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spk01: Good afternoon. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands fourth 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 at that time, please press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Brian Lance, Senior Vice President of Communications and Corporate Administration. You may begin your conference call.
spk08: Good afternoon, everyone, and welcome to the Fortune Brands Home and Security Fourth Quarter and Full Year 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 and our Form 10-K. The company does not undertake Any obligation to update or revise any forward-looking statements will 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 four charges and gains basis unless otherwise specified. With me on the call today are Nick Fink, our Chief Executive Officer, and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions that you may have. I will now turn the call over to Nick for his remarks.
spk02: Thank you, Brian, and thank you to everyone for joining us on the call today. I hope that you and your loved ones are all staying safe. I could not be prouder of what we achieved in 2020. Our strong fourth quarter results kept a remarkable full year performance by our teams. Facing unprecedented challenges, we drove market-beating growth and delivered on our margin expansion strategy ahead of schedule. During the year, we deployed over a billion dollars in capital towards M&A, shared buybacks and dividends, generated excellent free cash flow, and exited the year with attractive leverage. And amidst all of this activity, our teams worked tirelessly to keep consumers and customers supplied while maintaining industry-leading safety performance. It has truly been an extraordinary year. All of our businesses saw impressive double-digit growth in the quarter. and we drove margin improvement in each segment by delivering against strong demand for our leading brands and leveraging our efficiency programs. Importantly, this past year, we also made critical long-term investments in our brands, innovation, Fortune Brands core capabilities, and supply chain capacity that will enable us to capture future opportunities and accelerate our share gains. Over the last eight quarters, we have shown that we can deliver results and create value for our stakeholders in a variety of market conditions. We are positioned to capture growth as the market accelerates and are structured to tightly manage our P&L in times of slower expansion. With the initiatives that we have undertaken, the investments that we have made, and momentum that we are seeing, we expect even stronger sales and profit growth as we enter 2021. Looking forward, we are in the early stages of a long-term expansion of U.S. housing As has been widely noted, the extent to which U.S. housing has been under-built is several multiples greater than the over-building of the mid-2000s. And yet, new construction starts are far short of their peak and only now reaching historic averages. Low supply and high demand coupled with favorable demographics and low interest rates have unleashed delayed momentum into our marketplace. Given the low inventory of housing, This momentum impacts both new construction and repair and remodel activity as the aging housing supply requires renovation. Given supply-side constraints, we expect this momentum to play out over several years. Turning to 2021, we are well positioned to take advantage of this expanding housing market. We've done a lot to re-platform the business to be even more efficient and agile, and we'll continue to do more in the year ahead. While economic and pandemic uncertainty still exist, we will stay flexible and nimble and manage the business very tightly. We expect to capture increasing opportunities in this market and have scenario planned for challenges that could arise. The last eight quarters have demonstrated that we can excel at playing offense and defense and can deliver for shareholders in a variety of market environments. We are well positioned and are very excited for the year ahead. 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 strong demand for home products. Our people are the foundation upon which our business is built and they drove our outstanding results in 2020. Turning to the remainder of our remarks today. First, I will discuss what we're seeing in the home products market. I will then highlight key takeaways from our fourth quarter and full year results, as well as discuss our key 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 our thoughts around our future financial performance expectations for 2021. Now, turning to our view on the housing market. As I've mentioned, Long-term fundamentals continue to be very favorable for housing and home products. U.S. housing is currently substantially underbuilt, and we are uniquely positioned with our brands and channels to take advantage of the tailwind of long-term housing activity. Additionally, the key millennial generation has accelerated their delayed move towards household formation and are showing increased interest in home ownership. Pandemic or no pandemic? This generation's move towards household formation had to happen as they formed families, and we simply lack the housing stock to support it. Moreover, increased workplace flexibility has allowed many younger homeowners to leverage technology, allowing for larger homes further from urban cores. Multifunctional spaces within the home, as well as increased trends towards entertaining at home and outdoor living, are accelerating new home buying and remodeling. New construction activity has remained strong since the latter half of 2019, except during a brief COVID shutdown driven by very favorable demographics, low inventory, and attractive mortgage rates, and is showing no signs of slowing down. The strength of our new construction channel gives us exposure to excellent growth as builders work to meet the significant demand. Repair and remodel activity remains very strong as consumers continue their focus on home improvement and spending to refurbish older homes. With demand for homes outpacing supply, older inventory is being purchased, leading to significant R&R projects as homes are modernized. Additionally, with home values on the rise, as well as homeowner balance sheet strength and home equity levels at or near all-time highs, we expect robust R&R activity through 2021 and beyond. We believe our bondage mix of exposure to the stable repair and remodel market combined with the torque of a strong new construction market gives us an unparalleled opportunity to add long-term value for our stakeholders. Given current market fundamentals, including very favorable demographics, low inventory, and an aged housing stock, we see a very positive multi-year tailwind powering the U.S. housing market to consistent mid-single-digit R&R growth and high single-digit single-family new construction growth, which could be even higher in the near term. Consistent with our long history, we intend to outperform any market conditions that materialize. As we have demonstrated over the last two years, our ability to capture the upside afforded by new construction exposure, as well as effectively manage periods of softer demand, if or when market conditions change, uniquely positions us to drive both growth and margins with a portfolio of leading brands and advantaged channel positions. With that market backdrop, some thoughts on the recent quarter. For the fourth quarter, our total sales increased approximately 13% over the last year and operating margin increased to 14.8%. This performance was the result of exceptional operational execution in a strong market while our teams continued to serve robust demand. We drove solid margin improvement as we saw the continued benefit of our efficiency programs implemented in early 2020. Consistent with our strategy, Our Fuel for Growth program allowed us to invest heavily in key growth initiatives, including the Mullen brand, innovation, decking capacity and distribution rollout, and value-priced cabinetry capacity. We also continue to invest in replatforming our business through advantaged Fortune Brands Common Core competencies, including complexity reduction, category management, and global supply chain management. We are accelerating investments in our most critical priorities as we position for continued growth in 2021 and for the longer term. Importantly, these cross-company initiatives to drive long-term growth and margin improvement, as well as to free up additional funds for investment in our key priorities, are ahead of schedule as reflected in our 2020 results and will continue to compound in 2021 and beyond. We will continue to drive a common set of capabilities to fuel growth and drive margin expansion. Now, let me turn to our individual businesses and how we are positioning to be even stronger long-term. Starting with plumbing. Our global plumbing group continued to outperform the global and U.S. markets with sales up mid-teens and a quarter at operating margins of 21.8%. We experienced strong double-digit sales growth across all brands, channels, and regions. Plumbing investments in marketing and innovation continue to fuel remarkable results. Our global plumbing group's ability to pursue growth in both core and adjacencies is creating new opportunities for this business to continue producing market-beating growth. Our sustained investment in brand, newer channels such as e-commerce, as well as in on-trend innovation sets GPG up for continued long-term success. We also achieved solid growth in China during the fourth quarter. Moen continues to outperform its market through channel and category expansion, driving excellent leverage to the bottom line. In China, housing continues to be an important overall component of economic growth and the Chinese economy. Turning to outdoors and security, sales increased double digits and operating margin increased by 90 basis points to 15.8%. These exceptional results were driven by double-digit decking and doors growth, a return to growth in security, and strong segment operating performance. Importantly, our fiber on decking brand continued to grow in excess of 30%, notwithstanding the lapping of product load-ins ahead of distribution gains in Q4 of 2019. Decking momentum 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 wins and capacity expansion plans remain on track. We had incremental capacity come online in the fourth quarter and will expand further at multiple points in time, throughout 2021. To further capture the momentum in outdoor living and leverage opportunities as the market leader in exterior door products, we added Larson to our outdoors and security business. Larson is the market leader in storm and security doors and is a perfect fit with our exterior door products and outdoor living portfolio of leading brands. It is a high-performing business with a phenomenal team and best-in-class products and customer relationships. We're off to a great start with Larson and are excited to accelerate value creation with our advantage to FortuneBrain's core competencies and synergistic portfolio. Shells in our legacy Doors brains experienced strong double-digit growth in the quarter, including robust demand in retail POS and increased wholesale activity from distribution wins. The synergies in scale emerging from our shared wholesale distribution for Doors and Decking has been particularly advantageous to 2020 share gains. Turning to security, sales returned to growth, with retail producing double-digit growth and commercial markets remaining soft as the sales channel remained largely closed. We're continuing to innovate in our security product lines with touchless and connected products for residential and commercial applications and feel good about the progress that the business is making under its new leadership. Finally, turning to cabinets, our cabinets team again delivered excellent performance in the quarter, Sales increased low double digits with growth across product lines at all price points and operating margin expanded 150 basis points over the last year to 11.6%. This past year, the business has demonstrated how our pivot plan has worked, producing outperformance across vastly different market environments under extremely challenging conditions. 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 achieve and sustain share gains with leverage through the PML, producing higher margins. The make-to-order market has returned to solid growth with the stabilization of imports and the rise in home sales and remodeling activity. The streamlining of our make-to-order business is now delivering, and we are being rewarded with incremental business from our advantage dealer network. We continue to further optimize the supply chain to prepare for growth at higher margins over the next few years. Within our 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 who have been replaced to a lesser extent with other importers with higher costs and longer lead times. Our advantage low-cost country supply chain is competing and winning against domestic competitors and higher-costing imports. Our cabinets team has succeeded in repositioning products to win in the market and has improved the cost structure of the business. More opportunities lie ahead, and the team is pursuing it with the same aggressiveness and tenacity demonstrated over the last few years. We are well on our journey to drive our cabinet's business to our long-term goal of mid-teens margins. In summary, 2020 was an unprecedented year that has reshaped many facets of our society. It also shone a bright light on the value of the home and the role it plays in people's lives. We're proud to work towards our purpose of fulfilling dreams of home, now more than ever. Combined with attractive demographics, strong demand, and low supply of homes, we expect a long-term, multi-year tailwind for housing. With our excellent teams, leading brands, strong channel positions, and powerful balance sheet, we're perfectly positioned to continue to drive accelerated value creation for our stakeholders. As we continue to outperform a strong home products market, we are accelerating our journey to improve operating margins and are ahead of schedule. While the immediate economic outlook and pandemic environment remain uncertain, and supply chains and cost inflation may introduce some volatility, we have proven our ability to perform in a variety of market conditions. We will continue to operate the business with focus and agility while investing in key strategic initiatives to deliver excellent long-term results 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 model and management team have multiple pods to increasing growth and profitability. We're excited to be in the early innings of a multi-year expansion in U.S. housing. While we are far from prior peaks in housing activity, our business has grown stronger and has more scale than at any prior time in its history. As the market expands to full the much-needed demand for U.S. housing, we expect to scale with that demand and continue to take share consistent with our track record. Our portfolio of products is targeted at the heart of the market, is more innovative, and has broader channel exposure than ever. Combined with our own actions to continuously improve the business and our proven resilience, we are uniquely positioned to capture the upside of this multi-year expansion while managing any volatility that may come our way. Our 2021 outlook, which Pat will speak to in greater detail, reflects the strength of our business, with robust growth translated to excellent profit leverage while we continue to invest for the long term. We expect to continue to outperform our markets in 2021 and beyond. In addition, our balance sheet is strong and positions us to continue to drive incremental value creation. We are excited for what our world-class brands and people can accomplish. With that, I will turn the call over to Pat, who will speak to our financial results.
spk09: 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. Let me start with our fourth quarter results. Sales were $1.66 billion, up 13% from a year ago. Consolidated operating income for the quarter was $246 million, up 19%, or $40 million compared to the same quarter last year. Total company operating margin was 14.8%, up 70 basis points over the same quarter last year. EPS were $1.25 for the quarter, up 25% versus $1 the same quarter last year. Our associates' focus on safety and on serving our customers during challenging circumstances made these remarkable results possible. Our teams used the circumstances of 2020 to enhance focus, improving share competitiveness and cost efficiency, driving 2020 growth, and accelerating our margin improvement trajectory. providing an excellent 2021 setup. Our advantage business model with leading brands and channel positions allowed us to navigate 2020s uncertainties to outperform the markets in which we operate. Now let me provide more color on segment results, beginning with plumbing. Sales for the fourth quarter were $638 million, up $89 million, or 16%, or up 15% adjusting for FX. Fourth quarter growth was strong double digits across all major products, channels, and geographies. Full year 2020 sales were up almost 9% versus 2019. Plumbing operating income increased 17% to $139 million for the current quarter. Operating income for the full year was $490 million, an increase of 12% over 2019. Operating margin for the quarter was 21.8%. and over 22% for the full year. Our global plumbing group concluded its fifth straight year of strong growth and margin performance. Our strategies are clearly working, and we expect another strong year for plumbing in 2021. Now turning to outdoors and security. Sales for the fourth quarter were $367 million, up 35 million, or 11%, driven by double-digit growth in doors and decking and a return to growth in security. Full-year 2020 sales were $1.4 billion, an increase of over 5% versus the prior year. We expect all product categories to drive 2021 growth, with particular strength continuing in doors and decking. Door sales were up double digits in the fourth quarter, driven by strong retail POS and accelerating single family new construction. We expect sales growth to continue in 2021 as both retail and new construction remain strong. Decking sales were up strong double digits in the quarter as our distribution gains achieved new performance levels. We added incremental capacity during the quarter and more capacity will come online in 2021. The secular trends favoring composite decking remain as strong as ever. Security sales return to growth in the quarter, with retail products growing double digits, while commercial products and markets remain soft due to COVID-19. Outdoors and security segment operating income was $58 million during the quarter, up 17% over the same quarter last year, driven by operating improvement in doors and decking, Operating income for the full year was $205 million, an increase of approximately 16% versus 2019. Segment operating margin for outdoors and security increased 90 basis points for the quarter over last year to 15.8% and was 14.5% for the full year, up 130 basis points versus 2019. Turning to cabinets. Sales for the fourth quarter were $656 million, an increase of 11% over the same quarter in 2019. Full-year 2020 sales were $2.5 billion, up 3.4%. We continue to experience strong growth of value-priced products and sales of higher-priced make-to-order products return to growth this quarter, a positive signal for big-ticket R&R and reflective of the stabilization of imports and consumers' increased desire and ability to invest in their homes. Operating income in the fourth quarter was $76 million, up 27%, or $16 million versus the prior year, and full-year operating income was $256 million, up 11%, or $26 million versus 2019. Operating margin for the quarter was 11.6%, and 10.4% for the full year, up 150 and 70 basis points, respectively, versus the same period a year ago. Full-year cabinet's margin performance was very strong, given big-ticket R&R, inclusive of cabinets, experienced the most severe demand and operating impacts during the second quarter COVID shutdown. We are very pleased with cabinet's second-half margin performance of 11.9%, and strong year-end exit rate. We expect Cabinet's operating margin improvement to continue in 2021 as we build on our efforts in 2020 to further enact operational efficiencies and aggressively leverage our market-beating growth. For FBHS as a whole, to sum up our full-year consolidated 2020 performance, sales increased approximately 6% to over $6 billion for the first time ever as a public company. EPS grew over 16% to $4.19, demonstrating our ability to deliver growth and margin improvement by outperforming the markets in which we operate in an increasingly efficient manner. Our total company operating margin was up 80 basis points to 14.1% ahead of our full year 2020 plans. Free cash flow was $742 million, reflecting a conversion rate of 126%. 2021 profit growth will benefit from the efficiency programs initiated in 2020 and the continuation of a strong U.S. housing market. This will result in positive operating leverage across the company as we continue to enact Fortune Brand's core capabilities across the portfolio. Before turning to the balance sheet, I want to take a moment to provide perspective on expected signs of material and cost inflation in the face of current elevated demand and amid a backdrop of a fundamentally strong housing market. We continue to deploy a multitude of tools to mitigate or offset inflation within our business. We do this through continuous cost improvement within our operations, having enacted major improvements just within the past year. We also employ cost sharing with suppliers where appropriate and continuously look for ways to add flexibility and durability to our global supply chains. Finally, when necessary, we act via pricing. Through this combination of actions, we expect to navigate 2021 inflation and achieve our margin improvement objectives. We will mitigate, offset, and overcome inflationary headwinds and deliver our goals of market-beating growth and continued margin expansion. Turning to the balance sheet, our balance sheet remains strong with cash of $419 million, net debt of $2.2 billion, and our net debt to EBITDA leverage end of the year at 2.1 times or slightly below 2 times on a pro forma basis inclusive of Larson EBITDA. We now have $865 million of total liquidity available between our $1.25 billion revolver and supplemental $400 million revolver. We have the ability to make investments and deploy capital to accelerate growth and shareholder value creation and are assessing opportunities to do so. We will also look to continue to return capital to shareholders through targeted buybacks and our dividend. Turning to the details of our outlook for 2021. Based on the global market for our products growing 5% to 7%, with the U.S. housing market also growing 5% to 7%. And within this market forecast, we expect U.S. new construction growth of 10% to 12%, and U.S. R&R growth of 4% to 6%. Based on those assumptions, we expect 2021 full-year sales growth of 12.5% to 14.5%, or 5.5% to 7.5%, excluding Larson. We expect four-year EPS within the range of $4.85 to $5.05 on a before-charges-and-gains basis, of which the implied midpoint equates to 18% EPS growth versus 2020. Specifically, our outlook for each business as it relates to our overall plan, plumbing net sales growth of 7% to 9%, with operating margins of 22-plus percent, Outdoors and security net sales growth of 35% to 37%, or 5% to 7% ex-Larsen, with segment operating margins of 14% to 15%, or approximately 15% to 16% adjusting for purchase accounting and one-time integration expenses. Cabinets net sales growth of 5% to 7%, with operating margins of 11% to 12%. We expect 2021 free cash flow of approximately 600 to 650 million, which includes the accelerated investments in capacity and inventory to drive growth across all of our segments. We anticipate a cash conversion rate between 85% and 95%. The annual EPS outlook includes the following assumptions. Corporate expenses of about 92 to 93 million. interest expense of approximately $82 to $86 million, a tax rate between 24.5% and 25%, average fully diluted shares of approximately $140 to $141 million. To summarize, we have put together a 2021 plan that provides solid sales and excellent EPS growth, while we continue to accelerate investments in brand, innovation, and advantage Fortune Brand's capabilities. Potential exists for upside to our plan and guidance if some combination of the following occurs. Labor is available to address in full the strong expected U.S. new construction and big-ticket R&R demand. If U.S. R&R growth improves beyond the 4% to 6% assumed in our plan, government stimulus increases materially beyond programs currently in place without impacting interest rates. Better insight to these opportunities will unfold during the first half. As this occurs and as merited, we will refine our guidance accordingly. We expect a long runway of fundamental U.S. housing growth to result in prolonged market strength for our products. With market growth averaging 5 plus percent per year over the next few years, assuming the current level of unemployment continues to stabilize, then improves. We expect our sales to continue outperforming the market and our margin progression to remain accelerated, averaging improvement above 50 basis points in 2021 and each of the next two to three years. Our balance sheet strength supports capital deployment, and while we delivered over $1 billion in M&A, share repurchases, and dividends in 2020, we are still advantageously positioned to assess further opportunities to deploy capital. We see multiple paths of value creation to execute for our shareholders, and our company has never been better positioned to capture these opportunities. Our teams remain committed to driving market-being sales performance and continued operating margin improvement. I will now pass the call back to Brian to open the call up for questions. Brian?
spk08: Thanks, Pat. That concludes our prepared remarks on the fourth quarter and for the full year. We will now begin taking a limited number of questions, and since there are a number of you who would like to ask a question, I will ask that you limit your initial questions to two and then re-enter 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?
spk01: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Susan McClary from Goldman Sachs. Your line is open.
spk04: Thank you. Congratulations, everybody, on a great quarter and a great year.
spk00: Thanks, Andrew.
spk04: My first question is, you know, kind of looking at the 2021 guide, you know, I know historically you've talked to an incremental margin of about 20 to 30%. And it seems like the midpoint of the revenue guide for this year implies something that's kind of at the lower end of that range in terms of the incrementals. And Pat, I know that you laid out some of the factors that you're kind of thinking about that could, you know, impact where you end up for this year. But can you kind of outline for us maybe some of the things that could take you to the higher end of that 20 or 30 percent range and how you're thinking about that across each of the different segments?
spk09: Yeah. In terms of margin overall, Sue, I'd start with we remain committed to getting the total business above 15%, which is a target we've had for a while. And on an organic basis, next year we'll be very much approaching that. You know, we should be at 15% or very close to it on an organic basis by the end of next year, which means on an organic basis we'll be driving 70 to 80 basis points of margin improvement, if not more, and be on the higher side of that incremental margin. We do, as we fold Larson into the business, we have some purchase accounting and some integration costs. So our reported margin might be closer to 14.5% for the year. But we expect over 20 and 21 combined to achieve the 150 basis points of total margin approval we've been talking about for a while. And as we get through to be driving for the next two to three years 50-plus basis points for each of the following years after that. And so very much on track, if not ahead of track, with where we were at the investor day we had held all the way back in February 19, you know, despite multiple tariff waves and a pandemic. So we feel good about the margin trajectory. And I think, Sue, as we continue to drive market-beating growth and manage our SG&A tightly, we could stay on the higher side of that leverage range.
spk02: Okay. This is Nick. I'd just add that, you know, if you step back a little bit more, we set out as a team to really accelerate the flywheel within the business. So investing in core capabilities across the entire platform to generate fuel for growth with the intention that a portion of that would be seen through margin accretion and a portion of that would be generated to incrementally invest in the business to drive more top line. And once the pandemic hit, we really used it as a platform to accelerate our plans and are delighted with how we've emerged, you know, basically probably about a year ahead of schedule from where we thought we were, but having made, you know, far more incremental investments in the business in 2020 than I think we would have expected at the outset of the year, with plans to continue that, you know, 21 and beyond. And so this flywheel really is working now, and you'll see it through – Our organic margin, as Pat describes, but also through our investment profiles, we continue to invest in brand, in innovation, in capacity, and in capability in the business.
spk04: Okay, that's helpful. And I guess when we do think about the out years then, and that 50 basis points or so of margin expansion that you expect each year, you talked a lot about how it seems like housing is structurally kind of operating at a higher level, and you've obviously done a lot of work to really position the business to capture that growth. Do you think that 50 basis points, could that re-rate higher? What would you need to see to really capture more of that on an annualized basis? And what kind of concerns you maybe as you look out and what could kind of hold things back a bit?
spk09: I definitely think it could re-rate higher. I think that'll be driven by the amount of growth you see because the growth gives you some pretty powerful leverage. and then the pace at which you're able to drive the cost improvement and pricing necessary to offset inflation. I do think we go into 21, eyes wide open, that we'll have inflation on multiple fronts, material, logistics, and labor, but we'll manage it effectively as we have managed considerable tariff inflation the last three years. And so, you know, I don't think we lie awake at night on inflation or think that that's going to hold us back. In fact, we're committed to drive the margin improvement through that inflation. But I think there will be multiple episodes, and some of the timing of that will unfold as we, you know, pursue the next couple years.
spk04: Okay, great. Thank you, and good luck.
spk09: Yes, sir.
spk01: Your next question comes from the line of Phil Eng from Jefferies. Your line is open.
spk07: Hey, good afternoon, and congratulations on a really impressive quarter. Yeah, growth has been really strong and impressive. I'm just curious how you situate from a capacity standpoint, you know, and your ability to kind of meet some of that demand, because I noticed your CapEx guidance for 2021 is there's a step up. So I'm curious if there are any pockets that you're adding a little more capacity to kind of help meet that demand.
spk02: Yeah, so let me take that and then I'll hand it to Patty to give a little bit more color. But I'll tell you, I mean, firstly, hats off to our team to be able to kind of deliver these quarters of growth because you're right, it does stretch capacity. And when you drill down, And, you know, look in pockets of the business where, you know, it really was surging. I mean, people working literally around the clock to make it happen. And so, you know, we have been stretched. I think, you know, the feedback from customers is more pleased, but they've been very satisfied with the fact that I think we've stayed a step ahead of the competition. And that has really helped fuel our share gains because we've been reliable through this period, notwithstanding the fact that it's taken a lot of work. And so we're working hard. And as we built out a plan for 21, we hypersensitized it, I would say, to both an upside scenario and a downside scenario. And so in a downside scenario, we're ready to manage the P&L very, very tightly and manage expenses very, very tightly to deliver the kind of margin that progression that we were just talking about there with Sue. But we've sensitized on the upside as well. And, you know, to the extent that there's upside, you know, we're leaning into capacity investments and inventory to be able to serve the market and capture that upside. The housing market is undeniably strong. And, you know, we don't just view this as a pocket of strength. I mean, you go all the way back to the fundamentals. They support this, and this expansion is going to have to go on for a long time in order to support it because we're just fundamentally underbuilt in U.S. housing, and there might be bumps along the way. But over time, this will play out very strongly, and so therefore, you know, we have confidence in leaning in towards that tech capacity and the capacity investment inventory because we know that the market needs it. Any color you want to add?
spk09: No, and you're picking up accurately, you know, the CapEx, in 21 will be, you know, $60 to $80 million more than it was in 20. You know, both 20 and 19 were a little bit lower than our normal CapEx run rate because of the COVID shutdown in the second quarter of 20 and the generally slow start to housing in the first part of 19. So we'll be in the kind of 210, 230 range for CapEx. And so it'll be going across decking, plumbing, ThermaTru and cabinets, cabinets predominantly for entry price points on the coasts. And, you know, as Nick said, it'll be, you know, tight for the first part of the year, but we'll service the demand. Our people are doing a great job utilizing the capacity they have to keep customers happy, and we'll be getting the capacity we need to deliver our growth online effectively.
spk07: That's really helpful. And obviously, you've seen really strong growth in plumbing for some time now, and that growth has accelerated nicely in the back half. Any noticeable pockets where you're seeing some of these share gains? Is it from some of these adjacent markets, e-com, and just how much more runway do you have? And lastly, curious if you've seen any channel partners restock inventory quite yet. Thanks a lot.
spk02: Yeah, sure. So we're delighted with plumbing. And, I mean, you're looking at something like five years now of just consistent market outperformance at increasing margins. And so really phenomenal performance to put up an excess of 16% growth in the quarter just to gain your capacity. I mean, just the ability to do that alone is impressive. But we're feeling really good about it, Phil. I mean, firstly, it's been going on for a long time now. It's not kind of this moth that's been going on for a long time. To answer your question, it was really strong across the board. As you know, retail was very strong, in particular throughout the year. But as the wholesale channel opened back up, we did see it. start to pick up momentum, and we saw that momentum accelerate. And by the time we got to the end of the year, you know, we saw healthy growth in every part of that business, bar none. I mean, you know, it's rare that you get to say that, that it was just everywhere, but it really was everywhere. And, you know, it's hard to service it, whether it be in retail, in e-com, in wholesale, or in China. You know, the other exciting thing, so, you know, you asked, is there room to go? I mean, you know, notwithstanding the fact that the business was able to do that and the business delivered margin excess of 22%, it also upped its incremental investment significantly. You know, so investment in brand was up, you know, significantly. almost $15 million year-on-year, $10 million in the quarter. That's significant. Investments in packaging refreshments, investments in capabilities like e-commerce and operations, as well as things like supply chain around headcount, DCs, air freight, to meet a customer demand. And so really putting in investment that sets the business up to continue to grow. And as you step away from that, what do you have? You have this brand that we're investing behind, which is just absolutely refreshed and peaking. Consumers love it. It's number one for purchase intent, and so we feel really strongly about that. We've invested in the channel and our supply chain capacity, and so we're there to serve. And then we're building out these new adjacencies, these future cores of the business, And, you know, those are starting to really gain traction. And, you know, we're seeing it in areas like, you know, the smart home, where you've seen the products we've done with things like Flow by Mo, and we just won a CES Best of Innovation winner for our U by Mo Smart Faucet. We won some recognition at CES with USA Today's Editor Choice on our Flow by Mo Smart Pump sump pump monitor, which we just launched. What's really exciting, though, is when you start to tie all that stuff together, what you'll start to see in 2021 is that we're really building out that whole smart home ecosystem and all of these elements are going to start to talk to each other. and be able to do water conservation, freeze protection, you know, vacation modes. And so, you know, when you pose that question, do we see room to go, I would say absolutely. You know, we're performing really well in the core of faucets and showerheads. But the business has gotten so good at just leveraging its kind of twin assets of brand and channel strength to build out these adjacencies. I think, you know, you'll see some near-end adjacencies that will perform well. in the near term and then, you know, really building out future cores with some of these further out adjacencies that are really starting to gain traction. So, you know, we're feeling great. The business is doing great under Sherry Pfeiffer's leadership. And, you know, I think given the investments that were made in 20 is really just poised to keep doing what it's doing and even see some acceleration from here.
spk07: Super helpful. Thanks a lot, guys.
spk02: Sure. Thanks.
spk01: Your next question comes from the line of Stephen Kim from Evercore ISI. Your line is open.
spk03: Yeah, thanks very much, guys. Let me also add my congratulations. I certainly wholeheartedly agree with your outlook on the housing market, and I definitely think that it's going to be interesting to see how you can leverage that strength. And you've given some really good commentary here, particularly on a multi-year basis on the margin here. What I wanted to ask you about, though, is closer in, it seems like this year, having a little bit of guidance or maybe some hand-holding from you all with respect to the sequential progression of sales might be helpful, just given how weird last year obviously was. Is there a way that we can think about what we might expect to see or what you all are expecting to see In terms of the sequential trajectory as you progress from, you know, 1Q through into the back half of FY21, is there some way that you could help us to envision something like what you're foreseeing?
spk09: Yeah, Stephen, you know, it's tricky business even for those of us here who watch kind of the daily order flow and shipments. I think what we could say is, Obviously, from our results, the fourth quarter finished very strongly, right? We delivered double-digit growth across all the lines of business, and you saw that in POS as much as you saw it in shipments. We're still kind of in a mode where we're largely shipping to POS at this point, and I think that will continue through a good part of the first quarter to half of the year. And the POS momentum from the fourth quarter has largely carried into the opening month of this year and doesn't seem to be abating. So we would definitely expect double-digit growth for the first quarter at least, and that could easily continue into the second quarter given Last year, you were shut down for at least about a half of the quarter. And then we'll see where it goes from there. I think when we looked at understanding a market and setting guidance for the full year, you see some pretty wide goalposts on external data for U.S. R&R and U.S. new construction. As you noticed, we come out on I think the bullish side of it, because we think that this is underpinned by fundamental demographics and other drivers of the macro that are not just episodic here. And so we'll see if the back half of the year is kind of flat to low single-digit growth, or it gets a lot better. I think there's a good chance that it gets better than that, but I'd kind of guide you towards double-digit growth to start the year and then We'll update you as appropriate. We don't typically give quarterly guidance, but I think what we're seeing this early part of the year is the same POS strength we saw to end the year.
spk02: Yeah, I agree wholeheartedly with what Pat said. We ask ourselves the same question, right, and especially with the weirdness of some of these comps. you know, the Q4 is a proper comp. You know, if you recall going back to 19, you know, 19 was pretty sluggish for the first two to three quarters on the back of the rate hikes in 18. But by Q4, the market was humming pretty well and into Q1 of 20. And so, you know, those are sort of proper comps. So to kind of put up the growth that we put up and seeing the POS that we saw in Q4, um, gives us a good degree of confidence. The fact that we've carried that momentum, that exit momentum, you know, right into what we're seeing now in January, um, it makes us feel pretty good that, you know, there's a very solid market there on, you know, on top of, uh, solid comps from the prior year.
spk03: Yeah, absolutely. It's, uh, it's, it's bullish. Um, I wanted to, the second question I had relates to the cabinet business specifically. We think of it as primarily kitchen and bath cabinetry, and yet one of the interesting things with the pandemic and the working from home is that people, I'm guessing a certain population and probably one that you can cater to well, would be considering maybe converting rooms to more permanent work from home space as opposed to something ad hoc and just throwing it together, getting something from Ikea. And in that regard, I'm wondering how much of your business in the cabinet segment has historically been outside a kitchen and bath, and I'm thinking would probably be primarily home office type setups. And where do you think that can go?
spk02: Well, I'll start. Pat, having spent some time in the cabins, maybe be able to give you some tighter perspective on that. We don't sort of track it that tightly by, you know, rooms outside a kitchen and bought. But what I will say is the team there has actually been very focused on adjacencies and areas for growth. as part of their strategic plan, but is also being absolutely prioritized about the way in which they're going to go after things, right? So first and foremost is kind of dedication to the margin journey that we're on and making sure that we are absolutely able to hit that. And, you know, again, you see the exit rate here for Q4 and even the exit rate that Pat referenced, you know, for the second half at 11.9%, very satisfied with how they're tracking. And they're, you know, They're not satisfied, though, to sit on that. They're working very hard to say what's the journey to maintain subjective and even beyond it. So that's their priority number one. Priority number two is capturing the share from the imports. And they've done a phenomenal job of that. And if you look at the imports, while some of that has flowed back, um, it is at a much higher AUP, um, than was previously, right? So less volume, higher price, um, that's absolutely the landscape in which we want to compete, which isn't even playing field. And so we're competing there in winning. And then from there, you know, I'd say it's, it's, uh, it's, it's new channels and new products. And so new channels, There's a lot of opportunity in e-commerce. We're starting to see that come to fruition and investing behind the opportunity there. And then adjacencies, so areas like other rooms, is there expansion beyond the kitchen, areas for other vanities. And so that's the order of priority. I'd say that they're attacking these things, and we'll get off to them. And I think as we do, you're going to see both the margin progression that we're absolutely committed to delivering, but also because of what you touched on, as well as some of the other areas I've touched on, there'll be some really nice growth as well.
spk09: Yeah. Stephen, I don't know if I can speak specifically to the percentage of our cabinet business that is in offices. It certainly does Our catalogs certainly enable that, especially at the mid to higher price points. One of the nice things we saw in the fourth quarter and continue to see in the early part of 21 is the mid to high price point make-to-order business is growing very nicely and very much a contributor to the overall growth of cabinets at a rate that's almost equal to the entry price point cabinets. I would imagine that that is part of what's driving it is people doing things like offices as a component of that, but I couldn't speak specifically to the percentage.
spk03: Great. Thanks. Appreciate it. Sure.
spk01: Your next question comes from the line of Michael from JP Morgan. Your line is open.
spk06: Thanks very much. Good afternoon, everyone. Congrats on the results and hope everyone's happy. safe, safe and healthy, healthy out there. Um, uh, first question on, um, outdoor insecurity, uh, obviously continued great progress there. You know, I'm wondering around the guidance outlook for five to 7% organically given the strong momentum, obviously in decking, uh, acknowledging it's a small piece of the, of the pie still, but, um, you know, and also the, the momentum in, uh, new res, which is a big part of the door business, you know, wondering if there's any upside to that organic growth outlook and, you know, maybe as part of the overall picture of outdoors and security before I hit my second. Uh, follow up, um, on the security piece, you know, just, just wondering around, you know, what can be done to maybe increase that growth rate? Uh, obviously it was a little bit more lagging this year. and if there's any updated thoughts from a strategic and portfolio perspective.
spk02: Sure. So when I start, I'll start with the doors and decking piece. And so, you know, if you, the way we kind of put it together, Starting from the very strong performance in this year, decking, as I said, in excess of 30% in Q4, and again, a real lap there, right, because you had product load-ins ahead of the distribution gain in Q4 of 2019. And then we're seeing really, really strong performance in doors as well. I would say, you know, on the decking side, we've got a capacity plan and we're kind of working to our capacity plan. And then we're trying to work an upside plan to that capacity plan to the extent that we're able to bring that upside plan to fruition or see more pricing momentum on decking, which I think that sector probably merits. there's some upside there. And then I think indoors, you know, there may well be, certainly if the momentum that we're seeing continues, and it's really both wholesale and retail, so it's not just the new construction part, but retail as well, then, you know, we would see it there as well. You know, we were somewhat cautious as we built the plan around just the strength of what we saw towards the end of the year, both in indoors and in our Larson acquisition. And so we want to kind of progress through the first quarter. and see how that's going. But again, the momentum in both of those businesses, like we touched on plumbing and cabinets, has continued to be very strong and has maintained its velocity coming out the back end of the year. And so I don't disagree with you. I think we put together a prudent plan, and we are still cognizant of the fact that there is pandemic and economic uncertainty out in the world, and we want to manage the P&L very tightly. but we're gearing the business and the capacity to the upside there. And I think you touched on a couple areas in which it could happen. And then just turning to your question on security, I fully agree with you. You know, we would like to see more growth. Now, you know, you had a couple things, a couple dynamics in the year. You had on the retail side of the business, you had a back-to-school season that just didn't happen, right? So you saw a lot of locker locks and things like that. And you had a commercial channel where we go in really and do a consultative sale with factories and facilities that shut down in Q2 and stayed shut down throughout the rest of the year. We actually exited the fourth quarter with really nice growth in retail in the double digits. And so we were really encouraged. by that. And where we got the business squarely focused is on getting the product assortment right, getting the supply chain absolutely set, getting the category management capabilities in. And once all that is set and we made some really good progress and invested for it in 2020, then we're going to start to turn the dial harder on things like innovation, which should then start to raise the top line. And so we wanted to be very deliberate about that progression. getting that core right, getting the operations and supply chain absolutely stable and healthy and producing, and then kind of turning that down on growth. Although, even given that, we were happy to see retail, which is the biggest part of the business, power along as it did at the end of the quarter.
spk09: Yeah, Mike, I think just to add to what Nick was saying, I think he hit on the key points. I think There is potential upside to both DOORS and decking. I think in decking, Nikit on it, it's the pace of our capacity plan and the pricing dynamics in the marketplace. Those things could lend upside if they go faster than expecting. And then DOORS, you know, think of the DOORS business as probably the one business we have that's closer to 50-50 new construction in R&R as opposed to most of our portfolios, about two-thirds or more R&R. and if you recall our outlook on U.S. new construction is 10 to 12 percent, I think there's upside to doors to the extent that builders can pace completions closer to their order flow. Our market outlook is really predicated on about 100,000 unit growth in U.S. housing, but that's about 110 to 100 of I'm sorry, that's 100 to 110 of new construction, single-family new construction housing growth, and a decline in multifamily for a total of about 75,000 units across the two. So I think it really gets down to can the pacing of completions and single-family pick up, and that will help drive that business. And then to Nick's points on security, it's You know, can we get a real back-to-school season? Can we get the industrial markets opened up as consultants are allowed in factories and get innovation going in that business? Those are the things.
spk06: That's great. I appreciate that. And I just wanted to circle back to a prior question around, you know, cadence throughout the year and, you know, very much appreciate the – the talk around the top line where you're saying, you know, double-digit top-line growth likely to continue into the first quarter, possibly the second. It sounded like, by contrast, just again at this point in the year and obviously the way the numbers would work, you know, flat to up most single digits, which is still very impressive, obviously, given the tough comps. And I think most people would be – many people would be thinking perhaps it would be down a little bit. So I just want to make sure I heard that right, that at this point in the game, as you look at your plans, you're, you're looking for flat to maybe up slightly in the back half. And you know what that means for EPS distribution, you know, typically, you know, during a year you have, um, anywhere from, uh, 45, you know, 40 to 45% or so of EPS is generated in the first half of the year. and 55%, 60% in the back half. I would almost think this year that would flip, and I just wanted to get your thoughts on that.
spk09: I think you have it correct, both top and bottom line. We do expect, given the margin momentum we have in the business, to be producing more nice margin improvement in both half of the year next year but I think you're right you're gonna see at least from a EPS growth perspective a bit of the bias towards that first half of the year but but I wouldn't over accentuate it I mean you do recall we even in the second quarter of 2020 when we had a basically a 10-ish percent decline at the top and a 10-ish percent decline at the bottom. We made margin improvement. So, you know, there will be some nice EPS growth across the year, but there will be a little bit more of an unusual bias to the first half.
spk06: That's great. Thank you.
spk01: Our final question today comes from the line of Justin Spear from Zellman & Associates. Your line is open.
spk05: Good evening, guys. Thank you. I wanted to just turn the attention a little bit to the Chinese opportunity. Your growth there has been pretty special, but maybe you can remind us what it was for all of 2020, and if you could, just provide some context on your 2021 guidance for that market and maybe some color or context behind the dynamics there and headroom for growth there in that large market for you.
spk02: Sure. Happy to, Justin. I'll give you some perspectives, and then Pat will speak a little bit to the numbers. But I would say, firstly, just to step back from a market perspective, we're very fortunate. The two most favorable housing markets in the world are the U.S. and China markets, right? And that's where you see the most growth and the most opportunity. And, you know, China is sort of the rare market that is not only growing quickly but also is quite fragmented, and so there's still an opportunity to build a lot of share over time. And, you know, our business there has been built organically over a long time with a homegrown team that has out-executed that market and now is very focused not on just out-executing the top line but driving profit and driving leverage through the P&L market. as much just as good discipline to be able to reinvest in the business for the long run as a profit driver for us overall. It's really more we want that business to be disciplined and to be healthy and be able to continue to drive itself. And so they've grown incredibly quickly, and the focus has really been on leveraging our brand and channel position into new product adjacencies, And you channel adjacencies. And I think they do it better than anybody in our business. You know, they really kind of are a north star for the rest of Fortune brands in their approach. When you look at their more recent performance, you know, it's continued to power on. We obviously saw the shutdown around Chinese New Year and then continue on. As you know, the Chinese economy actually did pretty well. You know, it grew a bit over 2% for the year. So pretty impressive, and we're calculating, we're banking somewhere between six, maybe a bit more. Where we continue to see strength throughout the year was really in the developer side of the business and in the e-commerce side of the business. Showrooms were slower as people were still cautious to head out, but we have a leading share in developers, so we were very excited about that, and developers continued to build. And bear in mind, you know, we're really – prioritized on tier one and tier two markets, so we're not really exposed to the big speculative buildings and the empty cities that you hear about. We're really big share in Shanghai and other densely populated areas where people are either moving in or upgrading their living circumstances. And so we're very bullish on the opportunity in China. Housing continues to be a fundamentally important part of the country's economy, and so we don't see that backing down. And then within housing, we're out-executing, and we're out-executing with a homegrown team that really knows how to build out the Moen brand and the House of Roll brands. into even broader adjacencies and how to build out new channels and new channel partners. And while we've been doing this, actually in 2020, we raised our, let's say, our incremental investment in that business and really started building the pull behind the brands, not just the push model that we've done really well with over time, And the early read on the brand metrics have been extremely strong. And so we're very excited about China. We think over the long term it could be a really nice player for our company. We don't answer a bank on it at any given year, but we've just grown it slowly, or not so slowly, but I'd say over a long period of time to the point where now it's a significant player in that market and can be a significant growth contributor for us.
spk09: Yeah. Just as it grew for the year, our plumbing business kind of grew high teens, and it was growing at that rate consistently both the third and the fourth quarter. And I think if you take the first and the second quarter, which obviously they had the very severe shutdown dynamic in Q1 and And then a bounce back in Q2, you kind of average those two together, the first half and the second half are both kind of high-teens quarters. So there's a very consistent drumbeat there of growth in large part. I think if there's one part of our business, and Nick hit on it, that's probably driving innovation at the most rapid pace and with the greatest level of success, including into adjacent categories. and finding growth across multiple channels and doing it profitably in that market as well. It's just the talent on the ground we have there is every bit as strong as the talent we have across the globe, and they're doing an amazing job.
spk05: Thanks. And one last question because I think it's a point of emphasis for a lot of investors and analysts is tied to cabinets and that operating margin expectation, not just for 2021, but I think you said mid-teens. in light of the import competition. I know non-Chinese imports have been aggressively backfilling the Chinese, what was vacated by the Chinese. I guess thinking about the raw material and transportation cost basket, thinking about price levers and productivity levers, maybe as you think about what's at your disposal in this kind of environment, maybe midterm environment, maybe help us understand how you get to that mid-teens from here.
spk02: But, Justin, I'll start a little bit on the imports, and then Pat can walk us a little bit through that journey. But, you know, I'll just start with the imports. You know, recall, firstly, we never counted on government assistance to help us. We set about pivoting the portfolio to really aim at the heart of that market, like what was working there anyway, and adjusted our whole portfolio to really target that heart of the market. But then we were successful in the anti-dumping suit, and the purpose of that really was to get rid of illegal subsidies and unfair competition. It wasn't to close the border and eliminate all imports. And we're happy to import – we're happy to compete against other low-cost countries, and we feel not only are we set up to compete, we're set up to win. And I think that's what's now playing out. And so as you've seen those imports start to migrate to other countries, and by the way, you know, a lot of that is illegal trans shipping, and I think customs is going to be all over that. But you're seeing it come across at a higher cost, either because, you know, it truly is manufactured in another country. So, you know, average selling price out of Vietnam is, you know, more than 2x what the China AUP is. or, you know, it's being illegally trans-shipped. But, frankly, you know, moving stuff from one country to another and, you know, trying to evade customs has a cost to it that's being reflected in the marketplace. And so, you know, I'm sure you're seeing it through your channel checks, but you go through the channel checks, you'll hear that imports are still struggling from a supply chain perspective, lead times are long, and pricing is up. And that is a very favorable backdrop for which for us to compete. And, you know, that's why, you know, it's one of the reasons why we're not seeing growth across the board. Even though you could argue on a dollar perspective, those imports are, you know, kind of, you know, probably at a dollar level where they were prior to the run-up of inventory with the duties coming on. The playing field is level and the business is competing well. And, you know, that's the only outcome. we could have hoped for in our, again, trying to shut a border. We're just trying to have a level playing field, and it's had the necessary impact. We will, however, continue to aggressively investigate or help pursue anybody who cheats, and there's going to be cheating happening, but it happens with enough incremental costs that I think it's leveled out the playing field enough. Pat, you want to touch on the margin progression a little bit?
spk09: Yeah, and I think, you know, Justin, you saw this year 70 basis points of margin improvement on the full year. But the cabinet business was probably the most severely impacted along with our security business on the second quarter shutdown. And so if you really look at the back half margin of that business, which is 11.9, I think that's more indicative of kind of where they're running at these days. You hit out, you know, what are the levers to kind of get this farther up the margin chain and more towards that mid-teens? I think there's room to go on both the stock and the make-to-order side of the businesses. You know, we'll deal with inflation in our cabinet business as we do in all of our businesses. We'll take continuous cost improvement and supply chain actions that were necessary price to drive improvement offsets inflation. And then I think getting leveraged to get further margin expansion, there's still a lot of growth on the asset and SG&A base in stock. And also I would say during 20, we were repurposing some older capacity on the fly and still are in the early parts of this year. That is not the optimal way to service demand. We're doing that just because the demand is so strong. So there's still some footprint optimization to go in the stock business. And then I think we did a lot of hard work to standardize product and right-size the semi-custom and premium make-to-order businesses. A, there's still some more standardization opportunity out there. and all the hard work to right-size those businesses. And now that those businesses are growing, you're going to see in 21 and beyond the ability to leverage the tougher structuring work that the teams have been doing for the two years in that business. So I think you're going to see both stock and make-to-order contributing to growth from this point forward. I think what you haven't seen, and really until the back half of this year, is on the stock side, you still had so many things moving to service demand. You weren't seeing the optimal long-term cost structure for the stock side, and you were still seeing declines in make-to-order. And it's only now that we're seeing the stock get closer to its end game, and we're seeing growth in make-to-order to leverage that resized business. So I think there's good opportunity ahead for both of them. And we're wide-eyed to the competition, as Nick said. We built a better mousetrap. We're not looking for the government to give that business margin, and that business is demonstrating that it can compete for share and turn it into margin accretion.
spk05: That's excellent. Thank you for the color, and I look forward to watching you guys progress towards that mid-teens over time. That would be, I think, a big win for everyone.
spk09: Thanks, Justin. Have a good afternoon.
spk01: That concludes our Q&A and concludes the Fortune Brands quarterly earnings call. Thank you, everyone, for joining today. You may now disconnect.
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