Hello, my name is Tawanda, and I will be your conference operator today. At this time, I would like to welcome everyone to Fortune Brands' Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. .

I would now like to turn the call over to Mr. David Barry, Senior Vice President of Finance and Investor Relations. Sir, you may begin..

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

Thanks, Dave, and thank you to everyone for joining us on the call today. I hope that you're all enjoy 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 20% versus 2019 and over 9% sequentially versus our excellent first quarter of 2021.

Current demand for our products remains robust and our teams continue 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're 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 the 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 in to further detail on our increased guidance later in the call..

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 6% 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 across 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 the 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 indoors. 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 or material constraints, the latter of fading impact of the Texas storms.

Decking sales were up strong double digits in the quarter as our distribution gains and wholesale continue 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% growth in the quarter with continued strength in retail and a welcome pickup in the commercial market.

Outdoors & Security operating income was $79 million during the quarter, up 64% 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 Cabinet; sales for the second quarter $706 million, an increase of 31% over the same quarter in 2020. We again saw strong growth of value-priced 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 utilized 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'll 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 enhancement. 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. As always, we will 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 US housing market growing 11% to 13% and within this market forecast, we now expect US new construction growth of 11% to 14% and US 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 $5.65 to $5.85 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%.

Outdoors and security net sales growth of 44% to 48% or 14% to 16% excluding Larson with segment operating margins of 15% to 16% or approximately 16% to 17% adjusting for purchase accounting. Cabinets net sales growth of 13% to 15% with operating margins approaching 12%.

We expect 2021 free cash flow of approximately $675 million to $725 million, which includes additional investments in 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 the 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 and 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 out outperform a long-term housing expansion and could not be more excited about the opportunities ahead. I will now pass the call back to Dave to conclude our prepared remarks..

Thanks, Pat. That concludes our prepared remarks in 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..

Thank you, ladies and gentlemen. . Our first question comes from the line of Michael Rehaut with JP Morgan. Your line is open..

Thanks. Good afternoon, everyone, and congrats on the results.

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 in a, it sounds like 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 are contributing to that ability to offset sure?.

Sure, Mike. This is Nick.

I'll start and give you some thoughts conceptually and Pat can influence some of the detail, but as you all know and as you've noted, I mean, the business continues to perform and demonstrated its resilience notwithstanding the environment and so we're seeing really strong market and we're seeing some very large inflationary pressures, as well as seen on supply chain disruption that continues given this has been widely reported and yes, if you step back for a second ago, how the business continue to perform -- a lot of it comes from the fact that we on a margin improvement journey and we're doing a very programmatically, very deliberately and we're leveraging it across the whole business.

And so, I think if you were take us, we were just static and we're just turned to hold the line and then you might see buffering from outside forces, but since the businesses 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, there are three big products business simplification, you've got category management and you got global sourcing right and two of those business simplification 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 in the different pockets and it goes beyond the desires. I mean this is backed by investments we've made in building the capabilities in building the team.

So for example, just this year, we hired a Fortune Brands Center of Excellence in global sourcing fairly material number of people that we continue to build out that team. And so, by doing that we had the business on a trajectory.

We were able to drive cost improvement as well as improve the quality of the supply chain again taking complexity out and what you find is that suppliers that are able to work with us to 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 that is a big underpinning of the progress that we've been able to make and then of course if it doesn't cover everything as we've said, we do to take price.

We try not to do it outside of our regular cadence. We certainly head to this year, I think what prices 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, it's very much in favor of the consumer, we're innovating, we're adding a lot of value to our products, we are building brands and so we able to take price where we have booked in other price is going to and I'm sure you guys are doing your channel checks and you've seen that and it's being well received.

We're just trying to do it in a way that as constructive as possible, notwithstanding the headwinds that we're facing.

So, it's not really programmatic approach and I think the fact that we've taken a more programmatic approach is really paying off now what I'd say is particularly exciting about it is, from our perspective, we're just getting started. I mean 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 in that momentum will build over time and so we expect it to continue to deliver for the business for very long time to come.

Pat, anything?.

Yes. Mike, hearing your question, trying to get to the numbers of at all when we talked at the end of the last quarter, we talked about commodity freight and tariff inflation in the range of 4% to 5% of COGS.

We're probably in the range of plus 6% of COGS and you're starting to talk a dollar amount that's approaching $250 million with all components, tariffs are pretty minor part of that they're pretty static year-over-year, but both freight and commodity is 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 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 toward 16% to 17% margin by 2023, which is 75 basis plus 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 will lever the structural cost savings we made the last couple of years especially in cabinets in a few other of our businesses and continue to make in our businesses and volume to lever towards the margin improvement this year both be drive in the margin improvement this year.

And what I'd say is, we're 8 quarters in a row of year-over-year quarterly margin improvement and we expect to keep marching on that though, the third quarter, we 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 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 4th 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 goals..

That's great. And I appreciate all the quantitative color there. It's really helpful.

I guess maybe taking a step back, strategically, you mentioned in terms of your free cash flow deployment as always evaluate combination of share repurchase and both M&A, obviously in the last couple of three, four years you've really bolster the outdoor and Security segment that follows before that kind of building out a rounding out a little bit on the plumbing side, how should we think about the opportunity set over the next three or four years across your different segments of portfolios.

You know, it seems like cabinets has certainly been on the quieter side, I think the last major one was more craft 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 perhaps to think about or expect on the plumbing side or is it really more just 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?.

Sure. I'm happy to give you some perspectives, and you're right to point out we're well aware of strong cash generation and we will begin -- we are being very thoughtful about ways in which we can continue to create value for our stakeholders here and in our priorities remain the same.

I mean, first and foremost, we look to our own business and CapEx opportunities to grow and drive our strategic priorities, and I think you know at this level of growth opportunities there to continue to invest behind which are pretty satisfied M&A.

And then, we're in the fund good M&A opportunities, we remain focused on returning cash to shareholders. Yes, I mean I'll say the pipeline is robust and it's as robust as I've seen in, 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 as the bar we hold very high for us. The areas that are of interest to remain the same have Doors and Security, we're very excited about opportunities outdoor space.

Our focus on net where you know 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 now have, by the areas, which will focus.

There are other areas in outdoors that we've looked at, we decided in a more commoditized, not worth pursuing, but as that space becomes increasingly we're continuing to look at opportunities there. And we think there some stuff, it's pretty interesting that add the portfolio and really work in an integrated way.

I mean, when you think about even Larson with Doors, when we looked at Larson, and one of the most interesting things that we popped out screen door to let light on to their homes, really was to create an access point for the outside.

And so you're combining that with the leading exterior door business in the US small carrier door system reform could be very interesting kind of indoor-outdoor living thing which is certainly we see also that is, that is an area we do remain very focused on plumbing opportunities and they're not easy to come back, but there, there are things out there that are of interest and particularly as our Plumbing Group continues to such a phenomenal job of building out the adjacencies and the areas of which are compete -- it opens the aperture of type of things that we can add to the group and 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. It's very interesting and we have acquired flow as you're well aware and that is, is very, very exciting for us.

It's being well received by builders, by insurers, by consumers and there is little question in our mind that there is an inflection point at which that really becomes and if you know that sort of digitize all home management of water becomes standard in homes, when that completes what it comes to not that believe that we can call up, 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 -- what other there in the connected home where again we can create value.

I know you asked a little bit earlier about Fortune Brands Advantage.

It certainly helps as we go out and look at what's in the pipeline, because we have both the skill sets out 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.

So we're excited. Again, our, the bar we hold is high value and we won't do things where we cannot progress ..

Great, thank you..

No worries..

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

Thank you. Good afternoon, everyone, and congrats on a great quarter. My first question is around your play margins have been really impressive -- 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, can you talk to, what's driving that outperformance in there the sustainability of it? And the guide of plus 22% for the year suggest a pretty decent deceleration sequentially which I know that there is some inflationary pressures and those kinds of things coming through, but still it feels like on a relative basis as 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?.

Yes, Su. I think first, the team there is doing a great job of managing its business simultaneously drive growth and margin but make the right investments.

But you're right in observing the second quarter was particularly strong, part of that was FX driven in that we have about $7.5-ish million of FX benefit to OI and that is almost all in plumbing with the strength of the Chinese currency versus the US currency.

Based on 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 of the back of the year -- back half of the year and what happens in the back half of the year the currency neutralize, so you get the effect of the kind of the currency benefit fades away in the back half of the year and the investment goes in and so therefore you end up with a back half where they're planning out closer to the longer-term margin trajectory, which should be plus 22%..

And so, I just add; I mean, conceptually we have got a business that's going to grow organically in 21% to 23% with margins above 22%.

We're going to look for ways to invest to continue to drive that top line and the fact that the business produced these types of margins with double-digit millions increased investment in brand on top of versus last year, we're actually, you may recall in Q2 of last year, we've actually increased our brand investment on '19.

And so it's kind of compounding investment levels, but really driving the topline at a phenomenal pace and so that's the flywheel that we're trying to keep going in and we'll will keep going..

Okay, all right. That's very helpful color.

My second question is a bit higher level you talk to your expectations for R&R spend to be up about 11% to 13% this year for the industry overall -- clearly some of our channel checks of 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?.

Yes, I'll start and Pat may some color to add. We see the same noise that you're proud seeing in commentary around deceleration.

And I think without a doubt in big box retail, we've seen some deceleration as other channels have moved up, but we've got a pretty broad view over housing product through when you look at the portfolio and this is a question that we've tested deeply with our teams and we're not seeing deceleration at all.

In fact, we're still seeing inputs at a level in excess of capacity and we are seeing backlogs that are growing and our team is working unbelievably hard to try to meet customer needs to get product out the door and we believe it's driven by these fundamentals, which remain to be true, that people need housing, the market is fundamentally under both, that there is not enough new construction and that there is an extremely aged housing stock that is entire need of renovation and you add to that, home equities are high and people, even if it's soften a little bit which it is not actually a bad thing, because we believe it allows for sustainability of the marketplace.

Houses continue to trade, which is a good catalyst and so with those things in place, and we do our checks across all of our portfolio speak to our teams and our customers. We are seeing it continue to be very robust and believe that will continue to be robust as people need to renovate very aged housing stock.

So, Pat, are you adding into that?.

Yes.

So, I put the context then our expectation on US R&R specifically going beyond the DIY centric channels is we're going to see mid to high single-digit growth across the back half of the year and the reason that help support a full year at 11 to 13 is what we are probably and you can always going to judge this thing is that approximately when you're this close to the end of the first half but we buy our best estimates think that the first half was in the high teens to low '20s right.

So there has 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 strong mid to high single-digit growth of total R&R..

Okay. Thank you very much for the color and good luck..

Yes..

Thank you. Our next question comes from the line of Tim Weiss with Baird. Your line is open..

Hey guys, good afternoon and nice job..

Thanks, Tim..

Hey, maybe just starting, big picture, you mentioned several times in your prepared remarks, Nick that you're operating your capacity in several areas of your business, could 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?.

Sure. To a degree in the capacity has been constrained, less by sort of hard assets, but certain labor constraints have been a real challenge.

Transportation has been a real challenge and that is just sort of what I'll call shorter term capacity now, we have seen some labor start to flow back particularly as unemployment benefits have lessened in certain states and so we're very interested to see what happens in the fall in that starts to go away and we feel a little bit using up on logistics and transportation although in another continent, but those are short-term constraints that we do believe will ease up over time.

On the longer term kind of capital journey as we look at capacity, there are areas where we're investing, I say fairly across the board, obviously in cabinets, we just opened a new facility that's fully open now but still ramping into that brings more capacity online and we'll continue to look as we fine tune that business, but I will 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 a simplify that business the frees up capacity inside of the existing footprint.

And so, and I think we'll create more headroom there. Decking; we are at capacity, got more capacity online coming this back half of the year. We think that will be left up immediately.

We're looking to accelerate in 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 that product it is such a value for consumer, whether it'd be at current lumber prices or lower lumber prices, you're comparing a product that is innovative, branded and really certain consumer desired versus out the commodities that is going to run for a very long time and so there'll be capacity needs their employment.

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 kind of growth that we've got, we continue to work very, very hard and then to Doors is also kind of nearing kind of capacity and we're going to look at incremental as there.

Pat, can speak to it from a CapEx security perspective, I would say it's fairly in line with historic maybe a bit more investment, but from a headroom perspective.

But I'd tell you is 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 that now more shorter term in nature, but we will have to add a high 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..

Yes. Tim I I'd say and just put some numbers around it. Last year, we had kind of a low CapEx year for us out of 150-ish.

It's mostly been in the kind of 175 to 200 the prior 3 years of 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, fiber glass door for Therma-Tru, plumbing distribution and luxury plumbing capacity.

Those are going to be the disproportionate things but to Nick's point right now the pinch points, we're feeling kind of for the next 3 to 9 months are mostly around labor and logistics and then some of the things we're working with our vendors on whether they will force majority of things coming out of spring storms or their capacity needs..

Okay, that's great. Thanks for all that and then 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, we did see any moderation?.

Yes. I don't know that I'm prepared today to make a call on next year's inflation. I certainly would say, we would have thought early this year that maybe inflation would be in the 2.5% to 3.5% range.

So it would go logic just with us conveying plus 6%, we're probably carrying in 3 points of inflation in the next year that we weren't anticipating in our start plan but we're managing that now and we'll manage that -- we will manage that next year.

I think in terms of our ability to hold pricing and-or drive margins, we're confident in our margin journey and we will be mindful in managing prices as inflation may be changes on the downward as we were and 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.

So that's a little bit of the problem facing and then the good news is, it does seem to be stabilizing a bit right now. So that is one favorable dynamic that is playing out right now..

Okay. Okay, great. Well, I say, nice work and good luck on the second half..

Thank you..

Thank you. Our next question comes from the line of Adam with Zelman. Your line is open..

Hey guys, thanks for taking my question.

Just curious on the 3Q margin decline, any of this segments impacted more than others or is it pretty much across the board?.

This is pretty even across the board, Adam. I wouldn't call out, I mean first of all, the team is focused on avoiding that right, we didn't 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..

Got it, okay. And then, just in decking in terms of -- you guys are sold out.

Demand is 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 kind of lumber decking fairly negative if you are seeing any signs of that in composite decking..

No, I wouldn't say it's negative by any means. If you looked at the growth rates a year ago and through the back half of the year, they are astronomical.

So in the very end, I think, and I think like 40%, the comps are pretty huge and against that you see more modest growth, but it's, it's still been healthy and then on the wholesale side in 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, very mature relationships and that's because sale 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 in new geographies..

Got it, thanks. Good luck..

You too. Thanks..

Ladies and gentlemen, that concludes our call for today. Thank you for participating. You may now disconnect. Everyone have a wonderful day..