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spk02: Hello, my name is Tawanda, and I will be your conference operator today. At this time, I would like to welcome everyone to Fortune Brand's second 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 the question during this session, you will need to press star then one on your telephone. I would now like to turn the call over to Mr. Dave Berry, Senior Vice President of Finance and Investor Relations. Sir, you may begin.
spk06: Good afternoon, everyone, and welcome to the Fortune Brands Home and Security Second Quarter 2021 Investor Conference Call and Webcast. 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 call 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. I will now turn the call over to Nick.
spk03: Thanks, Dave. And thank you to everyone for joining us on the call today. I hope that you are all enjoying your summer while continuing to stay safe and healthy. Our teams, once again, delivered an exceptional quarter, driving outperformance on both the top and bottom lines. Our second quarter results demonstrated that we are delivering market-beating growth and margin progression, even in the face of numerous external challenges. We remain on track to achieve both our near and long-term performance objectives across all metrics. For the quarter, our company sales increased 41% in total and 32% organically, with all segments driving strong growth. That includes organic growth of 21% versus 2019 and over 9% sequentially versus our excellent first quarter of 2021. Current demand for our products remains robust, and our teams continued to drive accelerated share gains across the portfolio. Operating margin increased 110 basis points to 15.4%, and earnings per share increased 66%. Headwinds from inflation and supply chain constraints were significant in the quarter, making these results even more remarkable. Across our company, we are diligently working to meet demand and keep our customers served with our industry-leading brands. On the back of a strong market and our accelerating outperformance, we are again increasing our full-year 2021 sales and EPS guidance while maintaining our operating margin goal of around 15%. Pat will go into further detail on our increased guidance later in the call. While this quarter provided an easier comp given the COVID-related shutdowns in North America and Europe last year, each segment also delivered sequential sales growth and operating margin improvement versus a strong first quarter of 2021. We now expect full-year organic sales growth to be in the high teens as favorable demand trends persist. We continue to deliver on our strategic agenda, including accelerating our margin improvement and growth initiatives via our Fortune Brains Advantage capabilities, while also investing for future growth to drive increasing stakeholder value. These outstanding results would not have been possible without our exceptional team of people who continue to make the difference. putting safety first, going above and beyond to serve our channel partners and customers, and operating with a culture of excellence. Thank you to all who work hard each day, standing proudly behind our world-class brands that make an increasingly positive impact on people's homes, safety, and communities. Turning to the remainder of our remarks today, first, I will discuss what we are seeing in the home products market. I will then highlight key takeaways from our second 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 thoughts around our increased guidance to our financial outlook for the year. Now, turning to our view on the housing market. The long-term fundamentals for U.S. housing and home products remain very favorable. The U.S. housing stock is underbuilt by millions of homes and builders are currently pacing orders and managing backlogs to alleviate constraints on labor, commodities, and affordability while completing communities under construction. Though demand remains extremely robust, this pacing will result in a further elongation of demand that will provide long-term momentum to many of our leading brands, which are the preferred choice for builders and the trade. Our strong positioning across all channels, including the wholesale and dealer channel, which service pros and builders, is differentiating us and gives us exposure to the additional torque from new construction growth. With low inventory and builders facing supply, homeowners are buying existing homes from a very aged housing stock requiring repair and remodel investment. We have seen the strengthening of larger ticket R&R as the channels historically serving that demand have more fully opened. Within the retail channel, there has been some market commentary regarding demand normalizing and consumer spending shifting to other categories as the economy opens further. While the retail channel may be showing some recent signs of normalization for certain product categories, demand is shifting back towards the trade channels that were largely closed at this time last year. We are still expecting robust activity for the remainder of the year as reflected by our increased market and financial guidance. As we continue to make progress in our objectives, it is important not to lose sight of the long-term demographic tailwinds supporting this prolonged housing boom. The two largest segments of the population, millennials and baby boomers, both have significant need for housing and home products. Millennials, the largest segment of the population, will be a great force for years to come in forming and upgrading households, accelerating the need for home building, and driving investment in new homes and R&R. This demographic is still in the early stages of fueling housing growth. Meanwhile, baby boomers are retiring in large numbers with record equity in their homes and retirement accounts and are upgrading and adjusting their homes for their next phase of life. Given the sheer size of these demographics and severity of the U.S. underbuild, we expect these fundamentals to play out over many years to come. Our portfolio is excellently positioned from a product mix, price point, and channel exposure standpoint to take advantage of the long-term secular trends in new construction and R&R. We intend to outperform this market, consistent with our long track record. With that market backdrop, some thoughts on the recent quarter. As I mentioned, we had an excellent quarter. Our leading brands continue to resonate with consumers who are looking for world-class products driven by purpose and innovation. When consumers buy our products, they expect more than just functionality. They buy our brands because our brands are built with purpose. When they buy Moen, they are buying a brand that continuously innovates to advance water efficiency and conservation. When they buy fiber on decking, they are buying eco-friendly composite boards that are over 94% made from recycled materials. When they buy Masterbrand cabinets, They are buying quality craftsmanship using responsibly sourced materials. Our ThermaTru door systems are energy efficient, and our security products keep people and possessions safe. This sense of purpose and greater good for all resonates from our amazing employee base. Our recent ESG report has received accolades from investors, and I am very proud of the contributions our brains and people make to the environment and our communities. We are committed to doing even more in the future. Operationally, we continue to execute our Fortune Brands Advantage capabilities that fund investment and key growth priorities, including in our brand building and product innovation, digital initiatives, and capacity and distribution expansion. Those capabilities are contributing to our performance in the first half of 2021 and will continue to accelerate in the years ahead. Inflation, whether it be from material, freight, or labor, increased as we moved through the second quarter. However, as you can see from our strong performance we're pulling every lever available to us to offset these headwinds and serve our customers. We prioritize our continuous improvement and supply chain programs to offset inflation and then turn to price where necessary we've been thoughtful about where and when we take price, so as to maintain constructive customer relationships. As we have demonstrated over the past few years, our brands and products are desired by consumers and are capable of sustaining price increases while growing share. Our ability to mitigate and overcome challenges, whether demand, supply, or inflationary in nature, has been proven through our consistent delivery of results. We will continue to be laser-focused on execution, driving stakeholder value across the organization, no matter the environment. I mentioned it last quarter, and I will state it again, we are committed to offsetting inflationary and supply chain headwinds for the full year. With an even stronger 2021 outlook, we are accelerating investment behind our core strategies to continually deliver market beating growth and margin expansion over the long run. Now, let me turn to our individual businesses and how we're positioning for long term growth, starting with plumbing. Our global plumbing group continued to significantly outperform the global and U.S. markets this past quarter, taking share in every geographic region in which we operate. The business is firing on all cylinders, with sales growth of 38% or 33% excluding FX. Our strong plumbing sales drove operating leverage, resulting in a 24.3% operating margin for the quarter, notwithstanding increased investment in brand, innovation, and customer service. To put this margin performance into context, we delivered this result inclusive of increased brand investment of low double-digit millions over last year and significant expenditures related to improving our service levels to our customers. We achieved very strong double-digit sales growth across all brands, channels, and regions. We are winning share and generating incremental investment dollars to pursue further above-market growth and margin in both North America and in China. In North America, our plumbing business has never been stronger. We continue to be an industry leader in both innovation and key metrics on brand awareness, purchase intent, and loyalty among customers. Our momentum in the smart home plumbing market, including continued adoption by builders, insurance companies, and consumers of our Flow by Moen technology is driving further core growth, propelling the flywheel of top and bottom line performance. In China, Moen achieved double-digit growth on a very tough comp to Q2 last year as the Chinese market was reopening in this quarter a year ago. We continue to invest to position Moen as a leading brand with Chinese consumers and are increasing our total addressable market by expanding our product adjacencies. We are also making incremental investments in capacity and distribution. Finally, the House of Roll sales nearly doubled globally and increased double digits sequentially in all regions. The brands achieved these results despite many showrooms remaining appointment only. We're seeing a clear uptrend in premium and luxury demand, not only in plumbing, but across our entire portfolio, signaling consumer demand is strengthening for big-ticket R&R. Turning to outdoors and security, sales increased by over 60%, and operating margin was 14.7%. Organically, sales increased 26%. These exceptional results were driven by strong double-digit decking and security growth and double-digit growth in doors. Supply chain and labor availability continue to impact operations across multiple brands within this segment. Our teams are hard at work to offset these headwinds, which held us back from achieving full capacity production. Integration of Larson continues to progress well, and the business is performing as we expected. As with our other operations, the Larson team met the supply chain and select material availability constraints in the quarter head-on. Our teams across outdoors and security are working together to advance integration while capturing plan synergies. Turning to decking, Fibron grew nearly 30% for the second quarter versus a strong quarter a year ago, and we continue to operate in a sold-out environment. Incremental mid-year capacity will be utilized quickly, and we continue to take price and accelerate capacity expansion plans. Market share conversion from lumber to higher-performing eco-friendly composites continued to trend higher. Sales endorsed experienced double-digit growth in the quarter and would have been even better had operations not been constrained by labor and materials. As a leader in serving the new construction market, activity remained robust as it had for much of the past year. Similar to our decking operations, we are currently in near sold-out conditions and are working to optimize our supply chains to meet this high level of demand. Turning to security, sales accelerated this past quarter, growing strong double digits versus a year ago, and led by U.S. retail POS and the continued recovery of commercial and international markets. Our key North American retail market is back above 2019 levels, and we continue to leverage Fortune Brands' advantage capabilities within security to drive our momentum. Finally, turning to cabinets. Our cabinets operations again delivered excellent performance in the past quarter, with sales growing 31%, an operating margin of 10.9%. Even when compared to a very strong first quarter, the business achieved sales and operating margin growth. This now marks four consecutive quarters of double-digit above-market growth as the market leader. Demand was impressive in both value and make-to-order. Our current record backlog in cabinets is a clear sign of the strong demand for our product. Our Advantage dealer network has continued to drive increasing sales and margin progression for much of the past year. Additionally, our new facility in Georgia is fully open and ramping up production to serve demand. Mantra continues to perform well and is demonstrating the competitiveness of our low-cost global supply chain. In addition to strong demand, both Fortune Brands Advantage capabilities and a culture of continuous improvement have driven Cabinet's performance. We are on track to continue margin progression this year and in the future as we progress towards our goal of mid-teens margins as the market leader in the industry. In summary, we continue to see very strong demand for our products, driven by fundamentals and demographics. Our performance has been accelerated by the strengths and culture of our company, brand building and consumer-led innovation, expertise in channel development, and a relentless focus on people, execution, and continuous improvement. The operating environment has been quite challenging in 2021, but it was also challenging a year ago. We have faced these challenges head-on and have planned for future scenarios with our eyes wide open. While there may be other short-term obstacles and bumps in this long-term multi-year housing expansion, our team has proven its ability to overcome and emerge stronger time and time again. In addition to outperforming operationally, We are also well positioned with a strong balance sheet to continue to pursue future growth, whether organically or inorganically. Our stakeholders can count on our experience management team to continue to create value regardless of the environment. We expect to capture the upside of the long-term expansion in housing as we continue to build a great company for our stakeholders. With that, I will turn the call over to Pat, who will speak to our financial results and updated guidance. Pat?
spk07: Thanks, Nick. 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 second quarter results. Sales were $1.94 billion, up 41% from a year ago. Organic sales growth, excluding the Larson acquisition, was up 32%. Consolidated operating income for the quarter was $298 million. up 51%, or $101 million compared to the same quarter last year. Total company operating margin was 15.4%, up 110 basis points over the same quarter last year. EPS were $1.56 of the quarter, up 66% versus $0.94 the same quarter last year. It is important to note that our associates' focus on safety and a culture of outperformance drove these outstanding results. Demand has remained strong in cross product categories with growing strength in larger ticket and contractor installed products. Headwinds from increasing material and freight inflation as well as supply chain and labor inefficiencies are being addressed head on as reflected in our results. We are taking additional actions during the second half and our teams are working tirelessly to address these challenges. Our advantage business model of leading brands and channel positions across a portfolio of products is providing synergistic benefits as we navigate this environment. We are executing above market and our Fortune brands advantage capabilities enable us to deliver strong results for the company and our stakeholders. Now let me provide more color on our segment results beginning with plumbing. Sales for the second quarter were $695 million up $190 million or 38% or 33% adjusting for FX. Second quarter growth was up very strong double digits across all major brands, channels and geographies. Plumbing operating income increased 37% to $169 million for the second quarter Operating margin for the quarter was 24.3%, despite significant investment during the quarter in our brands, strategic priorities, and to service our customers. We expect 2021 margins to be above 22% for the full year. Turning to outdoors and security. Sales for the second quarter were $536 million. up $203 million, or 61%, driven by the addition of Larson, as well as strong double-digit growth in security and decking and continued double-digit growth in doors. On an organic basis, sales were up 26%. Door sales were up double digits in the quarter, driven by consistently strong retail POS and an accelerating new construction market, Reported sales results would have been even stronger within the quarter if not for labor and material constraints, the latter a fading impact of the Texas storms. Decking sales were up strong double digits in the quarter as our distribution gains in wholesale continued to drive results. Demand continues to exceed production capacity and we are selling every board we can make. We expect this will continue as additional capacity comes online in the fourth quarter and we are accelerating future capacity expansion plans. Security sales significantly rebounded with over 40 percent growth in the quarter, with continued strength in retail and a welcome pickup in the commercial market. Outdoors and security operating income was $79 million during the quarter, up 64 percent over the same quarter last year, driven by the addition of Larson and operating improvements in decking and security. Segment operating margin increased 30 basis points versus the same quarter last year to 14.7%. Turning to cabinets, sales for the second quarter were $706 million, an increase of 31% over the same quarter in 2020. We again saw strong growth of value price products and sales of higher price make-to-order products accelerated in the quarter. This positive signal for big-ticket R&R reflects consumers' increased desire and ability to invest in their homes. Operating income in the second quarter was $77 million, up 74% or $33 million versus the prior year. Operating margin for the quarter was 10.9%, up 270 basis points versus the same period a year ago. Before turning to the balance sheet, and our updated financial guidance, I would like to address the topic of increasing inflation as well as inefficiencies in supply chain and labor markets as we continue to execute in this period of long-term sustainable housing growth. While inflation headwinds were anticipated, they continued to strengthen throughout the quarter. As I mentioned earlier, we are taking incremental actions during the second half of the year to offset increased inflation. We always first challenge ourselves to drive enhanced cost savings, then when necessary, we utilize price. As inflation has intensified, we remain thoughtful regarding price increases. We seek to keep our channel partners and products competitive and to minimize disruption if and when off-cycle pricing becomes necessary. That said, our brands and products continue to demonstrate their ability to drive share gains while commanding additional price. Through this combination of cost and thoughtful pricing actions, we plan to offset all inflationary headwinds this year and expect to deliver 2021 operating margin improvement. We remain on our 21 and long-term margin improvement trajectory. Turning to the balance sheet, our balance sheet remains strong with cash of $460 million net debt of $2.1 billion, and our net debt to EBITDA leverage is now at 1.7 times. We ended the second quarter with approximately $430 million of available capacity on our revolver. We are in a strong financial position to continue to deploy capital to benefit our company and stakeholders. We have made and will continue to make significant investment both in our core Fortune Brands Advantage capabilities as well as into our brands through continued innovation, production capacity, and distribution enhancements. We also recently announced an additional authorization to repurchase common stock. The new two-year authorization allows for the purchase of up to an incremental $400 million of common stock. We have purchased approximately $156 million through the first half of the year. And as always, we'll be strategic and opportunistic when purchasing shares. We remain focused on deploying capital effectively to accelerate stakeholder value creation. I would now like to address our updated market and financial outlook. Given our continued outperformance and a strong home products market, we are raising our market and financial outlook for the year of 2021. Based on the expectation that the global market for our products will now grow 10 to 12%, with the U.S. housing market growing 11 to 13%. And within this market forecast, we now expect U.S. new construction growth of 11 to 14%, and U.S. R&R growth of 11 to 13%. Based on these assumptions, our revised 2021 full-year sales growth is expected to be 23%, to 25% or 16% to 18% on an organic basis. Our full year operating margin is expected to remain around 15%. We expect second half operating margin to average around 15%, similar to the 15.1% achieved during the first half. The third quarter is expected to experience modest margin compression while fourth quarter margin is expected to expand as mid-year actions reflect more fully in our income statement. We continue to target meaningful margin progress during 21 and are tracking to our long-term margin objectives, demonstrating our ability to accelerate value creation regardless of the environment. We now expect full-year EPS within the range of 565 to 585 on a before charges and gains basis, of which the implied midpoint equates to earnings growth of 37% over our record 2020. Specifically, our outlook for each business as it relates to our updated guidance includes plumbing net sales growth of 21% to 23%, with operating margins above 22 percent. Outdoors and security net sales growth of 44 to 48 percent or 14 percent to 16 percent excluding Larson with segment operating margins of 15 percent to 16 percent or approximately 16 percent to 17 percent adjusting for purchase accounting. Cabinet's net sales growth of 13 percent to 15 percent with operating margins approaching 12%. We expect 2021 free cash flow of approximately $675 million to $725 million, which includes additional investments and capacity to accelerate growth. We anticipate a cash conversion rate of 80% to 90%. The revised full-year EPS outlook includes the following assumptions. corporate expenses of about $104 million to $106 million, interest expense of approximately $83 million to $86 million, a tax rate of between 23% and 24%, with a second half tax rate more in line with our longer term rate of around 25%, and average fully diluted shares of approximately $140 million to $141 million. Our increased forecast represents the outperformance of our business in a strong market, including continued share gains and positive operating leverage. In addition, our relentless focus on internal improvement and driving synergies across our portfolio will enable us to extend our continued best-in-class track record. Our Fortress balance sheet will continue to allow us to pursue internal and external growth, and we are actively assessing opportunities to do so. We expect to outperform a long-term housing expansion and cannot be more excited about the opportunities ahead. I will now pass the call back to Dave to conclude our prepared remarks.
spk06: Thanks, Pat. That concludes our prepared remarks on the second quarter. We will now begin taking a limited number of questions. Since there may be 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, will you please open the line for questions? Thank you.
spk02: Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Reholt with JP Morgan. Your line is open.
spk05: Thanks. Good afternoon, everyone, and congrats on the results. Thank you. First question, I wanted to perhaps get a little bit more color, if we could, on the back half margin outlook, appreciating the fact that, you know, in a sounds like in an increasingly inflationary environment, you continue to offset. I was hoping to get a sense of, you mentioned that you're pursuing some incremental actions to offset the incremental inflation in the back half. I was hoping, and you always kind of talk about balancing cost savings with price increases. I was hoping maybe to get a sense of, when you think about the incremental headwind that you're seeing in the back half, how much are you expecting to offset through cost versus price? And also, perhaps more broadly, if you could talk about perhaps on the cost side and operational excellence, productivity, how some of the Fortune Brands Advantage programs and initiatives you know, are contributing to that ability to offset.
spk03: Sure, Mike. This is Nick. I'll start and give you some thoughts conceptually and Pat can fill in some of the detail. But, you know, as you'll note and as you've noted, I mean, you know, the business continues to perform and demonstrate its resilience, you know, notwithstanding the environment. And so, you know, We're seeing a really strong market and we're seeing, you know, some very large inflationary pressures as well as just, you know, supply chain disruption that continues, you know, that's been widely reported. And, you know, if you step back for a second and go, well, how does the business continue to perform, you know, a lot of it stems from the fact that, you know, we are on a margin improvement journey and we're doing it very programmatically and very deliberately and we're leveraging it across the whole business. And so I think if you were to take us, if we were just static and we're just trying to hold the line and then you might see, you know, buffering from outside forces. But since the business is so geared towards a continuous improvement mindset and taking these Fortune Brands advantages and deploying them throughout the business, we're able to see those benefits come through even in a challenging environment. And so if I take Fortune Brands Advantage, for example, you've got three big pillars, business simplification, you've got category management, and you've got global sourcing. And two of those, business simplification and global sourcing, really do drive, I'd say, both business resilience and cost improvement. And so coming into the year, we had significant plans to take those and leverage them throughout the business in different places and in different pockets. And, you know, it goes down to desire, as I said before. I mean, you know, this is backed by investments we've made in building the capabilities, in building the team. So, for example, you know, just this year we hired a Fortune Brands, you know, center of excellence in global sourcing, you know, fairly material number of people that were continuing to build out that team. And so by doing that, you know, we had the business on a trajectory where we're able to drive cost improvement as well as improve the quality of the supply chain because they're taking complexity out. And what you find is that suppliers that are able to work with us to, you know, meet the sort of input cost that we're looking for actually tend to be the better suppliers. And so where we put these programs in place, we actually found the business is actually more resilient at lower cost versus less resilient. And so that is a big underpinning of the progress that we've been able to make. And then, of course, if that doesn't cover everything, as we've said, we do look to take price. Now, we try not to do it outside of our regular cadence. We certainly had to this year. I think what price has spoken to is the strength of the brand. and the strength of our channel management, because despite the fact that we've taken price, we continue to gain share, which is telling you that the value equation still sits very much in favor of the consumer. You know, we're innovating. We're adding a lot of value to our products. We're building brands, and so, you know, we're able to take price from where we have, you know, the price has gone in. I'm sure you guys are doing your channel checks, and you're seeing that, and it's being well-received. We're just trying to do it in a way that's as constructive as possible, notwithstanding the headwinds that we're facing. It's that really programmatic approach, and I think the fact that we've taken a more programmatic approach is really paying off now. What I'll tell you is particularly exciting about it is, from my perspective, we're just getting started. These are investments that we've made over the last couple of years. We're just building out these teams, and we're just getting rolling, and that momentum will build over time. We expect it to continue to deliver for the business for a very long time to come. Pat, anything?
spk07: Yeah, you know, Mike, hearing your question, trying to get to the numbers of it all, when we talked at the end of the last quarter, we talked about commodity freight and tariff inflation in the range of, you know, 4% to 5% of COGS. We're probably in the range of 6% plus of COGS. So you're starting to talk a dollar amount that's approaching $250 million, you know, with All components, you know, tariffs are a pretty minor part of that. They're pretty static year over year. But both freight and commodities, a big chunk of that. We don't break down what chunk is cost versus what chunk is price. They're both contributing very significantly to us offsetting that, and we plan to totally offset that this year. I'd kind of point us to the margin journey we're on As Nick said, we're pointing still towards 16% to 17% margin by 2023, which is 75 basis points a year plus of margin improvement, and we're tracking that this year. This year, we'll use cost and price on the variable side to get after the variable inflation, and we'll lever the structural cost savings we made the last couple of years, especially in cabinets and a few other of our businesses and continue to make in our businesses and volume to lever towards the margin improvement this year. They'll both be driving the margin improvement this year. And what I'd say is we're eight quarters in a row of year over year quarterly margin improvement. We expect to keep marching on that, though the third quarter will present some challenges. This year, of that 6% margin inflation, about 70% of it will hit during the second half with a disproportionate chunk in the third quarter. And so the back half will be about a 15-ish percent margin to complement the front half to deliver somewhere around that for the full year. but we'll probably be 30 to 60 basis points down in operating margin for the third quarter, but then probably 30 to 60 basis points of margin up in the fourth quarter to deliver a back half that's right around 15%, and go into next year solidly on the ground to keep making progress towards our longer-term goal.
spk05: That's great, and appreciate all the... the quantitative color there. It's really helpful. I guess maybe taking a step back strategically, you know, you mentioned in terms of your free cash flow deployment, you know, as always, you evaluate a combination of share repurchase and both on M&A. Obviously in the last couple, you know, three, four years, you know, you've really bolstered the outdoor and security segment that follows before that, kind of building out or rounding out a little bit on the plumbing side. How should we think about the opportunity set over the next two or three or four years across your different segments or portfolios? You know, it seems like cabinets has certainly been on the quieter side. I think the last major one was Norcraft way back when. You know, plumbing, you know, you've obviously made some very nice add-ons with the House of Roll now rolled up into that. Just curious if there's anything left, you know, perhaps to think about or expect on the plumbing side, or is it really more just, you know, building out opportunistically the outdoor portfolio and, Specifically on the outdoor, I'm particularly curious if there's any product categories that perhaps we should be thinking about.
spk03: Sure. I'm happy to give you some perspectives. You're right to point out we're well aware of the strong cash generation and being very thoughtful about ways in which we can continue to create value for all our stakeholders here. And, you know, our priorities remain the same. I mean, you know, first and foremost, you know, we look to our own business and CapEx opportunities to grow us, you know, and drive the strategic priorities. And I think, you know, with this level of growth, opportunities there to continue to invest behind it, which are pretty exciting. M&A, and then where, you know, we don't find good M&A opportunities, we remain, you know, focused on returning cash to shareholders. On M&A, I'll say the pipeline is robust. And it's as robust as I've seen in a very long time, if not ever. And so there's a lot of stuff out there. We're going to remain disciplined and look for places where we can figure it out. That's the bar we hold very high for us. The areas that are of interest remain the same, certainly. Security, we're very excited about opportunities in the outdoor space, are focused on things that you historically think of in terms of Fortune brands, where we believe we can create brand, where there can be structural advantage, where we can leverage our channel know-how. are the areas in which we'll focus. The other areas, you know, in our doors that we've looked at that we've decided are more commoditized and, you know, are not worth pursuing. But as that space becomes increasingly, you know, built out, we're continuing to look at opportunities there, and we think there's some stuff that's pretty interesting that could add to the portfolio, and really work in an integrated way. I mean, when you think about even, you know, Larson, with doors, when we looked at Larson, you know, one of the most interesting things that popped out, that screen door to let light or air into their homes. It really was to create an access point to the outside. And so, you know, combining that with the leading exterior door business in the U.S. small container door system could be a very interesting kind of indoor-outdoor living thing, which is certainly a trend that you see. So, you know, that is an area. We do remain very focused on plumbing opportunities. And, you know, they're not easy to come by. But there, you know, there are things out there that are of interest. And particularly as our plumbing group continues to do such a phenomenal job of building out the adjacencies and the areas in which it competes, you know, it opens the aperture of the types of things that we can add to the group and, you know, to really move the business into kind of residential water management. and creating great experiences for consumers with water. So as you open that aperture, more opportunities can flow through. Connected Home is a very interesting industry. We have acquired Flow, as you're well aware, and that is very, very exciting for us. It's being well-received by builders, by insurers, by consumers, and You know, there's a little question on our mind that there's an inflection point at which that really becomes standard. You know, that sort of digitized all-home management of water becomes the standard in homes. When that inflection point comes, you know, we're not that brilliant that we can call it, but you can see that really becoming something of so much value that it becomes undeniable. So what other spaces... are there what other adjacencies are there in the connected home where again we could create value you know now you asked a little bit earlier about fortune brands advantage it certainly helps uh as we go out and look at what's in the pipeline because we have built these skill sets out you know in category management in global supply chain management in business simplification essentially that we can look at other businesses and see how we can deploy those capabilities against those businesses to create value. And it becomes a very powerful tool in our quiver when we think about creating value for stakeholders. And so, you know, we're excited, you know, again, you know, the bar we hold high is creating value. And we want to do things where we cannot.
spk00: Great. Thank you. No worries.
spk02: Thank you. Our next question comes from the line of Susan McClary with Goldman Sachs. Your line is open.
spk01: Thank you. Good afternoon, everyone, and congrats on a great quarter.
spk00: Thank you.
spk01: My first question is around, you know, your plumbing margins have been really impressive. I mean, they came in well ahead of where we were for the second quarter in a row. And even understanding the investments there, you were about flat year over year. And so I guess two questions there. One is, you know, can you talk to what's driving that outperformance in there, the sustainability of it? And the guide of, you know, 22 plus percent for the year suggests a pretty decent deceleration sequentially, which I know that there's some inflationary pressures and those kinds of things coming through. But still, it feels like on a relative basis, that's a big move down. Can you just talk a little bit about how we should be thinking about that and what the drivers there are?
spk07: Yeah, Sue, you know, I think first the team there is just doing a great job of managing its business to simultaneously drive growth and margin, but make the right investments. But you're right in observing the second quarter was particularly strong. You know, part of that was FX driven in that, you know, we had about, seven and a half-ish million dollars of FX benefit to OI, and that is almost all in plumbing with the strength of the Chinese currency versus the U.S. currency. They still have a very strong margin without that, and they've made double-digit brand investment up in the quarter year over year, but they're going to be also accelerating brand investment outside the back half of the year. What happens in the back half of the year is the currency is neutralized. You get the effect of the currency benefit fades away the back half of the year and the investment goes in. Therefore, you end up with a back half where they're planning out closer to their longer term margin trajectory, which should be 22 plus percent.
spk03: And should I just add, I mean, conceptually, you know, we've got a business that's going to grow organically, you know, 21% to 23% with margins above 22%. We're going to look for ways to invest to continue to drive that top line. And, you know, the fact that the business produced these types of margins with double-digit millions, you know, increased investment in brand. On top of, you know, versus last year, we're actually, you may recall in Q2 of last year, we'd actually increased our brand investment on 19. And so it's kind of compounding investment levels, but really driving a top line at a phenomenal pace. And so, you know, that's the flywheel that we're trying to keep going here. And we'll keep going.
spk01: Okay. All right. That's very helpful, Collar. My second question is a bit higher level. You know, you talked to your expectations for R&R spend to be up about 11% to 13% this year for the industry overall. You know, clearly some of our channel checks have pointed to some deceleration in the consumer side in the second quarter. I guess, can you talk to what you're seeing kind of across the business, across the different channels, and what gives you the confidence around that 11% to 13% when you do think about the full year?
spk03: Yeah, I'll start, and Pat may have some color to add. You know, we see the same noise that you're probably seeing in commentary around deceleration. And I think without a doubt, in big bucks retail, we've seen some deceleration as other channels have moved up. But we've got a pretty broad view over housing products when you look at the portfolio. And, you know, this is a question that we've tested deeply with our teams and we're not seeing deceleration at all you know in fact we're still seeing inputs at a level um in excess of capacity and we're seeing backlogs that are growing uh and our team is working unbelievably hard uh to try to meet customer needs and get product out the door and we believe it's driven by these fundamentals which you know remain to be true that you know people need housing that the market is fundamentally underbuilt, that there's not enough new construction and that there's an extremely aged housing stock that is in dire need of renovation. And you add to that that, you know, home equities are high and, you know, people, even if it's softened a little bit, which isn't actually a bad thing because we believe it allows for sustainability of the marketplace, you know, houses continue to trade, which is a good catalyst. And so, you know, with those things in place and we do, you know, our checks across all of our portfolio, speak to our teams and our customers, We're seeing it continue to be very robust and believe that it'll continue to be robust as people need to renovate, you know, very age housing sucks. So anything you'd add to that?
spk07: Yeah, you know, so I put the context in, you know, our expectation on USRR specifically, you know, going beyond the DIY centric channels is, you know, we're going to see mid to high single digit growth across the back half of the year. And the reason that helps support a full year at 11 to 13 is we were probably, and you can always kind of judge this thing as best approximately when you're this close to the end of the first half. But we, by our best estimates, think that the first half was in the high teens to low 20s, right? So there's been a really strong first half of growth. The second quarter was stronger than we would have anticipated. and the back half is very much within the expectations we had even a quarter ago, which is, you know, strong mid to high single-digit growth of total R&R.
spk01: Okay. Thank you very much for the color, and good luck.
spk07: Yes.
spk02: Thank you. Our next question comes from the line of Tim Weiss with Bayer. The line is open.
spk04: Hey, guys. Good afternoon, and nice job.
spk00: Thanks, Ted.
spk04: Hey, maybe just starting big picture. You mentioned several times in your prepared remarks, Nick, that you're operating near capacity in several areas of your business. Can you just talk about kind of your capacity availability as you kind of think about growth over the next two to three years and really where you might need to add kind of incremental fixed capacity versus maybe adding labor shifts?
spk03: Sure. Well, to a degree, you know, capacity has been constrained, you know, less by sort of hard assets, but, you know, certain labor constraints have been a real challenge. Transportation's been a real challenge. And, you know, that has just sort of capped what I call shorter-term capacity. Now, you know, we have seen some labor start to flow back, particularly as unemployment benefits have lessened in certain states. And so, you know, we're very interested to see what happens in the fall when that starts to go away. And we've seen a little bit of easing up on logistics and transportation, although, you know, not a ton. But those are short-term constraints that, you know, we do believe will ease up over time. On, you know, the longer-term kind of capital journey as we look at capacity, You know, there are areas where we're investing, I would say, you know, fairly across the board. Obviously, in cabinets, you know, we just opened a new facility that's fully open now but still ramping, and so that brings in more capacity online. And we'll continue to look as we, you know, fine-tune that business. But I would say that that team is doing a phenomenal job. getting more out of its existing footprint, and that's part of their margin journey as they simplify that business that actually frees up capacity inside of the existing footprint. And so, you know, I think we'll create more headroom there. Decking, you know, we're at capacity. We've got more capacity online coming this back off of the year. We think that will be lapped up immediately. We're looking to accelerate, you know, a multi-year plan to see if we can bring some more in a little bit sooner, and we'll continue to add there. And, you know, that product is such a value for a consumer, whether it be, you know, at current lumber prices or lower lumber prices. You know, you're comparing a product that is innovative, branded, and really consumer-desired versus something that's a commodity, that is going to run for a very long time, and so there will be capacity needs there. In plumbing, we've invested in a new distribution center as well as in our global supply chain. That's going to give us some headroom, but with the kind of growth that we got, we continue to work very, very hard. And then, you know, so DOORS is also kind of, you know, nearing kind of capacity, and, you know, we're going to look at incremental as there. You know, Pat can speak to it from a CapEx journey perspective. I would say, you know, it's fairly in line with historic, maybe, you know, a bit more investment. But from, you know, a headroom perspective, what I'd tell you is, you know, we look at capacity very – seriously with the teams at every quarterly review and have a multi-year plan to add it. And so really the constraints I'd say now are more short-term in nature, but we will have to add a hard capacity over the next few years to meet the kind of demand that we're seeing now and we expect to see into the future.
spk07: Yeah, Tim, I'd say just put some numbers around it. Last year was kind of a low CapEx year for us at 150-ish. It's mostly been in the kind of 175 to 200 prior three years to that. And we're probably hitting this year that's going to be somewhere in the 225 to 250, and next year that's in the 250 to 275 range. And that uptick is going to be going disproportionately to places like decking, fiberglass doors for ThermaTru, plumbing distribution and luxury plumbing capacity. Those are going to be the disproportionate things but to Nick's point right now you know the pinch points we're feeling kind of for the next three to nine months are mostly around labor and logistics and then you know some of the things we're working with our vendors on whether they were force majeure things coming out of spring storms or their capacity needs okay okay that's great thanks for all that and then
spk04: I know it's early, but is there a way to think about the carryover impact of inflation next year? And then just if we actually do see input start to moderate, I mean, could you talk about your ability to kind of keep the pricing and the productivity offsets that you're using this year if we did see any moderation?
spk07: Yeah, I don't know that I'm prepared today to make a call on next year's inflation. I certainly, you know, would say, you know, we – we would have thought early this year that maybe inflation would be in the two and a half to three and a half percent range. So, you know, it would go to logic just, you know, with us conveying six plus percent, we're probably carrying in three points of inflation into next year that we weren't anticipating in our strap plan, but we're managing that now and we'll manage that. We'll manage that next year. I think in terms of, our ability to hold pricing and or drive margins, you know, we're confident in our margin journey. And, you know, we will be mindful in managing prices as inflation maybe changes on the downward as we were in managing it on the uptick. We were very thoughtful with our channel partners to keep our products competitive for them and to keep them competitive in the end markets for consumers. And so we'll use that same logic as we manage any dynamics next year that might be deflationary. Let's hope that's a little bit of the problem we face. I mean, the good news is it does seem to be stabilizing a bit right now. So, you know, that is one favorable dynamic that is playing out right now.
spk04: Okay. Okay, great. Well, nice work, and good luck on the second half.
spk02: Thank you. Thank you. Our next question comes from the line of Adam Van Garten with Zellman. Your line is open.
spk08: Hey, guys. Thanks for taking my question. Just curious, on the 3Q margin decline, any of the segments impacted more than others, or is it pretty much across the board?
spk07: It's pretty even across the board, Adam. I wouldn't call out – I mean, First of all, the team is focused on avoiding that. We just want to be signaling some realistic expectations, and I think that's all kind of pretty manageable given the sense that they're experiencing almost 40% of the year's inflation in the third quarter.
spk08: Got it. Okay, and then just in decking, it sounds like you guys are sold out. Demand's really good. Anything you're hearing on the DIY side? in terms of weakness. I know there's a fair amount of exposure in overall composite decking to DIY. Just curious with the lumber decking read-throughs being fairly negative, if you're seeing any signs of that in composite decking.
spk03: I wouldn't say it's negative by any means. If you looked at the growth rates a year ago and through the back of the year, they're astronomical. So, you know, I think it was like 40%. So, you know, the comps are pretty huge in the gains that you see more modest growth, but it's still been healthy. And then on the wholesale side, you know, our distribution gains continue to take place. And so as we've invested in that channel and really built it, from scratch on the back of our very strong firmature relationships, and that's because channel management there, we're taking a lot of share, and so the growth on the wholesale side has been very, very strong as we've really opened up new channels and new geographies.
spk08: Got it. Thanks. Good luck. You too.
spk03: Thanks.
spk02: Ladies and gentlemen, that concludes our call for today. Thank you for participating. You may now disconnect. Everyone have a wonderful day.
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