in the second half was impacted by extreme material and freight inflation ahead of price.

Further labor availability and supply chain challenges resulted in operating inefficiencies and shipments below forecast.

We expect labor availability and supply chain effectiveness to improve throughout 2022 and price to start fully offsetting inflation in the middle of the first half of the year, we expect margin progress to Reaccelerate in the second quarter, an increase throughout the second half of 2022.

Turning to the balance sheet.

Our balance sheet remains strong with cash of $472 million.

Net debt of $2 2 billion.

And our net debt to EBITDA leverage is now at one seven times.

We finished the year with $730 million of total liquidity on our revolver.

Our 2021 free cash flow of 518 million includes increased investment in our inventory to service customers and 2022 growth.

While our cash conversion of 65% was below our three year average of around 100% we.

We expect our conversion rate to improve in 2022 to between 70% and 80%.

Then to progress higher beyond 'twenty two when.

When inventory returns to normal levels as supply chain scale.

In summary, our.

Our teams delivered exceptional 2021 results in the face of numerous challenges in.

In addition to making 50 basis points of operating margin progress, we continued to invest in the business to accelerate our opportunities for future growth and margin expansion across the portfolio.

We are committed to investing further including in our digital transformation to pursue increasing growth and to better connect with customers and partners in a more meaningful way.

Before turning to the details of our outlook for 2022, let me first provide some thoughts on the market backdrop, and our approach to creating value regardless of the environment.

We believe that strong demand fundamentals in our core markets support our multi year housing expansion still the challenges of labor availability and supply chain constraints continue in early 2022. Additionally, if fed rate action surprised the housing market.

Could create near term distortions to this long term market strength.

We will confront such instances in 2022 as we have the past two years.

By aggressively managing our P&L and balance sheet.

We will maintain investment in top priority growth and differentiation initiatives.

Such as in our Fortune brands advantage capabilities, and we will deploy capital with a focus on long term value creation.

With that backdrop, let me discuss the specifics of our 2022 outlook.

Based on the global market for our products growing 3% to 5%.

With the U S housing market growing 4% to 6%.

And within this market forecasts, we expect U S, new construction growth at or above 6% to 7%.

And U S R&R growth at or above 3% to 5%.

Based on those assumptions, we expect full year sales growth of five 5% to seven 5%.

We expect full year EPS within the range of $6 35.

To $6 55.

On a before charges and gains basis of which the implied midpoint equates to an increase of 13% versus our record 2021 results.

This EPS range includes the impact of approximately five cents from an additional fiscal week in the fourth quarter at our plumbing and outdoors and security segments.

This outlook assumes COVID-19 driven challenges continue to impact the first half of 2022.

In a manner similar to the second half of 2021.

We believe underlying demand is greater.

These challenges abate more quickly this would create upside to our forecast.

Better insight to ease upside opportunities one fold during the first half of 2022, and we will refine our guidance as Meredith.

Specifically our outlook for each business as it relates to our overall guidance.

Plumbing net sales growth of 5% to 7% with operating margins around 23%.

Outdoors and security net sales growth of 8% to 10% with segment operating margins around 16, 5%.

Our solar innovations acquisition will not contribute meaningfully to outdoors and security income in 2022, as we invest to integrate their product line into our doors offering.

Cabinets net sales growth of four 5% to six 5%.

With operating margins of 11% to 12%.

We expect 2022 free cash flow of approximately $615 million to $700 million and anticipate a cash conversion rate between 70% and 80%.

Our free cash flow forecast includes capital expenditures of 375 to 425 million <unk>.

Inclusive of growth investments in our decking plumbing and doors operations that enhanced capacity and capabilities meaningfully.

Our balance sheet and cash flow remains strong and we expect to actively deploy capital for value creation consistent with our track record.

Following our organic investment priorities.

And share repurchases remain our other top allocation priorities with a continued plumbing and outdoors and security focus for M&A.

The annual EPS outlook includes the following assumptions.

Corporate expenses of about $125 million to $135 million, including digital transformation investments of $15 million to $25 million.

Interest expense of approximately $89 million to $94 million, a tax rate between 24, and a half and 25%.

Average fully diluted shares of approximately $137 million to $138 million.

We have put together a strong 2022 plan that builds off too robust years for our housing markets, we anticipate solid sales and double digit EPS growth as well as an acceleration of operating margin.

As discussed we expect several of the challenges that govern growth and margins during 2021 to continue into 2022.

We have price and cost actions in place to offset inflation.

And we expect margins to inflect positively by the second quarter and accelerate through the balance of the year.

To be clear we are in the midst of a long runway of fundamental housing growth and we expect prolonged market strength for our products.

Supply of available housing remains extremely low and the importance of the home remains top of mind for consumers.

We expect our sales to continue outperforming the market and our margin progression to remain accelerated averaging 70 to 100 basis points in 2022.

And targeting 75 plus basis points each of the next two to three years.

We are excited about the future and thankful for the commitment from all of our associates, who contributed to a strong 2021.

We are as excited about the next 10 years as we were about the last.

I will now pass the call back to Dave to open the call for questions Dave.

Thanks, Pat that concludes our prepared remarks on the fourth quarter and for the full year.

We will now begin taking a limited number of questions.

Since there may be a number of you would like to ask a question I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.

I will now turn the call back over to the operator to begin the question and answer session.

Operator can you open the line for questions. Thank you.

Thank you Dave.

<unk> would like to ask everyone, if you'd like to queue for a question Press Star then one on your telephone keypad to withdraw your question press the pound key as a reminder, please limit yourself to one question and one related follow up question. So that more colors on NICU can ask their questions. Thank you.

And our first question is going to come from the line of Phil <unk> with Jefferies.

Hey, guys solid quarter in a challenging backdrop and Pat I appreciate you, giving us a full year outlook. The wanted to see if you could drill down on the shape of the year any color on orders and what your customers are saying since comps are a little tougher to begin the year and then on a price cost standpoint and margins how should we think about that cadence through the course.

For the year and what's embedded in that assumption are you assuming inflation kind of levels off and you effectively have all the pricing that you need out there already.

Hey, Phil.

Good to hear from you what I have just kicked off the launch of the first part of your question. What we're seeing from a demand perspective impacted speak to the shape of the year sort of the assumptions that we've made in our expectations I'd say demand as we just indicated for all 21 remained robust through the end of the year.

It remains robust into 'twenty, two so looking over some of the Pls dollars.

We're seeing strength.

Through the start of the year I would say you are at or slightly above 21, which had a pretty robust start to the year, we're going to get into some funky comps over the course of the next few quarters and so we expect some swings and roundabouts, but that fundamental strength that youre seeing.

Assist in demand both in retail and wholesale is there and so that gives us a degree of confidence around the market both from a new construction and R&R perspective.

Yes.

Karl with Nick a lot of good signs from a.

End market demand perspective in both retail and wholesale a few things to think about though as you think about the shape of the air and where are we kind of ended last year, because we did have a lot of the inflation.

Come about in the back half of the year and.

Important note, we do have I'd say over 90%, maybe even above 95% of the pricing and cost actions in place to drive the margin profile for 2022, but it will flow from about the second quarter to the back half of the year. So a few important things to.

Last year 'twenty one.

We had about $298 million of inflation, which is about a seven 5% of Cogs, just a little bit less than that.

But 80% of that inflation hit in the back half of the year and 40% of that.

Inflation hit in the fourth quarter. So we will come out of the gate in Q1.

With a lot of that type of inflation hitting businesses that have the longer supply chains like plumbing and security.

And so we will have a margin profile in the first quarter, that's a little bit like.

The margin profile, we had in the fourth quarter like 13 ish.

We're going to be 15.

To 15, five ish in the second quarter, and then above 16 in the back half of the year and Thats the way the margin profile will play out.

And even with strong demand.

In the first quarter that we're experiencing I do expect.

Omicron absenteeism.

Our non broad range of our facilities.

To keep.

Shipment based.

In the quarter more like at.

Mid single digit sales growth in the first quarter.

But as Nick was saying, we feel very good about the year from early signs of demand and from preparation against price and cost, but I do think we will carry in some of what you saw in the fourth quarter into the first quarter of the year.

Got it that's really helpful and just one last one from me you're guiding to a pretty sharp step up in Capex can you kind of unpack, what's driving that I mean, you talked about this greenfield facility for decking gave us some color how much that could unlock and how that kind of ramps up and any color on that digital investment you've talked about as well in terms of.

The capex for that investment.

Yes, I'll talk to the numbers of both of those topics, Nick Mike want to add.

Ed.

Some color commentary, especially around digital.

But.

Our capex profile, we we spent until about the middle of last year being somewhat fiscally conservative on Capex.

But had been seeing such strong growth.

Since the back half of 2020.

We're now at a point in time, where we have to invest both to accommodate the growth that kind of immediately in front of us and then the longer term growth objectives. So we will have elevated capex in 'twenty, two and 'twenty three.

About $400 million, plus or minus $25 million.

About of that $400 million.

About $200 million of that will be in decade call. It.

Maybe 110 to 120 of that.

The earliest portion of that Greenfield facility in Tennessee.

And then another 50 ish or so million on getting additional capacity out of existing facilities with.

Technology that helps the throughput of our existing footprint in decades.

And then we're making.

Our Greenfield facility investment in the UK for our luxury plumbing brands.

And eventually.

That site will will be servicing in one form or another.

All of our brands for the EMEA market.

And we will be adding a DC in plumbing on the west coast and expanding our door facility. So all I'd say bigger than would be just our typical.

Nudge, a wall out and put one more line in the facility type investments in.

Decking plumbing and doors for 2022, but all in concert with our near term and long term growth plans and all of that will be protective pretty pretty quickly and as it relates to the greenfield facility, we'll phase that in.

And very thoughtfully.

That facility has the potential to be.

Quite a hub for production and volume for us over time.

But we will grow it thoughtfully as demand and market factors.

Merit and then in terms of the digital transformation, we've been talking to you now for a number of years.

A set of fortune brands capabilities, whether it's strategic sourcing or revenue growth management.

And.

Supplier development and so forth digital transformation is just the next wave of that and in fact this year, we invested $5 million this year to get that initiation.

Initiatives started so 22 is not starting from a cold start from ground zero.

And we're going to be making a range of investments some of them will benefit our connected products some of them will benefit our e-commerce capabilities as well.

Unlock.

Data and market insights to help us better.

Understand.

<unk> supply and demand and also to source more effectively so we will be making a range of investments.

And we're going to be making them as much we can.

Central fashion, so we can leverage both our market insights and our capabilities across the portfolio.

Got it Super Ella I would just emphasize a couple of points.

One is I mean from the Capex investments, we expect it to be at a point that we're making that investment.

Close to 20% organic growth.

Next year than what we forecast going forward. This is going to allow us not just to serve.

Customers, well, but to do so more efficiently.

You alluded to the fact that we opened a new retail focus Tcf plumbing right.

Right at the end of the year and you can see the relief from the supply chain is that thing started to flow in.

And do so more and more efficient levels in these.

These are great. These are the best investments, we can make the highest returns associated with them as Pat says, we're going to be careful we're going to govern the pace of the investment, particularly the Greenfield facility. So we're feathering the dollars and as we're seeing the demand.

Come in.

We're very careful about that.

On the digital piece I would also just reiterate I mean, we.

You've kind of shown our ability to leverage capabilities across the enterprise over the last couple of years.

Both to accelerate growth and drive margin expansion and.

To create more fuel for growth and so digital is really just the next logical pillar of our fortune brands advantaged capabilities.

And as Pat referred to we spent about $5 million.

In 'twenty, one and piloted a couple of things.

We are already starting to see the results.

Yes.

If you look at our E Commerce share for example in plumbing.

Sure you 500 or team really.

E Commerce Center of excellence under these principles kind of starting in Q4 of last year.

We've made material share gains in this space and the number one share spot in.

For short quarter. So it really encourages us about building these capabilities and the kinds of impact that we can have.

We dedicate ourselves to them and of course, when Youre doing things like mobile cloud and we're going to be doing procurement data, having the benefit of scale to be able to make the investments essentially develop the talent centrally leverage it across the entire enterprise really contributor towards the results that we expect to get out of this.

Got it really helpful very exciting.

Thank you. Our next question will come from the line of Susan Mcclary with Goldman Sachs.

Thank you good afternoon, everyone.

I'm not sure if your question is.

Hello, My first question is around when.

When you think about growth for 2022 can you talk to how much of that will be led by volumes relative to prices. Some of those actions that you took last year actually start to take effect and come through in the results and then I guess with that can you also discuss how youre thinking about perhaps a change in the rate environment and what that could mean for housing.

Across.

Across the business when you think about the different products and price points that you had any sort of areas, where we could see relative gains or incremental weakness in demand as that some of that could come through.

Yes, sure I'd be happy to touch on a couple of those I'm sure.

I'll give some more color when you look at sort of our growth assumptions I would say.

<unk> got a lot of pricing for the year and as Pat mentioned near 90% of that.

As in market agreed and so while it takes us a while to work down our backlog from actually access that new price.

And that is the majority of the driver of growth that we'd expect so we're not banking on a ton of volume.

You've heard our kind of market forecast.

But we're conservative this year, we will see as the next couple of quarters unfold.

What the market actually does.

By the way, we're securing our supply chain and inventory and you've seen that in our <unk>.

So numbers to be able to service more sure you're right, but we're not.

On a ton of volume growth control really I'd.

I'd say very modest volume growth.

And price driving growth into two with opportunity there.

Sure.

Should it go quicker.

And then from from.

With respect to what we're seeing.

Demand, we're not really senior come off anywhere I mean, it'd be easy to be able to say.

Richard figure very strong here and not fair, but it's.

Really continued to be very consistent.

And.

Obviously, a lot of the things we've discussed before demographics below housing supply.

<unk> housing stock record levels of home equity I think are all playing into that.

If you think about rates.

Firstly that bumped up already 50 basis points.

And three.

Three 5% ish on the <unk>.

30 year, I mean, theres still materially below.

Even where they were if you think about the end of a team that can come out like a four 9%.

The mortgage bankers association forecast to 4% by the end of the year and so there's quite a lot of room we.

We feel and rates for them to go up and so affordability to stay in check and I think is somewhat different right now is.

Very very low inventory that's in the market tier one seven.

Seven times monthly supply of existing homes.

The demand that's there and homeowners equity in so.

No you should should we be shocked the market with.

On.

Foreseen rate increases that aren't telegraphed well I think there is always a danger of that and if thats. The case this team will be prepared.

To manage our business manager of investments to manage our P&L for continuing to deliver for our stakeholders and I think that's a hallmark of this company.

But if it should grow at a reasonable rate and be well.

Telegraph to the market, we think that there is quite a bit of room.

Okay. That's very helpful color. Thank you and then I'm, hoping that you can also speak a little bit about the solar innovations deal that you announced yesterday can you, perhaps just give us an overview of the business and talk about what made this attractive for you and perhaps how this furthers the outdoor segment that you've been growing on in.

Some of the core innovations and focus that you have across the company.

Peter I would say, we're very excited about some of the innovations with Fisher company that we've been covering for for some time and entertaining conversations with their founders and we've done a remarkable job.

It is a very fast growing segment of the doors market right and so it's a big wide opening doors do you think about.

Particularly commercial space as you see.

The big Wall opens fully.

It's about 50 50 commercial residential application and the CAGR of the category has been.

Double digit for the loss.

Three to five years, perhaps even a bit beyond that now what's interesting is it's very highly engineered.

Technology driven.

A lot of patents protecting the technology is so.

I visited and there is kind of amazing and moved to 2000 pound or with a with a finger alright, and you don't just do that and how that the technology that works.

Feeling worse.

The bogo door, that's flushed to the ground and have a train to that afterwards I mean, all of this is highly technical stuff and what we see an opportunity to take that technology and combine it with <unk>, which is the leading exterior door brand by the way number one build a brand in our entire portfolio and really start to lead with some standardized product.

Embrace this growing segment of the market.

And what you really do when you start to create indoor outdoor spaces right. You can open the entire living space to the outdoors integrated with.

The decking products through the screening products that we have through Larson and really start to create much much more of an integrated portfolio. So very excited about the ability to access it.

Through this acquisition and the other thing that allows us to do is build on our <unk>.

Nascent commercial capability because this doesn't have a big commercial application and you might've noticed as well fiber on.

<unk> is also getting into some of the commercial space with our Wildwood product, which is some of the the cladding phenomenal product into much better application for exterior siding.

Wood in the decorative architectural space.

Combining all of that.

To really kind of turbocharged both the commercial space.

But also our ability to excess.

Alright.

So just to get an area of our troponin.

Okay. That's very helpful color. Thank you and good luck.

Our next question is going to come from the line of Adam Baumgarten Garden with Zelman.

Hey, everyone. Good afternoon, thanks for taking my questions.

Just maybe starting on margins if you could talk about what gives you the confidence that margins will start to inflect positively in Q I mean, it seems like that maybe it was pushed out a little bit here I mean, you're starting to see supply chain improvements or is it really simply just starting to lap some of that meaningful cost inflation as you get into mid year and then just on that same vein just on Cogs inflation.

<unk> you talked about the $290 million in 'twenty, one how should we think about the dollar inflation in 'twenty two that's embedded in guidance.

Yes.

I would say there is a number of things that give us confidence in margins.

$4 20 to one is most of the actions as we've said are in place now.

Some of them start to take effect.

Late Q1.

Early Q2.

Whether that's because of negotiated timing with channel partners or whether thats because.

<unk> backlog and working the backlog down until the new price takes effect.

But that is what pushes that out a bit longer than we thought and also some of the inflation we brought in from.

21 was a bit higher than what we would've expected in the third quarter.

But we will be about breakeven on.

Price versus cost by the end of Q1, and we will reflect positively by Q2.

And so we see the fact that we have those actions in place.

That we've been leveraging SG&A very effectively for the last three years and when you look at how we really leverage SG&A. This year, while still making $85 million of capability investments, we expect to be leveraging SG&A.

That effectively next.

Next year, we still see our brands resonating very very well and they're not having to compete.

Compete.

By promotions or discounting so I think all of those things.

It gives us the confidence that we're on are both near term and long term margin trajectory. We just have to work through some of the heavy.

Inflation, we took in from the quarter.

And get the new pricing in.

New orders.

And I would also say I wouldn't we're not sanguine on inflation.

Many areas have stabilized I would say about the areas that haven't you have hardwoods.

Got bored whether its particle board plywood spot.

Spot market freight and aluminum, but outside of those elements a lot of stability now not declines, but stability to the rate at which things.

Are coming at Us a new has gone down in.

In terms of.

The Cogs inflation in the plan I would think of it as our Cogs went.

From $3 9 billion in $2024 9 billion in 2021.

We're going to expect at least mid single digit.

Level percentage Cogs inflation, so at least $300 million I'd say that would be the low side of what we'd expect.

We're prepared if more emerges.

But that would be the low side of what we would expect.

And we will act as more does emerge.

Got it thanks, and then just on maybe thinking about inventory levels across your retail and wholesale customers is there still an opportunity in certain businesses or maybe all businesses for that matter to for some restocking in 'twenty two if demand holds in and supply and Bruce.

Yes, Adam I would say there is some.

Definitely got better over the course of the year.

And so we've been trying to be very strategic about servicing the high runner skus and getting those consumers need them. So I'd say, there's still behind on kind of C&D skus to store.

Some of our businesses.

Have customers on allocation.

All of 'twenty one.

And so we do think there's continued.

Tucking.

In 'twenty, two but we are in a better spot than we were this time a year ago.

Great. Thanks Best of luck guys.

Hey, thanks.

And we have time for one final question. Our last question that will take for the day will come from the line of Truman Patterson with Wolfe Research.

Hey, good afternoon, everyone and thanks for taking my questions.

So just wanted to follow up on the on the prior question on second quarter margins.

Being up year over year.

This is the case for you.

Your thoughts on each of the segments I'm really hoping you can walk us through those or any of the segments catching up with inflation, a little bit faster, taking a little bit longer than that <unk> time frame and then.

Wanted to dig in a little bit more into what's incorporated into guidance.

I'm assuming that.

Cost inflation does tick higher from here are there any incremental levers that you can pull to offset.

Continued inflation without really impacting guidance.

Yes ill touch on a few things Nick may add.

So your first comment on Q2 margins, what I would expect is key.

Q2 margins to be in a similar ZIP code as Q2 of 2021 BOE recall Q2 margins in 2021, where we're quite strong. They were 15, 4% in 2021, I mean, you would expect a 200 plus base sequential margin improvement.

Q1, 'twenty two to Q2 'twenty, two so thats, where youre going to see it Truman is as we moved actually from Q1 to Q2 youre going to see.

Big uptick driven by pricing fully coming into effect, but when you look year over year. We had we had exceptionally strong first half margins in 'twenty one in particular.

In Q2, I think across the board.

You would expect.

Strength in margins.

Across the business, though always remember in plumbing, depending on when we're phasing investments.

Plumbing is always going to be dancing around its margin plumbing for the year is around.

23% it might be closer to 22% in the first quarter and then.

23, plus or minus for the balance of the year.

In terms of.

How would we adjust as the year went on at different things unfolded all of our teams.

We're pretty darn good at managing the P&L I think.

We've kind of had that as a trademark for quite some time.

Especially when.

The downturn hit in Q1 Q2 of 2020, we manage the P&L very effectively on the way down as well as we have on the way up since in I'd say the last two years have really gotten all of our businesses into a much tighter cadence.

<unk>.

Monitoring inbound cost both materials and freight and labor.

And then.

For better or worse, we're just in a much tighter coordination with our channel partners to be prepared to take price.

More frequently than would be typical in the building products industry.

And Thats.

The capability, we will carry forward into 'twenty, two and we will move nimbly throughout 'twenty two.

To hold to our guidance I mean, we've tried to anticipate and our guidance.

As we mentioned in our prepared remarks that works at least for the first half carrying in many of the same dynamics.

And we do expect there to be things that unfold throughout the year, but we will manage them effectively and make the margin progress we've signal.

And I'd just add a couple just a couple of thoughts on Christmas.

Chris I'm sure about margin evolution, I mean, as you think about it hard to overstate the impact that the backlog has had an ability to chase margin could push a button.

Reprice backlog you to see.

Pretty strong margins in Q4 because of the prices in a degree, but we're working down the stuff. We're building the business for the long term, we're building channel relationships for the long term.

And so we're trying to do things in a constructive way over time.

And to gain and hold.

Sure and so.

That just takes time to work through the system and it would pass shrink as you worked through that you really do see.

Yes.

And then.

The other part of your question about should bigger risks materialize I really think one of the hallmarks of this team has been its ability to manage risk and to respond to risk rapidly and I think back to Q2 of 'twenty I mean, a decremental margin was 12% when you saw the world come to an end.

And why is that because our financial priorities to grow above market and to grow our margins.

And we've been able to invest over the last couple of years to really catapult.

Both the growth above market and the growth in margins, but I'd say make no mistake in the face of challenge.

We will work to offset cost will take price as needed and we will pace investment as the environment warrants it.

We will do those things to continue to deliver for shareholders.

No matter the environment.

As we take a great deal of private and so here, we show a lot of exposure growth.

And earnings growth on the upside, but a lot of levers in the business to manage any short term challenges we may face.

Okay. Okay. Thanks for that and then.

In plumbing I believe you all mentioned you grew in the quarter gained market share you all been gaining share in China specifically.

Specifically for the past handful of years I'm, hoping.

To get an update on the Chinese real estate market your expectations in 'twenty two.

Because I believe last quarter, you were still expecting.

Growth in China, just seeing if anything's changed there.

Yes.

Did see I'd say modest growth in China in Q4.

Continue to plug along and as we look to 2022.

We have obviously moderated our expectations as compared to the last few years.

We expect that business to continue to perform and for a few reasons. One is you'll recall that our business is really.

Outperformed.

Both.

Upstream and downtrodden, largely because we are continuing to innovate and expand into new categories and new channels and that's really been.

One is our calling card for that business. So for example, we very successfully launched modern sanitary ware and smart sanitary Ware in China. It's been a really good success, we're probably only at a point or two of share in the total market.

Which is a huge opportunity and so through that expansion outside of just riding the market.

Housing market wave gives us a lot of opportunity and then the second part is while the government's taken what steps to take to cool the market and take spot.

Speculative buying out of the market now you have seen some easing of that sense, but I think thats easing is going to take a while to work through.

That hasnt really been our exposure you'll recall, we're much more exposed to tier one and tier two cities Shanghai is our leading share market and so we are in a market like that we're seeing a lot more on an army of people just.

After upgrade aging homes, we are one of the first things that the Chinese consumer touches when they move into a home is the bathroom done a lot of consumer work there.

Exposure.

More favorable deliberately so by the way we've chosen not to chase perspective, our business exposure to a lot more favorable than the totality of the Chinese market. So we've created room this year.

To allow that business.

To experience slower growth and are continuing to make investments that needs to make.

Continues to grow but.

We're confident that we'll work through this year.

Whatever may throw at US and then we will continue to.

Put up the kind of performance you put up over the last few years and I think Matt.

Maturation from speculation to more.

Normal regular way growth in R&R and the Chinese market is probably not a bad thing in the long run for businesses like ours.

Thank you and with that we will conclude today's fortune brands' fourth quarter and full year 2021 earnings conference call. Thank you for joining you may now disconnect.

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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' fourth quarter and full year 2021 earnings conference call.

Lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session to ask a question. Please press Star then one on your telephone keypad to withdraw your question press the pound key.

I would now like to turn the call over to senior Vice President of Finance and Investor Relations Mr. David Barry Sir you may begin the call.

Good afternoon, everyone and welcome to the Fortune brands home <unk> security fourth quarter, and full year 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 SBA just dot com website.

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.

As required by law.

Any references to operating profit or margin earnings per share or cash flow on today's call. We 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.

Helen <unk>, 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.

Thank you, Dave and thank you to everyone for joining us on the call today.

Hope that everyone has a safe and enjoyable holiday season, and best wishes for 2022.

Following an extraordinary 2020, our teams once again delivered outstanding performance in 2021.

Our strong fourth quarter results capped a remarkable year at fortune brands, including exceptional sales operating income and earnings per share growth.

I am, particularly proud of how we delivered for our employees customers and consumers. While also achieving 50 basis points of operating margin improvement.

We accomplished these results despite facing numerous external headwinds, including supply chain disruptions and extreme inflation.

Importantly, we also made progress on our fortune brands advantaged capabilities and continued investing in our leading brands to drive innovation expand capacity and to serve our customers.

As a result of our team's outstanding work in 2021. The company is well positioned to continue outperforming a strong housing market in the years to come.

In the fourth quarter sales grew over 18% or 13% organically with all of our businesses delivering double digit growth driven by continued strong pure west a month across all channels.

Operating income grew 7% and EPS grew 6% as operating leverage in the quarter was impacted by labor availability constraints supply chain inefficiencies and inflation ahead of price.

Despite these challenges we made full year operating margin progress and delivered a 37% increase in full year earnings per share versus 2020.

Additionally, in 2021, we increased our investment in the business by $85 million.

Returned over $590 million of capital to shareholders executed capacity expansions across the portfolio and recently acquired solar innovations a leading producer of white opening door systems and outdoor enclosures that will join our <unk> family.

Our fortune brands advantaged capabilities leveraged across the portfolio helped to offset extreme inflation by reducing cost executing strategic price increases and building stronger deeper supplier relationships.

Are people driven by our culture of excellence continued to position our portfolio of leading brands to capture the upside from the strong housing market.

Additionally, we will remain agile in our response to any short term headwinds that may come our way.

We continue to see strong demand for our products and our team is working hard and we think that demand we're.

We're making progress on strategic initiatives and later in the call Pat will provide details around our 2022 investments, which further position us for profitable growth.

The work that we've done to position the company to outperform extends beyond our exceptional financial results. We continued to advance our key environmental social and governance focus areas.

We are acutely aware of the responsibility we have of keeping all of our associates safe.

Our safety records are among the best in the industry and we invest to ensure that all newly acquired companies meet our extremely high safety standards as quickly as possible.

This is one of the ESG synergies that we bring to bear when we acquire a business.

Our safety performance as a point of pride for us and our entire team is committed to keeping the bar high.

We look forward to highlighting our full ESG progress in our upcoming 2021, ESG report, which will be released next quarter.

All of our work is being recognized we've seen consistent improvement in our scores by key ESG Raiders for the third consecutive year music named Fortune brands as one of America's most responsible companies and just today, we have once again been named as one of Fortune magazine's world's most admired companies.

I'm proud to lead the company, where our associates are so passionate about realizing our purpose of fulfilling dreams of home in an ethical responsible and sustainable way.

As we look to the year ahead all of the progress that we've made over the past two years has positioned us extremely well to create further value for all of our stakeholders.

Demand remains strong and our commitment to further expand and develop our fortune brands advantaged capabilities will bolster our operating model and create extra fuel for growth.

We aim to further our momentum in 2022, identifying additional strategic investment opportunities, including our digital transformation.

I am very excited to announce that May Russell will be joining our company in the coming weeks as our first ever Chief Digital Officer May.

Joins us from Ford, where she was a senior technology executive serving as the Chief Technology Officer for Ford Commercial solutions and had global responsibility for the award winning Ford and Lincoln apps, the digital consumer interface for all vehicles vehicle connectivity safety and security products and for the Digitization of fleet management.

Our ability to attract talent like me speaks to the tremendous opportunity that we have to transform fortune brands into a consumer first digitally enabled growth platform.

We believe the potential for digital transformation within our portfolio is remarkable and I'm excited to speak more about our digital initiatives throughout the year.

Our people are the foundation upon which our business is built and they drove outstanding results in 2021.

Turning to the remainder of our remarks today first I will share what we're seeing in housing and home products market. I'll, then highlight key takeaways from our fourth quarter and full year results as well as discuss our key initiatives across the portfolio and how we expect these to evolve overtime.

Pat will then provide highlights on our financial results and thoughts around our future financial performance expectations for 2022.

Now turning to some thoughts on the housing market as I've mentioned demand remains strong due.

Due to the demographic and fundamental trends favoring both new construction and repair and remodel we expect the long term expansion of housing and building products to continue.

New construction activity has a robust year in 2021, who would have been even stronger if unimpeded by labor availability and supply chain inefficiencies.

With all time record low existing housing inventory in the U S inventory is turning over nearly as fast as it is becoming available there is simply not enough homes to purchase.

Our wholesale and building momentum, which persisted through all of 2021 is showing signs of continued strength as we begin 2022.

Our exposure to the new construction industry continues to give us incremental tailwind and a powerful installed base.

Repair and remodel activity remains robust across our product categories and our Pos was strong during the fourth quarter.

With record low supply and an aging housing stock.

So requiring significant R&R spending.

We saw clear above market growth across our portfolio as our leading brands are centered around the most in focus spending areas of the house, the kitchen bathroom and the outdoors.

R&R has been supported by tremendous home equity well, which has grown by trillions of dollars in the past year.

While we expect interest rates to increase as the federal reserve works to combat inflation 30 year mortgage rates, which currently have around three 5% remain attractive.

Coupled with compelling demographics. This financial backdrop is supportive of continued new construction and R&R spend.

We continue to believe in our long term run rate for housing expansion, driven by demographics, and fundamentals and underpinned by low supply and aged humps.

Multi year runway for growth provides a significant long term opportunity for new construction and R&R, we intend to outperform the strong market and we'll stay agile to both capture opportunities and quickly respond if short term headwinds arise.

Now, let me turn to our performance in the fourth quarter and full year as well as how we're positioning ourselves to be even stronger across our portfolio.

Total company sales were up over 18% for the fourth quarter capping off a superb year of 26% revenue growth versus a year ago.

This performance is demonstrative of strong demand, but also of our ability to source manufacture and ship and a complex supply chain environment.

Sales were up double digits across all businesses during the quarter compared to a strong fourth quarter last year.

Operating margins were 13, 4% for the fourth quarter and 14, 6% for the full year.

As I mentioned earlier consistent with our long term strategy to deliver for shareholders. We've made 50 basis points of overall margin progression in 2021, despite numerous headwinds during the year and investing an additional $85 million and strategic initiatives.

Now turning to our individual businesses starting with plumbing.

Operating margins were 28%, we experienced sales growth across all brands and regions, including growth in China, Despite the slowing market.

Full year results were exceptional delivering sales growth of over 25% and operating margin of 22, 9% momentum remains strong across the group.

We invested heavily in plumbing in 2021 further perpetuating the flywheel of top and bottom line outperformance for this world class business.

The investments in marketing and innovation, clearly resonate with consumers and continue to fuel our remarkable results.

Additional investments in capacity and distribution, we will further elevate customer service and provide additional opportunities for growth.

We're also very excited about the innovation taking place in plumbing today, our Mone Smartwater network was unveiled at the consumer electronics show and is the first step in enabling consumers to digitally controlled water throughout the home.

We have a strong leadership position and are in the early stages of what we expect to be widespread adoption of smart home water management by consumers builders and insurers.

Our growing smartwater ecosystem will continue to add inventive product and services at an increasing rate leveraging our growing digital capabilities.

Turning to doors <unk> security.

For the fourth quarter and full year sales were up over 40% or high teens, excluding larson.

Outdoor living continues to show sustained momentum and we are focused on expanding our presence in this attractive category.

Sales in our legacy door operations grew high teens in the quarter driven by strong wholesale sales.

Our robust distribution network is a differentiator and both our doors and decking brands and we continue to deepen our ties with our key channel partners.

At <unk>, we delivered a successful year of integration.

Formed ahead of our acquisition expectations and are enthusiastic about the ability for <unk> to work together to achieve further synergies in 2022 and beyond.

To further expand our leadership position in entry openings, we recently acquired solar innovations, a leading producer of wide opening door systems and outdoor enclosures, we're excited to bring their leading product innovations into our door portfolio and to welcome their employees to the fortune Brands' family.

Our fiber in decking brand continues to perform very well growing above 20% for the quarter.

Full year.

Our success in decking is the result of the strong channel building and product development that we've executed since acquiring the brand.

Conversion from wood to advanced composite materials accelerated over the past few years as the benefits are increasingly resonating with consumers.

Additional capacity has come online during the fourth quarter, and we will expand capacity incrementally throughout 2022.

To further accelerate our growth we will be developing a greenfield facility with construction beginning in 2022.

This investment will be executed in phases, and we will control the pace of capacity additions based on the demand outlook, which we forecast to be very strong for years to come.

Turning to security strong performance continued sales increased low double digits in the quarter driven by continued recovery in outperformance in commercial and international channels bolstered by solid performance in our core North American retail market.

The security team continues to make progress towards its strategic goals, including innovation led growth and margin expansion.

As you can see there was a security team executed well across multiple initiatives in 2021 and are set up to achieve even more into the future.

Finally, turning to cabinets.

Sales increased mid teens for the fourth quarter and full year with growth across product lines at all price points full.

<unk> full year operating margin was 10, 1%.

While our margin performance was short of the targeted progress that we wish to make in 2021 and is also a testament to how agile businesses become given the challenges faced and overcame in a very short amount of time.

Demand remains strong and we continue to work through our elevated order backlog.

We're progressing well with our margin enhancement initiatives and the results will be even more evident as the pace of supply chain volatility subsides.

Within our value price point cabinets, we continue to wind versus both domestic players and from importers, who are shipping into the U S at longer lead times and significantly higher costs.

Our mantra line continues to take share in the sales of this brand more than doubled in 2021.

Demand remains strong and a make to order segment, especially within premium.

So operations were impacted by labor availability and freight costs in the fourth quarter.

We continue to make progress on our strategic initiatives can we expect to drive margin progression in 2022.

Redeploying fortune brands advantaged tools, including complexity reduction advanced our margin progress and we remain on track to achieve our long term margin targets.

In summary in 2021, we celebrated 10 years as a public company.

We have consistently produced exceptional results, while simultaneously investing in key strategic initiatives that will drive the business for the future.

We have the team to continue to deliver above market growth and outperformance and will maintain the discipline agility and execution for which we have become known.

Future looks every bit as price or brighter as we look forward to the next 10 years.

As noted the U S remains millions of homes short of demand and fortune brands is well positioned to capture an increasing share of that expansion.

Our 2022 outlook, which Pat will speak to in greater detail reflect our confidence in the strength of our markets and business.

We expect continued top line growth driving leverage through the P&L, increasing margins and creating further value for our stakeholders.

Our investment in Capex outlook is reflective of our burgeoning opportunity set.

With profitable growth levers to pull at each of our brands.

Our balance sheet is strong and positions us to continue to drive incremental value organically and inorganically.

Very excited for the future.

With that I will turn the call over to Pat will speak to our financial results and outlook.

Pat.

Thanks, Nick as.

Let me start with our fourth quarter and full year results.

Sales were $2 billion up 18%.

And consolidated operating income was $264 million up 7%.

Total company operating margin was 13, 4%.

EPS were $1 32 up 6%.

For the full year.

<unk> were $7 7 billion up 26% and consolidated operating income was $1 1 billion up 30%.

Total company operating margin improved 50 basis points to 14, 6% and.

And EPS grew 37% to $5 73.

Our teams continue to overcome pandemic related challenges to serve our channel partners and consumers amid a dynamic operating and supply chain environment.

These remarkable results are a testament to their commitment.

We remain highly focused on driving outperformance, including above market growth and margin progression.

Achieving both in 2021 was an extraordinary accomplishment and positions us to continue doing so in 2022.

Driving incremental investment dollars and increased operating margin.

Now, let me provide more color on our segment results.

Beginning with plumbing.

Sales for the fourth quarter were $704 million up $66 million or 10%.

Or up 9% adjusted for FX.

Fourth quarter growth was driven by U S wholesale and strong double digit growth at the house of ROHL and.

Importantly.

POS remains strong during the quarter, including in retail.

For the full year sales were up over 25%.

Plumbing operating income increased 6%.

$147 million in the fourth quarter.

Operating income for the full year was $633 million an increase of 29%.

Our plumbing business continues to outperform expectations and the team delivered an outstanding year in the face of numerous challenges.

We are carrying strong momentum into 2022 for continued above market growth and strong margins.

Turning to outdoors and security sales.

Sales for the fourth quarter were $514 million up $148 million or 40% driven by the addition of Larson and double digit growth in doors and decking and security.

Excluding larson organic growth was 17%.

Full year sales were $2 billion, an increase of 44% organically sales increased 15%.

We expect this strong growth to continue in 2022 led by decking and doors.

Door sales benefited from a continued strong new construction environment.

Sales were up high teens in the fourth quarter and mid teens for the full year.

We expect strong sales growth to continue in 2022.

As housing supply remains low favorable demand fundamentals persist.

And new construction completions catch up with orders as supply chain and labor availability constraints ease throughout the year.

We added incremental capacity in the fourth quarter, and we will continue to increase capacity in 2022 by further optimizing our existing footprint.

Additionally, we will begin construction in 2022 on a greenfield expansion to further accelerate our growth.

We will phase investment dollars and capacity over a number of years flexing with the pace of expected strong underlying growth.

Demand remains strong we expect fiber on to grow above 20% in 2022.

Security sales momentum continued in the fourth quarter with low double digit sales growth contributing to mid teens growth for the year.

North American retail sales remained solid and outperformance in commercial and international led to continued above market growth.

2021 was a strong year for security.

We expect growth momentum and incremental margin progress to continue in 2022.

Outdoors in Securities segment operating income was $82 million during the quarter up 41% driven by strong performance across the segment.

Operating income for the full year was $305 million an increase of approximately 49%.

Segment operating margin for outdoors, and security increased 10 basis points for the quarter to 15, 9%.

And was 14, 9% for the full year up 40 basis points.

Turning to cabinets sales for the fourth quarter were $745 million, an increase of 14%.

Full year sales were $2 9 billion up 16% growth was strong in both stock and make to order.

Operating income in the fourth quarter was $67 million down, 13% or $10 million and full year operating income was $287 million up 12% or 31 million.

Operating margin was eight 9% for the quarter and 10, 1% for the full year.

Cabinets margin performance, especially in the second half was impacted by extreme material and freight inflation ahead of price.

Further labor availability and supply chain challenges.

<unk> and operating inefficiencies and shipments below forecast.

Turning to the balance sheet.

Our balance sheet remains strong with cash of $472 million net debt of $2 2 billion.

And our net debt to EBITDA leverage is now one seven times.

We finished the year with $730 million of total liquidity on our revolver.

Our 2021 free cash flow of 518 million includes increased investment in our inventory to service customers and 2022 growth while.

While our cash conversion of 65% was below our three year average of around 100% we.

We expect our conversion rate to improve in 2022 to between 70% and 80%.

Then to progress higher beyond 'twenty two.

When inventory returns to normal levels as supply chain scale.

In summary.

Our teams delivered exceptional 2021 results in the face of numerous challenges.

In addition to making 50 basis points of operating margin progress, we continued to invest in the business to accelerate our opportunities for future growth and margin expansion across the portfolio.

We are committed to investing further including in our digital transformation to pursue increasing growth and to better connect with customers and partners in a more meaningful way.

Before turning to the details of our outlook for 2022, let me first provide some thoughts on the market backdrop, and our approach to creating value regardless of the environment.

Could create near term distortions to this long term market strength.

We will confront such instances in 2022 as we have the past two years.

We're aggressively managing our P&L and balance sheet.

We will maintain investment in top priority growth and differentiation initiatives.

Such as in our Fortune brands advantage capabilities, and we will deploy capital with a focus on long term value creation.

With that backdrop, let me discuss the specifics of our 2022 outlook.

Based on the global market for our products growing 3% to 5%.

With the U S housing market growing 4% to 6%.

And within this market forecasts, we expect U S, new construction growth at or above 6% to 7%.

In U S R&R growth at or above 3% to 5%.

Based on those assumptions, we expect full year sales growth of five 5% to seven 5%.

We expect full year EPS within the range of $6 35.

To $6 55.

On a before charges and gains basis.

Of which the implied midpoint equates to an increase of 13% versus a record 2021 results.

This EPS range includes the impact of approximately <unk> <unk> from an additional fiscal week in the fourth quarter at our plumbing and outdoors and security segments.

This outlook assumes COVID-19 driven challenges continue to impact the first half of 2022 and.

In a manner similar to the second half of 2021.

We believe underlying demand is greater.

If these challenges abate more quickly this would create upside to our forecast.

Better insight to ease upside opportunities one fold during the first half of 2022, and we will refine our guidance has Meredith.

Specifically our outlook for each business as it relates to our overall guidance.

Plumbing net sales growth of 5% to 7% with operating margins around 23%.

Outdoors and security net sales growth of 8% to 10% with segment operating margins around 16, 5%.

Our solar innovations acquisition will not contribute meaningfully to outdoors and security income in 2022, as we invest to integrate their product line into our doors offering.

Cabinets net sales growth of four 5% to six 5%.

With operating margins of 11% to 12%.

We expect 2022 free cash flow of approximately $615 million to $700 million and anticipate a cash conversion rate between 70% and 80%.

Our free cash flow forecast includes capital expenditures of $375 million to $425 million inclusive of growth investments in our decking plumbing and doors operations that enhanced capacity and capabilities meaningfully.

Our.

Lets sheet and cash flow remains strong and we expect to actively deploy capital for value creation.

<unk> with our track record.

Following our organic investment priorities.

M&A and share repurchases remain our other top allocation priorities with a continued plumbing and outdoors and security focus for M&A.

The annual EPS outlook includes the following assumptions.

Corporate expenses of about $125 million to $135 million, including digital transformation investments of $15 million to $25 million.

Interest expense of approximately $89 million to $94 million.

Tax rate between 24, and a half and 25%.

Average fully diluted shares of approximately $137 million to $138 million.

We have put together a strong 2022 plan that builds up to robust years for our housing markets, we anticipate solid sales and double digit EPS growth as well as an acceleration of operating margin.

As discussed we expect several of the challenges that govern growth and margins during 2021 to continue into 2022.

We have price and cost actions in place to offset inflation.

And we expect margins to inflect positively by the second quarter and accelerate through the balance of the year.

To be clear we are in the midst of a long runway of fundamental housing growth.

And we expect prolonged market strength for our products.

Supply of available housing remains extremely low and the importance of the home remains top of mind for consumers.

We expect our sales to continue outperforming the market and our margin progression to remain accelerated averaging 70 to 100 basis points in 2022.

And targeting 75 plus basis points each of the next two to three years.

We are excited about the future and thankful for the commitment from all of our associates, who contributed to a strong 2021.

We are as excited about the next 10 years as we were about the last.

I will now pass the call back to Dave to open the call for questions Dave.

Thanks, Pat that concludes our prepared remarks on the fourth quarter and for the full year.

We will now begin taking a limited number of questions.

Since there may be a number of you would like to ask a question I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.

I will now turn the call back over to the operator to begin the question and answer session.

Operator can you open the line for questions. Thank you.

Thank you Dave as a reminder, we would like to ask everyone. If you'd like to queue for a question Press Star then one on your telephone keypad to withdraw your question press the pound key as a reminder, please limit yourself to one question and one related follow up question. So that more callers in the queue can ask their questions. Thank you.

And our first question is going to come from the line of Phil <unk> with Jefferies.

Hey, guys solid quarter in a challenging backdrop and Pat I appreciate you, giving us a full year outlook, but wanted to see if you could drill down on the shape of the year any color on orders and what your customers are saying since comps are a little tougher to begin the year and then on a price cost standpoint and margins how should we think about that cadence through the course.

For the year and what's embedded in that assumption are you assuming inflation kind of levels off and you effectively have all the pricing that you need out there already.

Hey, Phil.

Good to hear from you why not just kicked off the launch of the first part of your question, what we're seeing from a demand perspective, and Pat can speak to the shape of the year. Some of the assumptions that we've made in our expectations I'd say demand as we just indicated for all 21 remained robust through the end of the year.

Remains robust into 'twenty, two so looking over some of the Pls dollars.

We're seeing strength.

Through the start of the year I would say at or slightly above 21, which had a pretty robust start to the year, we're going to get into some funky comps over the course of the next few quarters and so we expect some swings and roundabouts, but that fundamental strength that youre seeing.

Persist in demand both in retail and wholesale is there.

So that gives us a degree of confidence around the market both from a new construction and R&R perspective.

Yes.

Concur with Nick a lot of good signs from a end market.

Kit demand perspective in both retail and wholesale a few things to think about though as you think about the shape of the air and where are we kind of ended last year, because we did have a lot of the inflation.

Come about in the back half of the year and.

So a few important things to appreciate you know last year 'twenty one.

We had about $298 million of inflation, which is about a seven 5% of Cogs, just a little bit less than that.

But 80% of that inflation hit in the back half of the year and 40% of that.

Inflation hit in the fourth quarter. So we will come out of the gate in Q1.

With a lot of that type of inflation hitting businesses that have the longer supply chains like plumbing and security.

And so we will have a margin profile in the first quarter, that's a little bit like.

The margin profile, we had in the fourth quarter like 13 ish.

We're going to be 15.

To 15, five ish in the second quarter, and then above 16, the back half of the year and Thats the way the margin profile will play out.

And even with strong demand.

In the first quarter that we're experiencing I do expect.

Omicron absenteeism.

Our non broad range of our facilities.

To keep.

Shipment based volume in the quarter more like at mid single digit sales growth in the first quarter.

But as Nick was saying, we feel very good about the year from early signs of demand and from preparation against price and cost, but I do think we'll carry in some of what you saw in the fourth quarter into the first quarter of the year.

Got it that's really helpful and just one last one for me you are guiding to a pretty sharp step up in Capex can you kind of unpack, what's driving that I mean, you talked about this greenfield facility.

Sure.

<unk> gave us some color how much that could unlock and how that kind of ramps up and any color on that digital investment you've talked about as well in terms of the capex for that.

<unk>.

Yes, I'll talk to the numbers of both of those topics Nick might want to add.

Some color commentary, especially around digital.

But our our Capex profile.

We spent until about the middle of last year being somewhat fiscally conservative on Capex.

But had been seeing such strong growth.

Since the back half of 2020.

About $400 million, plus or minus $25 million.

About of that $400 million.

About $200 million of that will be a decade collette.

Maybe 110 to 120 of that.

The earliest portion of that Greenfield facility in Tennessee.

And then another 50 ish or so million on getting additional capacity out of existing facilities with.

Technology that helps the throughput of our existing footprint in decades.

And then we're making.

Our Greenfield facility investment in the UK for our luxury plumbing brands.

And eventually.

That site will will be servicing in one form or another a number of our brands for the EMEA market.

And we'll be adding a DC in plumbing on the west coast and expanding our door facility. So all I'd say bigger than would be just our typical.

Nudge, a wall out and footwall more aligned in the facility type investments in decades.

Decking plumbing and doors for 2022, but all in concert with our near term and long term growth plans and all of that will be productive pretty pretty quickly and as it relates to the greenfield facility, we'll phase that in.

And very thoughtfully.

That facility has the potential to be.

Quite a hub for production and volume for us over time.

We will grow it thoughtfully as demand and market factors.

Merit and then in terms of the digital transformation, we've been talking to you now for a number of years.

A set of fortune brands capabilities, whether it's strategic sourcing or revenue growth management.

And.

Supplier development and so forth digital transformation is just the next wave of that and in fact this year, we invested $5 million this year to get that initiation.

Initiatives started so 22 is not starting from a cold start from ground zero.

And we're going to be making a range of investments some of them will benefit our connected products some of them will benefit our e-commerce capabilities and so well.

Unlock.

Data and market insights to help us better.

Understand.

<unk> supply and demand and also to source more effectively so we will be making a range of investments.

And we're going to be making them as much we can.

Central fashion, so we can leverage both our market insights and our capabilities across the portfolio.

Got it Super Ella I would just emphasize a couple of points.

One is I mean from the Capex investments.

To be at a point that we're making the investments.

We are close to 20% organic growth.

Next year than what we forecast going forward. This is going to allow us not just to serve cut.

Customers, well, but to do so more efficiently.

You alluded to the fact that we opened a new retail focus Tcf plumbing right.

Right at the end of the year and you can see the relief from the supply chain is that thing started to flow.

And do so more and more efficient level.

These are great. These are the best investments, we can make the highest returns associated with them as Pat says, we're going to be careful we're going to govern the pace of the investment, particularly in a greenfield facility. So we're feathering the dollars and as we're seeing the demand.

Come and we are very careful about that.

On the digital piece I would also just reiterate I mean, we.

We've kind of shown our ability to leverage capabilities across the enterprise over the last couple of years.

Both to accelerate growth and to drive margin expansion and to create more fuel for growth and so digital is really just the next logical pillar of our fortune brands advantaged capabilities.

And as Pat referred to we spent about $5 million.

In 'twenty, one and piloted a couple of things.

We are already starting to see the results.

Yes.

If you look at our E Commerce share for example in plumbing.

Sure if I heard her team really led.

E Commerce Center of excellence under these principles kind of starting in Q4 of last year.

We've made material share gains in this space and the number one share spot enforcer of quarters. So it really encourages us about building these capabilities and the kinds of impact that we can have.

We dedicate ourselves to them and of course, when Youre doing things like mobile cloud and we're going to be doing procurement data, having the benefit of scale to be able to make the investments essentially develop the talent centrally leverage it across the entire enterprise really can turbocharge. The results that we expect to get out of this.

Got it really helpful very exciting.

Thank you. Our next question will come from the line of Susan Mcclary with Goldman Sachs.

Thank you good afternoon, everyone.

If your question is.

Hello, My first question is around when.

Across.

Yes, sure I'd be happy to touch on a couple of those I'm sure.

I'll give some more color when you look at sort of our growth assumptions I would say.

We've got a lot of pricing for the year and as Pat mentioned near 90% of that.

As in market degrees in for Bob.

<unk> takes us a while to work down our backlog from actually access that new price.

And that is the majority of the driver of growth that we'd expect so we're not banking on a ton of a ton of volume.

<unk> heard our kind of market forecast.

But we're conservative this year, we will see as the next couple of quarters unfold.

What the market actually does.

And by the way, we're gearing our supply chain and inventory and you've seen that.

Cash flow numbers to be able to service more shooting right, but we're not on a ton of volume growth, which are really.

It's a very modest volume growth.

And price driving growth in 'twenty, two with opportunity there.

Sure.

Should it go quicker.

And then from from.

A perspective of what we're seeing.

Demand, we're not really senior come off anywhere I mean, it'd be easy to be able to say.

We're seeing really strong here not there, but it's really continued to be very consistent.

And.

Obviously, a lot of the things we've discussed before demographics, but low housing supply.

<unk> housing stock that record levels of home equity I think are all playing into that.

And if you think about rates.

Firstly that bumped up already in a 50 basis points.

And at three 5% ish on the 30 year I mean, there is still materially below even where they were if you think about the end of a team it's kind of like a four 9%.

The mortgage bankers association to forecast to 4% by the end of the year and so there's quite a lot of room we.

We feel and rates for them to go up and so affordability to stay in check and I think is somewhat different right now is very.

Very very low inventory that's in the market one.

Seven times monthly supply of existing homes.

The demand that's there and homeowners equity in so.

No you should should we be shocked the market with.

Foreseen rate increases that arent telegraphed well I think there is always a danger of that and if that's the case this team will be prepared.

To manage our business manager of investments to manage our P&L to continue to deliver for our stakeholders I think that's a hallmark of this company.

But if it should grow at a reasonable rate and be well.

Telegraph to the market, we think that there is quite a bit of room.

And some of the core innovation and focus that you have across the company.

Peter Obviously, we're very excited about those renovations and Fisher company that had been covering for for some time and entertaining conversations with their founders and we've done a remarkable job.

And it is a very fast growing segment of the doors market right and so it's a big wide opening doors do you think about.

Particularly our commercial space as you see.

The big Wall that open Chipotle.

It's about 50 50 commercial residential application and the CAGR of the category has been.

Double digit for the loss.

At three to five years, perhaps even a bit beyond that now whats interesting is very highly engineered.

Technology driven industry.

Lot of patents protecting the technology.

I visited and there is kind of amazing moved to 2000 pound door with a finger alright, and you don't just do that and how that the technology that works.

The ceiling works.

The bulk of the door Thats flushed to the ground and have a train to that afterwards I mean, all of this is highly technical stuff and what we see an opportunity to take that technology and combine it with <unk>, which is the leading exterior door brand by the way number one build a brand in our entire portfolio and really start to lead with some standardized product.

Embrace this growing segment of the market.

And what you really do when you start to create indoor outdoor spaces right.

The entire living space to the outdoors integrated with the decking products through the screening products that we have through Larson and really start to create much much more of an integrated portfolio. So very excited about the ability to access it.

Through this acquisition and the other thing that allows us to do is build on our <unk>.

Nascent commercial capability because this doesn't have a big commercial application and you might have noticed as well fiber on.

<unk> is also getting into some of the commercial space with our Wildwood product, which is some of the the cladding phenomenal product is much better application for exterior siding.

Wood in the decorative architectural space and so we're planning on combining all of that.

To really turbocharge growth the commercial space.

But also.

<unk> to excess.

Alright.

Our sophisticated area of our troponin.

Okay. That's very helpful color. Thank you and good luck.

Thanks.

Our next question is going to come from the line of Adam Baumgarten Garden with Zelman.

Hey, everyone. Good afternoon, thanks for taking my questions.

Just maybe starting on margins if you could talk about what gives you the confidence that margins will start to inflect positively in <unk> I mean, it seems like that maybe it was pushed out a little bit here I mean, you're starting to see supply chain improvements or is it really simply just starting to lap some of that meaningful cost inflation as you get into mid year and then just on that same vein just on Cogs inflation.

<unk> you talked about the $290 million in 'twenty, one how should we think about the dollar inflation in 'twenty two that's embedded in guidance.

Yes.

I'd say theres, a number of things that give us confidence in margins.

$4 20 to one is most of the actions as we've said are in place now.

Now some of them start to take effect.

Late Q1.

Early Q2.

Whether thats because of negotiated timing with channel partners or whether thats because.

<unk> backlog and working the backlog down until the new price takes effect.

But that is what.

What pushes that out a bit longer than we thought and also some of the inflation we brought in from <unk>.

'twenty, one was a bit higher than where we would've expected in the third quarter.

But we will be about breakeven on.

Off price versus cost by the end of Q1, and we will reflect positively by Q2.

And so we see the fact that we have those actions in place.

Next year, we still see our brands resonating very very well and they're not having to.

Compete.

By promotion of our discounting so I think all of those things.

It gives us the confidence that we're on are both near term and long term margin trajectory. We just have to work through some of the heady.

Inflation, we took in from the quarter.

And get the new pricing in.

New orders.

And I would also say I wouldn't we're not sanguine on inflation.

Many areas have stabilized I would say about that.

The areas that haven't you have hardwoods somewhat board, whether its particle board plywood.

Spot market freight and aluminum, but outside of those elements a lot of stability now not declines, but stability so the rate at which things.

Are coming at Us a new has gone down.

In terms of.

The Cogs inflation in the plan I would think of it as our Cogs went.

From $3 9 billion in $2024 9 billion in 2021.

And we're going to expect at least mid single digit.

Level percentage Cogs inflation, so at least $300 million I'd say that would be the low side of what we'd expect.

We're prepared if more emerges.

But that will be the low side of what we would expect.

And we will act with more does emerge.

Adam I would say there is some.

It definitely got better over the course of the year.

And so we've been trying to be very strategic about servicing the high runner Skus.

He knows what consumers need them. So I'd say, there's still behind on kind of C&D skus they are still.

Some of our businesses that are pretty clear if you had to have customers on allocation.

All of 'twenty one.

And so we do think there's continued.

Stocking.

'twenty two but we are in a better spot than we were at this time a year ago.

Great. Thanks Best of luck guys.

Thanks.

And we have time for one final question.

Last question that will take for the day will come from the line of Truman Patterson with Wolfe Research.

Hey, good afternoon, everyone and thanks for taking my questions. So just wanted to follow up on the on the prior question on second quarter margins.

Being up year over year is this the case for your thoughts on each of the segments I'm really hoping you can walk us through those or any of the segments catching up with inflation, a little bit faster, taking a little bit longer than that <unk> time frame and then.

Wanted to dig in a little bit more into what's incorporated into guidance.

Assuming that.

Cost inflation does tick higher from here are there any incremental levers that you can pull to offset.

Continued inflation without really impacting guidance.

Yes.

Touch on a few things Nick May add.

Yeah. So your first comment on Q2 margins, what I would expect is.

Q1, 'twenty two to Q2 'twenty, two so thats, where youre going to see it Truman is as we moved actually from Q1 to Q2 youre going to see.

A big uptick driven by pricing fully coming into effect, but when you look year over year. We had we had exceptionally strong first half margins in 'twenty, one and in particular.

In Q2, I think across the board.

You would expect.

Strength in margins.

Across the business, though always remember in plumbing, depending on when we're phasing investments.

Plumbing is always going to be dancing around its margin plumbing for the year is around <unk>.

23% it might be closer to 22% in the first quarter and then.

23, plus or minus for the balance of the year.

In terms of.

How would we adjust as the year went on at different things unfolded all of our teams.

We're pretty darn good at managing the P&L I think.

We've kind of had that as a trademark for quite some time.

Especially when the.

Monitoring inbound cost both materials and freight and labor.

And then.

For better or worse, we're just in a much tighter coordination with our channel partners to be prepared to take price more.

More frequently than would be typical in the building products industry.

And Thats.

The capability, we will carry forward into 'twenty, two and we will move nimbly throughout 'twenty two.

To hold to our guidance I mean, we've tried to anticipate in our guidance.

As we mentioned in our prepared remarks that worth at least for the first half carrying in many of the same dynamics.

And we do expect there to be things that unfold throughout the year, but we will manage them effectively and make the margin progress we've signal.

Julian I'd just add a couple just a couple of thoughts on that.

Chris I'm sure about margin evolution as.

As you think about it hard to overstate the impact that.

Backlog has had on our ability to chase margin and if we could push a button.

Reprice backlog you to see.

Pretty strong margins in Q4, because the prices in a degree but were working on stuff. We're building the business for the long term, we're building channel relationships for the long term.

And so we're trying to do things in a constructive way overtime.

Gain and hold.

Sure and so.

It just takes time to work through the system in Red patch furniture as you work through that you really do see it come through.

And then.

The other part of your question about should bigger risks materialize.

I think one of the hallmarks of this team has been its ability to manage risk and to respond to risk rapidly and I think back to Q2 of 'twenty I mean, our decremental margin was 12% when you saw the world come to an end.

And why is that because our financial priorities to grow above market and to grow our margins.

And we've been able to invest over the last couple of years to really catapult.

Both the growth.

Above market and the growth in margins, but I'd say make no mistake.

In the face of challenge.

We will work to offset cost will take price as needed and we will pace investment as the environment warrants.

I will do the things to continue to deliver for shareholders.

The environment.

We take a great deal of private and so here, we show a lot of exposure growth.

And earnings growth on the upside, but a lot of levers in the business to manage any short term challenges we may face.

Okay. Okay. Thanks for that and then.

In plumbing I believe you all mentioned you grew in the quarter gained market share you all been gaining share in China.

Specifically for the past handful of years and I am hoping.

To get an update on the Chinese real estate market your expectations in 'twenty two.

Because I believe last quarter, you all were still expecting.

Growth in China, just seeing if anything's changed there.

Yes.

Did see I'd say modest growth in China.

In Q4.

Does this continue to plug along and as we look to 2022.

We can see we've obviously moderated our expectations as compared to the last few years.

That business to continue to perform and for a few reasons. One is you'll recall that our business is really.

Outperformed.

Both.

Upstream and downtrodden, largely because we are continuing to innovate and expand into new categories, and new channels and Thats really been.

One is our calling card for that business. So for example, we very successfully launched Mohan sanitary Ware and smart sanitary Ware in China. It's been a really good success, we're probably only at a point or two of share in the total market.

Which is a huge opportunity and so through that expansion outside of just riding the market housing.

Housing market wave gives us a lot of opportunity and then the second part is while the government has taken a lot first to take to cool the market and take spec.

Speculative buying out of the market now you have seen some easing of that sense, but I think thats easing is going to take a while to work through.

That hasnt really been our exposure recall, we're much more exposed to tier one and tier two cities Shanghai is our leading share market and so we're in a market like that we're seeing a lot more on an army of people just.

After upgrade aging homes, we are one of the first things that the Chinese consumer touches when they move into a home is the box route done a lot of consumer work there.

Exposure.

More favorable deliberately so by the way we've chosen not to chase perspective, our business and our exposure is lot more favorable than the totality of the Chinese market. So we've created room this year.

Drill out of that business.

To experience slower growth and are continuing to make investments that needs to make.

Continues to grow but.

We're confident that we'll work through this year.

Whatever they throw at us.

We'll continue to put up the kind of performance, we put up over the last few years and I think this maturation from speculation to more.

Normal regular way growth in R&R and the Chinese market is probably not a bad thing.

The long run for businesses like ours.

Thank you and with that we will conclude today's fortune brands' fourth quarter and full year 2021 earnings conference call. Thank you for joining you may now disconnect.

Q4 2021 Fortune Brands Home & Security Inc Earnings Call

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