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. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration.

You may begin your conference call..

Good afternoon, everyone, and welcome to the Fortune Brands Home & 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 Investors section of our fbhs.com website..

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’ve achieved in 2020, a strong fourth quarter results cuts 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 $1 billion in capital towards M&A, share buybacks and dividends, generated excellent free cash flow and exited the year with attractive leverage.

And amidst to all of this activity, our teams worked tirelessly to keep consumers and customers supplied, while maintain 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’ve 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. And it has been widely noted, the extent to which U.S.

housing has been underbuilt is several multiples greater than the overbuilding of the mid 2000’s. And yet new construction starts are far short of their peak, and only now reaching historic averages..

Thanks, Nick. And as a reminder, the majority of my comments will focus on income before charges and gains in order to best reflect ongoing business performance. Let me start with our fourth quarter results. Sales were $1.66 billion, up 13% from a year ago.

Consolidated operating income for the quarter was $246 million, up 19% or $40 million compared to the same quarter last year. Total company operating margin was 14.8% up 70 basis points over the same quarter last year. EPS were $1.25 for the quarter, up 25% versus $1 the same quarter last year.

Our associates focused on safety and on serving our customers during challenging circumstances made these remarkable results possible.

Our teams use the circumstances of 2020 to enhance focus and proving share competitiveness and cost efficiency, driving 2020 growth and accelerating our margin improvement trajectory, providing an excellent 2021 setup.

Our advantage business model with leading brands and channel positions allowed us to navigate 2020s uncertainties to outperform the markets in which we operate. Now let me provide more color on segment results, beginning with Plumbing. Sales for the fourth quarter were $638 million, up $89 million or 16%, or up 15% adjusting for FX.

Fourth quarter growth was strong double-digit across all major products, channels and geographies. Full year 2020 sales were up almost 9% versus 2019. Plumbing operating income increased 17% to $139 million for the current quarter. Operating income for the full year was $490 million, an increase of 12% over 2019.

Operating margin for the quarter was 21.8%, and over 22% for the full year. Our Global Plumbing Group concluded its fifth straight year of strong growth in margin performance. Our strategies are clearly working and we expect another strong year for Plumbing in 2021. Now turning to Outdoors & Security.

Sales for the fourth quarter were $367 million, up $35 million or 11% driven by double-digit growth in doors and decking, and a return to growth in security. Full year 2020 sales were $1.4 billion, an increase of over 5% versus the prior year.

We expect all product categories to drive 2021 growth with particular strength continuing in doors and decking. Door sales were up double digits in the fourth quarter, driven by strong retail POS and accelerating single-family new construction. We expect sales growth to continue in 2021 as both retail and new construction remain strong.

Decking sales were up strong double digits in the quarter, as our distribution gains achieved new performance levels. We added incremental capacity during the quarter and more capacity will come online in 2021. The secular trends favoring composite decking remain as strong as ever.

Security sales returned to growth in the quarter with retail products growing double digits, while commercial products and markets remain soft due to COVID-19. Outdoors & Security segment operating income was $58 million during the quarter, up 17% over the same quarter last year, driven by operating improvement in doors and decking.

Operating income for the full year was $205 million, an increase of approximately 16% versus 2019. Segment operating margin for Outdoors & Security increased 90 basis points for the quarter over last year to 15.8% and was 14.5% for the full year, up 130 basis points versus 2019. Turning to Cabinets.

Sales for the fourth quarter were $656 million, an increase of 11% over the same quarter in 2019. Full year 2020 sales were $2.5 billion, up 3.4%.

We continue to experience strong growth of value-priced products, and sales of higher price make-to-order products returned to growth this quarter, a positive signal for big ticket R&R and reflective of the stabilization of imports and consumers increased desire and ability to invest in their homes.

Operating income in the fourth quarter was $76 million, up 27% or $16 million versus the prior year and full year operating income was $256 million, up 11% or $26 million versus 2019. Operating margin for the quarter was 11.6% and 10.4% for the full year, up 150 and 70 basis points respectively versus the same period a year ago.

Full year Cabinets margin performance was very strong, given big ticket R&R, inclusive of Cabinets, experienced the most severe demand and operating impacts during the second quarter COVID shut down. We are very pleased with Cabinets second half margin performance of 11.9% and strong year-end and exit rate.

We expect Cabinets operating margin improvement to continue in 2021, as we build on our efforts in 2020 to further enact operational efficiencies and aggressively leverage our market beating growth. For FBHS as to the whole to sum up our full year consolidated 2020 performance.

Sales increased approximately 6% to over $6 billion for the first time ever as a public company. EPS grew over 16% to $4.19 demonstrating our ability to deliver growth and margin improvement by outperforming the markets in which we operate in an increasingly efficient manner.

Our total company operating margin was up 80 basis points to 14.1% ahead of our full year 2020 plan. Free cash flow was $742 million reflecting a conversion rate of 126%. 2021 profit growth will benefit from the efficiency programs initiated in 2020 and the continuation of a strong U.S. housing market.

This will result in positive operating leverage across the company, as we continue to enact Fortune Brands core capabilities across the portfolio.

Before turning to the balance sheet, I want to take a moment to provide perspective on expected size of material and cost inflation and the face of current elevated demand and amid a backdrop of a fundamentally strong housing market. We continue to deploy a multitude of tools to mitigate or offset inflation within our business.

We do this through continuous cost improvement within our operations having enacted major improvements just within the past year. We also employ cost sharing with suppliers where appropriate and continuously look for ways to add flexibility and durability to our global supply chain. Finally, when necessary, we act via pricing.

Through this combination of actions, we expect to navigate 2021 inflation and achieve our margin improvement objectives. We will mitigate, offset and overcome inflationary headwinds and deliver our goals of market beating growth and continued margin expansion. Turning to the balance sheet. Our balance sheet remains strong with cash of $419 million.

Net debt of $2.2 billion and our net debt to EBITDA leverage end of the year at 2.1 times or slightly below 2 times on a pro forma basis, inclusive of LARSON EBITDA. We now have $865 million of total liquidity available between our $1.25 billion revolver and supplemental $400 million revolver.

We have the ability to make investments and deploy capital to accelerate growth and shareholder value creation and are assessing opportunities to do so. We will also look to continue to return capital to shareholders through targeted buybacks and our dividend.

Turning to the details of our outlook for 2021, based on the global market for our products growing 5% to 7%, with the U.S. housing market, also growing 5% to 7%, and within this market forecast, we expect U.S. new construction growth of 10% to 12% and U.S. R&R growth of 4% to 6%.

Based on those assumptions, we expect 2021 full year sales growth of 12.5% to 14.5% or 5.5% to 7.5% excluding LARSON. We expect full year EPS within the range of $4.85 to $5.5 on a before charges and gains basis of which the implied midpoint equates to 18% EPS growth versus 2020.

Specifically, our outlook for each business as it relates to our overall plan. Plumbing net sales growth of 7% to 9% with operating margins of 22% plus.

Outdoors & Security net sales growth of 35% to 37% or 5% to 7% ex-LARSON with segment operating margins of 14% to 15% or approximately 15% to 16% adjusting for purchase accounting and one-time integration expenses. Cabinets net sales growth of 5% to 7% with operating margins of 11% to 12%.

We expect 2021 free cash flow of approximately $600 million to $650 million, which includes the accelerated investments in capacity and inventory to drive growth across all of our segments. We anticipate a cash conversion rate between 85% and 95%. The annual EPS outlook includes the following assumptions.

Corporate expenses of about $92 million to $93 million; Interest expense of approximately $82 million to $86 million; a tax rate between 24.5% and 25%; average fully diluted shares of approximately 140 million to 141 million.

To summarize, we have put together a 2021 plan that provides solid sales and excellent EPS growth, while we continue to accelerate investments in brand, innovation and advantage Fortune Brands capabilities.

Potential exists for upside to our plan and guidance, if some combination of the following occurs, labor is available to address in full the strong expected U.S. new construction and big ticket R&R demand, if U.S. R&R growth improves beyond 4% to 6% assumed in our plan.

Government stimulus increases materially beyond programs currently in place without impacting interest rates. Better insights to these opportunities will unfold during the first half as this occurs and as merited, we were applying our guidance accordingly. We expect a long runway of fundamental U.S.

housing growth to result in prolonged market strength for our products. With market growth averaging 5% plus per year over the next few years, assuming the current level of unemployment continues to stabilize that improves.

We expect our sales to continue outperforming the market and our margin progressions will remain accelerated, averaging improvement above 50 basis points in 2021 in each of the next two to three years. Our balance sheet strength supports capital deployment.

And while we delivered over $1 billion in M&A, share repurchases and dividends in 2020, we are still advantageously positioned to access further opportunities to deploy capital. We see multiple paths of value creation to execute for our shareholders and our company has never been better positioned to capture these opportunities.

Our teams remain committed to driving market being sales performance and continued operating margin improvement. I will now pass the call back to Brian to open the call up for questions.

Brian?.

Thanks, Pat. That concludes our prepared remarks on the fourth quarter and for the full year. I will now turn the call back over to the operator to begin the question-and-answer session.

Operator?.

Thank you. Your first question comes from the line of Susan Maklari from Goldman Sachs. Your line is open..

Thank you. Congratulations everybody on a great quarter and a great year.

My first question is, kind of looking at the 2021 guide, I know historically you’ve talked to an incremental margin of about 20% to 30% and it seems like the midpoint of the revenue guide for this year implies something that’s kind of at the lower end of that range in terms of the incremental.

And Pat, I know that you laid out some of the factors that you’re kind of thinking about that could impact where you end up for this year, but can you kind of outline for us, maybe some of the things that could take you to the higher end of that 20% or 30% range and how you’re thinking about that across each of the different segments?.

Yes. In terms of margin overall, too, I start with, we remain committed to getting the total business above 15%, which is a target we’ve had for awhile. And on our organic basis, next year, we’ll be very much approaching that.

We should be at 15% or very close to it on an organic basis by the end of next year, which means on an organic basis, we’ll be driving 70 to 80 basis points of margin improvement, if not more and be on the higher side of that incremental margin. We do as we fold LARSON into the business, we have some purchase accounting and some integration costs.

So our reported margin might be closer to 14.5% for the year. But we expect over 2020 and 2021 combined to achieve 150 basis points of total margin improvement, we’ve been talking about for a while. And as we get through 2021 to be driving for the next two to three years, 50 plus basis points for each of the following years after that.

And so very much on track, if not ahead of track with where we were at the Investor Day, we had held all the way back in February 2019 despite multiple tariff waves and a pandemic. So we feel good about the margin trajectory.

And I think, Susan, as we continue to drive market beating growth and manage our SG&A tightly, we could stay on the higher side of that leverage range..

So this is Nick. I just add that if you step back a little bit, we set out as a team to really accelerate the flywheel within the business.

So we’re investing in core capabilities across the entire platform to generate fuel for growth with the intention that a portion of that would be seen through margin accretion and a portion of that would be generated to incrementally invest in the business to drive more top line.

And once the pandemic hit, we really used it as a platform to accelerate our plans and are delighted with how we’ve emerged, basically probably about a year ahead of schedule from where we thought we were.

But having made, far more incremental investments in the business in 2020 than I think we would have expected at the outset of the year with plans to continue that 2021 and beyond. And so the spiral really is working now.

And you’ll see it through our organic margin as Pat describes, but also through our investment profiles, we continue to invest in brand, in innovation, in capacity and capability in the business..

Okay. That’s helpful. And I guess when we do think about the out years than and that 50 basis points or so of margin expansion that you expect each year. You talked a lot about how it seems like housing is structurally kind of operating at a higher level, and you’ve obviously done a lot of work to really position the business to capture that growth.

Do you think that 50 basis points, could that rerate higher, what would you need to see to really capture more of that on an annualized basis? And what kind of concerns maybe as you look out and what could kind of hold things back a bit?.

I definitely think it could rerate higher. I think that will be driven by the amount of growth you see, because the growth gives you some pretty powerful leverage. And then the pace at which you’re able to drive the cost improvement in pricing necessary to offset inflation.

I do think we go into 2021 eyes wide open that will have inflation on multiple fronts, material, logistics, and labor. But we’ll manage it effectively as we have managed considerable tariff inflation the last three years. And so I don’t think we lie awake at night on inflation or think that that’s going to hold us back.

In fact, we’re committed to drive the margin improvements through that inflation, but I think there will be multiple episodes and some of the timing of that will unfold as we pursue the next couple years..

Great. Thank you, and good luck..

Your next question comes from the line of Phil Ng from Jefferies. Your line is open..

Good afternoon and congratulations on a really impressive quarter. Growth has been really strong and impressive. I’m just curious how you situate from a capacity standpoint in your ability kind of meet some that demand because I noticed your CapEx guidance for 2021 is, there’s a step up.

So I’m curious if there were any pockets that you’re adding a little more capacity to kind of help meet that demand..

Yes. So let me take that, and then Pat gives a little bit more color. But I’ll tell you, I mean, firstly, hats off to our team to be able to kind of deliver these quarters’ a growth. Because you’re right, it does stretch capacity.

And when you drill down and looking at pockets of the business where, it really was surge, when people working literally around the clock to make it happen. And so we have been stretched. I think, the feedback from customers is more pleased, but they’ve been very satisfied with the fact that I think we stayed a step ahead of the competition.

And that has really helped fuel our share gains because we’ve been reliable through this period, notwithstanding the fact that it’s taken a lot of work. And so we’re working hard and as we built out the plan for 2021, we hypersensitized it, I would say to both an upside scenario and a downside scenario.

And so downside scenario where we’re ready to manage the P&L very, very tightly managed, expenses very, very tightly to deliver the kind of margin progression that we were just talking about there with too. But we’ve synthesized on the upside as well.

And to the extent that there’s upside, we’re leaning into capacity investments and inventory to be able to serve the market and capture that upside. The housing market is undeniably strong. And we don’t just view this as a pocket of strength. I mean, this is – you go all the way back to the fundamentals.

They support this, and this expansion is going to have to go on for a long time in order to support it, because we’re just fundamentally under built in U.S. housing and there might be bumps along the way. But over time this will play out very strongly.

And so therefore, we have confidence in leaning in towards that tech capacity and the capacity investment and inventory, because we know that the market needs it. Pat, any color you want to add..

No. You’re picking up accurately. The CapEx in 2021 will be $60 million to $80 million more than it was in 2020 and both 2020 and 2019 were a little bit lower than our normal CapEx run rate because of the COVID shutdown in the second quarter of 2020. And the generally flow start the housing in the first part of 2019.

So we’ll be in the kind of $210 million to $230 million range for CapEx and still it will be going across decking, plumbing, Therma-Tru and Cabinets. Cabinets predominantly for entry price points on the coasts. And as Nick said, it’ll be tight for the first part of the year, but we’ll service the demand.

Our people are doing a great job, utilizing the capacity, they have to keep customers happy, and we’ll be getting the capacity we need to deliver on growth online effectively..

That’s really helpful.

And obviously, you’ve seen really strong growth in Plumbing for some time now, and that growth has accelerated nicely in the back half, any noticeable pockets where you’re seeing some of these share gains, is it – from some of these adjacent markets e-comm and just how much more runway do you have? And lastly, curious if you’ve seen any channel partners, restock inventory quite yet? Thanks a lot..

Yes, sure. So we’re delighted with Plumbing. And I mean, you’re looking at something like five years now of just consistent market outperformance at increasing margins and so. It really phenomenal performance to put up – in excess of 16% growth in the quarter, just to gain to capacity in Plumbing, just the ability to do that alone is impressive.

But we’re feeling really good about it, Phil. I mean, firstly, it’s been going on for a long time, right? It’s not kind of – this has been going on for a long time. To answer your question, it was really strong across the board, as you know retail was very strong in particular throughout the year.

But as the wholesale channel opened back up, we did see it start to pick up momentum and we saw that momentum accelerate. And by the time, we got to the end of the year; we saw healthy growth in every part of that business spur on. And I mean, it’s rare that you’d get to say that. And it was just everywhere.

It really was everywhere and hard to service it, whether it be in retail, in e-comm, in wholesale or in China. The other exciting things, you asked, is there is the goal, I mean, notwithstanding the fact that the business was able to do that. And the business delivered margin in excess of 22% had also opt its incremental investment significantly.

So investment in brand, it was up almost $15 million a year-on-year, $10 million in the quarter. I mean that’s significant investments in packaging, refresh, and investments in capabilities like e-commerce and operations, as well as things like supply chain around head count and decease air freight to meet customer demand.

And so really putting in investment that sets the business up to continue to grow. And as you step away from that, what do you have this brand that we’re investing behind, which is just absolutely refreshed in peaking. Consumers love it. It’s number one for purchase intent. And so we feel really strongly about that.

We’ve invested in the channel and our supply chain capacity, and so we’re there to serve. And then we’re building out these new adjacencies, this future cores of the business.

And those are starting to really gain traction and we’re seeing it in areas like the smart home where you’ve seen the products, we’ve done things like Flo by Moen, and we just won a CES Best of Innovation winner for U by Moen Smart Faucet.

We won some recognition at CES with the USA Today’s Editor’s Choice for our Flo by Moen Smart Pump, Sump Pump Monitor, which we just launched. What’s really exciting though, is when you start to tie all that stuff together, what you’ll start to see in 2021 is that we’re really building out that whole smart home ecosystem.

And all of these elements are going to start to talk to each other and be able to do water conservation, freeze protection, vacation modes. And so you pose that question. Do we see room to go? I would say, absolutely. We perform really well in the core of faucets and shower heads.

But the business has gotten so good at just leveraging its kind of twin assets of brand and channel strength to build out these adjacencies. I think, you’ll see some newer adjacency that will perform in the near term and then in a really building out future course with some of these further out adjacencies that are really starting to gain traction.

So we’re feeling great, as the business sitting right under Cheri Phyfer’s leadership and I think given the investments that were made in 2020 is really just poised to keep doing what it’s doing and even see some acceleration from here..

Super helpful. Thanks a lot guys..

Your next question comes from Stephen Kim from Evercore ISI. Your line is open..

Yes. Thanks very much guys. Let me also add my congratulations. I certainly wholeheartedly agree with your outlook on the housing market. And I definitely think that it’s going to be interesting to see how you can leverage that strength and you’ve given some really good commentary here particularly on a multi-year basis on the margin.

What I wanted to ask you about though is closer in, it seems like this year having a little bit of guidance or maybe some handholding from you all with respect to the sequential progression of sales might be helpful just given how weird last year obviously was, is there a way that we can think about what we might expect to see? Or what you all are expecting to see in terms of the sequential trajectory as you progress from 1Q through into the back half of FY 2021? Some helpful way that you could help us to envision something like what you’re foreseeing?.

Yes, Stephen. It’s tricky business, even for those of us here who watch kind of the daily order flow and shipments. I think what we could say is, obviously, from our results, the fourth quarter finished very strongly, right. We delivered a double-digit growth across all the lines of business.

And you saw that in POS as much as you saw it in shipments, we’re still kind of in a mode where we’re largely shipping to POS at this point. And I think that will continue through a good part of the first quarter to half of the year.

And the POS momentum for the fourth quarter has largely carried into the opening month of this year and doesn’t seem to be abating. So we would definitely expect double-digit growth for the first quarter, at least. And that could easily continue into the second quarter. Given last year you were shut down for at least about a half of the quarter.

And then, we’ll see where it goes from there. I think when we looked at understanding of market and setting guidance for the full year, you see some pretty wide goalposts on external data for U.S. R&R and U.S. new construction.

As you noticed, we come out on – I think the bullish side of it, because we think that this is underpinned by fundamental demographics and other drivers of the macro that are not just episodic care. And so we’ll see if the back half of the year it’s kind of flat and low single-digit growth or it gets a lot better.

I think there’s a good chance that it gets better than that, but I kind of guide you towards double-digit growth to start the year, and then we’ll update you as appropriate. We don’t typically give quarterly guidance, but I think what we’re seeing this early part of the year is the same POS strength we saw at the end of the year..

And I include all hardly with what Pat said. We asked ourselves the same question, right. And associate with the weirdness of some of these comps. The Q4 is a proper comp, if you recall, going back to 2019. 2019 was pretty sluggish for the first two to three quarters on the back of the rate of hikes in 2018.

But by Q4, the market was humming pretty well and into Q1 of 2020. And so those are sort of proper comps. So it’s kind of put up the growth that we put out and seeing the POS that we saw in Q4 gives us a good degree of confidence.

The fact that we’ve carried that momentum, that exit momentum here right into what we’re seeing now in January makes us feel pretty good that there’s a very solid market there on top of a solid comps from the prior year..

Yes. Absolutely, it’s bullish.

I wanted to – second question I had related to the Cabinets business specifically, we think of it as primarily kitchen and bath cabinetry and yet one of the interesting things with the pandemic and the working from home is that people, I’m guessing a certain population and probably one that you can cater to well would be considering maybe converting rooms to more permanent work-from-home space as opposed to something ad hoc and just throwing it together, getting somebody from IKEA.

And in that regard, I’m wondering how much of your business in the Cabinets segment has historically been outside of kitchen and bath.

And I’m thinking would probably be primarily home office type setup and where do you think that can go?.

Well, I’ll start. Pat, having spent some time in the Cabinets, may be able to give you some tighter perspective on that. We don’t sort of track or buy at tightly by rooms outside of kitchen and bath. But what I will say is, the team there is great, has actually been very focused on adjacencies in areas for growth, as part of their strategic plan.

But it is also being absolutely prioritized about the way in which they’re going to go after things. And right, so first and foremost is kind of dedication to the margin journey. That we’re on and making sure that we are absolutely able to hit that.

And again, you see the exit rate here for Q4 and even the exit rate that Pat referenced for the second half at 11.9%, very satisfied with how they’re tracking and they’re not satisfied though, to set on that. They’re working very hard to say, what is the journey term, the teams’ objective and even beyond that. So that’s our priority number one.

Priority number two is capturing the share from the imports and they have done a phenomenal job of that.

And if you look at the imports while some of that has flowed back, it is at a much higher AUP than was previously, right? So less volume, higher price, but absolutely the landscape which we want to compete, which is an even playing field and so we’re competing there and winning. And then from there, I’d say it’s new channels and new products.

And so new channels, there’s a lot of opportunity in e-commerce. We’re starting to see that come to fruition and investing behind the opportunity there and then adjacency. So areas like, other rooms, there is expansion beyond the kitchen other areas for other vanities. And so that’s the order of priority. I’d say that they’re attacking these things.

And we’ll get after them. And I think as we do, you’re going to see both the margin progression that we’re absolutely committed to delivering, but also because of what you touched on as well as some of the others I’ve touched on there’ll be some really nice growth as well..

Yes. See I don’t know, like it speaks specifically to the percentage of our cabinet business that is in offices. It certainly does. Our catalogs certainly enable that especially at the mid to higher price points.

And one of the nice things we saw in the fourth quarter and continue to see in the early part of 2021 is the mid to high price point make to order business is growing very nicely and very much a contributor to the overall growth of cabinets at a rate that’s almost equal to the entry price point cabinets.

And I would imagine that that is a part of what’s driving, it is people doing things like offices as a component of that. But I couldn’t speak specifically to the percentage..

Great. Thanks. Appreciate it..

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open..

Thanks very much. Good afternoon, everyone. Congrats on the results and hope everyone’s safe and healthy out there. First question on outdoor and security obviously continued great progress there.

I’m wondering around the guidance outlook for 5% to 7% organically, given the strong momentum, obviously in decking, acknowledging it’s a smaller piece of the pie still. And also the momentum in new res, which is a big part of the door business.

I’m wondering if there’s any upside to that organic growth outlet? And maybe as part of the overall picture of outdoors and security before I hit my second follow-up. On the security piece, just wondering around what can be done to maybe increase that growth rate. Obviously, it was a little bit more lagging this year.

And if there’s any updated thoughts from a strategic and portfolio perspective?.

Sure. I’ll start with the doors and the decking piece. And so, the way we’ve kind of put it together starting from the very strong performance and this year in decking as I said, in excess of 30% in Q4.

And again, a real lap there, right, because you had products load-in ahead of the distribution gains in Q4 of 2019 and then received really, really strong performance in doors as well.

I would say, on the decking side, we’ve got a capacity plan and we’re kind of working through our capacity plan and then we’re trying to work an outside plan for that capacity planning to the extent that we’re able to bring that upside plan to fruition or see more pricing momentum on decking, which I think that sector probably merits, there’s some upside there.

And then I think in doors, there may well be certainly if the momentum that we’re seeing continues and it’s really both wholesale and retail. So it’s not just new construction part, but retail as well. Then, we would see it there as well.

We were somewhat cautious as we built the plan around just the strength of what we saw towards the end of the year, both in doors and in our Larson acquisition. And so we want to kind of progress through the first quarter and see how that’s going.

But again, the momentum in both of those businesses, like we touched on plumbing and cabinets has continued to be very strong and it has maintained its velocity coming up the back end of the year. And so I don’t disagree with you.

I think, we put together a prudent plan and we are still cognizant the fact that there is pandemic and economic uncertainty out in the world. And we want to manage the P&L very tightly, but we’re gearing the business and the capacity to be upside there. And I think you’re touched on a couple areas in which it could happen.

And then just turning to a question on security. I fully agree with you. We would like to see more growth now. You had a couple of things, a couple of dynamics in the year you had on the retail of the business, you had a back to school season that just didn’t happen, right? So you saw a lot of locker locks and things like that.

And you had a commercial channel where we go in really into a consultative sale with factories and facilities that shutdown in Q2 and stayed shutdown throughout the rest of the year. We actually exited the fourth quarter with really nice growth in retail in the double digits.

And so we were really encouraged by that and where we got the business squarely focused is on getting the product assortment, right, getting the supply chain, absolutely set, getting the category management capabilities in.

And once all that is set and we made some really good progress and invested for it in 2020, then we’re going to start to turn the dial harder on things like innovation, which should then start to raise the top line.

And so we want it to be very deliberate about that progression, getting that core, right, getting the operations and supply chain absolutely stable and healthy and producing, and then kind of turning that down and growth.

Although, even given that we were happy to see retail, which is the biggest part of the business, power along as it did at the end of the quarter..

Yes. Mike, I think I’d just to add to what Nick was saying, I think he hit on the key points. I think there is potential upside to both doors and decking. I think in decking that kit on it, the pace of our capacity plan and the pricing dynamics in the marketplace, those things could lend upside if they go faster than expecting.

And then doors, think of the doors business is probably the one business we have that’s closer to 50-50 new construction in R&R as opposed to most of our portfolio is about two-thirds or more R&R. And if you recall, our outlook on U.S. new construction is 10% to 12%.

I think there’s upside to doors to the extent that builders can pace completions closer to their orders flow. Our market outlook is really predicated on about 100,000 unit growth in U.S. housing.

But that’s about 110,000 to 100 – I’m sorry, that’s 100,000 to 110,000 of new construction – single-family new construction housing growth, and a decline in multi-family for a total of about 75,000 units across the two. So I think it really gets down to the pacing of completions in the single-family pickup and that will help drive that business.

And then the next point on security is, can we get a real back to school season? Can we get the industrial markets opened up? Consultants are allowed in factories and get innovation go on in that business. Those are the things..

No, that’s great. I appreciate that. And just wanted to circled back to a prior question around cadence throughout the year. Very much appreciate the talk around the top line where you’re seeing, double digit top line growth likely to continue into the first quarter, possibly the second.

It sounded like by contrast just again, at this point of the year and obviously the way the numbers would work, flat to up low single digits, which is still very impressive, obviously given the tough comps. And most people would be – many people would be thinking perhaps it would be down a little bit. So just want to make sure I heard that, right.

That at this point in the game, as you look at your plans, you’re looking for flat to maybe up slightly in the back half. And what that means for EPS distribution, typically during a year you have anywhere from 45% – 40% to 45% or so of EPS is generated in the first half of the year and 55% to 60% in the back half.

I would almost think this year that would flip and I just wanted to get your thoughts on that..

I think you have it correct both top and bottom line. We do expect given the margin momentum we have in the business to be producing a nice margin improvement in both half of the year, next year. But I think you’re right, you’re going to see at least from a EPS growth perspective, a bit of a bias towards that first half of the year.

But I wouldn’t over accentuate it. I mean, you do recall we even in the second quarter of 2020 when we had basically 10-ish percent decline at the top and a 10-ish percent decline in the bottom, we made margin improvement. So there’ll be some nice EPS growth across the year, but there will be a little bit more of a unusual bias to the first half..

Great. Thank you..

Your final question today comes from the line of Justin Speer from Zelman & Associates. Your line is open..

Good evening, guys. Thank you. I wanted to just turn the attention a little bit to the Chinese opportunity. Your growth there has been pretty special, but maybe you can remind us what it was for all of 2020.

And if you could just provide some context on your 2021 guidance for that market? And maybe some color or context behind the dynamics there and the head room for growth there in that large market for you?.

Sure. I’m happy to Justin. I’ll give you some perspectives and then Pat will speak a little bit to the numbers. I would say, firstly, just cut that back from a market perspective. We’re very fortunate that the two most favorable housing markets in the world, the U.S.

and China markets, right? And that’s where you see the most growth and the most opportunity. And China’s sort of the rare market that is not only growing quickly, but also is quite fragmented. And so there’s still an opportunity to build a lot of share over time.

And our business there has been built organically over a long time with a home growing team that is out executed that market. And now is very focused not on just executing the top line, but driving profit and driving leverage through the P&L.

As much just as good discipline to be able to reinvest in the business for the long run as a profit driver for us overall, it’s really more, we want that business to be disciplined and to be healthy and be able to continue to drive itself.

And so, they’ve grown incredibly quickly and the focus has really been on leveraging our brand and channel position into new product adjacencies and new channel adjacencies. And I think they do it better than anybody in our business, they really kind of our North Star for the rest of fortune brands in their approach.

When you look at their more recent performance, it’s continued to power on, we obviously saw the shutdown around Chinese New Year and then continued on as the Chinese economy actually did pretty well, grew a bit over 2% a year, so pretty impressive. And we’re calculating baking somewhere between 6%, maybe a bit more.

We continue to see strength throughout the year was really in the developer side of the business and in the e-commerce side of the business. Showrooms were slower as people were still cautious to head out. But we have a leading Sharon developer, so we were very excited about that. And developers continue to build.

And bear in mind, we’re really prioritized on Tier 1 and Tier 2 markets, so we’re not really exposed to the big speculative buildings and the empty cities that you hear about. We’re really – big Sharon in Shanghai and other in a densely populated areas where people are either moving in or upgrading their living circumstances.

And so, we’re very bullish on the opportunity in China. Housing continues to be a fundamentally important part of their country’s economy. And so we don’t see that backing down.

And then within housing, we’re out executing and we’re out executing with a home grown team that really knows how to build out the Moen brand and the House of Rohl into even broader adjacencies and how to build out a new channels and new channel partners.

And while we’ve been doing this, actually in 2020, we raised our let’s say, the incremental investment in that business and really started building the pool behind the brands, not just the push model that we’ve done really well with over time. And the early read on the brand metrics have been extremely strong. And so we’re very excited about China.

We think over the long-term, it could be a really nice player for our company. We don’t sort of bank on it in any given year, but we’ve just grown it slowly or not so slowly, but I’d say over a long period of time to the point where now it’s a significant player in that market. And it can be a significant growth contributor for us..

Yes. Justin it grew for the year – our poly business China grew high teens and it was growing at that rate consistently both the third and the fourth quarter.

And I think if you take the first and the second quarter, which obviously they had the very severe shutdown dynamic and Q1, and then a bounce back in Q2, you kind of average those two together the first half and the second half are both kind of high teens quarter. So there’s a very consistent drum beat there of growth in large part.

I think if there’s one part of our business that Nick hit on it, that’s probably driving innovation at the most rapid pace and with the greatest level of success, including into adjacent categories and finding growth across multiple channels and doing it profitably in that market as well.

It’s just the talent on the ground we have there is every bit as strong as the talent we have across the globe, and they’re doing an amazing job..

Thanks. And one last question, because I think it’s a point of emphasis for a lot of investors and analysts is tied to cabinets and that operating margin expectation not just for 2021, but I think you said mid-teens in light of the import competition.

I know non-Chinese imports have been aggressively back-filling the Chinese what was vacated by the Chinese.

I guess, thinking about the raw material and transportation cost basket, thinking about price levers and productivity levers, maybe as you think about what’s at your disposal in this kind of environment, maybe midterm environment, maybe help us understand how you get to that mid teens from here..

Justin, I’ll start a little bit on the imports and then Pat can walk us a little bit through that journey. But to start with saying with the imports, recall firstly we never counted on government assistance to help us. We said about pivoting the portfolio to really aim at the heart of that market.

Like what was working there anyway and adjusted our whole portfolio to really target that heart of the market. But then we were successful in the anti-dumping suit and the purpose of that really was to get rid of illegal subsidies and unfair competition. It wasn’t to close the border and eliminate all imports.

And we’re happy to import – we’re happy to compete against other low cost countries and we feel not only are we set up to compete, we’re set up to win. And I think that’s what’s now playing out. And so as you’ve seen those imports start to migrate to other countries and by the way a lot of that is illegal transshipping.

And I think customs is going to be all over that. But you’re seeing it come across at a higher cost either because truly is manufactured in another country.

So average selling price out of Vietnam is more than 2x what the China AUP is, or it’s being illegally transshipped, but frankly, moving stuff from one country to another and trying to evade customs has a cost to it, that’s being reflected in the marketplace.

And so, I’m sure you’re seeing it through your channel checks, but you got to do the channel checks, you’ll hear that imports is so struggling from a supply chain perspective, lead times are long and pricing is up and that is a very favorable backdrop for which – for a trust to compete.

And that’s why – it’s one of the reasons why we’re not seeing growth across the board, even though you could argue on a dollar perspective, those imports are kind of probably at a dollar level where they were prior to the run-up of inventory with the duties coming on. The playing field is level and the business is competing well.

And that’s the only outcome we could have hoped for not trying to shut a border. We’re just trying to have a level playing field and it’s had the necessary impact. We will, however, continue to aggressively investigate or help pursue anybody who cheats and there’s going to be cheating happening.

But it happens with enough incremental costs that I think it’s leveled out the playing field enough. Pat, do you want to touch on the market progressing a little bit..

And I think, Justin, you saw this year 70 basis points of margin improvement on the full year but the cabinet business, it probably the most severely impacted along with our security business on the second quarter shutdown.

And so if you really look at the back half margin of that business, which is 119 I think that’s more indicative of kind of where they’re running at these days. And you hit out, what are the levers to kind of get this farther up the margin chain and more towards that mid teen.

I think there’s room to go on both the stock and the make-to-order side of the businesses. We’ll deal with inflation in our cabinet business, as we do in all of our businesses. We’ll take continuous cost improvement and supply chain actions that were necessary priced to drive improvement, offsets inflation.

And then I think getting leveraged to get further margin expansion. There’s still a lot of growth on the asset in SG&A basin stock. And also, I would say during 2020, we were repurposing some older capacity on the fly and still are in the early parts of this year. That is not the optimal way to service demand.

We’re doing that just because the demand is so strong. So there’s still some footprint optimization to go in the stock business. And then I think we did a lot of hard work to standardize product and right-size the semi-custom and premium make-to-order businesses.

A there’s still some more standardization opportunity out there and all the hard work to right-size those businesses. And now as those businesses are growing, you’re going to see in 2021 and beyond the ability to lever the tough restructuring work that the teams you’ve been doing for the two years in that business.

So I think you’re going to see both stock and make-to-order contributing to growth from this point forward. I think what you haven’t seen in really until the back half of this year is on the stock side, you still had so many things moving to service demand.

You weren’t seeing the optimal long-term cost structure for the stock side, and you were still seeing declines and make-to-order. And it’s only now that we’re seeing the stock get closer to it then game and we’re seeing growth and make-to-order to leverage that resize business. So I think there’s good opportunity ahead for both of them.

And we’re wide eyes to the competition, as Nick said, we built a better mousetrap. We’re not looking for the government to give that business margin and that business is demonstrating that it can compete for share and turn it into margin creation..

That’s excellent. Thank you for the color. And I look forward to watching you guys progress towards that mid teens over time. That would be a big win for everyone..

Thanks, Justin. Have a good afternoon..

That concludes our Q&A and concludes the Fortune Brands quarterly earnings call. Thank you everyone for joining today. You may now disconnect..