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 first quarter 2021 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 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. Dave Barry, Senior Vice President of Finance and Investor Relations. You may begin our conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Home and Security First Quarter 2021 Investor Conference Call and Webcast. I'm Dave Barry, and I recently became Senior Vice President of Finance and Investor Relations at Fortune Brands after spending the prior six years in our plumbing segment, most recently as Chief Financial Officer. I'm excited to be here, and I look forward to working with you all in my new role. Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings 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 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 in our most recent Form 10-K. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share, or cash flow on today's will focus on our results on a before charges and gains basis, unless otherwise specified. With me on the call today are Nick Fink, our Chief Executive Officer, and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions, and I will now turn the call over to Nick.

Dave, thank you, and welcome. And thank you to everyone for joining us on the call today. I hope that you and your loved ones are all staying safe as parts of the world begin to reopen. I couldn't be prouder of our first quarter results, which reflect a broad-based acceleration of our remarkable 2020 performance. Our business performed very strongly across the board. For the quarter, our total company sales increased by 26% over the last year, with each business delivering double-digit organic growth. Operating margin increased 270 basis points, to 14.8%, and earnings per share increased 68%. This performance is the result of exceptional execution by our teams in a housing market which we believe is in the early stages of a period of long-term sustainable growth. Our stellar first quarter results were meaningfully ahead of a strong market and left a very good Q1 in 2020. We continue to drive market-beating growth while advancing our strategic agenda, including accelerating our margin improvement initiatives. Our focus on execution, efficiency, and safety drove share gains and favorable operational leverage. This focus allowed us to continue to service our customers and consumers with our industry-leading brains and innovation while also increasing investment in the business. These best-in-class results cannot be achieved without our wonderful people. They drive what we call the Fortune Brains Advantage, which I introduced to you one year ago. This powerful combination of a common set of capabilities, including category management, global supply chain excellence, and complexity reduction skills deployed across Fortune Brains will continue to provide both investment for sustained above-market growth and operating margin improvement into the future. Our performance continues to demonstrate that Fortune Brains is among the most reliable providers to our channel partners, delivering high levels of service in a high demand environment while proactively working to keep people safe. As the pandemic moves into its next stages, we've continued our efforts to keep our employees safe by working tirelessly to secure access to vaccines for our workers. Through the efforts of our local teams, we have held or are planning on holding nearly 20 on-site vaccination events across our locations. We are also working with local communities to help with their local vaccination events and are engaging and educating our employees to ensure the highest vaccine adoption rates possible. I am proud of our safety track record during the pandemic, which continues to be ahead of manufacturing and national benchmarks. That said, we've learned a lot about operating in this type of environment and will apply those lessons to continuously improve and make Fortune brands stand out among employers. On the backs of our continued outperformance, In a housing market with long-term sustainable growth momentum, we have increased the global and U.S. market expectations for our leading brands and our financial guidance for the year. Pat will go into greater detail later how we are successfully navigating demand-driven challenges to be able to pursue higher rates of growth, margin, earnings, and cash flow for our stakeholders. We will leverage our Fortune brand's advantage in this favorable market to accelerate operating income improvement and continue to free up incremental cash to make strategic long-term investments in our brains, innovation, digital strategy, and supply chain capacity. This will enable us to capture more opportunities and continue to increase our share gains over time. 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 first quarter and provide additional color on what drove the results. Finally, Pat will provide highlights on our financial results, balance sheet strength and liquidity, as well as our thoughts around increased guidance to our financial outlook for the year. Now, turning to our views on the housing market. Long-term fundamentals for housing and home products remain very favorable, and the rate of demand has further accelerated after a strong second half of 2020. It has been widely noted the U.S. is currently millions of homes underbuilt as growth of housing supply has not kept up with household formations. This dynamic has grown over a long period, and we expect the unwinding to persist for a long time. This supply imbalance has reached a point where, even at the current rate of new construction starts, it will take several years for supply and demand to come into balance. This severely under-built environment impacts both new construction and repair and remodel activity as consumers are faced with the choice of purchasing a new home or updating very aged housing stock. As a result, we are uniquely positioned with our leading brands and channel positions to take advantage of the tailwind of long-term housing activity. A differentiated exposure to new construction, combined with our powerful channel strength in R&R, will remain a lever for growth well into the future. Additionally, demographic-driven forces support the need for this expansionary housing environment to persist. The key millennial generation continues to move into their homebuying years, while the baby boomer generation is choosing to age in place and is adapting their homes accordingly. The pandemic has accelerated favorable trends that were already in place and has increased focus on the value proposition of the home. Even as vaccine distribution expands and the majority of the U.S. population is vaccinated this year, both employers and employees have seen the benefits of more flexible workplace arrangements. This resulting shift away from a full work week in the office will create continued demand for workspace in the home and allow employees the optionality of living further from their offices. Moreover, we have also seen purchases of second homes thrive. Our brands and products are well positioned to capitalize on this likely to be lasting movement. Turning specifically to new construction, activity remains robust. driven by these very favorable demographics, low inventory, and attractive mortgage rates. Current pace and activity seem only to be governed by the ability of builders to source land, labor, and materials effectively. Although inventory and rising home prices might create an uneven growth trajectory, we strongly believe that favorable demographics will fuel a multi-year sustainable housing expansion. As I mentioned, repair and remodel activity also remains very strong and has expanded into 2021 as consumers spend on home improvement projects to refurbish an aging housing stock. With demand for homes uphasing supply, older inventory is being purchased, leading to significant R&R projects as homes are modernized. For example, we saw a strong double-digit growth in the premium price point segments of our cabinets and plumbing businesses, indicating the strength of large-ticket R&R. Current homeowners are also driving investment as rising home prices have increased home equity levels to an all-time record of more than $7 trillion. This significant drive of R&R activity is amplified by the fact that consumers today are sitting on $2 trillion more in saving accounts than before the start of the pandemic. This combination of favorable demographics, severe underbuilding, attractive interest rates, high home equity levels, and the focus on the home as a place for multifunctional enjoyment gives us confidence in our increased market forecasts for 2021 and the anticipated persistent housing tailwind we expect for years to come. Much attention in the first quarter of this year has been paid to material and other cost inflation, as well as pressure in global supply chains. we are pulling every lever available to us to service our customers. As we have demonstrated, our ability to mitigate and overcome challenges, whether demand, supply, or inflationary in nature, has been proven through our consistent delivery of results. As we speak to you today, having once again delivered exceptional performance and having increased our financial outlook for the year for both sales and margin, we will continue to be laser-focused on driving consistent stakeholder value across the organizations, no matter the environment. With that market backdrop, some thoughts on the recent quarter. We further executed on our margin accretion objectives in the quarter, as we saw the continued benefit from our efficiency programs, which began in early 2020. Consistent with our strategy, the execution of our Fortune Brands Advantage capabilities created fuel for growth that allowed us to invest in key growth initiatives, including in our brand and product innovation, digital capabilities, capacity expansions 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 and have contributed to our growth and margin improvement in the quarter with an even stronger 2021 outlook we are accelerating investment behind our core strategies while also delivering margin improvement above our prior expectations at the same time We will maintain investment discipline, knowing that the pandemic is still ongoing and expansions do not always unfold in a linear way, so as to deliver consistent performance for our stakeholders. Now let me turn to our individual businesses and how we are positioning for a stronger long-term future, starting with plumbing. Our global plumbing group continues to outperform the global and U.S. markets. The business accelerated during the first quarter of this year, with sales up in excess of 30% in the quarter. These strong sales drove operating leverage, resulting in a 24% OI margin, notwithstanding increased investment in brand, innovation, and customer service. We experienced very strong double-digit sales growth across all brands, channels, and regions. Even if we exclude China to isolate the first quarter of 2020's COVID impact on the business, plumbing sales still grew in excess of 25%. Our Moen brand continues to win in its core products and adjacencies. Our leading brand awareness, purchase intent, and loyalty metrics show Moen persistently resonates with the key millennial consumer. Our cutting-edge marketing is winning accolades, and we are investing more behind our powerful campaigns. Our combination of advanced smart technology and on-trend designs drive share and profit growth as Moen leads in defining the way humans will interact with water, now and into the future. We made significant progress as our Flow by Moen technology rolled out into a key Boulder partner, and we also increased our retail distribution. We also further expanded Moen's smart home network with our Flow by Moen digital sump pump monitor, which won accolades at CES and the prestigious KBIS show. Our sustained investment in innovation, brand, and channel with unrelenting focus on product delivery and service levels will continue to perpetuate the cycle of outperformance for North America's leading plumbing brand. Additionally, Moen China continues to outperform its market through channel and category expansion while providing high levels of product quality and service to our customers. All of our channels grew double-digit versus their first quarter 2019 pre-COVID levels. We have rolled out increased brand investment in China and are seeing a very strong response to our campaign. Finally, the House of Roll grew in excess of 25% globally despite continued restrictions on showroom capacity in the U.S. and rolling lockdowns in Canada and Europe. The positioning of these brands as authentic luxury plumbing collections resonates with consumers who are leveraging their own strong balance sheets to elevate and customize their kitchen and bathroom designs. Turning to outdoors and security, Sales increased by over 45%, and operating margin increased by over 300 basis points to 13.5%. Organic sales, which excluded our recent Larson acquisition, came in at an impressive 15% growth. These exceptional results were driven by very strong double-digit decking and doors growth, continued growth in security, and exceptional execution across the segment. With respect to Larson, our teams are hard at work at integrating the business and capturing expected growth and synergies. The Larson team is proving to be a wonderful fit with our Fortune Brands family. There is more work to do, but we are ahead of schedule, and our expectation of synergies from this addition to our portfolio are as good or better than we thought at the time we announced the transaction. Turning to decking. Fiberon grew in excess of 40%, an impressive feat during a winter period that normally includes some seasonal slowing. Momentum in our decking brand has not only continued, but is strengthening. Similar to other composite board makers, we continue to take increasing share from lumber decking products. Our investment thesis continues to be confirmed as distribution expansion, coupled with leveraging our Fortune Brands Advantage capabilities, positions Fiberon for long-term growth in the market, fueled by trends in housing, outdoor living, and long-term material conversion from wood to higher-performing eco-friendly recycled materials. We remain on track to add capacity mid-year as we drive double-digit top-line growth across fiber. With inflationary pressure on lumber over much of the last year, the price differential between commodity wood and branded engineered decking is negligible, contributing to a greater number of customers choosing engineered materials. That said, even if lumber pricing moderates, The cost-benefit equation will continue to weigh heavily in favor of engineered materials, and the value proposition will continue to improve through branding and innovation. Sales in our legacy Doors branding experienced strong double-digit growth in the quarter, including robust demand in retail POS and increased wholesale activity as new construction ramped up during the quarter, leveraging our deeply developed channel. Our advantaged single-family new construction exposure is driving results at Thermature, and our team is working hard to supply increasing demand while navigating cost and supply chain challenges. Much like at Fiberon, consumers are increasingly realizing the benefits of engineered products over more traditional materials used in exterior doors and outdoor living. These conversion tailwinds will continue to power our doors business well ahead of the market. Our new design tools, innovation in performance and functionality, and the ability to customize through technologically driven skins and coatings have expanded the opportunity set in this product category where we have deepened our position as the number one exterior door brand. Turning to security, sales grew further this past quarter as commercial and international markets continued to open. Master Lock is continuing to demonstrate improved performance as it progresses its transformation under its new leadership. We are employing Fortune Brands Advantage capabilities within our security operations to drive growth and operating margin improvement. In fact, securities performance this past quarter contributed to the success of overall margin progression in the segment versus a year ago. Finally, turning to cabinets. Our cabinets team again delivered excellent performance in the quarter. Sales grew low double digits for the third quarter in a row as single-family new construction and bigger-ticket R&R increased. With strong growth across product lines at all price points, operating margins expanded by 180 basis points over prior year to 10.8%. That impressive margin improvement was off of a strong Q1 last year as new construction activity produced seasonally strong results a year ago. Our cabinets business continues to demonstrate how our hard work over the past few years produces market-beating top-line performance at increasing margins. We've considerably changed the way we look at both our current operations and view our future opportunities. Our work in our global low-cost supply chain is adding flexibility and resiliency to the business. We're building a scalable and cost-effective network across our platform with increased simplification and commonization, driving both operating leverage and best-in-class service. We're winning share against a fragmented domestic market and against imports, which are coming in at higher cost and at longer lead times. We're seeing growth at both ends of the price spectrum. Our cabinet's pivot plan, now in the late innings, positions our business extremely well to capitalize wherever demand materializes. In the first quarter, we delivered double-digit growth in both our make-to-order and value price categories. In our make-to-order business, we're seeing strong trends this past quarter in the U.S., led by premium price points and a nice return to performance in Canada as that housing market re-accelerates. Our best-in-class dealer network continues to deliver for us. Additionally, our cabinets team is exploring new omni-channel opportunities and is accelerating investments in e-commerce. Within our value price point cabinets, we continue to gain share while optimizing our operations and offerings. During the quarter, demand was widespread in value cabinets across builder, dealer, and retail channels. We made considerable progress in capacity and distribution with investments in the quarter in Mexico, as well as the on-time opening of our new Southeast facility to serve surging demand in Mantra and other value price products. We expect another breakout year for our Mantra line in 2021, which serves the market previously addressed by importers with stylish, short lead time product. Our cabinet's team has increased share by continuing to win in the market and is doing so on an advantaged, re-platformed cost base. More opportunity lies ahead, and the team is pursuing it with the same vigor and tenacity that they have 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... Our teams work tirelessly to deliver on our purpose, fulfilling the dreams of home, and we take great pride in our impact on the quality of people's lives within the home. The world is not without challenges or risks, health, safety, or otherwise. The home provides comfort, protection, respite, and is a center for human connection, whether it be work, school, entertaining, or generally forming deeper relationships between friends and family. We are central to the role of the home And our pride in that role comes through in our brains, innovation, and people every day. In addition to fulfilling the dreams of home, our company is committed to doing its part to help improve the lives of those around us through our environmental, social, and governance efforts. Whether it is through our environmentally responsible products, leading safety record, or diversity, equity, and inclusion initiatives, we are continually challenging ourselves to raise the bar. I encourage you to visit our website to see our recently released ESG report. Combined with attractive demographics, strong demand, and low supply of homes, we expect a long-term, multi-year tailwind for housing. As the market expands to fill the severe gap in housing supply, we expect to scale ahead of that demand and continue to take share consistent with our long track record. Our innovative portfolio of products is targeted at the heart of the market and has broader channel exposure than ever before. By leveraging our own actions to continuously improve the business and our proven resilience, we intend to capture the upside of this multi-year expansion while managing any volatility that may come our way. With our exceptional team, leading brands, strong channel positions, and powerful balance sheet, we are uniquely positioned to continue to drive accelerated value creation for our stakeholders. Our updated and improved 2021 outlook reflects the strength of our business. with robust growth translated to operating leverage and increased margins while we continue to invest for the long term. We expect to continue to outperform our markets in 2021 and beyond, while fully offsetting inflation and supply chain challenges to produce even stronger results. In addition, our powerful balance sheet positions us to continue to drive incremental value creation. We are excited for what our world-class brains and people can accomplish. With that, I'll turn the call over to Pat, and we'll speak to our financial results.