Good afternoon. My name is Holly and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Fortune Brands' Fourth Quarter and Full Year 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have a question-and-answer session. I would now like to turn the call over to Senior Vice President of Finance and Investor Relations, Mr. Dave Barry. Sir, you may begin the call.

Good afternoon, everyone and welcome to the Fortune Brands Home & Security fourth quarter and full year 2021 investor 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. 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. 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.

Thank you, Dave and thank you to everyone for joining us on the call today. I hope that everyone had a safe and enjoyable holiday season and best wishes for 2022. Following an extraordinary 2020, our teams once again delivered outstanding performance in 2021. Our strong fourth quarter results kept a remarkable year at Fortune rates, including exceptional sales, operating income, and earnings per share growth. I'm particularly proud of how we delivered for our employees, customers, and consumers while also achieving 50 basis points of operating margin improvement. We accomplished these results despite facing numerous external headwinds, including supply chain disruptions and extreme inflation. Importantly, we also made progress on our Fortune Brands Advantage capabilities and continued investing in our leading brands to drive innovation, expand capacity, and to serve our customers. As a result of our team's outstanding work in 2021, the company is well-positioned to continue outperforming a strong housing market in the years to come. In the fourth quarter, sales grew over 18% or 13% organically, with all of our businesses delivering double-digit growth, driven by continued strong POS demand across all channels. Operating income grew 7% and EPS grew 6% as operating leverage in the quarter was impacted by labor availability constraints, supply chain inefficiencies, and inflation ahead of price. Despite these challenges, we made full year operating margin progress and delivered a 37% increase in full year earnings per share versus 2020. Additionally, in 2021, we increased our investment in the business by $85 million, returned over $590 million of capital to shareholders, executed capacity expansions across the portfolio, and recently acquired Solar Innovations, a leading producer of wide opening door systems and outdoor closures that will join our Therma-Tru family. The pandemic period now into its ninth quarter continues to cause a variety…

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. Additionally, all comparisons will be made against the same period last year, unless otherwise noted. Let me start with our fourth quarter and full year results. Sales were $2 billion, up 18% and consolidated operating income was $264 million, up 7%. Total company operating margin was 13.4%. EPS were $1.32, up 6%. For the full year, sales were $7.7 billion, up 26%, and consolidated operating income was $1.1 billion, up 30%. Total company operating margin improved 50 basis points to 14.6%, and EPS grew 37% to $5.73. Our teams continue to overcome pandemic-related challenges to serve our channel partners and consumers amid a dynamic operating and supply chain environment. These remarkable results are a testament to their commitment. We remain highly focused on driving outperformance, including above-market growth and margin progression. Achieving both in 2021 was an extraordinary accomplishment and positions us to continue doing so in 2022. Our portfolio of innovative and quality brands with leading market positions continues to resonate with homeowners. Our value creation journey is fueled by a strong market and deployment of our Fortune Brands Advantage capabilities, driving incremental investment dollars and increased operating margin. Now let me provide more color on our segment results, beginning with Plumbing. Sales for the fourth quarter were $704 million, up $66 million or 10%, or up 9% adjusted for FX. Fourth quarter growth was driven by U.S. wholesale and strong double-digit growth at the House of ROHL. Importantly, POS remained strong during the quarter, including in retail. For the full year, sales were up over 25%. Plumbing operating income increased 6%, to $147 million in the fourth quarter. Operating income for the…

Thanks, Pat. That concludes our prepared remarks on the fourth quarter and for the full year. 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 reenter 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, can you open the line for questions? Thank you.

Thank you, Dave. And our first question is going to come from the line of Phil Ng with Jefferies.

Hey guys. Solid quarter in a challenging backdrop. And Pat, I appreciate you giving us a full year outlook. But wanted to see if you could drill down on the shape of the year, any color on orders and what your customers are saying since comps are a little tougher to begin the year. And then on a price cost standpoint and margins, how should we think about that cadence through the course of the year and what's embedded in that assumption? Are you assuming inflation kind of levels off and you effectively have all the pricing you need out there already?

Hey Phil. Good to hear from you. Why don’t I just kick off, I'll answer the first part of your question, what we're seeing from a demand perspective and then Pat can speak to the shape of the year and some of the assumptions that we've made in our expectations. I'd say demand, as we just indicated for all 2021 remained robust through the end of the year and remains robust into 2022. And so looking over some of the POS dollars, we're seeing strength through the start of the year, I would say at or slightly above 21%, which had a pretty robust start to the year. Now, we're going to get into some funky comps over the course of the next few quarters. And so we expect some swings and roundabouts, but that fundamental strength that you're seeing persist in demand, both in retail and wholesale is there. And so that gives us a degree of confidence around the market both from a new construction and R&R perspective.

Yes. I concur with Nick, a lot of good signs from an end market demand perspective in both retail and wholesale. A few things to think about, though, as you think about the shape of the air and where we kind of ended last year because we did have a lot of the inflation come about in the back half of the year. And important note, we do have, I'd say, over 90%, maybe even above 95% of the pricing and cost actions in place to drive the margin profile for 2022. But it will flow from about the second quarter through the back half of the year. So, a few important things to appreciate. Last year 2021, we had about $290-ish million of inflation, which is about 7.5% of COGS, just a little bit less than that. But 80% of that inflation hit in the back half of the year and 40% of that inflation hit in the fourth quarter. So, we'll come out of the gate in Q1 with a lot of that type of inflation hitting businesses that have the longer supply chains like Plumbing & Security. And so we'll have a margin profile in the first quarter. That's a little bit like the margin profile we had in the fourth quarter, like 13%-ish. We're going to be 15 to 15.5%-ish in the second quarter, and then above 16% in the back half of the year. And that's the way the margin profile will play out. And even with strong demand in the first quarter that we're experiencing, I do expect Omicron absenteeism in a broad range of our facilities to keep shipment based volume in the quarter more like at mid-single-digit sales growth in the first quarter. But as Nick was saying, we feel very good about the year from early signs of demand and from preparation against price and cost. But I do think we'll carry in some of what you saw in the fourth quarter into the first quarter of the year.

Got it. That's really helpful. And just one last one for me, you're guiding to a pretty sharp step-up in CapEx. Can you kind of unpack what's driving that? I mean, you talked about this greenfield facility for decking. Give us some color how much that deck could unlock and how that kind of ramps up? And any color on that digital investment you've talked about as well in terms of the CapEx for that investment?

Yeah, I'll talk to the numbers of both of those topics. Nick might want to add some color commentary, especially around digital. But our CapEx profile, we spent until about the middle of last year being somewhat fiscally conservative on CapEx but have been seeing such strong growth since the back half of 2020, we're now at a point in time where we have to invest both to accommodate the growth that kind of immediately in front of us and then the longer term growth objectives. So we will have elevated CapEx in 2022 and 2023, about $400 million, plus or minus $25 million, and about of that $400 million, about $200 million of that will be in decking, call it, maybe $110 million to $120 million of that. The earliest portion of that greenfield facility in Tennessee and then another $50-ish or so million on getting additional capacity out of existing facilities with technology that helps the throughput of our existing footprint in decking. And then we're making a greenfield facility investment in the UK for our luxury plumbing brands. And eventually, that site we'll be servicing in one form or another -- a number of our brands for the EMEA market, and we'll be adding a DC and plumbing on the West Coast and expanding our door facility. So all I'd say, bigger than would be just our typical nudge a wall out and put one more line in the facility type investments in decking, Plumbing and Doors for 2022, but all in concert with our near-term and long-term growth plans and all that will be productive pretty quickly. And as it relates to the greenfield facility, we'll phase that in very thoughtfully. That facility has the potential to be quite a hub for production and volume for us over time. But we will grow it thoughtfully as demand and market factors merit. And then in terms of the digital transformation, we've been talking to you now for a number of years of a set of Fortune Brands capabilities, whether it's strategic sourcing or revenue growth management and supplier development and so forth. Digital transformation is just the next wave of that. And in fact, this year, we invested $5 million this year to get that initiation, that initiative started. So 2022 is not starting from a cold start from ground zero. And we're going to be making a range of investments. Some of them will benefit our connected products. Some of them will benefit our e-commerce capabilities and some of it will unlock data and market insights to help us better understand and balance supply and demand and also to source more effectively. So we'll be making a range of investments, and we're going to be making them as much we can in a central fashion, so we can leverage both our market insights and our capabilities across the portfolio.

Got it. Super.

I'll just emphasize a couple of points on what Pat said. One is, I mean, from -- on the CapEx investments, we're excited to be at a point that we're making investments. So we look at close to 20% organic growth next year and what we forecast going forward. This is going to allow us not just to serve customers well, but to do so more efficiently. And we alluded to the fact that we opened a new retail-focused DC in Plumbing right at the end of the year. And you could see the relief in the supply chain as that things started to flow and do so at more and more efficient levels. And so, these are great -- these are the best investments we can make with the highest returns associated with them. As Pat said, we're going to be careful. We're going to govern the pace of the investment, particularly the greenfield facility. So we're feathering the dollars in as we're seeing the demand come, and we are very careful about that. On the digital piece, I'd also just reiterate, I mean, we've kind of shown our ability to leverage capabilities across the enterprise over the last couple of years, both to accelerate growth and drive margin expansion and to create more fuel for growth. And so, digital is really just the next logical pillar of our Fortune Brands Advantage capabilities. And as Pat referred to, we spent about $5 million in 2021 and piloted a couple of things and are already starting to see the results. I mean -- if you look at our e-commerce share, for example, in Plumbing, Cheri Phyfer and her team really led e-commerce center excellence under these principles, kind of starting in Q4 of last year and we've made material share gains in the space and now sit in the number one share spot in four short quarters. So it really encourages us about building these capabilities and the kind of impact that we can have when we dedicate ourselves to them. And of course, when you're doing things like mobile, cloud, we're going to be doing procurement data having the benefit of scale to be able to make the investments centrally develop the talent centrally, leverage it across the entire enterprise, really can turbo the results that we expect to get out of this.

Got it. Really helpful. Very exciting.

Thank you. Our next question will come from the line of Susan Maklari with Goldman Sachs.

Thank you. Good afternoon, everyone. My first question is -- hello, my first question is around when you think about growth for 2022, can you talk to how much of that will be led by volumes relative to price as some of those actions that you took last year actually start to take effect and come through in the results? And then I guess, with that, can you also discuss how you're thinking about perhaps a change in the rate environment and what that could mean for housing? And across the business, when you think about the different products and price points that you have, any sort of areas where we could see relative gains or incremental weakness in demand as that -- some of that could come through?

Yes, sure. I'll be happy to touch on a couple of those. I'm sure Pat will give some more color. When you look at sort of our growth assumptions, I would say we've got a lot of pricing for the year. And as Pat mentioned, 90% of that is in market and agreed. And so while it takes us a lot of work done, the backlogs and actually access that new price, that's in and that is the majority of the driver of growth that we'd expect. So, we're not banking on a ton of volume and you heard our kind of market forecast. But we're conservative this year, we'll see as the next couple of quarters unfold. What the market actually does. And by the way, we're gearing our supply chain and inventory, and you've seen that in our cash flow numbers to be able to service more should it arise, but we're not taking on a ton of volume growth. And so really -- it's a very modest volume growth in price driving growth in 2022, with opportunity there, should it go quicker. And then from a perspective of what we're seeing demand -- I mean we're not really seeing it come off anyway. I mean, it would be easy to be to say were seeing very strong here and not there, but it's really continued to be very consistent. And obviously, a lot of the things we've discussed before, demographics, below housing supply, aging housing stock, the record levels of home equity, I think, are all playing into that. And as you think about rates, firstly, they bumped up already 50 basis points and at 3.5%-ish on the 30-year, I mean, they're still materially below even where they were if you think about the end of 2018, it's kind of like 4.9%. Mortgage Bankers Association is forecasting 4% by the end of the year. And so there's quite a lot of room. We feel in rates for them to go up and still affordability to stay in check. And I think what is somewhat different right now is the very, very low inventory that's in the market, 1.7 times monthly supply of existing homes the demand that's there and homeowners equity. And so now, should we shock the market with unforeseen rate increases that aren't telegraphed well, I think there's always a danger of that. And if that's the case, will be prepared to manage our business and manage our investments and manage our P&L to continue to deliver for stakeholders. I think it's a hallmark of this company. But if it should go at a reasonable rate and be well telegraphed to the market, we think that there is quite a bit of room.

Okay. That's very helpful color. Thank you. And then I'm hoping if you can also speak a little bit about the Solar Innovations deal that you announced yesterday. Can you perhaps just give us an overview of the business and talk about what made this attractive for you? And perhaps how this furthers the outdoor segment that you've been growing on and some of the core innovations and focus that you have across the company?

Yes, I'd be delighted to say, we're very excited about Solar Innovation. It's actually a company that we've been coveting for some time and entertaining conversations with their founders. We've done a remarkable job. And it is a very fast growing segment of the doors market, right? And so it's the big wide opening doors, you think about, particularly in commercial space as you see in the big wall that opens fully. It's about 50/50 commercial residential application, and the car of the category has been double- digit for the last three to five years, perhaps even a bit beyond that. Now what's interesting is it's very highly engineered, technology driven in the sense that there are a lot of patents protecting the technology. And so when I visited it's kind of amazing, it moved to 2,000 pound door with a finger, right? And you don't just do that. And how the technology that works, how the ceiling works, the ability to build the door that’s plus to the ground and have it drained to the outdoors. I mean, all of this is highly technical stuff. And what we see an opportunity is to take that technology and combine it with Therma-Tru, which is the leading exterior door brand. By the way, the number one builder brand in our entire portfolio and really start to leave with some standardized product and embrace this growing segment of the market. And what you really do, then you start to create indoor outdoor spaces, right, an open the entire living space to the outdoors, integrate it with the decking products, some of the screening products that we have through LARSON and really start to create much, much more of an integrated portfolio. So very excited about the ability to access it through this acquisition. The other thing that allows us to do is build on our more nascent commercial capability because this does have a big commercial application. And you might have noticed as well, Fiberon is also getting into some of the commercial space with our Wildwood product, which is some of the cladding phenomenal product and a much better application for exterior sighting than wood in that decorative architectural space. And so we're planning on combining all of that to really kind of turbocharge both the commercial space, but also our ability to access this high end sophisticated area of large opening.

Okay. That’s very helpful color. Thank you, and good luck.

Thanks.

Our next question is going to come from the line of Adam Baumgarten with Zelman.

Hi everyone. Good afternoon. Thanks for taking my questions. I guess, maybe starting on margins. If you could talk about what gives you the confidence that margins will start to inflect positively in 2Q. I mean, it seems like that maybe was pushed out a little bit here. I mean you're starting to see supply chain improvements? Or is it really simply just starting to lap some of that meaningful cost inflation as you get into mid-year? And then just on that same vein, just on COGS inflation, you talked about the $290 million in 2021. How should we think about the dollar inflation in 2022 that's embedded in guidance?

Yeah. Adam, I'd say there's a number of things that give us confidence in margins for 2022. One is most of the actions, as we've said, are in place. Now some of them start to take effect late Q1, early Q2, whether that's because of negotiated timing with channel partners or whether that's because of backlog and working the backlog down until the new price takes effect. But that is what pushes that out a bit longer than we thought. And also some of the inflation we brought in from 2021 was a bit higher than what we would have expected in the third quarter. But we will be about breakeven on price versus cost by the end of Q1, and we will inflect positively by Q2. And so we see the fact that we have those actions in place that we've been leveraging SG&A very effectively for the last three years. And when you look at how we really leveraged SG&A this year, while still making $85 million of capability investments, we expect to be leveraging SG&A that effectively next year. And we still see our brands resonating very, very well, and they're not having to compete by promotion or discounting. So I think all of those things give us the confidence that we're on our both near-term and long-term margin trajectory. We just have to work through some of the heavy inflation we took in from the quarter and get the new pricing in new orders. And I would also say, I wouldn't -- we're not sanguine on inflation, many areas have stabilized. I'd say about the areas that haven't, you have hardwoods, some wood board, whether it's particleboard, plywood, spot market freight and aluminum, but outside of those elements, a lot of stability, not declines, but stability. So the rate at which things are coming at us and new has gone down. In terms of the COGS inflation in the plan, I would think of it as our COGS went from $3.9 billion in 202 to $4.9 billion in 2021. And we're going to expect at least mid-single-digit level percentage COGS inflation, so at least $300 million. I'd say that would be the low side of what we'd expect. We're prepared if more emerges, but that would be the low side of what we would expect, and we will act if more does emerge.

Got it. Thanks. And then just on -- maybe thinking about inventory levels across your retail and wholesale customers. Is there still an opportunity in certain businesses or maybe all businesses for that matter for some restocking in 2022 if demand holds in and supply improves?

Yes, I might say there's some. It definitely got better over the course of the year. And so, we've been trying to be very strategic about servicing the high-runner SKUs and getting those where consumers need them. So I'd say, it's still behind on kind of C&D SKUs. There's still some of our businesses that frankly had to have customers and allocation all of 2021, and so we do think there's continued restocking in 2022, but we are in a better spot than we were this time a year ago.

Great. Thanks. Best of luck, guys.

Thank you.

Thanks.

And we have time for one final question. Our last question that we'll take for the day will come from the line of Truman Patterson with Wolfe Research.

Hey. Good afternoon, everyone, and thanks for taking my questions. So just wanted to follow up on the prior question. On second quarter margins, being up year-over-year, is this the case for your thoughts on each of the segments? I'm really hoping you can walk us through those? Are any of the segments catching up with inflation a little bit faster, taking a little bit longer than that 2Q time frame? And then, wanted to dig in a little bit more into what's incorporated into guidance assuming that cost inflation does tick higher from here? Are there any incremental levers that you can pull to offset continued inflation without really impacting guidance?

Yes. I'll touch on a few things. Nick may add. As your first comment on Q2 margins, what I would expect is Q2 margins to be in a similar ZIP code as Q2 of 2021. But recall, Q2 margins in 2021 were quite strong. They were 15.4% in 2021. I mean you would expect a 200-plus base sequential margin improvement from Q1 2022 to Q2 2022. So, that's where you're going to see it Truman is as we move sequentially from Q1 to Q2, you're going to see a big uptick driven by pricing fully coming into effect. But when you look year-over-year, we had exceptionally strong first half margins in 2021 and in particular, in Q2. I think across the board, you would expect strength in margins across the business, though always remember in plumbing, depending on when we're phasing investments. Plumbing is always going to be dancing around its margin plumbing for the year is around 23%. It might be closer to 22% in the first quarter and then 23%, plus or minus, for the balance of the year. In terms of how would we adjust as the year went on, if different things unfolded. All of our teams, we are pretty darn good at managing the P&L. I think we've kind of had that as a trademark for quite some time. And especially when the downturn hit in Q1, Q2 of 2020, we managed the P&L very effectively on the way down as well as we have on the way up since. And I'd say the last two years have really gotten all of our businesses into a much tighter cadence on monitoring inbound costs, both materials and freight and labor. And then for better or worse, we're just in a much tighter coordination with our channel partners to be prepared to take price more frequently than would be typical in the building products industry. And that's the capability we will carry forward into 2022 and we will move nimbly throughout 2022 to hold to our guidance. I mean we've tried to anticipate in our guidance, as we mentioned in our prepared remarks, that we're at least for the first half, carrying in many of the same dynamics. And we do expect there to be things that unfold throughout the year, but we will manage them effectively and make the margin progress we've signaled.

Okay.

And Truman, I'll just add a couple -- just a couple of thoughts on that. Your question about margin evolution. I mean as you think about it, hard to overstate the impact that the backlog has had on ability to chase margin if we just could push a button and reprice backlog, you'd have seen pretty strong margins in Q4 because the price is in and agreed, but we're working on -- we're building the business for the long-term. We're building channel relationships for the long-term. And so we're trying to do things in a constructive way over time and gain and hold share. And so that just takes time to work through the system. And what Pat's referring to is, as you work through that, you really do see us come through. And then the other part of your question about should bigger risks materialize. I really think one of the hallmarks of this team has been its ability to manage risk and to respond to risk rapidly. And I think back to Q2 of 2020, I mean our decremental margin was 12% when you saw the world come to. And why is that? Because our financial priority is to grow above market and to grow our margins. And we've been able to invest over the last couple of years to really catapult both the growth above market and the growth in margins. But let's say, make no mistake in the face of challenge; we'll work to offset cost. We'll take prices needed, and we'll pace investment as the environment wants. And we'll do those things to continue to deliver for shareholders no matter the environment. And it's one of the things we take a great deal of pride in. And so we see a lot of exposure to growth and earnings growth on the upside, but a lot of levers in the business to manage any short-term challenges we may face.

Okay, okay. Thanks for that. And then in Plumbing, I believe you all mentioned you grew in the quarter, gained market share. You all have been gaining share in China specifically for the past handful of years. I'm hoping to get an update on the Chinese real estate market, your expectations in 2022. Because I believe last quarter, you all were still expecting growth in China, just seeing if anything's changed there?

Yeah. We did see, I'd say, modest growth in China in Q4. And so the business continues to plug along. And as we look to 2022, we've obviously moderated our expectations as compared to the last few years, but we expect that business to continue to perform. And for a few reasons, I mean one is, you'll recall that our business is really outperformed both upswings and down troughs largely because we are continuing to innovate and expand into new categories and new channels. And that's really been one of our calling cards of that business. So, for example, we've very successfully launched Mon Sanitary Ware and Smart Sanitary Ware in China. It's been a really good success. We're probably only at a point where two of share in the total market, which is a huge opportunity. And so through that expansion outside of just riding the market of the housing market wave, gives us a lot of opportunity. And then the second part is while the government is taking a lot of steps to take to cool the market and take speculative buying out of the market. Now you have seen some easing of that sense, but I think that easing is going to take a while to work through, that hasn't really been our exposure. Recall, we're much more exposed to Tier 1 and Tier 2 cities. Shanghai is our leading share market. And so in a market like that, we're seeing a lot more R&R people just have to upgrade aging homes. One of the first things that the Chinese consumer touches when they move into a home is the bathroom, done a lot of consumer work there. And so our exposure is a lot more favorable deliberately so, by the way, we've chosen not to chase the speculative and exposure is a lot more favorable than the totality of the Chinese market. So we've created room this year to allow that business to experience slower growth and continue to make investments it needs to make as it continues to grow, but we're confident that we'll work through this year and whatever may throw at us, and then we'll continue to put up the kind of performance we put up over the last few years. And I think this maturation from speculation to more normal regular way growth and on and on, the Chinese market is probably not a bad thing in the long run for a business like ours.

Thank you. And with that, we will conclude today's Fortune Brands fourth quarter and full year 2021 earnings conference call. Thank you for joining. You may now disconnect.