Fortune Brands Home & Security, Inc.

Good evening. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to Fortune Brands' third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After 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 1 in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Thank you. I would like to turn the call over to Mr. Brian Lance, Senior Vice President of Communications and Corporate Administration. You may begin our conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Home and Security Third Quarter 2020 Investor Conference Call and Webcast. 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 FBHS.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session, are based on current expectations and 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 SEC, such as our annual report on 10-K and our most recent Form 10-Q. The company does not undertake any obligation to update or revise any forward-looking statements which speak only to the time at which they are made. 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-engaged basis unless otherwise specified. With me on the call today are Nick Fink, our Chief Executive Officer, and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions that you may have. I will now turn the call over to Nick for his remarks.

Thank you, Brian, and thanks to everyone for joining us today. We hope that you and your loved ones are all managing well and staying safe during these challenging times. In the quarter, total company sales increased 13% over the last year, and operating margin was up 90 basis points to 14.8%. This performance was the result of excellent operational execution in an accelerating market while still managing a pandemic environment and prioritizing our employees' safety. I'm extremely pleased with the strong sales and profit results that we delivered in the third quarter, which bolts upon an impressive year-to-date performance in the face of unprecedented challenges. Performance is strong across our businesses with our teams delivered and our efforts to keep our people safe. We're working hard to serve our customers' needs as the fundamentally strong housing market is accelerating further as consumers invest in the home. While we are delivering ahead of expectations this year, we're also making long-term investments in our brands, innovation, core capabilities, and supply chain capacity that will enable us to capture future opportunities and accelerate our share gains. I want to thank all of our dedicated team members who continue to work so hard to keep our people safe and our facilities operating. I am so proud of our teams who are not only caring for each other, but who are doing so while serving increasing demand for home products. In the third quarter, all of our businesses saw impressive double-digit growth, and we drove overall margin improvement for the company by leveraging efficiencies enacted since the second quarter, as well as delivering progress against our planned efficiency roadmap for the year. Our efficiency initiatives should create fuel for increased investment as we continue to improve the overall margin profile of Fortune Brains. We're ahead of our expectations on these efforts, which should accelerate share gains at higher margins over the next few years. Through our operational agility and strict focus on safety, we were able to generally serve our customers' needs, which resulted in significant share gains. In many cases, we invested heavily to keep customers supplied in this accelerating market. Our channel partners continue to coalesce around our strength, and those deepened partnerships are leading to further opportunities to grow profitably. Turning to the remainder of our remarks today, first, I will discuss what we are seeing in the home products market. I will then highlight key takeaways from our third quarter results as well as discuss our performance acceleration initiatives and how we expect to evolve over time. And then Pat will provide highlights on our financial results, balance sheet strength and liquidity, as well as thoughts around our future financial performance in this environment. Now turning to our view on the housing market. Our U.S. home products market is underpinned by robust fundamentals, including very favorable demographics, low inventory, and attractive affordability thanks to low mortgage rates. As noted on prior calls, we saw strong demand across the board in the first quarter. This was followed by very robust activity in open channels in the second quarter. It has been encouraging to us. but as other channels opened further in the third quarter, demand for our products continued to increase. In fact, we continued to see strong retail POS even as wholesale and builder activity bounced back from the second quarter shutdowns. Key consumer trends have been expedited by the pandemic, which appears to have accelerated the movement of the key millennial generation toward household formation, suburbanization, and investment in the home. These trends, which were already in place prior to the pandemic, should drive new construction, repair, and remodel demand, especially at the entry price point part of the market where there is a short supply of available homes for purchase. The current environment has also accelerated trends for the large baby boomer generation. We have long identified that more and more seniors prefer to thrive in place in their homes. We expect that the pandemic's disproportionate impact on senior living facilities will only add to this trend. Repair and remodel activity during the quarter remained elevated, as home purchasing activity was high and consumers focused on home improvement. Additionally, as more people work from home and entertain at home, they have reconfigured and upgraded their homes to accommodate an expanded set of needs. With existing housing sales accelerating and aged housing stock and U.S. homeowners sitting on near all-time highs in home equity levels, we expect that the R&R market should continue to benefit from these underlying tailwinds. The market for single-family new construction also remains fundamentally strong as inventory is low. Our advantage to exposure to new construction provides a tailwind to our growth with strong fundamentals such as high household formation, affordability, and current supply at or near record lows. We expect this momentum to persist over the next few years. We believe our advantage mix of exposure to the stable repair and remodel market combined with the torque of a strong housing construction market gives us an unparalleled opportunity to add long-term value for our stakeholders. We've demonstrated our ability to capture the upside afforded by new construction exposure and manage the downside if or when it materializes. Given the market fundamentals of very favorable demographics, low inventory, and aged housing stock, we see a very positive multi-year tailwind powering the U.S. housing market back to consistent mid-single-digit R&R growth and high single-digit single-family new construction growth. Consistent with our long history, we intend to outperform this market and continue to gain share. Based on our view of a sustaining positive backdrop for U.S. housing, we will continue to position Fortune Brains for long-term profitable growth. The current pandemic, while unwelcome, has served as a catalyst for the consumer to focus on the critical importance of the home, which has only emphasized and unlocked this fundamental housing market strength. With that market backdrop, some thoughts on the recent quarter. As I mentioned, total company sales increased 13% over the last year, and operating margin was up 90 basis points to 14.8%. This performance was the result of excellent operational execution in an accelerating market, while our team worked tirelessly to prioritize our employees' safety and our customers' needs while still managing a pandemic environment. This operational outperformance across the company is leading to accelerated share gains as we are being rewarded with additional opportunities as consumers gravitate to trusted brands and customers coalesce around the most dependable supplier partners. We drove solid margin accretion as we saw the early benefit of our efficiency efforts. Consistent with our strategy, a portion of those efficiency gains were used to invest in key strategic growth initiatives, including the mowing brain, decking capacity, and distribution rollout, and value price category capacity. We also continued to invest in common core competencies across our businesses, including innovation, category management, and global supply chain management. We are accelerating investments in our most critical priorities as we position the business for 2021 and beyond. Last quarter, I mentioned the Cross Fortune Brands initiatives that we're taking to create permanent efficiency in our business to free up additional funds for investment in our key priorities and to drive incremental margins. As you can see from our performance, the effects of margin accretion are being felt in our 2020 results with increasing margins both quarter over quarter and year over year for the total company. we continue to take permanent cost reductions in the quarter as we re-platform the company using a common set of capabilities and a unified approach to fuel growth and reset our base cost structure for the long term. Our teams have delivered ahead of expectations, but we are not going to rest on our laurels. We will continue to position our company to generate increasing value through sustainably higher top and bottom line performance while increasing investment in core strategic initiatives. Now, Let me turn to our individual businesses and how we're positioning to be even stronger long-term. Starting with funding. During the third quarter, our global funding group continued to outperform the global and U.S. markets, with third quarter sales up 15% compared to last year and operating margins of 20.8%. Strong double-digit growth in both U.S. retail and e-commerce and in China drove the quarter. This quarter, we continued to invest heavily in our brands and consumer-led innovation, We also incurred meaningful one-time costs for items such as air freight and employee recognition to meet the increasing needs of our customers. Even with the incremental investments and costs, we are on track to deliver approximately 22% operating margin for GPG in 2020. Investments for plumbing continue to deliver results. In addition to our continued share gains as North America's number one fossil brand, Mullen continued to record market-leading scores in brand awareness, purchase intent, and customer loyalty, particularly with our key millennial consumers. A global partner group's ability to pursue growth in both core and new segments keeps opening up new opportunity sets for this business to continue to outperform the market. Our sustained investment in newer channels, such as e-commerce and in untrend innovation, sets GPG up for long-term profitable growth. We also experienced solid growth in China in the third quarter. Moen continues to outperform its market through channel and category expansion, driving excellent leverage to the bottom line. The Chinese economy has stabilized quickly and is continuing to show strong support for housing. Turning to doors and security, sales increased 14% over this quarter last year, and operating margin increased by 190 basis points to 16.4%. These exceptional quarterly results were defined by operational outperformance in decking indoors and the return to growth through our suite of security products after COVID impacted second quarter. Importantly, our fiber on decking brand grew by over 40% in the quarter. It continues to benefit from our distribution wins and execution as we position the brand for long-term growth in a market fueled by trends in housing, outdoor living, and long-term material conversion from wood to higher-performing, eco-friendly recycled materials. The pandemic has accelerated consumers' focus on outdoor living, and we are seeing continued strong demand for our products. Our distribution winds and capacity expansion plans remain on track, and we have incremental capacity coming in the fourth quarter and through 2021. Sales indoors experienced strong growth as retail remained robust, and home builders accelerated activity that began in the second half of Q2 and continued through the summer months and into the fall. Both the wholesale and retail channels recorded double-digit growth in the quarter, The synergies in scale emerging from our shared wholesale channel distribution for doors and decking has been particularly advantageous to our growth. Turning to security, sales returned to a more normal mid-single-digit growth rate for the quarter, despite an expected softer back-to-school and commercial market. We're continuing to innovate in our security product lines with touchless and connected products for residential and commercial applications. Finally, turning to cabinets. In the third quarter, our cabinet's team delivered excellent performance as they outgrew a strong market and continued to deliver on our margin initiatives. This year, the business has demonstrated how a pivot plan can produce outperformance in vastly different market environments. After more than two years of aggressive repositioning, this business is now squarely centered on the heart of the market and has proven it can be defensible when the macro dictates, but can also go above market in times of strong activity with excellent leverage. Sales versus a year ago increased 11%, with value price products continuing to drive strong growth, while we saw improving trends in our make-to-order business. Operating margin expanded to 12.2%, an increase over the last year of 200-plus basis points. Strong demand in retail big bucks and further momentum in our advantage dealer network drove the results. Make-to-order showed stabilization in the quarter. It was up in September. Our initiatives are driving scale efficiency in our made-to-order operations through a commonization of key components, which is contributing nicely to our cabinet's business performance. Our team has been aggressive in capturing operational efficiencies across the operating platforms to drive our margin improvement, and while we've made progress, we have plans to capture more opportunities in the future. With our focus on value price point cabinets, we continue to gain share from both domestic players and from the absence of Chinese suppliers who have exited the market over the past few months or have been replaced to a lesser extent with other importers with higher costs and longer lead times. While we saw imports increase from certain Southeast Asian countries, they are well below 2018 highs and, more importantly, are at a higher cost and come with longer lead times than the directly subsidized Chinese cabinetry that was in the market prior to the anti-dumping case. Our low-cost country supply chain is equipped to compete in this environment, and we are winning share on a more even playing field. We are well on our journey to drive this business towards a long-term goal of mid-teens margins. We have the ability to not only grow value cabinets at above market, but expect to do so at higher margins. Our performance initiatives across our make-to-order business are delivering and we are being rewarded with incremental business from Advantage Dealer Network. We continue to further optimize operations and add more network flexibility to prepare for additional sales upside at higher margins over the next few years. This includes adding capacity and flexibility to our advantaged low-cost global supply chain, as well as adding economies of scale, less variability in product configurations, and more consistent packaging solutions across our offerings. In summary, we continue to outperform a strong home product market driven by long-term fundamentals. The pandemic has served as a catalyst for these strong fundamentals by driving renewed consumer interest in household formation and renovation. While the immediate economic outlook remains uncertain, we expect housing will continue to benefit from demographic tailwinds in the long term, bolstered by increased consumer interest in investing in their homes. In the meantime, We will continue to operate the business with agility, managing costs in an uncertain environment, while investing in key strategic initiatives to deliver excellent long-term returns for stakeholders. Our teams yet again delivered excellent results in a challenging environment. We remain focused on keeping our people safe and serving our customers. We are investing for the long term and continue to demonstrate that this business and management team can deliver exceptional results in a variety of market environments. I could not be prouder of their performance. With that, I will turn the call over to Pat, who will speak to our financial results.