Fortune Brands Home & Security Inc

LSE:0IRN

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands' First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. Dave Barry, Senior Vice President of Finance and Investor Relations. You may begin our conference call.

[David Barry, executive]

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security First Quarter 2021 Investor Conference Call and Webcast. I'm Dave Barry, and I recently became Senior Vice President of Finance and Investor Relations at Fortune Brands after spending the prior 6 years in our Plumbing segment, most recently as Chief Financial Officer. I'm excited to be here, and I look forward to working with you all in my new role.

Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings release and the audio replay of the webcast of this call can be found in the 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, such as in our most recent Form 10-K.

The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified.

With me on the call today are Nick Fink, our Chief Executive Officer; and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions.

And I will now turn the call over to Nick.

[Nicholas Fink, executive]

Thank you, and welcome, and thank you to everyone for joining us on the call today. I hope that you and your loved ones are all staying safe as parts of the world begins to reopen.

I couldn't be more proud of our first quarter results, which reflect a broad-based acceleration of our remarkable 2020 performance. Our business performed very strongly across the board. For the quarter, our total company sales increased by 26% over last year, with each business delivering double-digit organic growth. Operating margin increased 270 basis points to 14.8%, and earnings per share increased 68%. This performance is the result of exceptional execution by our teams in the housing market, which we believe is in the early stages of a period of long-term sustainable growth.

Our stellar first quarter results were meaningfully ahead of a strong market and lapped a very good Q1 in 2020. Importantly, we continue to drive market-leading growth while advancing our strategic agenda, including accelerating our margin improvement initiatives. Our focus on execution, efficiency and safety drove share gains and favorable operational leverage. This focus allowed us to continue to service our customers and consumers with our industry-leading brands and innovation while also increasing investment in the business.

These best-in-class results cannot be achieved about our wonderful people. They drive what we call the Fortune Brands advantage, which I introduced to you 1 year ago. This powerful combination of our common center capabilities, including category management, global supply chain excellence and complexity reduction skills deployed across 40 brands will continue to provide both investment for sustained above-market growth and operating margin improvement into the future.

Our performance continues to demonstrate that Fortune brings is among the most reliable providers to our channel partners delivering high levels of service in a high-demand environment while proactively working to keep people safe. As the pandemic moves into its next stages, we've continued our efforts to keep our employees safe by working tirelessly to secure access to vaccines for our workers.

Through the efforts of our local teams, we have held or are planning on holding nearly 20 on-site vaccination events across our locations. We are also working with local communities to help with their local vaccination events and are engaging and educating our employees to ensure the highest vaccine adoption rates possible.

I'm proud of our safety track record during the pandemic, which continues to be ahead of manufacturing and national benchmarks. That said, we've learned a lot about operating in this type of environment, and we'll apply those lessons to continuously improve and make Fortune Brands as stand out among employers.

On the back of our continued outperformance, in the housing market with long-term sustainable growth momentum, we have increased the global and U.S. market expectations for our leading brands and our financial guidance for the year. Pat will go into greater detail later how we are successfully navigating demand-driven challenges to be able to pursue higher rates of growth, margin, earnings and cash flow for our stakeholders.

We will leverage our Fortune Brands advantage in this favorable market to accelerate operating income improvement and continue to free up incremental cash to make strategic long-term investments in our brands, innovation, digital strategy and supply chain capacity. This will enable us to capture more opportunities and continue to increase our share gains over time.

Turning to the remainder of our remarks today. First, I will discuss what we're seeing in the home products market. I will then highlight key takeaways from our first quarter and provide additional color on what drove the results. Finally, Pat will provide highlights on our financial results, balance sheet strength and liquidity as well as our thoughts around increased guidance to our financial outlook for the year.

Now turning to our views on the housing market. Long-term fundamentals for housing and home products remain very favorable, and the rate of demand has further accelerated after a strong second half of 2020. As has been widely noted, the U.S. is currently millions of homes under booked as growth in housing supply has not kept up with household formations. This dynamic has grown over a long period, and we expect the unwinding to persist for a long time.

This supply imbalance has reached a point where even at the current rate of new construction starts, it will take several years for supply and demand to come into balance. This severely underbooked environment impacts both new construction and recurring remodel activity as consumers are faced with the choice of purchasing a new home or updating very aged housing stock. As a result, we are uniquely positioned with our leading brands and channel positions to take advantage of the tailwind of long-term housing activity. A differentiated exposure to new construction, combined with our powerful channel strength in R&R will remain a level for growth well into the future.

Additionally, demographic-driven forces support the need for this expansionary housing environment to persist. The key millennial generation continues to move into their home-buying years. While the Baby Boomer generation is choosing to age in place and is adapting their homes accordingly. The pandemic has accelerated favorable trends that were already in place and has increased focus on the value proposition of the home. Even as vaccine distribution expands and the majority of the U.S. population is vaccinated this year, both employers and employees have seen the benefits of more flexible workplace arrangements.

This resulting shift away from a full work week in the office will create continued demand for workspace in the home and allow employees the optionality of living further from their offices. Moreover, we've also seen purchases of second homes rise. Our brands and products are well positioned to capitalize on this likely to be lasting movement.

Turning specifically to new construction. Activity remains robust, driven by these very favorable demographics, low inventory and attractive mortgage rates. Current pace and activity seem only to be governed by the ability of builders to source land, labor and materials effectively. Although inventory and rising home prices might create uneven growth trajectory, we strongly believe that favorable demographics will fuel a multiyear sustainable housing expansion. As I mentioned, repair and remodel activity also remains very strong and has expanded into 2021 as consumers spend on home improvement projects to refurbish an aging housing stock.

With demand for homes outpacing supply, older inventories being purchased, leading to significant R&R projects as homes are modernized. For example, we saw strong double-digit growth in the premium price point segments of our cabinets and plumbing businesses, indicating the strength of large ticket R&R. Current homeowners, while also driving investment, is rising home prices have increased home equity levels to an all-time record of more than $7 trillion. This significant driver of R&R activity is amplified by the fact that consumers today are sitting on $2 trillion more in saving accounts than before the start of the pandemic.

This combination of favorable demographics, severe underbuilding, attractive interest rates, high home equity levels and the focus on the home as a place for multifunctional enjoyment gives us confidence in our increased market forecast for 2021 and the anticipated persistent housing tailwind we expect for years to come.

Much attention in the first quarter of this year has been paid to material and other cost inflation as well as pressure in global supply chains. We are pulling every lever available to us to service our customers. As we have demonstrated, our ability to mitigate and overcome challenges, whether demand, supply or inflationary in nature has been prudent through our consistent delivery of results. As we speak to you today, having once again delivered exceptional performance and having increased our financial outlook for the year for both sales and margin, we will continue to be laser-focused on driving consistent stakeholder value across the organization in all matter of the environment.

With that market backdrop, some thoughts on the recent quarter. We further executed on our margin accretion objectives in the quarter as we saw the continued benefit from our efficiency programs, which began in early 2020. Consistent with our strategy, the execution of our Fortune Brands advantage capabilities created fuel for growth that allowed us to invest in key growth initiatives, including in our brand and product innovation, digital capabilities and capacity expansions.

Importantly, these cross-company initiatives to drive long-term growth and margin improvement as well as to free up additional funds for investment in our key priorities are ahead of schedule and have contributed to our growth and margin improvement in the quarter. With an even stronger 2021 outlook, we are accelerating investment behind our core strategies while also delivering margin improvement above our prior expectations. At the same time, we will maintain investment discipline, knowing that the pandemic is still ongoing and expansions do not always unfold in a linear way, so as to deliver consistent performance for our stakeholders.

Now let me turn to our individual businesses and how we are positioning for a stronger long-term future. Starting with Plumbing. Our Global Plumbing Group continued to outperform the global and U.S. markets. The business accelerated through the first quarter of this year with sales have in excess of 30% in the quarter. These strong sales drove operating leverage, resulting in a 24% OI margin, notwithstanding increased investment in brands, innovation and customer service. We experienced very strong double-digit sales growth across all brands, channels and regions. Even if we exclude China to isolate the first quarter of 2020's plumbing impact on the business, plumbing sales still grew in excess of 25%.

Our loan brand continues to win in its core products and adjacencies. Our leading brand awareness, purchase intent and loyalty metrics show non persistently resonates with the key millennial consumer. Our cutting-edge marketing is winning accolades, and we are investing more behind our powerful campaign. Our combination of advanced smart technology and on-trend designs drive share and profit growth as no one leads in defining the way humans will interact with water now and into the future.

We made significant progress as our flow line on technology rolled out into a key builder partner, and we also increased our retail distribution. We also further expanded Moen's smart home network with our Flo by Moen digital Sump Pump monitor, which won accolades at CES and the prestigious KBIS show. Our sustained investment in innovation, brand and channel with unrelenting focus on product delivery and service levels will continue to perpetuate the cycle of outperformance for North America's leading plumbing brand.

Additionally, Moen China continues to outperform its market through channel and category expansion, while providing high levels of product quality and service to our customers. All of our channels grew double-digit versus their first quarter 2019 pre-COVID levels. We have rolled out increased brand investment in China and are seeing a very strong response to our campaign.

Finally, the House of ROHL were in excess of 25% globally despite continued restrictions and showroom capacity in the U.S. and rolling lockdowns in Canada and Europe. The positioning of these brands is authentic luxury plumbing collections resonates with consumers who are leveraging their own strong balance sheets to elevate and customize their kitchen and bathroom designs.

Turning to Outdoors & Security. Sales increased by over 45% and operating margin increased by over 300 basis points to 13.5%. Organic sales, which exclude our recent LARSON acquisition came in at an impressive 15% growth. These exceptional results were driven by very strong double-digit decking and doors growth, continued growth in security and exceptional execution across the segment.

With respect to LARSON, our teams are hard at work in integrating the business and capturing expected growth and synergies. The LARSON team is proving to be a wonderful fit with our Fortune Brands family. There is more work to do, but we are ahead of schedule, and our expectation of synergies from this addition to our portfolio are as good or better than we thought at the time we announced the transaction.

Turning to decking. Fiberon grew in excess of 40%, an impressive feat during the winter period that normally includes some seasonal selling. Momentum in our decking brand has not only continued but is strengthening. Similar to other composite board makers, we continue to take increasing share from lumber decking products. Our investment thesis continues to be confirmed as distribution expansion, coupled with leveraging our percent brands advantage capabilities, positions Fiberon for long-term growth in the market, fueled by trends in housing, outdoor living and long-term material conversion from wood to higher-performing eco-friendly recycled materials. We remain on track to add capacity midyear as we drive double-digit top line growth across Viber.

With inflationary pressure on lumber over much over the last year, the price differential between commodity wood and branded engineered decking is negligible, contributing to a greater number of customers choosing Engineered Materials. That said, even as lumber pricing moderates, the cost benefit equation will continue to weigh heavily in favor of Engineered Materials and the value proposition will continue to improve through branding and innovation.

Sales in our legacy doors brand experienced strong double-digit growth in the quarter, including robust demand in retail POS and increased wholesale activity as new construction ramped up during the quarter, leveraging our deeply developed channel. Our advantaged single-family new construction exposure is driving results at Therma-Tru and our team is working hard to supply increasing demand while navigating cost and supply chain challenges.

Much like Fiberon, consumers are increasingly realizing the benefits of engineered products or the more traditional materials used in exterior doors and outdoor living. These conversion tailwinds will continue to power our Doors business well ahead of the market. Our new design tools, innovation and performance and functionality and the ability to customize through technologically-driven skins and coatings have expanded the opportunity set in this product category, where we have deepened our position as the #1 exterior door brand.

Turning to Security. Sales grew further this past quarter as commercial and international markets continue to open. Master Lock is continuing to demonstrate improved performance as it progresses its transformation under its new leadership. We are employing Fortune Brands advantage capabilities within our security operations to drive growth and operating margin improvement. In fact, securities performance this past quarter contributed to the success of overall margin progression in the segment versus a year ago.

Finally, turning to Cabinets. Our Cabinets team again delivered excellent performance in the quarter. Sales grew low double digits for the third quarter in a row as single-family new construction and bigger ticket R&R increased. With strong growth across product lines at all price points, operating margins expanded by 180 basis points over prior year to 10.8%. Having impressive margin improvement was off of a strong Q1 last year as new construction activity produced seasonally strong results a year ago.

Our Cabinets business continues to demonstrate how our hard work over the past few years produces market-leading top line performance at increasing margins. We've considerably changed the way we look at both our current operations and view our future opportunities. Our work in our global low-cost supply chain is adding flexibility and resiliency to the business. We're building a scalable and cost-effective network across our platform with increased simplification and commonization driving both operating leverage and best-in-class service. We're winning share against a fragmented domestic market and against imports, which are coming in at higher cost and at longer lead times.

We're seeing growth at both ends of the press spectrum. Our cabinets per the plant now in the late innings positions our business extremely well to capitalize wherever demand materializes. In the first quarter, we delivered double-digit growth in both our make-to-order and value price categories. In our make-to-order business, we are seeing strong trends this past quarter in the U.S., led by premium price points and a nice return to performance in Canada as that housing market reaccelerates. Our best-in-class dealer network continues to deliver for us. Additionally, our Cabinet team is exploring new omnichannel opportunities and is accelerating investments in e-commerce.

Within our value price grid cabinets, we continue to gain share while optimizing our operations and offerings. During the quarter, demand was widespread in value cabinets across builder, dealer and retail channels. We made considerable progress in capacity and distribution with investments in the quarter in Mexico as well as the on-time opening of our new Southeast facility see surging demand in Mantra and other value-priced products. We expect another breakout year for our Mantra line in 2021, which serves the market previously addressed by importers with stylish short lead time product.

Our Cabinet team has increased share by continuing to win in the market and is doing so on an advantaged replatformed cost base. More opportunity lies ahead, and the team is pursuing it with the same figure and tenacity that they have demonstrated over the last few years. We are well on our journey to drive our Cabinets business to our long-term goal of mid-teens margins.

In summary, our teams work tirelessly to deliver on our purpose fulfilling the dreams of home. And we take great pride in our impact on the quality of people's lives within the home. The world is not without challenges or risks, health, safety or otherwise. The home provides comfort, protection, respite and is a center for him a connection, whether it be work, school, entertaining or generally forming deeper relationships between friends and family. We are central to the role of the home and our private met role comes through in our brands, innovation and people every day.

In addition to filling the dreams of home, our company is committed to doing its part to help improve the lives of those around us, to our environmental, social and governance efforts. Whether it's through our environmentally responsible products, leading safety record or diversity equity and inclusion initiatives, we are continually challenging ourselves to raise the bar. I encourage you to visit our website to see our recently released ESG report.

Combined with attractive demographics, strong demand and low supply of homes, we expect a long-term multiyear tailwind for houses. As the market expands to fold the severe gap in housing supply, we expect to scale ahead of that demand and continue to take share, consistent with our long track record. Our innovative portfolio of products is targeted at the heart of the market and this broader channel exposure than ever before.

By leveraging our own actions to continuously improve the business and our premium resilience We intend to capture the upside of this multiyear expansion while managing any volatility that may come our way. With our exceptional team, leading brands, strong channel positions and powerful balance sheet, we are uniquely positioned to continue to drive accelerated value creation for our stakeholders.

Our updated and improved 2021 outlook reflects the strength of our business with robust growth translating to operating leverage and increased margins while we continue to invest for the long term. We expect to continue to outperform our markets in 2021 and beyond, while fully offsetting inflation and supply chain challenges to produce even stronger results. In addition, our powerful balance sheet positions us to continue to drive incremental value creation. We are excited for what our world-class brands and people can accomplish.

With that, I will turn the call over to Pat, who will speak to our financial results. Pat?

[Patrick Hallinan, executive]

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 first quarter results.

Sales were $1.77 billion, up 26% from a year ago. Organic sales growth, excluding the LARSON acquisition, was up 19%. Consolidated operating income for the quarter was $262 million, up 54% or $92 million compared to the same quarter last year. Total company operating margin was 14.8%, up 270 basis points over the same quarter last year. EPS were $1.36 for the quarter, up 68% versus $0.81 the same quarter last year. Our associates focus on safety and outperforming a strong market drove these outstanding results.

The momentum of activity in our markets was strong throughout the quarter and remained strong. While we are working hard to service the robust demand across the portfolio, we are also taking action against material and freight inflation and supply chain imbalances. We expect to offset these challenges fully to deliver higher growth and greater profitability than we planned.

Our high-performing business model of leading brands and channel positions combined with further deployment of our Fortune Brands Advantage, drives both incremental investments and increased value to the bottom line for our stakeholders.

Now let me provide more color on our segment results, beginning with Plumbing. Sales for the first quarter were $622 million, up $153 million or 33% or up 30% adjusting for FX. First quarter growth was up very strong double digits across all major brands, channels and geographies. Plumbing operating income increased 43% to $149 million for the first quarter. Operating margin for the quarter was 24%, reflecting strong volume leverage despite significant investment during the quarter in our brands, strategic priorities and to maintain service levels. We expect 2021 margins to be at or above 22% for the full year.

Turning to Outdoors & Securities. Sales for the first quarter were $462 million, up $148 million or 47%, driven by the addition of LARSON as well as strong double-digit growth in doors and decking and continued growth in security. On an organic basis, sales were up 15%. We expect all product categories to drive 2021 growth. Door sales were up double digits in the first quarter, driven by consistently strong retail sales and an accelerating new construction market. Decking sales were up strong double digits in the quarter as our distribution gains achieved new performance levels. Demand in retail and wholesale channels remain strong. We are selling every board we can make. We are on pace to bring additional capacity online in the middle of this year and are looking for options to pull forward capacity plans from 2022 and beyond.

Security sales continued single-digit growth in the quarter with strength in retail and international markets. Commercial markets showed improvement throughout the quarter and are poised to continue to perform better throughout the remainder of the year. Outdoors & Securities segment operating income was $62 million during the quarter, up 91% over the same quarter last year driven by the addition of LARSON and performance improvement in doors, decking and security. Segment operating margin increased 310 basis points versus the same quarter last year to 13.5%.

Turning to Cabinets. Sales for the first quarter were $688 million, an increase of 11% over the same quarter in 2020. We continue to experience strong growth of value-priced products and sales of higher-priced make-to-order products returned to double-digit growth 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 first quarter was $75 million, up 34% or $19 million versus the prior year. Operating margin for the quarter was 10.8%, up 180 basis points versus the same period a year ago. We expect Cabinets to deliver an average second half operating margin of 13% or greater as we benefit from our efforts to streamline operations and invest to capture additional share gain.

Before turning to the balance sheet, I want to take a moment to provide perspective on material and cost inflation in the face of elevated demand and amid a backdrop of an accelerating housing market. We continue to deploy a multitude of tools to mitigate or offset inflation within our businesses. We do this through continuous cost improvement throughout our operations. We enacted major programs during the past year and are furthering those initiatives in 2021. We also employ cost sharing with suppliers where appropriate. Finally, when necessary, we act via price. Through this combination of actions, we plan to offset fully all inflationary headwinds this year and expect to deliver 2021 margin improvement and remain on an increasing margin trajectory over the next several years.

Turning to the balance sheet. Our balance sheet remains strong with cash of $356 million, net debt of $2.3 billion, and our net debt-to-EBITDA leverage is now 2.1x. We ended the first quarter with approximately $755 million of total available liquidity. We have made and will continue to make significant investments. We are continuously assessing opportunities to deploy capital strategically to accelerate growth and stakeholder value creation. We will also look to continue to return capital to shareholders through opportunistic buybacks and our dividend, building on the over $1 billion of capital deployed during 2020.

I would now like to address our updated market and financial outlook. Given our continued outperformance and strengthening home products market, we are raising our market and financial outlook for the full year of 2021. Based on the expectation that the global market for our products will grow 9% to 11%, with the U.S. housing market growing 10% to 12%. And within this market forecast, we now expect U.S. new construction growth of 11% to 14% and U.S. R&R growth of 10% to 12%.

Based on these assumptions, our revised 2021 full year sales growth is expected to be 20% to 22% or 13% to 15% on an organic basis. Our full year operating margin is expected to be around or above 15%. We now expect full year EPS within the range of $5.45 to $5.65 on a before charge gain basis, of which the implied midpoint equates to earnings growth in excess of 30% over a record year in 2020.

Specifically, our outlook for each business as it relates to our updated guidance includes: Plumbing net sales growth of 15% to 17%, with operating margins at or above 22%; Outdoors & Security net sales growth of 43% to 47% or 11% to 13%, excluding LARSON, with segment operating margins of 15% to 16% or approximately 16% to 17% adjusted for purchase accounting and onetime integration expenses; Cabinet net sales growth of 11% to 13% with operating margins at or above 12%.

We expect 2021 free cash flow of approximately $650 million to $700 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 revised full year EPS outlook includes the following assumptions: corporate expenses of about $104 million to $106 million, interest expense of approximately $82 million to $86 million, a tax rate of between 23% and 24%, and average fully diluted shares of approximately $140 million to $141 million.

We expect a long runway of fundamental housing growth to result in prolonged market strength for our products. We expect our sales to continue outperforming the market, which will accelerate our margin progression. Our strong balance sheet allows for us to continue to assess further opportunities to deploy capital strategically. We see multiple paths of future value creation to pursue for our stakeholders. Our company has never been better positioned to capture these opportunities. Our teams remain committed to driving market-beating sales performance and continued operating margin improvement.

Our revised 2021 guidance is solidly on the trajectory of the 3-year outlook reflected in our updated investor presentation. This outlook contains a compound annual sales growth rate of 8% to 11% and a 2023 operating margin target of 16% to 17% relative to a global market growth CAGR expectation of 6% to 8%.

I will now pass the call back to Dave to open the call up for questions. Dave?

[David Barry, executive]

Thanks, Pat.

That concludes our prepared remarks on the first quarter. We will now begin taking a limited number of questions. [Operator Instructions]

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.

[Operator]

[Operator Instructions] Your first question comes from the line of Phil Ng from Jefferies.

[Philip Ng, analyst]

Congratulations on really impressive results and just broad-based strength across your portfolio.

Last quarter, I believe, Pat, you may have mentioned that by spring, you should have better line of sight in the back half of this year in terms of growth. I think previously, you were baking flattish sales just given the tougher comps. So can you expand on your thinking now and essentially what your customers are saying in terms of outlook?

[Nicholas Fink, executive]

Yes. So we definitely expect growth in the back half, and we expect to outperform that growth. I put the market into context by half of the year. You heard our updated market guidance, which is, call it, roughly 10% for the full year. I'd characterize the first half is kind of mid-teens or better, and the back half is kind of mid-single digits or better from a market growth perspective.

And then when you think about what that means for our sales across the halves of the year, we're thinking about reported sales growth in the first half averaging around 30% and reported sales growth in the back half averaging around 10%. So both first half and back half strength versus the market. And then even on an organic basis, a first half organic growth around 20% and a back half organic growth around high single-digit versus a mid-single-digit market.

So we are expecting back half growth. We just see the strength in the housing market continue. We expect to continue to outperform it. I'd probably further clarify, LARSON is probably $450-ish million in there, with about $250 million of that coming in the first half, just to kind of give you the way we see the year unfolding right now.

And I do think, at least it seems like it's tracking this way for the first half, but it seems also likely to track this way for the back half of the year, where on a quarter-by-quarter basis, looking at it in stacked margin versus those averages are helpful ways to look at these.

[Philip Ng, analyst]

Yes, that's really helpful, Pat. Good to see demand really bounce back in your made-to-order Cabinets business. Curious to get your thoughts on how you're positioned with some of the reshuffling you've done on the capacity side.

And then appreciating, from a dollar margin perspective, value is higher. But on an EBITDA dollar contribution, I think semi-custom is probably pretty additive. But just wanted to help us think about what this bounce back in big ticket, what that means for you, and then obviously, on the value side as well.

[Nicholas Fink, executive]

Sure, Phil. Yes, we're equally encouraged to see it. I mean, you stated it's true for Cabinet. It's true for the entire portfolio. I mean, the strength was just so broad-based across all products, channels and geographies. It was really impressive. Really nice to see it come through in make-to-order cabinets side and really being -- as we said in the prepared remarks, really led by premium, which I think tells us something about how the consumer is thinking about investing in their house. The confidence that they have in home values and liquidity.

And so that's rolling through very nicely. Now as we've talked about previously, I mean, we did a lot of work around the supply chain. We talked a lot about the work that we did on the value side to create a highly competitive global supply chain. We've also done a lot of work on the made-to-order side to kind of take out unnecessary complexity, to simplify wherever we can, commonize where we can, and that is helping compound a lot of the margin accretion in the business.

The work is far from done. Dave and his team continue to identify more and more opportunities to go after that. But it's well underway and it's well understood. And so as you start to see volume flow through that made-to-order, we'll see benefit there, certainly, as you point out on a dollar perspective and then also have plans to drive the margins further.

So Pat, do you want to add anything to add?

[Patrick Hallinan, executive]

Yes. I think the thing I'd add, Phil, is I think it's a great sign for housing in general and for our business, right? When people are buying more premium-priced cabinetry, it just shows the confidence they have in their home, in their home values and their willingness to invest in their homes. So I think it's a great overall kind of market strength signal.

I think when you talk about percentages, the Cabinets team is trying to drive both the make-to-order and the stock business to the mid-teens margin of the whole Cabinet portfolio. As you point out, though, in the make-to-order side you sell in the boxes at 2x to 3x, sometimes even more than 3x the cost of the stock boxes. So the dollar profit is quite substantially higher, which allows you to leverage SG&A much more significantly. So to the extent the level of strength we're seeing continues, that will be a powerful SG&A leverage and kind of upside to the next couple of years.

[Philip Ng, analyst]

And does some of the streamlining you guys have done on the made-to-order side of things, just lead times just really extended for everything, does that kind of give you an advantage this to service your customer better and that it helps you potentially gain share?

[Nicholas Fink, executive]

Yes. Over time, for sure. Because you're just removing unnecessary complexity. And at the end of the day, you have a network that allows you to move things through the network and put it in different places. I mean, today, as we speak today, the whole system is pretty strained. It's a high-quality problem. And so you have seen lead times for the whole industry extend out.

We work very hard to keep our lead times inside of competitors' lead times so that we can continue to gain share. But as we were to build out the system, you're absolutely right, it becomes a very powerful business system where you're leveraging a whole network, not one facility at a time.

[Operator]

Your next question comes from the line of Stephen Kim from Evercore ISI.

[Joseph Ahlersmeyer, analyst]

This is Joe Ahlersmeyer on for Stephen Kim. So great quarter. Just wanted to further discuss your prepared remarks on capacity within composite decking. You're saying you're selling everything you can make today, which is great and probably supportive of positive pricing, which the industry traditionally hasn't seen. And certainly, the investments you've previously made in distribution are helping you out with that.

But how much additional breathing room to the investments that you expect to come online midyear give you this year given that it sounds like you're already sort of eyeing additional investments? Could you just go into a little more detail on the runway you have and the plans to support multiyear growth in a category that doesn't seem to be showing any signs of slowing down?

[Nicholas Fink, executive]

Yes, why don't I -- I'll start off and give you kind of a couple of different perspectives around it and Pat can help lay out sort of how that comes online. But the first thing, we absolutely are pushing hard and getting everything we can out the door. And you're not wrong on pricing. I think -- although if you find -- as we build out the fiber on brand, we are really trying to work on leading in pricing. I think that's important. This is a high-value proposition for consumers, and it is one that is driven both by brand and by innovation.

And so it's taking from commoditized, unbranded wood with a much higher value proposition, and that deserves a premium. And so I think there's that equation and keeping that equation right, so the value always sits in favor of the consumer. But I think there is a pricing opportunity. And I think you'll see us start to develop a really good track record at driving that.

And then as you think about the capacity, yes, we do have more coming online, and we're looking to pull more into 2021 from 2022 and into '22 from '23. The way we've been able to approach it has been fairly incremental: a, investing to get more capacity and more efficiency out of the assets we have. I think under Fortune Brands ownership, we're getting a far greater efficiency level out of those assets and have plans to continue to increase that.

And then as we add capacity for us, it's sort of a extruder at a time. And so it's a very manageable approach to adding that capacity. These are not giant, giant big bites that we have to take. That said, there may come a time where we do want to add an incrementally larger footprint. But that's also something we know how to do. I mean, we open facilities all the time, and so I think we feel we can do that fairly efficiently.

And so we feel good about what we're adding this year. That said, I'm pretty bullish. It sounds like year or 2 in the category, so I don't expect that we'll find ourselves overcapacitized anytime this year or next year. Our plans are to meet the market. But as we continue to gain share, we continue to sell out at the capacity we have.

Pat, any color you'd add from a timing standpoint?

[Patrick Hallinan, executive]

I would kind of echo your sentiments. I think, first, we've stated we're working to get this business to $400 million by 2023. So we're very much on that track, if not ahead of that track. I think Nick's comment signals, if anything, we wish we are putting in more capacity faster. Last year, we grew this business about 25%, selling every board we can make, and we're probably going to grow this business this year 20%, 25%, selling every board we make. And we're just going to be constantly working to get more out of the assets we have and raise new assets to the forefront.

I think to Nick's point, most of our stuff is adding modest increments of assets at a time. They're digestible. And you can obviously slow things down as well if that were to be needed. It doesn't seem like that's going to need to be the case. And so we're not -- at this point in time, we're going to end up in an over-capacitized industry situation.

[Joseph Ahlersmeyer, analyst]

Yes. Fantastic. Obviously, a business with great prospects.

Just a quick one, if I could fit it in here on the acquisition of LARSON. The tailwind in the quarter sort of implies that it was a little bit more than 25% of the run rate sales that was discussed around the acquisition. Is there anything -- I mean, I know there was the accrual account for kind of the last couple of weeks of 2020, but it still doesn't really seem large enough to explain the sales in the quarter.

So was it just a stronger spring selling season in the Doors category? Or how should we think about, I guess, the cadence of the tailwind for the rest of the year?

[Patrick Hallinan, executive]

Yes. I think as I said in my remarks, to Phil just before this. I think it will be a business that's at about $450 million or more for the full year. It was a bit under $400 million last year. And it's probably going to be about $250 million or thereabouts for the first half and then about $200 million for the back half. And it's about people just kind of recovering on inventory and a busy first half of the year across the industry.

[Nicholas Fink, executive]

And I'd add, it just fits so well into the outdoor living envelope. As we looked at this business and sort of first -- ask the question, what's the primary use of a LARSON door? The first answer is to let light in, and the second was to let air in. I mean, it might be a category that kind of originated in installation, but it's really moved into letting the outdoors into your house. And so we see that trend just attach to the trends that we're seeing in people wanting to better the quality of their kind of outdoor/indoor experience and their outdoor living spaces.

And so as I said in the prepared remarks, the acquisition has been even better than expected. The team is fantastic, and they're integrating really, really well. And the business is performing at a really high level while we're still going off to sort of value creation synergies that we had identified. So we're feeling very good about LARSON.

[Operator]

Your next question comes from the line of Truman Patterson from Wolfe Research.

[Truman Patterson, analyst]

First, I wanted to touch on Fortune Brands Advantage. You mentioned that there are a handful of major initiatives to help offset some inflationary pressures that are flowing through. Could you just elaborate on what a few of those initiatives are maybe one from each segment?

[Nicholas Fink, executive]

Sure. I'm happy to do that, and then I'll pass to Pat to give you some more particulars on it.

But we saw -- as we looked across the portfolio, and really, did this as a team, late '19 or early '20, we've said what could we do from a business model perspective across Fortune Brands to really elevate the whole? And as we did that, we identified pockets of things that we were actually, a, doing really well and, b, investing behind. I mean, we're not just doing it very good at it, but we were doing it well because we were putting the dollars and the people behind building capabilities.

But we were doing it in pockets, and yet, these were things that were easily leverageable across the whole business. And so we really organized as a whole executive team against the Fortune Brands advantage to leverage these capabilities. And so things like category management. I mean, if you look at our categories, right, we're -- with very few exceptions, we're the leader. And in those other exceptions, we're a top 3 in all of our categories. And so as such, we should be able to bring category insights, understand how a shelf is set, how we engage consumers, what works best for them, where the innovation lies, price elasticities. And so how do we become really a category management leader and build that up.

The other is global sourcing. I mean, we're a manufacturer and a global sourcer. We have a very complex global supply chain. There are sourcing skills and capabilities that can really not just improve the cost basis, and they can do that in a very big way, but also the quality and resiliency of the sourcing base in a business. And so we've invested quite heavily and centrally to build out teams to go off those opportunities. And when I say investment, this could be single-digit million, but really that's driving double-digit millions over time.

And then the third one today is really around business simplification and leveraging tools likely, and like 80/20, but doing it in a more consistent way across the business, consistent training, speaking the same language, understanding the value chain and where we're going to get value. And so the vision is, as we really drive these, over time, these will just be the language we speak, these will be the skills we have, the capabilities. We'll embed them into the business, and then be able to kind of germinate new capabilities under the Fortune Brands Advantage umbrella that are going to help drive growth, right?

And we're looking really hard right now at investments we're making in digital. We have unique insights across the very broad portfolio that we have about what's happening in the housing market that we can drill down to. We built the data lake across all of our products. You can see POS in everything that we do and start to fare that trend very quickly.

So we're very excited about this. And I think we wanted to start concretely, get some wins on the board, and then really build momentum behind this business model over time.

[Truman Patterson, analyst]

Okay. And then in the prepared remarks, I don't believe I heard this, but could you give an update, either on a percentage basis or a dollar headwind, your raw material inflation expectations across the portfolio and the cadence in which it hits your P&L?

And then finally, I believe you all said that you would be able to offset it either through pricing or some of these initiatives that you're working on. Will that be more real time? Or do you think that you'll be trailing some of these cost pressures before kind of making it up at year-end?

[Patrick Hallinan, executive]

Yes. Truman, inflation has been intense across materials and freight. For us, specifically, things like metal, hardwood and freight have probably been the most extensive, but certainly, petroleum-based resins have been challenges as well, as much from the Texas storm as from different places in perspective.

So if you tease them out, last year, 2020, our full year COGS base was about $3.9 billion. And I'll tell you that inflation this year is going to be in the kind of 4.5% to 5% of COGS range. And much of that is yet to come. I mean, we probably have less than 20% of that flow through our Q1 P&L. Much of it, therefore, you're talking more than 80% is going to flow through the balance of the year.

And we are -- we're going to offset it with a combination of cost actions, and where necessary, price over the balance of the year. I think you should expect that across all 4 quarters. We'll show a measure of margin improvement. It will be tightest during Q2, in part just because freight really surged again kind of at the very end of last year and in Q1. And we're going to be doing things to expedite components and other products for our customers. We'll be absorbing some unique levels of freight inflation in the second quarter. But we do expect to make margin progress in the second quarter and make margin progress for the full year.

[Truman Patterson, analyst]

Well, that's -- sorry, go ahead.

[Nicholas Fink, executive]

And I was just going to say, I'd be remiss if I didn't call out how heroic our supply chain teams have been. I mean, everything from being able to secure the freight, being able to secure the raw mats, being able to -- as Pat referenced, resins and ready to find new resin suppliers, get them tested and through the system really quickly, and get that behind us. Really remarkable. And I think as you see the market gap to our performance and you see the outperformance of our business increase in an environment like this, a lot of that is really attributable to that team and their ability to keep our customers supplied.

And they've been at it for a long time now. I mean, if you go back to plywood tariffs in 2017, where we had to change out $100 million with the buy out of China into other geographies and do it very quickly, they've really become world-class experts at managing this. And so they're just excellent. And that's what gives us the confidence to basically say we'll manage this.

[Patrick Hallinan, executive]

Yes. I think the team has been incredible. As Nick referenced, I mean, I think since the second half of '17, they've been facing some extreme challenge, whether it's tariffs, pandemic disruption of Asia or the latest surge of inflation. And I'd say, even labor inflation is more challenging than it typically is as well, given the demand dynamics and the government program dynamics.

We're going to offset it, as I said this year. They've been doing a heroic job, and cost is a big part of it. We're not leaning just on price. The cost is contributing equally to that equation because we want to keep our products competitive and we want to keep our channel partners competitive.

[Operator]

Your next question comes from the line of Susan Maklari from Goldman Sachs.

[Susan Maklari, analyst]

And let me add my congratulations as well on a great quarter.

My first question is really around thinking about the second quarter, appreciating the guidance that you've given us year. But when we think about the upcoming quarter, specifically, given the fact that the comps are just so abnormally low given the shutdowns that we had last year, how are you thinking about that coming together? Is there any color you can give us on it?

[Patrick Hallinan, executive]

Yes. As I said a little bit earlier in the call, too, I think stacked growth quarter-by-quarter will be pretty helpful way to look at things. So if you recall, last year, we were down about 9% top line in the second quarter. And as I said, we're going to be averaging about 30% across the first half in terms of reported sales growth. So backing that up, that means down 9% last year second quarter, then up about high 30s to approaching 40 this year, getting to that stack 30% for the second quarter. And then similarly, on the organic basis, kind of averaging about 20% across the first half of the year.

The one thing I would point out is last year, while we were down 9% in the second quarter, we had really good expense and cash management in that down quarter, and our operating margin last year, with sales down was 14.3%. So we managed our bottom line very effectively during the second quarter. We'll still make a margin progression this quarter because all of our teams are working very hard on driving the business forward and contributing to the full year margin expansion of around 100 basis points, but it will be 50 basis points or less during that second quarter, I'd say, in terms of margin expansion.

[Susan Maklari, analyst]

Okay. That's very helpful. My second question is a bit more long term in nature. It seems like across the business, you are seeing a positive mix shift. You -- we talked about cabinets. You mentioned that ROHL saw 25% growth in the quarter.

Can you give us some sense of the positive mix shift, what role that's playing in the margins that you're expecting? And maybe not just for this year, but as we think about those 3-year targets that you outlined in the slides, how are you thinking about mix within that? And is there a potential that we actually get some lift if the mix ends up shifting slightly more positive than what your base case assumption is?

[Patrick Hallinan, executive]

Yes. I'll take it and maybe Nick could give some color.

I'll start with what is the mix signal about the market and I think as -- especially as you've seen, housing activity in suburbs, in the Northeast, Mid-Atlantic, Upper Midwest, where you have people moving from cities out into suburbs at housing price points that are relatively high and having a lot of confidence in the ability of both housing value to sustain and their desire to invest in their home, because they're going to probably be spending a bit more time there than they expected to be, it gives a lot of great signal at the housing market in terms of people investing in larger single-family homes than doing it in a premium fashion is well underway.

And it's nice relative to the last housing expansion. This is really not happening with unsustainable home equity loans or something like that. This is people, for the most part, using cash to do it. So I think it's a great signal for the market.

I think in terms of mix and how to think about it from our business, we've been working as we've been preparing for the millennial generation to make entry price point and mid-price point products on a percentage basis every bit as attractive as premium-priced products. So we've been trying to make across our portfolio, our ability to increase margins a possibility, even if it was a lot of millennials buying opening price point product.

So we try to not overplay mix. But as we talked about with some of the questions, I think we got to with Phil, on an absolute dollar basis, if you're selling a $1,000 faucet instead of a $200 faucet, even that's a same percentage margin, obviously, it's a lot more dollars. And so I think the upside that you're pointing to is it really allows you to leverage your fixed cost base.

And so if we were to see a pronounced and sustained mix in premium, there'll probably be upside to some of the figures we've given out there because it'd be reasonable to assume it's kind of new news, and therefore, it's kind of not in our multiyear assumption, some massive mix shift. And if that does perpetuate and sustain at the levels it's had recently, it would be upside. Just leveraging fixed cost base off of higher absolute dollar contribution per unit.

[Nicholas Fink, executive]

And Sue, I'd just add, as you think about it, what we're seeing is -- I mean, shifts, I guess, the term in terms of the fact that it's the total and how it comes together, but it's really additive. So we're not seeing any abatement in the trends in kind of the core portfolio. All of this is coming in addition to, which is really positive. And where -- you look at where it's coming from, and as Pat referenced, some of those markets are a lot healthier home equity levels are high. There's a degree of confidence.

Also some of our builder partners have pointed out, where there's sort of first few years of the millennial buyer was really focused on that entry-level price point, you're now having some first-time homebuyers for millennials but are fairly deep into their careers and are buying homes that were previously considered kind of second upgrade-type homes and sort of coming in and really building out those houses with sort of every option available. And so that, I think, combined with some of the value that you're seeing, the Boomer, Generation, Gen X kind of put back into homes as their confidence has increased and the home is really, really generally a very aged.

Housing stock gives us more and more confidence around the premium of that portfolio, so it's very exciting but margins are fairly comparable. But certainly, dollars are higher and a lot of design cues come out of having that portfolio that we leverage across everything.

[Operator]

Your final question today comes from the line of Keith Hughes from Truist.

[Unknown Analyst]

Yes. This is [ Denis Klementiev ] in for Keith. So I just wanted to ask a quick question on fiber on, specifically pricing. Just wanted to ask whether you'd be anticipating doing a midyear price increase or something along those lines? And then just one other one. In Cabinets, if we're seeing some imports come back, is that having an effect on your business?

[Nicholas Fink, executive]

All right. I'll give you some color on the -- firstly, we don't comment on particular timing of price increases kind of on a product-by-product basis. But I would refer you in my comments earlier that you have seen Fiberon start to really take a leadership position on pricing in the category. And this is a product that we -- when we purchased it, it really had built out its business at the entry level of deck board and our opportunity was really to move up the price spectrum. And as we built out the wholesale distribution that supports that not just in wholesale, but also in retail, which fills special order through our wholesale partners.

And so there's both a pricing opportunity in decking as well as a really good mix opportunity in decking. And just to come in the earlier conversation that we're having, this is an area where you see better margin as you move up the price spectrum. And so we think that is a nice opportunity. And so I think on both, you may see some tailwinds.

With respect to the imports, if you look -- a couple of things I'd point out. One is broadly stabilized from a volume perspective. And so from a volume perspective, kind of comparable to where it was pre -- there was a big run up in imports of -- to the antidumping cases filed as importers try to bring a ton of inventory in, where it's stabilized now, is well below that. It's sort of the volume -- the sort of dollar levels where it was running previously.

A couple of things that are different, though. While dollar levels are the same, our read on pricing in the market is that it's significantly higher than it was kind of back in '18. And so we believe that volume is a lot less than it was. And secondly, we make up a greater share of those imports to our global supply chain than we did then. And so on a volume perspective, while dollars have stabilized and have been coupled to that period volume, we think is quite a fair amount down.

But the really important thing about it and why it isn't impacting us is while, to a degree, it's been replaced, it's been replaced by importers who have product with longer lead times, less few availability and more cost. And whether it's more cost because they're legitimately competing or whether it's more cost because their tranche-shipping, it doesn't really matter. It's adding enough cost to the system.

And we always said that we were going to build a global supply chain. It didn't rely on government intervention. It was going to be cost competitive no matter what. And so it's proving to be very cost against imports, and we find that dealers are continuing to come to us looking for replace the product at an accelerating rate.

The other thing I'd call out is customs is really ramping enforcement against the tranche shippers. And I think that's going to even have a further damping effect on imports as we go forward. So the combination of that antidumping case, but more importantly, the work that we did when we platformed our whole global supply chain, has had the intended effect. And you've seen that come through in both the top line and margin numbers now.

[Operator]

At this time, I turn it back to management for closing remarks.

[Nicholas Fink, executive]

Okay. Well, I would just say thank you, everyone. I appreciate the questions, very thoughtful. Please stay safe out there, and we look forward to talking to you soon.

[Operator]

Thank you, everybody, for joining today's conference call. You may now disconnect.