Fortune Brands Home & Security, Inc.

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.

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.

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.