Q2 2019 Earnings Call
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key. Thank you I would like to turn the call over to Mr., Brian Lantz Senior Vice President of Communications and Corporate Administration, you May begin your conference call.
Good afternoon, everyone and welcome to the Fortune brands home and security quarterly Investor Conference call and webcast. We are pleased to be here today to provide an update on our progress during the second quarter 2019.
Hopefully everyone has had a chance to review the news release issued earlier the news release and the audio replay of the webcast of this call can be found in the Investor section of our <unk> Phs Dot com website.
I want to remind everyone that the forward looking statements we make on the call today either in our prepared remarks were in the associated question and answer session.
Based on current expectations and a 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 FCC such as our annual report on 10-K.
The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made.
Any references to operating profit earnings per share or cash flow on today's call will focus on our results when it before charges and gains basis for continuing operations with the exception of cash flow unless otherwise specified.
With me on the call today are Chris Klein, our Chief Executive Officer.
Nick I think our president and Chief operating officer, and Pat how one that our chief financial Officer.
Following our prepared remarks with allow some time to address questions that you may have.
I will now turn the call over to Chris.
Thank you, Brian and thanks to everyone for joining us today.
In the second quarter, our teams continued to execute at a high level in a soft market.
I'm proud of the progress we have made particularly in a market that looks as if it will now grow only in the 2% to 2.5% range in 2019.
Although we anticipated a soft first half market the market overall was softer than we expected in the second quarter, particularly in Canada.
Despite the market, we're making solid progress on the business plans, we communicated in February which are centered on delivering shareholder value even through periods of more moderate market growth.
We have shown great discipline on capital expenses and I'm very pleased with our progress through the first half of the year.
But continuing to manage our business as tightly with investments focused only on those areas needed to support new business and growth.
We put ourselves in a solid position to grow in the second half of the year and into 2020.
As the market begins to Reaccelerate.
So the first take you through our updated view of the us home products market.
Next I will provide my perspective on our business performance in the second quarter.
The next thing, our president and Chief operating officer, and provide some insights into how we are driving our businesses for growth and performance improvement.
So by parents, who will provide more details on our second quarter and 2019 outlook.
Starting with our updated view of the U.S. one products market.
In the second quarter the market for home products was softer than came in below even a moderate pace we have planned for.
We estimate that the market for our products grew below 2% for the quarter with the repair and remodel market growing around 3%.
The construction spending and our product categories was approximately flat.
As our business typically lags starts activity by a quarter or so.
And we continue to feel some impact from weak industry performance at the start of the year.
In terms of the quarter, we started off as in April that was in line with our weaker outlook.
Followed by a very wet and talk to me.
June orders were an improvement from the trend, but overall the market in the second quarter for our products was weaker than expected.
We are now seeing some signs of the building season, extending out later in the year and see indicators of stronger consumer demand for housing.
Order rates have been healthier late June and into July and while the slow ramp up we are seeing now is when we would have expected to see back in late April and May the data is pointing to a modest pickup in market growth in the second half of 2019.
Slower ramp up than building product demand will only begin to show up in our results later in the third quarter and should primarily benefit the fourth quarter and set us up for a solid start in 2020.
Now, let me provide some perspective on our business performance in the second quarter.
The second quarter sales increased 5% in total is 6% excluding the effects.
On the top line, we performed well given the market, particularly outside of Canada, where the market continued to trend lower in the period.
Total company sales growth, excluding Canada was up 7%.
Total company operating margin was 14.1%.
This was a solid result in light of the softer market.
Continued tariffs at the 25% level.
The investments, we are making related to our cabinet business, mostly in Mexico.
An incremental expense to support the additional capacity indoors in fiber.
Overall, our performance in the quarter was driven by a tough posture on cost management as we work to offset the market.
Solid growth and margins importantly, and strong sales of Italian cabinets were offset by weaker trends and make to order cabinets and the impact from wet weather on our doors and ducky outdoor product lines.
Despite the headwinds we continue to be aggressive with our cost controls and our pricing and supply chain actions are working to offset tariffs and other inflation.
Now turning to the segments beginning with plumbing.
The global Plumbing group continued to outperform the market with sales growth, excluding FX of over 6%.
And margin at 22.6% in the quarter.
Growth was driven by both market Pos in the U.S. and continued strong growth in China, as we expand our product offerings and take share.
Continued strong performance in our core markets more than offset the weakness in Canada.
Our sales were down low double digits, excluding FX.
In cabinets import encouraged by the continued progress our team is making it pivoting the business toward growth.
Sales in the targeted value part of the market, which is now approaching 50% of our total business were up low double digits in the quarter and above our expectations. As we continue to have success here and take share with our stock products.
Sales of semi custom made to order cabinets contracted in the high single digit range.
Which is in part the result of our own success in driving simpler high margin product solutions to meet the changing consumer demand.
Overall, the trend is as we thought and we're accelerating some pivot actions in response to a faster transition market.
Including ramping up additional stock capacity in Mexico is our credit facilities are already stretched the womens.
And taking more aggressive cost actions by technique capacity in the semi custom business.
Margin performance in light of all of our actions is encouraging.
As we navigate a near term drag on efficiency due to large scale changes, we're making to the business and the supply chains in the midst of a soft market.
Along with some new product launch expenses.
Well overall cabinet sales were flat in a market that we believe was also flat in the quarter.
It is clear that we're on the right track as we continue pivoting the cabinet business towards growth markets and reduce the cost and capacity of serving weaker segments of the market.
Their doors and security segment sales were up 19% and flat excluding fiber.
In this group.
Stores continued to perform well given the softer new construction environment and a challenging comp from last year's retail program wins and inventory loaded.
Syndicate, we've been leveraging our unique therma, tru distribution strength and reputation for quality and service to attract new and existing customers to fiber on.
Due to our recent program wins, we're accelerating investment in the second half of this year to capitalize on growth opportunities that will begin to be realized in the fourth quarter and more significantly into 2020.
Added security our Master lock brand is back on track.
On the strength of significantly improved product quality and service levels. Following the big product change over last summer.
Overall, we continue to execute on the plans across the businesses for profitable growth and a modestly growing housing market that we highlighted at our February investor day.
And I'm pleased with our progress.
A little market. So far this year is picking up later than we would have expected our businesses continued to execute at a high level and consumers are responding favorably to our brands and other product initiatives across our categories.
So while the softer market and slower ramp in housing activity. This year pumps, a reduction to the high end of our full year 2019, EPS outlook I'm encouraged by our performance and the continued strong fundamentals underpinning our market given prevailing low interest rates.
Moderating new and existing home prices and continued strong consumer jobs in which data.
The impact of the aggressive actions, we are taking it across the company to position ourselves for growth will be better reflected in our financials as we move into the fourth quarter.
Before I wrap up let me return to our capital deployment in the quarter and our broader plan to create long term incremental value.
Year to date through July we spent $50 million on share repurchases or about 1.1 million shares at an average price of $47.
We plan to continue to use share repurchases opportunistically as a vehicle to generate attractive returns consistent with prior practice.
We also continue to evaluate our pipeline of potential acquisitions.
Any potential acquisitions in the balance of the year are more likely to be bolt on opportunities within our core business categories.
Focused on plumbing and outdoor living.
While we continue to evaluate select larger acquisition opportunities.
Soldiers of larger companies for the most part appear to be waiting, which could change next year when the market Reaccelerates.
With our strong cash flow and balance sheet, we continue to have the capacity and flexibility to make strategic acquisitions.
Repurchase additional shares.
And increase our dividend to create meaningful incremental shareholder value.
Well still deleveraging naturally over time.
As a reminder over the next three years, we continue to believe that we have the potential to deploy an additional $3 billion to drive incremental growth and shareholder value.
Now I'd like to turn the call over to Nick will provide more detail on how we're driving performance across the segment.
That's gross.
Good afternoon, everyone.
[laughter] March I'll be working closely with the operating teams to execute on the players we highlighted at our Investor day.
To deliver long term shareholder value.
By driving unique strategies for profitable growth.
All in the backdrop of a modestly growing U.S. housing market.
Our actions are driving significant improvements across the company.
And our positioning us to capture more predictable growth as we head into the back off of the year and 2020.
As I work with the teams across our businesses have impressed with the aggressive actions we are taking specifically.
The ongoing steps, we're taking to build up the brand's capabilities product portfolio and partnerships in our global plumbing group. So it continues to leverage its competitive advantages and lead the industry from both the sales growth and margin perspective.
The permitting of our cabinets business towards innovative products at value price points.
Primarily through the expansion capacity in Mexico to support growing sales in stock cabinets that are running ahead of projections.
Orchard Mattera, our entry price point product for the dealer channel.
Hi, good reducing fixed cost and capacity in semi custom.
So the reposition the business creates more value in the face of changing consumer tastes and competitive threats.
Indoors and security.
The targeted smart investments that we're making in the business such as in Therma, Tru, where we're making incremental investments to support new product launches and our continued investment in Fiberlan zero tear 100% made in the USA business that uses 94% recycled content in this metric.
Like temperature this business benefits from accelerating trend towards performance materials and material conversion away from wood plus the opportunity to grow significantly in tow for which we already have a strong presence.
And finally, the competitive repositioning across our company.
Okay oversupply turns out of China, which helps us for sure low cost to supply for our efficient and more automated manufacturing as well as mitigate the impact of Paris.
About 10 months ago, as we announced the acquisition of Fiberlan, we detailed plans to leverage our existing relationships and strong therma Tru distribution in order to grow in the outdoor living segment of the market.
Since that time, we've added significant multistate distributors, including rule across the northeast.
And weeks building products across the upper Midwest.
Last week, we note that the vibrancy is set to expand distribution significantly.
The west in the southwest with the addition of Orbotech building products.
Corpak is a best in class large wholesale distributor and existing therma Tru customer, whose partnership has been instrumental to our western Europe's growth.
Our stores.
We're looking forward to deepening relationship with Orpic through the addition of fiber as both of our companies seek additional opportunities for growth in outdoor living.
In addition to these segments specific initiatives. We're also working harder across the company to better leverage common customer distribution opportunities ecommerce expansion initiatives connected home product innovations and stronger scale driven indirect spending initiatives.
In summary, so I've been in my role a short time, but I've seen so far as exciting and our planning and execution remain solid.
I see many opportunities for profitable growth across these businesses, which position us well to continue to outperform the market and our competition.
With that I will turn the call over to Pat.
Thanks, Nick.
As Brian mentioned to best reflect ongoing business performance.
The majority of my comments will focus on income before charges and gains from continuing operations.
Let me start with our second quarter results.
Sales were 1.5 billion up 5% from a year ago, and 1% on an organic basis, excluding fiber on.
Consolidated operating income for the quarter was $212 million up 1% or 3 million compared to the same quarter last year.
Total company operating margin was 14.1%.
We remain on track to achieve our goal of around 50 basis points of full year operating margin improvement despite a softer market and the increased tariff rate of 25% on inputs from China.
EPS were one dollar and three cents for the quarter versus the dollar the same quarter last year, an increase of 3%.
EPS were inline with our expectation and we are pleased by our team's continued ability to grow sales and earnings during a period of softer market growth.
The persistence of a challenging trading environment, and while navigating significant supply chain transitions within most of our businesses.
Now, let me provide more color on segment results.
Beginning with plumbing.
Sales for the second quarter were $506 million.
Up $22 million or 5%.
And Mark the first half billion dollar quarter employment history.
Excluding currency sales were up over 6% in the quarter, which was above our expectation given the 9% organic sales growth rate during the same period last year.
Mid single digit use Pos and continued strong growth in China drove the quarter.
With reported sales results muted by Canadian housing market weakness and unfavorable FX.
Plumbing operating income increased 13% to $114 million.
Operating margin was 22.6% an excellent result, driven by cost discipline and sales leverage in the us in China.
We continue to be on track with our full year outlook in plumbing with sales up in the mid to high single digit range and with operating margin around 21%.
Doors, and security sales were $366 million up $58 million or 19% from the prior year quarter driven by fiber on.
Sales in the base business were flat driven by doors, which was impacted by a soft second quarter us new construction market and having to comp the inventory loading associated with 2018 retail distribution gains, which drove 20% growth in the prior year quarter.
Operating income increased 5% to $50 million.
Income growth was muted by price the tariff flag and security that will be resolved during the second half.
Atypical doors mix associated with retail inventory rebalancing and a strong comp to last year.
And new capacity ramp up inefficiencies and doors in decking.
We remain on track to deliver high teen sales growth in the full year.
With segment operating margins of around 13.5% in 2019.
Driven by incremental distribution and capacity investments associated with fiber on distribution gains.
We expect our base Therma, Tru and master lock businesses to grow organic sales in the mid single digit range in 2019.
Turning to cabinets.
Sales for the second quarter were $635 million or roughly flat versus the prior year quarter.
Sales of stock cabinetry in the us were up 12%.
Including entry price point in stock product up mid teens and build a great product up mid single digits.
You make to order, Kevin Freesail, which include semi custom and premium products were down high single digits in Canada was down high teens.
Sales in the segments of the cabinet market to which we are pivoting our business grew stronger than expected as demand for simple Bath and kitchen remodel projects continues to be strong.
The successful launch of mantra, our new entry price point product for the dealer channel that Nick referred to earlier is on track to contribute materially to full year growth.
Operating income in the second quarter was $67 million down $14 million or 17% versus the prior year.
Operating margin was 10.6% and in line with our expectation for the quarter as we navigate temporary transitional inefficiencies associated with the pivot and new product launch specifically new facility ramp up costs and tariff associated with the safety stock as we complete an exit from Chinese wood products. This year.
For the full year, we expect cabinet sales growth in the low single digit range or roughly in line with the cabinet market full year margin is expected to be around 10%.
For the company to sum up consolidated second quarter performance sales increased 5%.
6% excluding FX.
And EPS were consistent with our plan at one dollarsthree.
Demonstrating our ability to execute and drive growth and strong margin in a slower market.
Our total company operating margin was 14.1%.
The financial discipline and expense control, we displayed in the first half will continue into the second half.
As we position ourselves to accelerate our financial performance in a gradually improving market.
Turning to the balance sheet.
Our June Thirtyth balance sheet remains solid with cash of $276 million.
Net debt of $2.1 billion and our net debt to EBITDA leverage is 2.4 times.
We continue to have the capacity and flexibility to fund potential acquisitions and share repurchases as we delever naturally during the second half of the year and overtime.
Year to date, we repurchased 1.1 million shares for approximately 50 million.
Our approach to share repurchases continues to be opportunistic and focused on where we can generate significant returns.
We have approximately 364 million remaining on our current share repurchase authorization.
Turning last to the details of our outlook for 2019.
As Chris mentioned, we adjusted the top end of our 2019 EPS outlook to reflect the softer market.
We now expect EPS within the range of $3.53 to $3.67.
Versus the prior range of 353 to 377 driven by the market.
And the incremental distribution and capacity investments associated with fiber on distribution gain.
We expect most of this EPS guidance revision to impact the third quarter.
Given the soft second quarter permits and starts in the U.S. and expected continued Canadian market softness.
The updated midpoint of 360 represents 8% EPS growth versus the prior year, we now expect full year sales growth of 5.5% to 6.5%.
Versus the prior range of 6% to 7.5%.
While the market is recovering more slowly than we initially anticipated.
We are encouraged by the improvement too and stability of demand drivers critical to the us housing market in particular housing affordability.
Employment and wage growth.
And by our business performance, specifically the momentum our plumbing business in the us in China.
The demand strength in the market segments to which we are pivoting our cabinet business.
And fiber on the distribution gains.
We expect 2019 free cash flow of approximately $480 million to $500 million, which include the accelerate investments in capacity in inventory to support new composite decking customers, we anticipate a cash conversion rate at or above 95%.
The annual EPS outlook includes the following assumptions.
Interest expense of around $94 million.
A tax rate between 25 and 26%.
An average fully diluted shares of approximately $142 million.
In summary, our businesses are executing well in a soft market and continuing to deliver a structural improvement that will better reflect as we move into the fourth quarter and next year.
During 2019, we anticipate our balanced approach of cost management supply chain changes and price will fully offset tariff and other inflation within the year, we will improve our overall margin by approximately 50 basis points.
And drive 5.5% to 6.5% sales growth or approximately 4% growth on an organic basis in a market growing 2% to 2.5%.
Our teams continue to execute well and manage expenses tightly while making rapid progress on our strategic initiatives.
I will now pass the call back to Chris for some closing remarks.
Before we begin the Q and a session. Let me build on pets closing comments and leave you with a few high level thoughts as well.
We are operating at a very intense level right now across our company transforming supply chains executing pricing actions simultaneously ramping up and taking down capacity to reposition businesses.
Launching innovation, expanding and growing categories and channels.
Integrating acquisitions and partnerships and winning new business.
Over the past nine months, we have been doing this in a decelerating market with tight controls on expenses and capital.
As we turn the corner and move into a gradually accelerating home products market in latter part of this year and into 2020.
We will see some significant leverage and an even higher degree of impact from all of the actions we've taken to position the business for the next wave of growth.
And while I'm pleased with our first half results I'm, even more excited about the growth and margin opportunities in front of us.
With that I will now pass the call back to Brian .
Thanks, Chris.
That concludes our prepared remarks in the second quarter of 2019.
We will now begin taking a limited number of questions. Since there maybe a number of you would like to ask the 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.
Thank you.
At this time I would like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad.
Again, if you have a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
We'll pause for just a moment to compile with you in a roster.
Your first question comes from the line of Tim Weiss from Baird. Your line is open.
Good good afternoon everybody.
So maybe just to start off first on the market.
I guess, you know I'm curious kind of what what you thought Q2 was was really representative of that is it.
Just kind of a delay from some of the weakening metrics that we've seen in housing over over the last couple of quarters or do you feel that just the underlying our market is maybe just a touch softer I'm just kind of curious if it's more of a timing issue in Europe and in your mind or if it's something that's maybe you had a great quarter, just maybe just a little less steep.
No I think.
Effectively the second quarter was was softer and delayed kind of re acceleration. We expected. We're seeing that now I think we lost a quarter along the way here. So I think where we would have expected the kind of activity that we're feeling right now in late April Mary.
Thats where were experiencing.
So that'll lead to we think a healthy fall building, both new construction and on our.
But weve incorporated that.
Net loss level of activity second quarter and slower ramp into the third quarter and what were guided.
I think the market still healthy if you look at overall demand.
Both for new construction, especially at the entry level point.
In our in our it's still strong there are parts of the country that was tough to do are in our work, especially outdoor on our work.
In late April in all major and not have to start picking up again until June so that impacted things like decking doors and other outdoor activities.
But we think that that's the three plus percent are in our growth for the year accelerating into kind of a normal quarter, 5% into next year I'm pretty healthy market.
Clearly that the existing housing stock turnover was little softer or the impact of lower rates will eventually help that has housing price.
Depreciation has moderated both in new construction or existing housing turnover. So all those things set up for a better second half and we think a pretty healthy market, we're not calling for an enormous acceleration here, we're calling for a modest acceleration into the second half and Thats, what our guidance as indicated.
So.
Okay. Okay, great. That's helpful. And then just maybe I'm curious your view just on yeah, Hello view on inventories I'm, just kind of what you're seeing with your customers you did note.
Pretty good Pos in plumbing and so just curious in some of your stock businesses. How you feel you're at your customer inventories look right now so all that ADESA.
Hey, Tim how are you.
Good you.
Okay, Yeah, I would say.
If you look across the inventories are pretty much cleaned up and in the first off I think as people were prudent and pulled back a fair amount.
So where we see it as pretty lean we're now tracking compared to last I would say that's been ahead.
Shipments restrict to feel encouraged about the underlying market and that pointed out for some really nice acceleration.
As it picks up we'll get some leverage off of our inventories coming back up.
Your next question comes from the line of Justin Spear from Zelman <unk> Associates. Your line is open.
Okay.
Hey, guys. Thank you.
Just a couple of questions one on they turn to the guidance revision.
How much how much U.S. estimate that revision was from tariffs and how much from slowing growth.
And with what apparently has a lift for tariff.
On the table, how should we think about that in the context of its guidance as well.
Jeff at.
No our guidance adjustment is virtually a 100% market driven we have adjusted our market outlook to two to two and a half verses.
The original two to four so roughly by 100 basis points.
And have adjusted our topline by roughly 100 basis points and we're flowing it through at a leverage rate of about 21%, which is consistent with the leverage we had for our full year plan and outlook. So the adjustment is really a market adjustment.
You know the range around it reflects a little bit of the timing uncertainty with some of the ore Pak distribution gains and when.
Inventories, you know will or won't flow into that new distributor, but that's really what's driving the change to our outlook in terms of the list for tariffs, which reemerge onto the radar screen. This afternoon. It's obviously something we've been tracking for a couple of years now we've been dealing with tariffs of one form or another consistently since 2017.
We've been attacking them very actively and aggressively with a balance balanced the cost.
Out and price approach.
The list for terrorists.
I'm sure there will be more emerging in the coming days in terms of specifics, but are tracking of them here to four is that anything coming out of lists for would be smaller than the Myles we've dealt with with list 123 and with plywood tariff.
We would expect to manage them as effectively as we manage previous tariffs weve.
In 2018, we offset.
Roughly 40 550 million worth of tariff expense in total inflation. This year, we'll have about $60 million of total tariff only inflation and will offset this year and navigate it.
There is no change to the guidance Thats driven with territorial the 25% tariff uptick on live three was three with something.
We obviously were aware could happen this year it came about probably a bit more abruptly than we would have thought of but we're dealing with it.
With cost out and with pricing.
Yes, I'd say just to echo what Pat said on our approach here, we've taken a very methodical balanced approach to move their supply chains.
And deemphasize, China, we think there is a long term trend and so we've been working on this in the last two or three years and then we've talked before about or incremental approach to pricing. So we take frequent smaller price increases.
And that combined with our supply too.
Changes have offset the tariffs and positioned us well in the market to continue to grow so we're competitive in our market. We're growing ahead of our market.
While at the same time offsetting the impact of the turns we think thats really competitively sound approach and we've had a lot of success.
Okay and one last follow up question from me if I can get sneak one in on the on the doors and security business, how much of a headwind to the margins from investments I don't know if you've got a pack that was from investments in the business versus the tariffs from the mix drag and in terms of the full year expectation just thinking about the phasing out of these new investments.
And then maybe the but the actual revenue benefit maybe help us think about how you think that phases in this year and next year.
Yeah, I would say.
Say that really weve tuned up the margin expectation on that business only slightly due to a bowl of some of the weather losses in decking, we don't fully expect to recover this year in some of the investments in decking, we expect to make at the end of the year. When we came out with our original guidance for that whole segment, we signaled roughly 100 basis points of margin improvement versus 18, which was roughly 14% and we'll be in that 13, and a half ish plus percent for that business. So call. It 50 basis points, but it's really driven by a weather softened a second quarter and some of the investments we're going to be both making in capacity and field field sales and marketing as we roll out some new distribution agreements going forward that segment in total should be tracking to 15 plus percent.
Over the next three years with the decking business.
Swimming along right at the average of the whole segment.
Thank you guys really appreciate it.
Your next question comes from the line of Mike Dahl from RBC capital markets. Your line is open.
Hi, Thanks for taking my questions.
My My first question is just around the cabinets business and understand the comments around.
The guide, but just specifically related to cabinets the scenario, where you guys as you've pivoted there have been some concerns about.
The ability to really ramp both growth and margin it was never going to be quite linear you had tough comps.
Here as well, but can you just give us a little more detail about what you're seeing that gives you confidence that.
Yeah. The plans that you had laid out and the Investor day are still.
We're still on track here.
Yeah, I'd say, we're pretty excited about where the cabinet business has gone in the first half of the year the stock value part of the market, which is now for us about half of our business grew 12% in the quarter. That's a much stronger than what we had anticipated and it's the success of our position in that market, we're taking share executing well that's not just in stock in the home centers. It's also through dealers. That's the builder market. So we're going to is accelerating faster the soft part of the market, which is a semi custom premium special order declined high single digits, which is consistent with where we think the market was overall, that's our plan right. So we called that out a couple of years ago that part of the market was decreasing that decrease in this softer market overall accelerated a bit so our reaction to that is we're investing more in capacity in Mexico, and then our D.A. system.
You asked to support that stock business, and we're moving even faster to take capacity out in the part of the market, that's not growing and not a semi custom part of the marketplace. So directionally everything is consistent with where we've been driving this business for the last two years.
In a very accelerated in the second quarter, and we think we'll continue to move into the second half.
One thing of note as you know we've talked a bit about the China imports, whether the impact of some of the tariffs that are already in place.
Or slowing that and we await the ruling or commerce and then on the anti dumping and you know we think that's beneficial as well so.
We've noted in the market that lesson that products coming into the market and that'll work its way.
In the most relevant is down the road. So I'd say everything we've laid out including every we talked about in the Investor day is in line I can look at it like a teeter totter, a little bit in the <unk> and the other part of the market that stock value part, a teeter totter to up a little bit more and they semi custom premium to your daughter down anymore and we've responded in kind and are accelerating so we're getting.
To our end state on a rapid pace and I like where we're positioned competitively in the market. So I think the margin or they're coming in at 10, six was consistent with our plan and where we're going to see the year. There wasn't efficiency in the second quarter. As you know, we're managing through port capacity down in Mexico, and carrying a little bit excess capacity in that semi custom premium is were speeding up the ramp there. So we're still going to come in you know, 10% at least on the margin side in cabinets and we're still going to come in positive in the low single digits on growth and that's I think better than the market overall, and we're positioned well for the future. So I think as you said to be kept its a little messy, but then there's been a little bit messy for a little while we're real comfortable with where we are managing it too so.
I think it was just an acceleration of those trends in this second quarter.
Hi, Thanks, Thanks for that comprehensive answer Chris that was.
Helpful. And then my second question, just if I, if I broaden out a bit.
Nick I think this year first time on the call you outlined in your prepared remarks, a number of different initiatives I think some of them have been underway. Some of them are newer just can you talk a little more about as you've gotten deeper into your new role.
One or a few of the initiatives that you highlighted where.
You'd look at those and really.
Point out some that are real needle movers and then what are some of the some of the other things that.
You've seen.
Over these past few months that maybe you do differently moving forward.
Sure happy to happy to talk about that I'll step back for a second just.
Say it being in this role and working or trial.
It's hard not to be excited about how our teams are executing across the businesses and the softer market.
While you're also.
Moving some really big growth initiatives Ford and making significant supply here.
You know.
If you look at all that happening and the results are delivering while they're really moving a big initiative.
[laughter] accelerate really prepared remark.
Right and so that's just a great backdrop for the lifetime with them on that but then as you mentioned. In addition, we're also working on a number of initiatives cross portion, but sorry for we're spending more time talking to customers together sharing insights we're leveraging the relationship that we have across business to open up new points of distribution in concert program.
We're also I think doing a better job leveraging our know how across the business and doing things like developing or e-commerce capabilities, which we grown up in different parts of the segment.
Geared towards different parts of the market that are very leverageable capabilities.
Same applies also for connected home products, we book that in different parts.
Security and plumbing those teams are now working more closely together to develop.
The next Gen products leveraging.
The capabilities that we've built.
The cost side. We're also working we're we're driving incremental value here by really leveraging our indirect spending power much better across the entire enterprise.
And then you put those against the backdrop of just working hard at the strategies articulated during our Investor day in Boston, which I think are proven to be spot on things working hard against codes that constantly looking for opportunities to enhance and accelerate those strategies. So a lot of time, there and then as we move through the strategic planning cycle. We're really working on you know what is the next horizon of growth. So you kind of sum all that together.
Really encouraging to have kind of really solid performance in stock market, while building on these initiatives, which set us up to accelerate really nice if the market picks up.
Okay, great. Thank you.
Your next question comes from the line of filling from Jefferies. Your line is open.
Hey, guys can you give us a sense, where you are with your price increases for the full 25% Terrace. The reason why I'm asking is because a competitor of yours reported it seemed like they saw a bigger lift on margins with.
Cost associated with the terrorist not really coming in later in the year and it got pricing now not sure. If your approach of smaller increases had an impact.
Phil at Oh, Yeah, there's a few areas, where we're working a price increases in all the 25% range, but our approach.
It's balanced and so we have better, whereas 25 was a potential outcome for the year.
We've been working across all of our businesses on a mic.
Cost and price and there's a few areas where people had some second half pricing coming in.
But it's not the only way, we're addressing the 25% tariff and consistent with our guidance at the beginning of the year and our guidance coming out of the first quarter were going to address inflation inclusive of terrorists with a mix of cost and price.
Total amount.
Inflation for the year inclusive of commodity inflation tariffs and.
Oh logistics is around 100 million and we'll address it was as I mentioned to balance cost and price approach by the end of the year.
Got it Okay. That's helpful color and just given the pivot given the success you've had in the pivot in cabinets.
How do you think if I heard you correctly, you're you're expecting growth or cabinet your cabinets business to track more in line with the market. So one did I hear you correctly I would've thought you know David would help you out paced market and given.
You know how strong the value side of things have been are you planning to make an even larger pivot going forward. Thanks.
Well, we're certainly accelerating the pivot as Chris was mentioning on.
Well prepared remarks and in some culinary response I think we've been surprised this year at both the strength in demand the other segments to which we're pivoting and the softness in the custom in semi custom arena. So we're we're pivoting a strongly or to address both of those dynamics.
We've said all along that our focus is first and foremost on driving margin improvement and growing with the market and that's still our strategy. We expect the cabinet market to be in the low single digits. This year and we expect our cabinet business to go 1% to 2%. This year somewhat is being muted by Canada, but we feel like that's broadly in line with the markets in which we play and we're going to be focused on margin improvement and we signal or both at the beginning of the year and on the second quarter call, which we usually don't try and signal too much quarterly guidance, we knew in the middle of the year, we'd be going through transitions as we ramped up new capacity in Mexico as we brought in a new entry price point product line in the dealer channel and as we transitioned a big chunk of supply chain out of China and had to address some inventory build associated with that so all those dynamics are coursing.
Through the margin in the middle of the year, it's in line with our expectations and a business that generated first half margins around 9.3% will generate back half margins and the 10 and a half 11% range and finished the year around 10.
And we've we've guided people to think of our cabinet progression more at half year increments setting quarterly increments and I would say that's going to be the case not just in fiscal 19, but even as we go through fiscal 2020.
Got it okay. Thanks a lot.
Your next question comes from the line of Michael Rehaut from JP Morgan Your line is open.
Thanks, Good afternoon, and thanks for taking my question.
First I just wanted to try and get a maybe a little bit of a finer point around.
I'm from a segment level, what's driving some of the changes in consolidated guidance because you know overall I believe you know when you think about the segment.
Topline guidance seems like you you reiterated.
Plumbing on the top line as well as doors and security you know maybe cabinets now up 1% to 2% maybe versus prior maybe a three to four we also to take it that you know in terms of just backing into the overall consolidated sales growth going down by about a point or so that.
You know in plumbing indoors and security that high teens growth for doors and security the mid to high single digits for plumbing, maybe that's skewing a little bit more to the lower end.
Oh, I mean, I know, Mike there's Ben.
Oh I just meant across all the segments, it's a bit less pronounced in plumbing, just because plumbing or compete in China and China has remained strong but I think you're generally in the right direction. I think you should think of cabinet for the full year in the 1% to 2% range. Your plumbing you should have in a 5.5% to 6.5% range and you know doors and security I would say you're in a 15 and a half or you know 16, and a half maybe 17% range, depending again on how some of the distribution gains play out.
And that's going to get you in the five and a half to six and a half range for the enterprise and total.
But it.
It's there's no single big adjustment in one chunk of the market I think we're acknowledging in the decking World, where do you have an ultra rainy second quarter, you don't get that back.
And plumbing doesn't adjust as much as maybe some of the others because it has china exposure, but other than that it's pretty much across the board.
That's a that's helpful. Thank so much Pat I guess secondly, just wanted to focusing on.
Yeah, some of the investment and you know the new distribution sign ups for the fiber on.
I'm, just trying to get a sense number one.
What type of drag that might represent on the doors and security segment in terms of the investment that's had what type of drag that might have been if it has had an impact on twoq you and you know the second half of the year and then Conversely, you know in terms of the new customer or distributor distributor sign up.
How should we think about what that impact how that might impact the segment's growth prospects for 2020.
Sure.
Happy to address and like the Fiberlan business, we've owned for I guess about 10 months now and when we bought the business. We said it was a very solid operating company, but you know they didn't have a strong presence at all and wholesale and didn't have a strong brand and could use some help on innovation.
In the last 10 months, we've done some extraordinary things are.
We have signed up a number of new distributors and really leveraging the therma Tru distribution system and so it's not just we announced one last week, which was insignificant, but if you take all the new business that we've contractually signed up in the last 10 months it ramps to to over $100 million incrementally on a business that we bought that'll that'll do about 200 million. This year. So so it's a 50% increase over the next three years so its massive.
As it sits here today, we are blown away with the success, we're having if I run it's a big deal. So we're having to put more capacity into support business out west some business in the east expansion of the product line and so you know, it's it's I'd say had modest impact in the second quarter, you'll have a little bit more impact in the second half I'm going to start ramping a lot of this product distribution coming out of the into the fourth quarter, but but more importantly in the 2020 and we'll give full detail of that when we get to 2020 guidance. But this is this is not incremental and kind of interesting. This is setting up to position us as we thought all along there's a really strong number two in the market. Overall, that's why we bought the business Weve had more success than we thought so I think that's kind of the general I don't know Pat going to give any more detail on the incremental impact to the context of you know I've said all along the best investments, we make with our capital.
Is into organic growth and I haven't seen this kind of a tremendous opportunity organic growth in our company a really long time. So every incremental dollar I can put into capacity in this market right now I'm going to vector into it and so to kind of have a little bit of a drag it's a great drag I love. It [laughter] I am hugely enthusiastic if you can't pick that up.
Yeah, I mean, you know Mike to put it in context for the year will spend an incremental mid single digit millions, but we're doing it to take a a $200 million business and make it a 300 million to our business in the course of three years and as I said, we would expect in that timeframe for it it'd be driving an NOI margin.
Ah north of 15% if not if not on the high side of that percentage range. So.
You know we feel like these are wise investments with short payback.
We've we've signed up some great channel partner, and we fully anticipate supporting them with capacity inventory field resources. So they can be successful.
That's great to hear and obviously these types of investments you've made in the past it played out very well so thanks for all the detail.
Sure.
Your next question comes from the line of Michael Ward from Nomura Instinet. Your line is open.
Hi, Thanks for taking my question.
I wanted to ask you about AD spending in plumbing in second quarter, just how it fair relative to your normal cadence and how that might look in the second half relative to the current run rate.
Sure.
AD spending in the second quarter for funding that was the question yes.
I don't know that I can say the number with precision you know all of our businesses have than.
Focusing their expenses thoughtfully and.
The plumbing business has been prioritizing innovation and AD spending on the the Herofive water campaign and you know we tend to be on a full year basis.
Spending in the tens of millions less than 50.
And there was nothing about the second quarter that was higher or lower than what we typically expected throughout the course of the year.
Yeah, what I will say, though about the here have been a broader campaign is it has driven some really impressive results.
Oh boy male and female consumers and so and we will continue to invest behind their campaign. It really is moving the needle, particularly vedran coupled with some of our innovation, which really drive holistically to support the brand and its reappraisals, you're kind of moving forward.
Okay and also you talked about the direct impact that you're managing well from tariff how are you thinking about the cumulative impact that's having on the consumer and how that might impact housing demand later this year and into next year.
Yeah, I think there is a limit on pricing you can push through and that's why we've taken a balanced approach over the last couple of years, both aggressively moving on supply chain and then incrementally taking price so that you're not overwhelming with consumer a win with big price increases I think our channel partners are taking an equally measured approach. So I think you know effectively we're kind of working through and you got a balance in terms of affordability as well with a lower interest rates. There is wage inflation, that's increasing so the consumer is taking home a bit more especially with the lower taxes. So in terms of overall affordability those metrics look a lot better this year than they did at this time last year and so I think you know we're we're moving through it I don't I don't think this latest round is going to have us toward a tipping point and I think for us in particular or we're going to remain very competitive given the measured pace that we've taken on pricing.
Great. Thank you.
Your final question comes from the line of John Lovallo from Bank of America. Your line is open.
Hey, guys. Thank you for squeezing me in here.
First question is you know there was a lot of talk about Canada on the call. Today I was curious if you see the market kind of in a similar light to what's going on in the us where some of the data on the new construction side at least in Canada seems to be improving a bit and if you think that you know, it's just a matter of a quarter or two before we start seeing a little bit of improvement on the on our side and then maybe along those same lines. If you could just help us kind of dimension.
The exposure you guys have to Canada in each of your segments.
Yeah, I'll just a macro part you know the Canadian government known back over a year or put in place some measures to to discourage foreign investment in the housing market and really try to suppress the bubble that they saw emerging especially some of the some of the hotter markets and and it's worked so they've been very effective.
Uh huh.
Taking the housing market down and so that'll that'll eventually I realize and so we'll see some signs of improvement there as it annualizes those actions. We're kinda looking for this kind of onetime actions to deflate the market. So we'll leave it for the balance of this year, but then it will stabilize as it annualizes and Pat you want to give anymore.
I mean, yeah, we have about 10% of our total enterprise exposed to Canada.
That that is driven a 15 to slightly more than 15 in plumbing and a little bit more than 10 in cabinets. So it's really driven by cabinet and plumbing and you know for plumbing. It. It's a big important market for US we have a very high share in that market are every bit as high as our U.S. share about higher and in cabinet, we participate, particularly in new construction and particularly in the western part and as Chris is mentioning.
You know their housing dynamic have have been slowed more with foreign buyers and natural resources in particular oil. So we don't read that Canadian market as a proxy for the U.S. market. They have their own set of dynamic I do think we'll start comping those are much more easily by the fourth quarter of this year, but I still expect them to be low growth in the fourth quarter and into next year and with a really tough in the third quarter, but I think Canada will work its way out of its housing.
A market situation based on how it navigates for buyers and based on the price of oil and other natural resources I think it's not analogous to the U.S.
Okay. That's helpful. And then maybe just one last one here you took the topline expectations in slightly and also the P.S. expectations I didn't hear anything on EBITDA was it was there any update there.
It's proportional yeah, we would have guided you to around 950 at the start of the year and nine Thirtyish now, but it's all proportional to the sales and EPS adjustment.
Got it thanks guys.
Thank you.
Thank you for joining.
Today's conference call.
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