Q1 2022 Fortune Brands Home & Security Inc Earnings Call
Good morning, My name is stating that I will be your operator for today's call at this time.
I would like to welcome everyone to the Fortune brands first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
I would now like to turn the call over to Mr. Dave Berry Senior Vice President of Finance and Investor Relations you may begin the conference.
Good afternoon, everyone and welcome to the Fortune brands home <unk> security first quarter earnings call and webcast hope.
Hopefully everyone has had a chance to review both the earnings release and the updated investor presentation that highlight the strategic rationale underpinning our pursuit of a separation into two companies via a tax free spin of our cabinet segment.
The earnings release Investor presentation, and audio replay of this call can be found on the investors section of our S. P. H S Dot com website.
I want to remind everyone. Today that are forward looking statements, we make on the call either in our prepared remarks or in the associated question and answer session are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
These risks are detailed in our various filings with the SEC.
The company does not undertake any obligation to update or revise any forward looking statements, except as required by law.
Any references to operating profit or margin earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified.
With me on the call today are Nick Fink, our Chief Executive Officer, and Pat Hallinan, Our Chief Financial Officer.
This call will be formatted differently than recent prior calls given today's news.
Nick will begin with his prepared remarks, which will highlight the strategic separation announcement, our first quarter performance and topics relevant to today's housing and economic environment.
<unk> will then highlight our first quarter financial results and provide an update to our financial guidance.
Finally, we will return to Nick to discuss today's announcement in more detail.
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.
Cited to update you on what we expect to be the next phase of value creation for our great company and its stakeholders.
As mentioned in today's press release, our board of Directors has authorized that we pursue a separation into two companies. So I attacked.
A tax free spin of our cabinets business into a standalone publicly traded company.
The result will produce two world class companies.
For the purposes of this discussion we will refer to as new fortune brands and cabinets.
We believe this decision is in the best interest of our investors associates and customers.
By separating these businesses, we can better maximize long term value and unlock exciting opportunities for both companies.
This move will enable each company to follow independent pods for value creation with fit for purpose strategies supported by thoughtful investment.
New Fortune brands will bring brand and innovation excellence to supercharged home building products and security categories.
Cabinets will continue to be the north American market leader driving operational excellence to deliver industry leading performance.
Both companies will be supported by powerful financial profiles, sending eshop to drive impressive results for investors.
I will discuss the announcement in more detail later in the call, but for our valued associates channel partners and customers that should be exciting news.
Additionally, we don't expect any disruption to our operations as a result of the separation.
Our same dedication commitment to excellence and to delivering results will continue with both companies.
That approach produced our strong results in the first quarter at least the company well positioned to deliver an excellent 2022 and beyond.
Turning to our first quarter results.
<unk> 2021 a year in which fortune brands delivered exceptional results amidst unprecedented challenges our teams once again performed well in the dynamic environment in the first quarter of 2022.
Net sales of $1 9 billion were up 8% versus prior year.
Demand remains strong and our teams worked tirelessly to fulfill that demand providing excellent service to our channel partners.
Our operating margin of 13% was in line with our expectations and we expect operating margins to expand sequentially across the balance of the year.
We remain on track to deliver our 2022 margin expansion goals.
Our sales growth and margin performance generated earnings per share of the dollar and 31 cents in Q1.
First quarter results look even stronger in the context of lapping extremely strong performance from the first quarter of 2021.
Our first quarter performance was the result of continued robust demand across our leading brands and advantaged channels and continued excellent execution by our teams.
Strong performance from our trade in builder channel across multiple product categories continued past the start of the spring building season and remains robust today.
Point of sale remains strong in line with last year's brisk pace and as rising seasonally.
Notwithstanding a sustained demand.
Cognizant of the tightening of affordability and are proactively increased priority on cost controls and cash management within each of our businesses as part of our commitment to outperform for shareholders in all environments.
We will remain agile in responding to evolving market conditions, consistent with our proven track record of outperformance.
That said all signs point to continued strength for R&R and new construction based on fundamental demand drivers and favorable demographics.
Turning to our segments I'm excited to announce that in the past quarter, we renamed our plumbing segment Fortune brands water innovations to better reflect our commitment to innovating engineering and designing products to help consumers manage and conserve Earth's most precious resources.
Water.
In the quarter, our water innovations business delivered net sales growth in all major markets with significant market outperformance from the house of ROHL and.
In our doors <unk> security high single digit sales growth was driven by double digit growth in doors and security and <unk>.
Doors and decking businesses continued to produce at full capacity.
Finally cabinets delivered double digit sales growth as price begin to work its way from the backlog into the P&L and volume growth remained positive.
While demand has remained solid across the portfolio inflation continues across the input spectrum.
Accordingly, Q1, we offset inflation dollar for dollar with price and continuous improvement initiatives driven by a fortune brands advantaged capabilities.
We expect margins to expand sequentially beginning in Q2 as price and continuous improvement will cover inflation at accretive margins.
Importantly, the price taken to help offset inflation has not negatively impacted demand for our products highlighting the strong pricing power that our brands carry in the marketplace and with our consumers.
Labor availability and supply chain challenges, both significant headwinds in the back half of last year and into the early part of the first quarter moderated as the quarter progressed.
In China, our key suppliers remain open and producing goods and we're working with our teams to ensure inventory positions on key components and skus remain elevated to buffer potential outages.
In the first quarter, we continued to invest in our core fortune brands advantaged capabilities, which are driving margin resilience and creating future fuel for growth.
Our digital transformation efforts are proceeding as expected with particular focus on e-commerce connected products data insights in direct sourcing.
We continue to make further investments in our key strategic priorities.
We're taking action to position ourselves for the future and that includes making progress on key ESG focus areas.
Our recently released 2021 is to report highlights initiatives and programs related to safety diversity equity and inclusion community sustainability and climate.
Additionally.
Carbon emissions and renewable energy targets to pursue in the years ahead.
It was climate goals and expanded environmental disclosures are contributing to improved ESG ratings.
That said, while we have a lot to be proud of today.
See even more opportunity for us to make a larger positive impact for our people our consumers our partners and our communities.
To complement our operational results, we opportunistically repurchased $405 million of shares year to date and close on our solar innovations acquisition.
Our cumulative capital returned to shareholders since the 20th 11 spin has surpassed $4 billion with another $3 billion deployed by accretive acquisitions.
We will continue to deploy capital to drive value creation and are actively looking at further opportunities to bolster the portfolio and drive returns.
Now I'd like to turn to some thoughts on the current housing market.
Demographic and demand drivers remain favorable for long term housing cross.
Our rising interest rates and continued inflation or potential impediments to the pace at which new homes and building products get consumed there are some stark differences between todays environment and that of 2018 and housing experienced a short term slowdown.
The supply of homes remains near all time lows.
Tumor is in a strong financial position with tremendous home equity and continues to demonstrate sustained interest in investing in and upgrading their home.
With so few homes available for sale. Many buyers are rethinking their existing space and are undertaking significant R&R projects to turn what they have into what they need.
The current age of housing stock at nearly 40 years old on average is perpetuating the need for this action.
As we are experiencing.
Ticket items and party rooms, such as the kitchen, Bath and outdoors remains strong from a P O S and order perspective.
The builder community being governed by the same labor and supply chain issues impacting the broader economy is working through a backlog of unfinished starts while experiencing continued high demand in many markets.
This dynamic extends a fundamental need for supply to multiyear opportunity as we remain millions of homes under belt.
Short term affordability and supply chain pressures, who eventually abates and long term fundamentals and favorable demographics will spur growth.
Ultimately.
The only further solve for the supply and demand imbalance in housing is to build more homes.
While rising interest rates and increasing home prices have tightened affordability for consumers home price appreciation has driven home equity values to nearly 10 trillion dollars as of the end of 2021 .
Consumers continue to demonstrate an elevated interest in spending on the home.
Recent Google search trend data over the past two months shows the queries on home renovation bathroom remodel and kitchen remodel remained 20% to 50% above pre COVID-19 search trends.
Additionally, when queried, 65% of the respondents from a recent consumer survey indicated that they would continue their higher spending levels on the home.
As evidenced the consumer remains healthy and housing remains and Infocus category for investment.
We continue to believe in a sustained runway for housing expansion driven by demographics and fundamentals and underpinned our low supply and age comps.
This 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 capture opportunities and quickly respond to short term headwinds materialize.
We have the experience and the team to create value and outperform in any market environment.
In summary in 2022 we put a plan together to continue to grow above market offset all inflation and in the face of expected continued headwinds achieved margin progression for the full year, while still investing for the long term.
After the first quarter, we remain on target to achieve these goals.
Our 2022 outlook, which Pat will address later in the call included a prudent and conservative set of volume assumptions and a clear line of sight to backlogs and embedded price.
The first quarter, which included worn Ukraine, and a COVID-19 outbreak in China has not altered our expectations for the year.
We are 100% focused on value creation through any cycle, and we will stay agile and flexible to meet any opportunities and challenges that may arise.
We're accelerating that pursuit of value creation with today's separation announcement and could not be more excited for the future of these two great companies.
Before I address that further I would like to turn it over to Pat to go through our quarterly financial performance in greater detail Pat.
Thanks, Nick and as a reminder, the majority of my comments will focus on income before charges and gains in order to best reflect ongoing business performance.
Additionally, all comparisons will be made against the same period last year unless otherwise noted.
Let me start with our first quarter results.
Sales were 1.9 billion up 8% and consolidated operating income was $249 6 million down 5%.
Total company operating margin was 13% consistent with our first quarter expectations.
P S were $1 31.
Our teams continue to advance our strategic priorities and have been resolute in overcoming headwinds.
As Nick mentioned earlier, we offset inflation dollar for dollar in the first quarter with price and continuous improvement initiatives. Though the result was dilutive to margin, which was further impacted by investments and by labor and shipment driven operating inefficiencies.
Beginning in the second quarter, we expect price and continuous improvement to fully offset inflation and contribute to margin enhancement.
And expect to deliver second quarter operating margin of around 15%.
Importantly, we remain on track to deliver our full year margin expansion objective of 70 to 100 basis points over last year.
First quarter performance was in line with our plan and leaves us well positioned to deliver our 2022 guidance.
While geopolitical tensions have spurred another round of inflation. Our teams have responded with incremental price and continuous improvement actions required to achieve our outlook.
Additionally, we are managing our fixed cost structure to prepare for a continued near term volatility, while making the strategic investments to deliver long term value creation.
Demand remains strong across our leading brands, which demonstrates their pricing power and appeal to consumers and pros.
Labor availability and supply chains have incrementally improved providing some relief to our elevated backlogs.
Now, let me provide more color on our segment results.
Beginning with water innovations.
Sales were 644 million up $22 million or 4% with no material FX impact in the period.
The first quarter was driven by strong double digit growth.
The house of ROHL and P. O S growth ahead of sales across our North American channels.
China sales grew mid single digits in the quarter as Covid, driven lockdowns did not materially impact the period.
Looking forward given what is known today, our teams expect to manage the impact from China Lockdowns to achieve our stated full year guidance.
While the second quarter may be impacted by the current COVID-19 disruptions as evidenced by the last major locked down in China. During the first quarter of 2020 pent up demand drives recovery once the lockdown is lifted.
Excluding the Lockdowns housing fundamentals in China have improved as the government recently lowered a key interest rate and loosen select restrictions we have confidence in our team's ability to successfully navigate short term disruptions and remained focused on creating long term value in China, a market that will continue to see.
Household formations and increasing R&R.
Water innovations operating income was approximately flat with last year at $150 million.
Operating margin was 23.3% impressive given the current inflationary pressures and notwithstanding continued incremental investment across the business.
Demand remains strong for our water innovations business and our brands and innovation continue to resonate with consumers.
Our strategic value, creating investments, including in distribution capacity are delivering results ahead of our expectations.
Turning to outdoors and security.
Sales were 497 million up 35 million or 8% driven.
Driven by double digit growth in doors and security.
Door sales were up mid teens and benefited from price and the continued strong new construction environment.
Labor availability and supply chain were disrupted early but improved as the quarter progressed and we continued to sell every door that we can make.
Realizing the value and benefits of advanced materials over traditional options.
Consumers continue to drive material conversion and home and building products.
Former two remains advantageously positioned to capitalize on the secular trend as the market leader in fiberglass exterior doors.
Lars and sales were down high single digits in the period as the business Comped, an extra week in the prior year quarter associated with an acquisition stub period.
Excluding that extra week sales grew mid single digits, and our integration and synergy realization efforts remain on track.
Decking sales grew over 3% coming off a very strong comp of over 40% a year ago demand remained strong as consumers continue to desire larger multifunctional outdoor spaces and are increasingly turning towards advanced materials, such as composite decking.
We continue to expect fiber on to grow above 20% in 2022.
Securities momentum continued with low double digit sales growth for the second consecutive quarter the.
The North American retail market drove the performance and commercial and international sales were also solid as our connected security products resonate with customers and consumers.
We expect sequential sales growth and margin progression throughout the year for security.
Outdoors and security segment operating income was $56 million down 10% segment operating margin was 11.2%.
Early in the quarter labor and shipping inefficiencies drove higher costs into the P&L.
We expect year over year margin expansion in the second quarter as price and continuous improvement initiatives offset inflation at accretive margins and is labor availability and shipping efficiency improve.
We experienced these favorable dynamics in March and expect them to continue.
Turning to cabinets.
Sales were 777 million, an increase of 89 million or 13% stock.
Stock cabinets grew strong double digits and make to order grew mid single digits as labor availability and shipping challenges persisted, but improved throughout the quarter.
While price primarily drove sales growth volume growth was also positive in the quarter overall backlogs remain elevated and demand remained strong into the second quarter.
Operating income in the first quarter was 74 million down 1% operating margin was nine 5% for the quarter, representing a 60 basis point sequential improvement over the fourth quarter.
We expect to deliver year over year margin improvement in the second quarter and further margin progression during the back half of the year as price and continuous improvement offset inflation at accretive margins and labor availability enables plant productivity improvements to be reflected favorably in reported results.
As Nick will highlight shortly this business is set up for a strong future standalone success, including outperformance in sales and margin progression for the long term.
Turning to the balance sheet.
Our balance sheet remains strong with cash of $378 million net debt of 3 billion and net debt to EBITDA leverage at 2.3 times.
We finished the quarter with 553 million of total liquidity on our revolver, we expect leverage to be reduced throughout the year with the typical seasonality of our operating cash flow generation.
This past quarter, we took proactive steps to strengthen our investment grade balance sheet and extend our capital structure duration by pricing of 900 million dollar bond offering.
We also announced a $750 million share repurchase authorization and bought back approximately 380 million of shares in the quarter and 405 million year to date.
Cumulative capital return to shareholders since the 20th 11 span has surpassed 4 billion with another 3 billion deployed via accretive acquisitions.
We continue to be committed to maintaining a strong financial profile, enabling pursuit of above market growth, while prioritizing the best returning opportunities for value creation.
Today's separation announcement should have no diminishing a fortunate as credit quality.
To summarize the quarter.
We delivered results in line with our expectations in a challenging environment.
Demand has been and remains robust.
While supply chain and Covid headwinds have persisted.
This reality was reasonably in line with our expectations.
As a reminder, our initial financial guidance included prudent volume assumptions price and continuous improvement actions taken to support our sales and margin goals.
And continued watch outs for inflation interest rate increases and the comp of last year's stimulus payments.
As we sit here with almost one third of the ear complete we feel good about our approach and our outlook for the year.
With that in mind I'll now provide an update to our 2022 guidance.
We believe that strong demand fundamentals in our core markets continue to support our multi year housing expansion.
As todays press release indicated we are increasing the midpoint of our EPS guidance by five cents to the range of $6.40 to $6 60 says to reflect the recent share repurchases net of incremental interest expense and a higher effective tax rate.
This guidance assumes that we remain a single company for the duration of 2022 importantly.
Importantly, our operating performance and margin outlook remain on track for 2022 and beyond.
I will now pass the call back to Nick to discuss the separation announcement in greater detail Nick.
Thanks Pat.
As I mentioned to start the call. We were very excited to be announcing our intent to pursue a separation into two world class independently traded public companies with attractive investment profiles.
New Fortune brands will be a brand and innovation leader driving accelerated growth and supercharged categories in home security and building products, including water management outdoor living material conversion in science and connector products.
Consistent with our history, we expect this business to outperform the market and drive already industry, leading margins to new highs by leveraging our fortune brands advantaged capabilities and powerful market, leading brands complemented by strategic inorganic opportunities.
With continued focus on areas, such as safety water conservation and development in and use of recycled and sustainable materials, New fortune brands will be a leader in sustainability and ESG.
Cabinets will continue to be the number one industry leader in North America, delivering top tier performance through operational excellence and an emerging leading end to end consumer experience.
Under date Banyas leadership, our cabinets team continues to execute transformational initiatives two and at the heart of the market.
Optimize enhance our operational capabilities and fortify our global supply chain.
These efforts coupled with our leading dealer network have widen the moat between us and domestic and import competition.
Our leading market share and ongoing transformational efforts favorably positioned the business to execute its strategy as a standalone company.
I'm also delighted to announce the date Bennion has agreed to continue to lead the company as its CEO once the separation is complete.
So why do this now.
As we've discussed in the past we routinely perform a deep dive strategic review of the entire portfolio with our board of directors.
Our entire business has made tremendous progress over the past few years to become more focused on our value, creating strategies to drive excellence through a fortune brands advantaged capabilities and to repeatedly deliver results.
All businesses are performing at a high level with significant future opportunity to create further value for stakeholders.
This separation will give investors exposure to two high performing businesses with scale and favorable tailwind all enhancing strategic and management focus.
It is the logical next step in the fortune rent story.
Both companies are financially sound with exciting, but different strategic parties and with different value creation parts.
It is also important to note that all of the attractive characteristics and investors appreciate within our businesses today should be accentuated by driving increased value creation as we pursue a differentiation and a more focused way.
Within new Fortune brands expect best in class financial performance with above market growth and expanding industry, leading margins, Brandon innovation excellence and secular growth tailwind and digitally enabled products and platforms.
These strong tailwind will be further bolstered by increasing opportunities for inorganic growth in attractive categories.
And within cabinets expect the industry leader executing strategic transformation to drive growth and margin progression.
Our focused multi brand strategy to drive unmatched value creation, leveraging north America's largest dealer network and a flexible supply chain and lean expertise to drive operational excellence.
Specifically for cabinets, the ongoing enhancement and positioning of our business is market share leader has enabled it to stand on its own to pursue its growth and margin objectives without having to compete for capital and resources as part of a larger portfolio.
All of our associates feel motivated empowered to take the business's future into their own hands to create even more value in the years ahead.
The business today has never looked stronger or better positioned.
Our core set of fortune brands advantaged capabilities will be a common point for each of the new companies.
Each business Leverages these capabilities in different ways and cabinets will be able to continue with their internal efforts to drive efficiencies and create additional fuel for margin and investment prioritized to their needs.
Pursuing this strategy allows from Hans strategic and management focus and provides for the opportunity to pursue highly attractive diverging pause to value creation with fit for purpose strategies.
This will drive tailored efficient capital allocation for each business. It creates two exciting distinct investment opportunities for our investors.
Both companies will be well capitalized and able to pursue their growth and margin objectives are.
Our management team is developing detailed plans for boards further consideration and final approval and we expect the separation to be complete in approximately 12 months.
In summary, the proposed separation is consistent with our long history of building, great businesses and creating value for all stakeholders.
We're all very excited for the future and as I mentioned before our associates of both future companies should be excited as well.
For our customers channel partners and associates that will largely be business as usual, but with even more potential.
There's two strong independent companies are bright future will become even brighter.
Let's turn the call back to Dave to open the line for questions.
Thanks, Nick that concludes our prepared remarks on the first quarter and on the proposed transaction.
We will now begin taking a limited number of questions.
Since there may be a number of you who'd like to ask a question I'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. Please open the line for questions. Thank you.
Thank you at this time I would like to remind everyone that in order to ask a question you will need to press star one on your telephone.
Again, if he would like to ask a question you may need to pin star one on your telephone.
Our first question, we have Adam Baumgarten from Xiaomi, Adam Your line is open.
Hey, Congrats guys, Nick maybe to start could you go over the strategic rationale and maybe the timing of the separation or in a more detail.
Sure Adam I'd be happy to.
You know.
Why don't I, just start a little bit with timing and kind of why now and then touch on some of the strategic rationale.
But you sort of look at the businesses and you look at how we've been developing the strategy for each over the last couple of years.
You can see here with the lens of the fortune brands advantage here, we've really been driving your brands and innovation on one side of the portfolio very hard and the operational excellence on the other side of the portfolio and it is tied together by the fortune brands advantage in common set of capabilities.
But as we have driven that pretty hard and we've seen results coming back.
You could see two sides of the house really performing very very well, but with.
We have divergent strategy until you come to a point, where you know the business.
Both businesses are in really firm footing, performing well clear industry leaders.
And then the ads better over the last few years, we've built the management team's capabilities and scale to really allow cabinets to thrive as an independent entity.
And then you look at the backdrop of a fundamental tailwind, which are very strong for all of the businesses. We just felt that this was a point at which the businesses are really well positioned to succeed now and well into the future, yes, which increasingly divergent strategies. So we're really really excited that this is this is a great moment.
You know the strategy themselves fell a little bit more towards the first part of your question.
Look too.
Cabinets.
Owing to continue to build on this strong foundation.
And really accelerate its transformation that's been underway for the last two years to operational excellence as well as really differentiated capabilities around it.
Customer consumer experience and so leveraging the dealer network.
Lean capabilities innovations are driving that customer assures all key to that.
On the other side, new fortune brands really focused on bringing branded innovation excellence to supercharged categories.
Inside of home security and building products right. So areas like water management outdoor living material conversion in science and connected products.
And so you were very specific focus there and leveraging the capabilities like brand management innovation digital leadership.
<unk> leadership, and then a personal lines of M&A on top of that.
We think we can drive.
It has already been a pretty phenomenal a returns profile, even harder and so timing makes sense strategy makes sense I think the investment profile for investors will be very attractive for both businesses and makes sense.
Where I got to tell you just incredibly excited and incredibly proud to be at a point, where we can take this next step in the Fortune Bank story.
Great. Thanks, and then I guess my second question would be probably for Pat but is there any change from last quarter and how we should think about the flow of earnings as we move throughout the year.
No I mean, I think a big part of what we're communicating is we're tracking to our full year guidance.
And we expect all parts of the portfolio to continue tracking to their individual parts of the guidance.
I think with some of the lockdown in China.
That will impact.
Water innovation sales during the second quarter, we would expect to recover some or all of that in the back half of the year.
But we're going to expect in.
In the second quarter.
The overall sales growth to be mid single digits with an O I around 15% and then the back half of the year, you're going to see mid single digits.
With a Y about 16 five.
Getting us to our 70 plus basis points for the year.
And in that second quarter, certainly water innovations could be flattish plus or minus depending on how China plays out.
But the team has.
As already been preparing to manage that situation and still stick with us.
23% Oi margin for the year and manage.
The impact of China throughout the year, we think.
Longer term, we're still bullish on.
The ability to create value in China, and we can manage the near term effects that but I would say.
While theres going to be.
Puts and takes with obviously, we took a little bit more price to handle inflation.
That price will go into the forecast.
Having cabinets and O&M towards the high side or their sales guidance.
China effect probably pulls.
Plumbing down towards the low side of its sales guidance, but the overall margin outlook and the overall result for the year being sound, we took EPS up to reflect appropriately.
Thoughtful capital allocation that we did in buying.
About 100 $405 million of shares net of incremental interest expense and tax rate.
Got it thanks, a lot best of luck.
Thank you.
Our next question, we have Susan Mcclary from Goldman Sachs. Susan Your line is open.
Thank you.
Good afternoon, everyone and congratulations on all the news in the quarter today.
Thank you.
My first question is I guess, when you think about the legacy 14 business that will be after this.
Transaction comes through can you talk a little bit about how you think around the strategy. There. Obviously, you know you'll have plumbing or water innovations, you'll have outdoors and security in there.
What will be the real focus areas within that anything that will change and I guess with that is there anything else that could be divested over time or maybe will change within the portfolio.
Sure I'd be happy to talk about that so you think about that portfolio right. There's points of commonality very powerful parts commonality across.
The portfolio and really at the highest level.
Brain management innovation under brand management like everything from marketing to pricing.
<unk>.
Management of the shelf and category Alright, and those are.
Very powerful drivers of what will be the new fortune brands portfolio, and they really sort of a ladder back to where competitive advantage. It's something we've been working on for a few years and so you think about.
<unk>.
Flexi reduction so that we can drive more innovation through.
<unk> global supply chain management, it's going to be less sort of heavy.
Heavy domestic manufacturing more balanced with our global supply chain management.
And then finally category management, which is really understanding where the consumer is how to build the shelf had a innovation consumer et cetera, those spiritually true across.
The entire portfolio.
And the exposure to what we're calling a supercharged categories, whether they be in water or out door living.
Or connected products.
Are driven by very very similar drivers of kind of brand innovation and technology and so what we really wanted to do is accelerate our central investment behind Fortune brands advantage.
<unk> Digital Inc.
Investments that were making.
Which do require scale to really drive.
And use that to.
Take this portfolio, which is already performing at a very high level and accelerated even further and so I think against that backdrop.
And a pretty consistent strategy, we will then see.
More.
M&A opportunities.
If anything I think we'll be adding to that portfolio and using the central capability that we're building and they tend to go deeper on driving even even harder and faster.
Okay, that's great color. Thank you.
My second question is water innovations had a very very impressive margin this quarter. Despite all the headwinds and you know obviously the moving parts in there can you talk a little bit about what drove that and how we should be thinking about the cadence going forward. I know you kept your guide for the year is still around that 20.
3% for the segment, but given where you are coming into.
This year is there the potential for maybe some further upside there.
Yes.
The business I think deserves a lot of credit for being able to manage that high margin across a lot of conditions, because they still invested in brand and digital transformation. This first quarter and delivered a 23% margins as they've been.
At the forefront of driving cost improvement and pricing in the industry.
While maintaining investments for future growth, both in brand and technology and so the team has done a great job I think sue for the for the year we're targeting.
23%.
Is there a chance of upside there yes.
We'll see how the situation in China plays out the team is really focused on delivering the oi dollars and the margin percent irrespective of that.
And from.
Our forecasting and planning perspective, I would expect us to be bouncing around 23% per quarter, plus or minus 50 bps in any given quarter.
Okay, Alright, thank you very much and good luck with everything.
Thank you.
And for our next question, we have Stephen Kim from Evercore ISI Stephen Your line is open.
Thanks, very much guys lots to talk about.
Let's start with the separation announcement I guess, you talked about maybe some divergent past the value enhancement I know you've talked a little bit of additionally on that but I was specifically wondering if you could talk about maybe differences that we might expect between the two in terms of optum.
Optimal leverage capex needs.
I get the sense capital allocation priorities will be different with the new fortune brands, a little bit more focused on M&A opportunities. So maybe you can just give us a little bit of color about what youre thinking in terms of differences along those lines.
Yes.
First Steven and then hand over to Pat can add a little bit more.
But you think about is just back up for a second if you think about these.
Strategies that were sitting under.
Fortune brands advantage umbrella, but one that was just increasingly about really driving operational excellence and I think the team of cabinets have been proving that out I mean, two years of just incredible headwinds and yet they put up this just market beating performance.
When you kind of Peel, the onion, a little bit of what's under that is just your eye wateringly good and art.
Just kind of getting started on that journey between that.
The performance of putting up you'll see that happen. This year and then as we describe it further kind of their plans.
A lot of value to be created through their strategy really first driven by business transformation simplification, leading into the ability to drive that manufacturing excellence.
That is one one set of strategies on the other hand, you a brand and innovation, which is going to set.
Investment priority, that's going to be more around further dollars into innovation.
R&D capability and material science digital will play a very big part of that and so all of those.
I think exist today under the umbrella, we havent starved any of our businesses have investment, but this will allow them I think to push harder and faster and in a more focused way.
Against the opportunity set that sit there for each business. So I'm at the patent you could talk a little bit about just how we're thinking about.
Leverage capex in either setting these businesses up to be really healthy going forward.
Steven.
First of all I'd remind you that worse or initiating this from a position of strength to all the businesses are performing well, they're all on our margin journey in achieving that margin journey.
Our annual cash flow generation is usually two to three X what.
Our internal Capex and other investment needs are and we would expect that to continue where the businesses are putting out way more cash than they need for organic growth and capex. Our capex outlook is unchanged by this announcement.
The capex that we're investing in the business because of strategies or staying the same for the for the biggest businesses in the near medium term.
There are a number of of capital structure considerations would come with the transaction like this you know I think for clarity.
We expect no change to the current fortune brands home and security dividend a dividend policy, which is.
28 cents a share per quarter, we expect that to continue.
We expect both companies upon the spin.
Have sound capital structures that allow them the flexibility to manage the current macro environment and to invest for growth organically and inorganically.
We expect the fortune brands' ability.
The ability to support its current credit quality to persist.
For sure both during.
And after the spin and we'll decide as we get farther down the road.
Final capital structure for the cabinets business, which we expect would be sound and there would probably be a one time.
Dividend from cabinet to fortune brands, but.
At a leverage ratio that still allows the cabotage business.
Our flexibility to navigate the macro environment and invest for growth that business is setup to succeed.
We expect and are going to help it succeed.
So I don't see.
Very big changes in the way, we're managing our capital structure, but each business will have a separate cash capital structure that is appropriate upon spin.
Okay. Yeah. That's helpful. Thanks, Thanks, guys second.
Second question you made a I thought I heard you mentioned that maybe supply chains have started to improve.
I'm just not sure I heard that right I just wanted to see if you could elaborate a little bit on that.
Sure I'd be happy to give a little bit of color.
A couple of things we saw in the quarter.
Firstly I would say as we started the quarter out January and February were pretty tough from an absenteeism standpoint in a number of pockets in the business, particularly in doors and cabinets.
We saw those rates radically improve as we move and moved into March in that state. So that's been pretty positive.
Seems to be largely COVID-19 , driven whether it's that people are just getting to a point, where there's a degree of comfort with living with it or whether in our rates really better in communities.
But that has been really key second point, we've talked a fair amount about.
Logistics availability, particularly kind of.
Nir.
Sure logistics and we saw that he's trucking.
He's a little bit.
In the latter part of the quarter and that has sustained that's been positive.
Then the third one I'd call out is we did see trans Pacific Ocean freight ease and we saw a number.
Our suppliers being able to supply us at a more rapid rate.
The quarter, which was a really healthy improvement as well as.
Our shipping rates improve as a consequence of us being able to get more of that contracted rate onto the ocean as opposed to.
Having to push spot through and so all of those are positive indicators, we're watching from a supply chain perspective, the situation in China very carefully to make sure that it doesn't go the other way and that there isn't any further interruption.
But we bought that supply chain very carefully with fair amount of redundancy in it and to date.
We've not seen any interruption and if anything we've kind of doubled down on some safety stock just to ensure that we would be covered.
Of an interruption. So after the last two years I would say cautiously optimistic about calling any supply chain easing it's been it's been.
Unbelievable two years, but it was good to finally see some easing as we as we got through the quarter and Thats you hope through this month.
Yeah, absolutely. Thanks, very much guys, yes. Thank you.
For our next question, we have seen Inc. From Jefferies. Your line is open.
Hey, guys.
Good quarter.
Nikita EQECAT alluded today, certainly the business is holding up really good but certainly some concerns consumer could be a little softer given all the inflation that's out there.
Can you remind us how much line of sight do you have in your business and any color on any change in order patterns, especially some of the bigger ticket categories and any color on the channel side as well.
Yeah, absolutely I'd be happy too so.
We got we.
We've got pretty good line of sight.
I'd say, it's kind of as broad as anyone in the industry.
And as we've really built out our digital capabilities under the porch brings a bunch, which we've really enhanced that light of sight. So we actually have a data lake it gives us.
Why.
Across most of the retail.
Universe, plus others that report pass through to Us and we can see that down to category store region, et cetera, and slice and dice, it any which way.
And then obviously your line of sight to degree into into wholesale and of course, its ecommerce as well and your bottom line is the consumer has been unbelievably resilient.
We.
Came in I think a little bit cautious about the lack of what was a giant stimulus injection.
The economy. This time last year and if you look at the weekly and monthly.
Pos consumption rate I'd say ultimately, there's probably the most important data point to answer your question that you're asking.
It's kind of tracking dollar for dollar.
With last year.
The benefit of that stimulus right and we're seeing that weekly dollar rate grow as it should seasonally and so I'm kind of answering your question for US are we going to see a big drop off as we lap that and to date, we haven't and so a lot of consumer resilience.
I noted in my prepared remarks.
Continuing to even see it through consumer insight data like Google searches being up.
40% to 50% versus pre COVID-19 , depending on the category.
Or it was 67% of consumers say, they intend to spending more in remodeling now than they did.
Pre COVID-19 notwithstanding.
The effect of affordability tightened and so still really strong consumer.
Wholesale.
There's also continued to be strong inventory of backlogs have evened out in a more balanced I would say a little down.
Certain places and so.
We expect that to continue to have strong pull through particularly when you look at builder backlogs, which are pretty significant.
Bill digital reporting at a very strong interest in <unk>.
Driving that so.
All around here, we keep probing it as you just did with your question around any consumer softness, but have not seen any yet.
It really seems to be very strong consumer interest.
In home and home renovation home purchase.
Have you seen that through the insight work through actual Pos that we pulled out of our data lake and with our partners.
Just showing itself to be very robust.
Great color, Nick and then from a margin standpoint, it was a little lighter in outdoor living can you expand on what's driving that and how that kind of plays out through the course of the year and then I guess bigger picture certainly we're seeing pretty broad based inflation, maybe Pat gave us some color on how you were thinking about inflation coming of the year versus now and then from a.
Pricing standpoint, how should we think about what's embedded in your guidance because I think your full year guide last quarter.
The way you kind of characterize it was mostly price and more flattish volume. So just any color how to think about those components as well.
So yes the quarter overall.
At 13% roughly in line with what.
We expected in our plan for the quarter as is the 15% we're targeting for the second quarter.
You're I think understandably noticing a lighter outdoors and security as Nick said.
That was a business, particularly hard hit.
Doors.
And that game, just like our cabinets business with a lot of absenteeism in January and February because of Covid.
And also during that period lots of freight inefficiency as we were trying to keep service levels up shipping.
Less than full truckloads, and so that that was a drag on the quarter.
A little bit better pricing and expense management to offset that but a lot of inefficiencies as Nick mentioned.
Knock on wood, the Covid, driven apps and T is something behind us So we really see.
Plant productivity and freight efficiency that means freighter fishing meeting ground freight outbound ground freight efficiency in the U S improving.
And right now we're at the point, where we're working through backlogs and we're getting the full price.
Coming on newer orders that.
We priced more originally so that's what gives us confidence.
We're seeing a very strong March and we shipped a lot in March.
And so we have confidence in our margin progression for the year I mean, as we said.
When we gave our initial guide in the Q&A in the last call our full year sales guidance of five 5% to seven 5% is still our guide and as we said then.
For the full year and for virtually every quarter and the year that growth is going to be predominantly price with volumes roughly flat and I would tell you Phil that's still where we are today, that's where the first quarter.
That was that's what we're expecting in the second quarter and Thats what were expecting for the balance of the year.
When we think about.
Inflation and price and cost improvement for the year.
We're expecting.
Material.
And.
Freight inflation.
Around.
$450 million for the year at the full year number on material and freight and that's about 9% to 10% of inflation on 'twenty one card.
There's maybe about another $50 million or so of labor inflation in there.
And then between continuous cost improvement.
Pricing in the year are probably going to be seeing something north of $600 million on the two of them by that's what's going to be necessary to drive not just coverage of the price, but to contribute to margin accretion through the balance of the year and.
That's up a bit from a price and inflation from where we were.
But.
We were we had a pretty heady assumption going into the year.
We carried in it was as I said, our full year inflation of $4 50, we carried about $350 million of that and just from the fourth quarter of last year.
Super Thanks, a lot <unk> color.
Our next question, we have Truman Patterson from Wolfe Research your.
Your line is open.
Hey, good afternoon, everyone. Thanks for taking my questions. So.
First just wanted to dive into cabinets I've heard of some some negative channel checks out there, but I'm, hoping you can.
To discuss a little bit further of your demand outlook, what you're seeing in the backlog if it remains healthy and then finally on the margin front.
Could you maybe elaborate on how the structure of your business might be different than some of the smaller peers in the industry or any internal initiatives that are maybe hoping you can navigate this inflationary environment a bit better.
Sure, let me I'll give some perspective.
Sure Paul jump in as well.
I would tell you from a demand and channel perspective, certainly what we're seeing is some pretty continued strength and we've talked about.
The stock.
Stock part of the cabinet.
Double digit growth and then.
Mid single digit for the make to order part of the business and I think that's continued to be true we've actually seen some picking up on the premium end and so you sort of got this effect, where you've got the value and performing very well the premium and performing very well and in some some good performance around the middle and so.
From our perspective, we continue to see consumers really leaning in.
So I'm not sure.
The channel checks, you might be seeing supply driven or for others, but we're.
Were not significant.
Sorry, yes.
Those weren't.
Channel checks per se, but.
I think investors have been hearing of some of those but could you, possibly just elaborate on the structure of your business.
That's fair.
That's what I'm gonna grow chairman, which is maybe it might be that the structure and the supply chain are leading to a differentiated result for our cabinets business and if so stepping back and I touched on that a little bit with the strategy.
Is that the team has really been driving business transformation strategy around simplification of the portfolio <unk>.
Communization and ability to leverage that into manufacturing excellence and so as these challenges that come our way of late we've really been able to leverage. The fact that we have a simpler portfolio and scale to secure what it is we needed to keep our service levels really high now at times, it's been very.
<unk>, particularly the higher you go up the price spectrum no more complexity there is.
But even there.
Massively.
Improved over the last few months and then at the stock and I mean, that's.
It's performed really well and the teams outperformed by far and so it's really been that differentiated strategy and ability to execute with scale and I think has led to.
The high service levels, which in turn to probably lead to superior performance in the market, which is why we're not necessarily.
Negativity I think we're able to supply and able to supply is needed now of note and what's interesting is I will tell you that while the team has progressed immensely over the last couple of years there is.
Plenty of room to go in that strategy right and so we've taken a lot of complexity out of the business. There is a lot more to come and then as they get that that's going to permit them to really press on.
On a differentiated.
The end customer experience that will set them even further apart.
Using the scale.
To drive.
Simplification and a better experience.
And I think thats, what youre seeing in the numbers now that are really driving the performance, but a lot yet to come.
Yeah, and I'd add our guidance of cabinets for the year.
What we gave at the end of last quarter was four.
One 5% to six 5% sales growth.
And 11% to 12% margin performance on a full year those are full year numbers.
I would tell you Kevin is tracking towards the high side of that guidance.
And.
Seeing kind of that kind of a margin run rate as they were coming out of the back part of.
First quarter so.
So to Nick's point, they've done the team there deserves a lot of credit and Thats one of the reasons why the timing now is appropriate as they've they've set the business up for long term success. There is more room to go but they're driving commonality of chassis and components to get procurement scale and simplification in man.
The factoring and then they've also combined.
The appropriate part of naphtha plus.
And Asian footprint to get the best cost structure.
In the marketplace. So there's a lot going rate for that business and that's why we're very proud of it and very excited about its future.
Okay. Okay. Thanks for that and then a final one for me just on that $450 million inflation number any way you could help us think through it.
By segment and then.
With all of this pricing that you all have been pushing are you seeing any mix trade down at all in any product category.
Sure why don't I'll start with the pricing question, which is short answer no.
The consumer has been remarkably resilient around it and I think it's if.
If anything spoken to the pricing power.
All of our brands and our positions and so it has been a lot of price it's been driven through all of the businesses to offset the inflation that has come our way and we've worked very hard driving continuous improvement to the extent, we can as well.
But in short answer no to consumers continue to be there and the businesses are seeing a lot of demand.
In certain parts of the business, even where I would say we've had some of our highest <unk>.
Pricing moves were still completely sold out.
And producing everything we can and so.
As we think forward.
<unk>.
The ability to.
Have pricing power and have brands that consumers want and innovation that people want and are willing to trade up for will be a big part of the strategy.
I don't know if you want to talk a little bit too and we were sure. When we do we don't really break out.
The.
Inflation in price by segment for a number of reasons.
But.
I would say just because the dollars of cod.
Or a little more heavily weighted towards water innovation.
Dollars of inflation or a little bit more weighted by that.
Just because there's a lot of valuable metal in those products and that tracks it but I would say all of the businesses are seeing a similar order of magnitude of inflation. When you talk about percentage of their costs.
And they're all having to take about the same order of magnitude of cost improvement and pricing actions to fight it.
Alright, Thank you all.
Thank you.
Thank you for joining today's conference you may now disconnect.
Thank you.
Okay.
Okay.
Yes.
Okay.
[music].
Yes.
Okay.
Yeah.
Okay.
Sure.
[music].
Yes.
Okay.
Sure.
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.
<unk>.
Yes.
[music].
Okay.