Fortune Brands Home & Security Inc

LSE:0IRN

Earnings Call Transcript 2020-Q2

[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 Second Quarter 2020 Earnings Conference Call.

[Operator Instructions] I would now like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin your conference call.

[Brian Lantz, executive]

Good afternoon, everyone. And welcome to the Fortune Brands Home & Security's Second Quarter 2020 Investor Conference Call and Webcast. Hopefully, everyone has had a chance to review the news release issued earlier. The news release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website.

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 the 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 our annual report on 10-K and our most recent 10-Q.

The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Any references to operating profit, 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 will allow some time to address questions that you may have.

I will now turn the call over to Nick.

[Nicholas Fink, executive]

Thank you, Brian. And thanks to everyone for joining us today. We hope you and your loved ones are all staying safe during these extraordinary and challenging times. I'm very pleased that we delivered strong sales and profit results through a historically turbulent quarter.

Against the backdrop of a relatively resilient housing market, excellent operational execution by our teams resulted in our businesses operating at a high level of efficiency in the face of enormous headwinds.

First of all, I want to thank all of our dedicated team members who worked so hard in such a challenging environment to keep our people safe and our facilities open. I'm inspired by the care our employees are showing for each other and within our operations.

I'm also proud that we've been able to continue to serve our customers with essential products as families sheltered at home. As the shelter-in-place orders took hold, we saw a noticeable shift in consumer behavior towards home purchase and home improvement that I will discuss in more detail.

Given the varying impact of the shutdowns on our channel and supply chains, we saw strength in some parts of our product offerings, ahead of expectations, while other parts performed as we had anticipated. Through our operational performance and agility, we were able to generally serve customers as needed, resulting in significant share gains for our company.

Our channel partners are coalescing around us as a bedrock of strength and those deepened partnerships are leading to further opportunities.

In addition to positioning us to capture further share gains on the top line, our team is focused on driving permanent efficiencies throughout the businesses. These benefits are intended to sustain through the recession and into a recovery to free-up additional dollars to drive investments as well as to improve our overall margin profile.

We have made progress ahead of our expectations. Our decremental margin performance for the quarter was substantially better than what we communicated on the last earnings call. In addition, we expect the real long-term benefits will be felt as we return to growing sales with increasing investment dollars in operating leverage and higher margins. Our robust efficiency initiatives and hard work have positioned the businesses to outperform expectations regardless of the environment, ensures that we can continue to win for all of our stakeholders, not only during the pandemic, but long after.

Turning to the remainder of our remarks today. First, I'll speak to our company's response to COVID-19 and how our people are keeping us safe and open, while we continue to outperform. Then I will discuss what we're seeing in the home products market. I will then highlight key takeaways from our second quarter results as well as discuss our performance acceleration initiatives and how we expect to evolve over time.

And then Pat will provide highlights on our financial results, balance sheet strength and liquidity as well as thoughts around our future financial performance in this environment.

Let me start with our #1 priority, safety. The second quarter environment was one of the most challenging in recent times. By making the safety of our people our #1 priority in taking steps in excess of WHO and CDC guidelines, we were able to keep people safe in our facilities. I'm proud that our COVID-19 incidence rate is only about 1/3 of the national average and materially below manufacturing benchmarks.

Through a rapid response to the evolving situation, we were also able to keep facilities open through the quarter with periodic shutdowns in certain places where we saw risk of community spread. This agility has been key to both safety and to keeping our customers supplied with our essential products. We've learned a lot by continuing to remain open and operating and are continually adjusting and improving our approach to operating safely in a COVID-19 environment.

A lot of measures have significantly contributed towards employee safety. They've also caused some inefficiencies that will resolve over time. The examples of inefficiencies experienced during the quarter included some shifts operating below optimal variable production levels as we relaxed attendance requirements. Instances of fewer hours of production per day for longer shift changes and for regular deep cleaning and accommodating temporary shutdowns from time to time for more extensive cleaning to avoid community spread and to accommodate any short-term government orders.

The net result of our efforts is that we were able to keep people safe and still operate in a COVID-19 environment. We did not experience large-scale shutdowns and ramp-ups and the disruption that, that would cause. Rather, we operated, albeit somewhat inefficiently in a continuous learning and improvement mode and feel well-prepared to weather the storm should the virus resurge further.

Now turning to our market and key takeaways from our second quarter performance. Our home products market was clearly stronger than many other industries. The very nature of the pandemic and the shelter-at-home orders have led to a resurgence of interest in housing.

Looking recently at Google Search data trends in mid-July, searches for home improvement are up 51% versus this time last year and searches for new home sales and existing home sales are each up over 30% over this time last year. Recent purchase mortgage applications data has been up strong double digits versus this time last year as well.

During the quarter, it was encouraging to us that as the economy opened back up, demand accelerated quickly. In fact, from a low of a 20% decline in sales in April as many channels were shut down, we saw orders accelerate to being flat year-on-year in the month of June. This trend has continued into July and appears to be stronger than a catch-up from the shipments in April and May.

New construction activity and product flows largely halted in the beginning of the quarter, but resumed in mid-May and accelerated into June and July with our broker channel expressing increasing confidence about the balance of the year.

R&R activity during the quarter was largely defined by channel with retail and e-commerce showing the most strengths, driven by both the channels being open and consumers increasingly focused on home improvement. Wholesale and dealer channels were closed for the first part of the quarter and accelerated more quickly in the second half of the quarter and now into July, driven by rebounding new construction activity. Since June's quarter end and into July, R&R and new construction activity continues to improve.

With that market backdrop, some thoughts on the recent quarter. In the quarter, total company sales decreased 9% over the last year and operating margin was up 20 basis points to 14.3%. This performance was meaningfully ahead of our own expectations, a result of excellent operating execution by our teams, stronger-than-anticipated demand for our products and delivery of our cost realignment initiatives ahead of schedule.

Our operational outperformance across the company led to accelerated share gains, and we are being rewarded with opportunities from customers. Most importantly, as we drove our cost realignment program, we continued to invest in common core competencies across all of our operations, including strategic spending on revenue management and in supply chain. We were also able to invest in key strategic growth initiatives, including the Moen brand, decking capacity and distribution rollout and value-priced cabinetry capacity.

I anticipate that if we continue to see stability in the back half of the year, we will accelerate further investments into our most critical priorities as we set ourselves up for 2021.

Before I delve into each individual business, I would like to mention the cross Fortune Brands initiatives that we are taking to create permanent efficiency in our business to free-up additional funds for investments in our key priorities and to drive incremental margins.

At the beginning of the year, we started a fuel for growth and margin enhancement journey predicated upon finding permanent efficiencies in the business and building core capabilities that we are leveraging across FBHS.

As the COVID-19 crisis took hold, we accelerated our cost-out and cash-generating initiatives by targeting fixed costs, supply chain and less productive SG&A. We're taking permanent cost reductions as we replatform the company using a common set of capabilities and a unified approach to reset our base cost structure for the long term.

As I mentioned, our teams have delivered ahead of schedule, and we now stand to pull our margin accretion goals forward by a year as volumes return to growth.

Now let me turn to our individual businesses and how we're positioning to be even stronger long term. Starting with Plumbing. During the second quarter, our Global Plumbing Group continued to outperform the global and U.S. markets, with second quarter sales roughly flat compared to last year and operating margins of 24.5%.

Strong double-digit growth in both U.S. retail and in China drove the quarter. Our POS well exceeded our sales number as customers reduced inventory early in the quarter. Our reenergized Moen brand continued to record top scores in brand awareness, purchase intent and customer loyalty. Our strong margins for this quarter continued to create more fuel for growth as we continued to invest in our brands in consumer-led innovation. Our ability to pursue growth in both core and new segments within the Global Plumbing Group has never been greater.

Our continued investment in new channels, such as e-commerce, and on-trend innovation set GPG up for long-term profitable growth.

We experienced a strong return to growth in China in the second quarter after having borne upfront of the COVID-19 impact during the first quarter. That business continues to outperform its market through channel and category expansion and drive excellent leverage at the bottom line. The Chinese economy have stabilized quickly and is continuing to show strong support for housing.

Turning to Doors & Security. Sales decreased by 9% over this quarter last year, and operating margin increased by 70 basis points to 14.4%. Importantly, our Fiberon decking brand grew mid-teens in the quarter. It continues to benefit from long-term material conversion from wood to higher-performing eco-friendly recycled materials.

The pandemic has accelerated consumers' focus on outdoor living and we are seeing continued strong demand for our products. Our distribution wins and capacity expansion plans remain on track, and this is a priority for us going forward.

Our Doors business experienced an abrupt slowdown in the first part of the quarter as homebuilders stopped work and the wholesale channel destocked. Those 6 weeks were followed by a rapid acceleration in the second half of the quarter as the market opened back up and new construction demand significantly reaccelerated.

Despite the volatility, the business operated at a high level of efficiency throughout the quarter as we delivered continuous improvement initiatives ahead of expectations.

Finally, turning to Cabinets. In the second quarter, our Cabinets team demonstrated excellent performance as our pivot plan has reached an inflection point up to 2 years of aggressive repositioning, which has intensified in the last 6 months. The business is showing increasing resilience through the downturn and has the opportunity to accelerate as conditions improve, and we continue to take share in value products. Sales versus a year ago declined 15%, with value-priced products declining by only 7% during the quarter.

Operating margin was 8.2%, which was very respectable given the pullback in volume. Further, have we been operating in a more normal environment with standard lead times, we had orders that would have resulted in sales only being down approximately 10% overall and value product sales would have been roughly flat during the quarter.

The pandemic is accelerating the mix shift to value price point products, which benefits us as market leader as we are best situated to catch this momentum, given all of the positioning and supply chain work we've undertaken over the past 2 years as part of our pivot plan.

We're gaining share from both domestic players and from the absence of Chinese players, who've exited the market over the past few months or who have been replaced to a lesser extent with other importers with higher costs and longer lead times. Our work to add further value in cabinets is not over as we continue to drive this business towards our long-term goal of mid-teens margins.

As the U.S. leader in cabinets, we're continuing our efficiency journey and our plan to capture more opportunity. We continue to further optimize operations and add more flexibility to prepare for additional sales upside at more accretive margins coming out of the pandemic. This includes adding capacity and flexibility to advantage low-cost global supply chain as well as adding economies of scale, less variability and product configurations and more consistent packaging solutions.

We have the ability to not only grow value cabinets at above-market but expect to do so at an increasing margin profile.

In summary, while the second quarter of 2020 will be noted as one of the most challenging in a generation, the U.S. home products market is emerging in relatively good shape. The nature of the pandemic has driven home improvement in the short-term and is causing renewed consumer interest in household formation and renovation. While the economic outlook remains uncertain, we expect housing will continue to benefit from demographic tailwinds in the long term, bolstered by increased consumer interest in investing in their homes.

Overall, while our strong second quarter results were executed in a very fluid business climate, they do demonstrate that our strategies remain intact and are delivering for us. Our businesses are reacting positively to the accelerated efficiency actions we are taking, and we are taking those actions very seriously with plans to do more. And as the environment turns more positive, we have the businesses positioned to grow drive strong operating leverage.

As the first half of the year has shown, we have a high-quality diversified portfolio underpinned by common core competencies that can grow above market and take advantage of a healthy new construction backdrop to outperform in times of strength as we did in the first quarter. That same high-quality portfolio of leading brands and advantaged positioning within our channels also provides resilience to the downturn as evidenced by our exceptional results in the second quarter. The work that we have done over the last few years to reposition the core of the portfolio to the most attractive parts of the market and to expand our channel exposure have paid off well.

This strength has allowed us to focus on our key priorities of keeping people safe, serving our customers, operating with excellence and reinvesting in our business. In addition to our businesses being well positioned, we also have a strong balance sheet with ample liquidity amongst the strongest in that sector, as Pat will describe in more detail.

With that, I'll 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. As Nick mentioned, we are pleased with our team's performance, both in prioritizing and operating safely and in delivering solid financial results amid unprecedented circumstances. Our priority is to build an even stronger company remain, protecting the health and safety of our teammates, servicing our customers and positioning our business for share gain, delivering strong margin performance this year and accelerating our profit objective without compromising the investments required to preserve competitive advantages and gain share and maintaining a strong balance sheet.

Our teams executed against these priorities across the board in the second quarter, which led to sales and profit performance that was meaningfully better than expected. This high level of execution positions us to deliver through the current uncertainty and to accelerate performance as economic conditions improve.

Now I will cover the specifics of our second quarter results. Sales performance throughout the quarter went from the extremes of down 20% in April to flat in June. April appears to have been the demand trough. Late June and early July demand have demonstrated meaningful improvement and hold promise for the balance of the year, should this level of demand persist through the high unemployment and recent uncertainty.

Sales were $1.38 billion, down 9% from a year ago. Consolidated operating income for the quarter was $197 million, down 7% or $15 million compared to the same quarter last year. Total company operating margin was 14.3%, up 20 basis points over the same quarter last year.

Decremental margin performance was 12%. Our efficiency actions, both permanent and temporary, are running ahead of expectations. Our decremental margin performance was aided in the quarter by items that may be onetime in nature, such as lower health care expense. Though even adjusting for nonsustaining items, our decremental margin performance was roughly 20% at the favorable end of our full year objective and well ahead of expectations for the second quarter.

EPS were $0.94 for the quarter, down 9% versus the $1.03 we earned in the same quarter last year. We are encouraged by our team's continued ability to compete and achieve our aggressive financial performance expectations.

Next, the segment results. Plumbing sales for the second quarter were $505 million, roughly flat versus the same quarter last year and up 1%, adjusting for FX. Strong U.S. retail and e-commerce channels as well as a return to growth in China drove the quarter. Plumbing operating income increased 8% to $124 million for the current quarter.

Our strong profit performance in a flat sales environment is representative of the aggressive efficiency actions taken during the quarter, while increasing Moen brand investment year-over-year. Operating margin for the quarter was a robust 24.5%, showing our continued ability to generate the strong margins that fuel brand building and market leading innovation. Complementing our strong U.S. operations during the quarter was not just a strong rebound of sales in China, but also favorable leverage from our operations in China during the quarter as the expanding product scope in China produced favorable fixed cost leverage as strategically intended.

Turning to Doors & Security. Sales for the second quarter were $332 million, down $34 million or 9%. Our decking business grew mid-teens and experienced POS performance meaningfully above this level. Results in our Door business were above expectations as well, given 80-plus percent of its revenues flow through trade-centric channels that were shut down for a meaningful portion of the first half of the second quarter. Further, we experienced high operational efficiency in our Doors business throughout the quarter, driving this segment's impressive year-over-year margin improvement.

Our security results were impacted during the quarter as post first quarter supply chain challenges from COVID-19 in China as well as second quarter inefficiencies associated with safety protocols in Mexico significantly constrained capacity. Our security team is in the process of resuming full capacity production safely, and we expect these challenges to be temporary. Operating income in Doors & Security was $48 million during the quarter, down 4% over the same quarter last year.

Segment operating margin for the quarter increased 70 basis points over last year to 14.4%. Due to cost efficiency initiatives, decremental margins for the quarter were better-than-expected at 7%. The business has seen further stabilization of demand and increasing activity into July.

Now turning to cabinets. Sales for the second quarter were $539 million, a year-over-year decrease of 15%. We continued to experience strong interest in value-priced products in all channels. Sales of higher-priced products were softer during the quarter, impacted heavily by channel shutdown, including our advantage dealer network.

Operating income in the second quarter was $44 million, down $23 million versus the prior year. Operating margin for the quarter was 8.2%, down 240 basis points versus the respective 2019 period. But would compare favorably with that of any low volume quarter as we typically experience during the first quarter of each year.

Decremental margin percentage for the second quarter was approximately 24%, well ahead of expectations and particularly noteworthy given the inefficiencies associated with implementing safety protocols and other inefficiencies observed while servicing customers during a period of unprecedented challenges and volatility.

Operating income results were driven by resiliency in value-priced cabinet volumes and the benefit of further pivot strategy efficiency improvements associated with higher-priced and Canadian products. We continue to advance our strategic efforts and further supply chain flexibility and capacity associated with the value-priced products experiencing continued strong demand momentum. We expect to continue to enhance our competitiveness in cabinets during and beyond this pandemic.

Turning to the balance sheet. Our balance sheet remains strong. Our solid second quarter results and cash management has our liquidity position ahead of expectations.

At the end of the second quarter, we had cash on the balance sheet of $398 million, net debt of $1.8 billion, and our net debt-to-EBITDA leverage stood at 2.0x. We now have $1.2 billion of total revolver liquidity available between our $1.25 billion revolver and supplemental $400 million 1-year revolver. Along with safety, liquidity remains a top priority. We will continue to manage our liquidity proactively.

Turning to the topic of financial guidance. Due to the continued economic uncertainty associated with the high unemployment and a recession caused by the pandemic, we are maintaining our suspension of 2020 and future period financial guidance. Our teams remain focused on continuing the strong market share and margin performance delivered during the first half of this year, demonstrating our ability to succeed before and after COVID-19 impacted the economy. A range of potential full year sales outcomes remain a possibility for this year. So a full year sales result ranging from low single-digit growth to low single-digit decline appears to be the most likely spectrum at this moment. If this were to be the sales range we experienced during 2020, we would expect to produce a full year operating income margin of roughly 14% to 13%, with our margin performance range tracking with the sales outcome. Further, we expect cash conversion of net income to be strong in the range of 105% to 115%.

We will continue to pursue permanent and temporary efficiency objectives to maintain strong liquidity and to accelerate operating margin improvements sustainably. We are committed to strengthening our share positions and our margin performance during and after this pandemic.

I will now turn the call over to Nick for some final thoughts. Nick?

[Nicholas Fink, executive]

We are facing a pandemic that we have not known in modern times. And we are acutely aware that we will be managing volatility as long as the virus and the resulting economic damage persist. We have been and we will continue to be aggressive in keeping our people safe and driving the optimal outcome through this period. We will manage our P&L and balance sheet prudently and act with urgency to respond to whatever challenges we face.

We will continue to stay laser-focused on execution. While we have known that demographics heavily favor our industry, the pandemic is driving a renewed interest in the home. As we continue to execute our strategies and develop new growth initiatives, we will be well-positioned to benefit from the sector tailwinds.

Our accelerated cost rebasing of the business is freeing up incremental investment dollars to help further drive profitable growth. We are investing in strategic initiatives and a common set of FBHS capabilities, while also improving margins and positioning us to leverage strongly in a recovery.

I couldn't be prouder of the work that our team has done over the quarter to keep our people safe, support our customers and deliver stellar results for our shareholders in this tough environment.

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

[Brian Lantz, executive]

Thanks, Nick. That concludes our prepared remarks in the second quarter. [Operator Instructions] I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Susan Maklari from Goldman Sachs.

[Susan Maklari, analyst]

I guess for my first question, I just -- in your comments, you noted that you're pulling forward your margin accretion goals by year. Just wondering if you can kind of walk us through what that will mean for the second half? How to think about some of that flowing through? And maybe what's baked in, in order for you to achieve those goals?

[Nicholas Fink, executive]

Sure. I'm going to -- this is Nick. I'm going pass to Pat, he can take you through what our assumptions are and how we're thinking about that. Of course, it's pretty volume dependent, and that's why we express it as volume returns over the period but Pat can take you through how we're framing it.

[Patrick Hallinan, executive]

Yes. So we -- on the last call, we iterated a decremental margin objective for the year of 20% to 30% for the full year. And I'd say that has improved considerably. I'll get back to that in a second. But what we're trying to do both for long-term value creation and to produce optimal results during this pandemic is to not have 2020 be a lost year. And so if our sales performance to be in the range that we described in the script, kind of low single digits -- up to low single digits down and we were to deliver in the 13% to 14% range of OI, we would make progress year-over-year in ROI margin and not have this be a lost year.

And then if the housing market returned to the mid-single-digit or better growth that we would have expected over our strategic planned horizon, we would effectively lose no ground in our margin progression during 2020 and probably would be 50-or-so basis points ahead of where we otherwise would have been had 2020 been a year that was flat to down. In dollar terms, that's something more like $30 million to $40 million of fixed costs. But our real objective is to invest and grow the business and have the [indiscernible] cost base just be that much more efficient so that 2020 is not a lost year, and we're a year ahead in our margin progression where we otherwise would be had 2020 dent in our operating margin.

[Nicholas Fink, executive]

So I'll just add a little -- so I'll add a little perspective over the longer term. If you rewind the clock even back to January, pre-pandemic, we started on a multiyear fuel for growth and margin enhancement journey as a team. And really, the goal is twofold. One was to drive efficiency, permanent efficiency through the business. And 2, was to replatform the company with a common set of capabilities and shared platforms so that we could further drive efficiency and fuel -- and create additional fuel to invest in the business as well as drive margin. So that was a path and a playbook that we set, we were heading down. COVID-19 has become an accelerant to that strategy. And if you go back to the last call, we said we intended to come out of this pandemic stronger than we came into it with an even higher-performing business. That was very much the goal. And we've come through the quarter even ahead of our own expectations. And we're on track to accelerate the margin progress we're making as volume returns into the business.

[Susan Maklari, analyst]

Okay. And then as a follow-up, I'm just wondering, given that you have an interesting perspective across some of the bigger ticket outdoor products with Fiberon as well as the indoor projects as it relates to cabinets and plumbing and those things. Can you perhaps give us just your thoughts on what you're seeing in terms of those 2 demand trends? Where you're seeing consumers focus? And has there been any shift there as we've kind of come out of the real kind of core of the shutdowns and the shelter-in-place situations and consumers maybe perhaps start to get out a little more, dealer channels are opening, those kinds of things?

[Nicholas Fink, executive]

Sure. Yes, it's not overall. There's no question. I think the market was more resilient than anybody might have feared. And -- but we even talked about that on the first quarter call as we had early April data, and we could see that even while wholesale and dealer were shut down, the consumers were leaning heavily on retail and e-commerce.

And really, then I think we're going to double than anything since we got data, but it was really driving a renewed interest in home and home renovation as people sheltered. We've seen that continue to play out across the portfolio. And it's lumpy, where we've had channels that have been closed, where it may require product coming into a house. But you have seen that strong consumer interest. We see continued very strong performance in retail and e-commerce channels. And again, it really seems like having more and more backed by data that COVID's been an accelerant to people's interest in housing.

Now you asked specifically about outdoor. When we look at our decking business, there's no questions being fueled by dual tailwinds of material conversion in outdoor living. Sales are up 15%-ish in the quarter for decking, but POS was well ahead of that.

And so that was a category that is very, very strong and benefiting from really strong tailwinds. And I think as you alluded to, the ability to do work outside the home, lent itself to they're continuing to work through the quarter.

Other bigger ticket items, I think we're inhibited by channels being closed and making it harder for consumers to get in there and purchase. But we saw from the low of April, things come back pretty strongly, particularly as dealers, for example, cabinets started to reopen, we've seen volumes come back to, I would say, somewhere around flat even in the make to order semicustom and custom side of the business which gives us confidence that we have volume traveling through that part of the business, while we've seen even stronger interest in the value part.

And then the smaller ticket stuff is just been particularly strong from a POS perspective. Again, less visible even through the sales numbers as you're dealing with channels closes, you're dealing with early destocking in the quarter. But as that has come back, and those channels have reopened, we're really encouraged about what we're seeing.

[Operator]

Your next question comes from the line of Justin Speer from Zelman & Associates.

[Justin Speer, analyst]

Just a couple of questions on cabinets. I just wanted to see if you could unpack a little bit more detail between the value versus the nonvalue trends in the quarter and then maybe even splicing the dealer versus the home center channel trends. I know maybe there's some congruence there, but see if you would unpack that for us?

[Nicholas Fink, executive]

Sure. I want to give you a little color, got a bit more on top. But start with overall sales were down 15%. Had we been able to ship to our normal lead times, that would have been more like 10%, really was very disrupted as we put safety ahead of everything else. And at times, either had some short-term shutdowns or certainly, a lot of absenteeism in the facilities. And so that takes kind of negative 10% as kind of the run rate. Value Cabinetry within that was down 7%, but would have been about flat have we not had the supply chain interruptions that we had. And so we saw value Cabinetry really hang in there with very strong interest on the retail side as the dealer channel is really closed in special order on the make-to-order side was closed.

As those reopened, I said we saw strength in value across all of our channels. And I'm really encouraged by that. The -- so the make-to-order side has also come back not quite to the strength that the value side has, but has come back as channels have opened closer to flat which is really just encouraging given the environment that we're in and the fact that it is a big-ticket item and requires installation.

[Justin Speer, analyst]

So the made-to-order was flat to conclude the quarter? Or the overall cabinet business was flat?

[Nicholas Fink, executive]

Kind of coming through July is that would be about the run rate we see.

[Patrick Hallinan, executive]

Yes. With value priced cabinets back to high single, low double-digit growth in that range.

[Justin Speer, analyst]

Okay. And then on that -- back to the cost reduction efforts, just the accretion goals that you mentioned. I appreciate the color there, but you mentioned some health care tailwinds. Were there any other temporary tailwinds in the quarter that explained the better-than-expected trends beyond that annualized $30 million to $40 million? Be it raw materials or others?

[Nicholas Fink, executive]

I'll just give some [indiscernible]. Yes, I think there were tailwinds. There are also some pretty big headwinds in the quarter. I mean what we spent on safety, what we spent on doing our very best to keep customers satisfied and in stock is pretty substantial as well. And so pretty hard to rip out and calculate each piece, but they kind of start to weigh against each other. So that's how we're initially thinking about it, but Pat can give a bit more detail.

[Patrick Hallinan, executive]

And Justin, we talked in the script a bit, when you just look at our reported decremental operating income margin, 12%, there were -- there was favorability from health care and some variable comp and some other true-ups like that, that you would expect, some of it was building component inventory where labor ends up going into inventory. It was about $10 million in the quarter. If you adjust for that, you're more like in a decremental margin performance in the quarter, adjusting any kind of onetime favorable items that won't sustain to 20%.

But that's independent of our long-term objective to make progress this year, fixed cost base and our overall margin progression. We're just trying to be clear in what was a more sustainable level of decremental margin performance because we wouldn't hope to kind of have the same things driving our decrementals going forward. And then as Nick mentioned, lots of puts and takes across the cost structure all the way through. But a great job by everybody to both lean into permanent cost structure change and temporary cost structure change to deliver really exceptional results in a very challenging quarter. Part of why the leverage was so favorable relative to the expectations in the quarter is we were concerned we could be seeing a quarter down 20-plus percent.

So we started driving cost actions congruent with that level of challenge. And then our team is really both on the sales and the operations side, delivered a good quarter of down 9%. So about half of that as you were preparing for on the cost side, that obviously explodes into a nice profit result.

[Nicholas Fink, executive]

And as I mentioned earlier, we started on a margin enhancement journey back in January. And so we were pretty well down the path of developing a playbook and understanding where we wanted to go as a team that allowed us to move with a lot of agility as COVID hit and accelerate our actions. We weren't starting from standstill.

[Operator]

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

[Michael Rehaut, analyst]

Congrats on the results in a very tough backdrop. I wanted to get a sense I appreciate all the granularity, of course, and as always, with Wall Street, we asked for more granularity. So with that being said, you found the progression, obviously, you're talking about consolidated sales down 20%, if I got that right in April to flattish in June. Just wanted to get a sense if that's the type of flattish number that you're continuing to see in July. And as you look at the different segments, obviously, it seems like Plumbing had a good amount of tailwinds coming out of the quarter. It would seem that, that would result in some positive growth in 3Q. Just trying to get a sense for kitchen -- for the Cabinet and Doors & Security segments as well how to think around that flat number, maybe continuing into July or perhaps it's even a little bit better in July? And how to think about that across the different segments?

[Nicholas Fink, executive]

Yes. [indiscernible]. It's better in July. It's better in July. And so we started from a negative April as things both opened back up, got the kind of flattish in June. We're anticipating growth in July and feeling pretty good about it at this point and that's across the portfolio in varying degrees depending on the segment but across the portfolio. And so that strength and a kind of real consumer interest that we're seeing in investing in the home seems to be continuing to play through. And what I'll tell you is interesting is even as channels opened back up, we didn't see some of the really strong performance we've seen in, for example, retail, which remained open throughout wane a whole lot. And so one of the questions we had early on was with everything driving there and people just trying to ramp up projects. And then ones it was done, it was done. And that's not what we're seeing it all. It's been through July. It's remained strong, and we do anticipate growth across the portfolio.

[Patrick Hallinan, executive]

Yes. And Mike, the only thing I'd add to that is it's [indiscernible] across our 3 reporting segments, Cabinets, Plumbing and Doors & Security, they're all 20 to 19 percentage point progression from April to June. As you can imagine, Plumbing was only down in the mid-teens in April and progressed towards high single-digit growth by June. And then the other 2 kind of danced around the average for the portfolio with Cabinets a little below and finishing June in kind of that a low single-digit or mid-single-digit decline in June.

But as Nick said, the latter part of June was strong. July, the momentum is sustained. And assuming nothing disrupts the momentum in the marketplace, we would expect all of our segments to perform flatter up in the quarter.

[Michael Rehaut, analyst]

Second question, I guess, just around the margin side. The kind of framework you laid out was very helpful in terms of maybe how to think about the full year understanding there's still a lot of volatility or uncertainty left, but that framework was pretty helpful. By all accounts, obviously, it seems like the lower end of that sales range, down low single digits. It almost seems like there would need to be some type of slowdown potentially, let's say, in 4Q versus 3Q to hit that lower end of the range, if I'm understanding your comments correctly about the momentum you have right now going into 3Q. So I wanted to make sure that I'm thinking about that right.

And then also on the margin side, to hit that lower end of 13%, I mean, here you are doing 14-plus or a little over 14% in 2Q on down 9%. I know that you might have some temporary costs come back that would push your decrementals closer to 20%, as you said. But is it just that amount of lower decrementals getting a little higher? Or is it also just kind of perhaps some cost creep or some other factors or maybe the environment again starting to weaken again in 4Q that would push you towards that 13% lower end of the range?

[Patrick Hallinan, executive]

Mike, it's all a fair set of questions as you try to triangulate. It's all about the uncertainty with the market and channel inventory in the fourth quarter to drive all of that. And there's no cost creep. If I give you the kind of first half numbers, I know we don't typically talk and have in these calls and a lot of your conversations are in half, we're down 2% net sales for the first half, and our operating income margin is a little more than 13% at 13.2%. So you're right, in order to be down for the full year, the high end of the low single digits, you have to have some decline in the fourth quarter because we're starting the third quarter with momentum. We don't know that, that will happen. It's certainly the momentum would not indicate that right now. But it's certainly is within the realm of possibilities, depending on how the next government package unfolds around and where the virus management goes. And then if we were to start going down towards 13%, it would just be -- we at the outside of that volume margin. I would say we're in a flat-to-down scenario. We're expecting our decremental margin performance to be 20%-plus or minus 5 points. And if we're in a growth scenario, where we're kind of on the up low single digits, we would expect our margins to be -- our incremental margins to be better than our gross profitability, probably towards 40% or better just because we're going to hold on to the cost progression we've made. And so we're going to be delivering our gross profit margin plus cost progression. So I think that's the way you need to think about it. And all we're trying to signal about the fourth quarter is all we can do is control power position versus the competition and how we manage our cost structure and liquidity and the market and channel inventories are going to unfold as they unfold. And that's what's going to drive the variability in our results.

[Nicholas Fink, executive]

And Pat's pointed about holding on to that is a critical point. As I said earlier, I mean, this is a step in a long-term journey that our team is really committed to, and we are going to fall further efficiencies. We're going to reinvest a big portion of those, even as we did in the quarter, and we will for the rest of the year. And we're going to accelerate our margin journey. And so we're dealing prudently with a very unforeseen set of circumstances and being kind of cautious as we proceed. And one, with all the opportunity we see while managing for all the risks that we see. But the real focus for us is on the long-term ability to accelerate margin, while investing for growth and drive shareholder value creation that way.

[Operator]

Your next question comes from the line of Seldon Clarke from Deutsche Bank.

[Seldon Clarke, analyst]

Can you just remind us of your long-term margin targets by segment, given the 24% margin [indiscernible] in plumbing and the traction you've gotten on the value price side. And when you say you're pulling them forward by a year, you sort of moved that around a little bit since your Investor Day. So just in addition to the segment color, can you sort of help contextualize what type of volume growth you would need to get to those targets? And what you see on the more company-specific cost take outside, whether it'd be from faster growth in your Fiberon business or any more structural costs that you've identified? Just helping bridge the time to need it to get to those targets would be helpful.

[Patrick Hallinan, executive]

Yes, yes. So Seldon, what all I would say is the last couple of updates we've had -- if you go to the Investor Day, which, of course, we're technically pulling specific guidance, but we are on the same progression to get our total portfolio performing above 15%. And so a lot of what we've talked to investors about the last couple of years is basically taking the total portfolio from around 13% to north of 15%. We're still committed to that. The fact that Plumbing had a very strong quarter, is just consistent with the overall portfolio set of actions where we were all expecting a very significant downturn in this quarter. We managed our cost structure, both permanently and temporarily down. And you saw that Plumbing had of roughly a flat quarter, and it was managing for a down significant quarter it had a very strong margin in that environment. We have not changed our long-term strategic objective in plumbing to keep it around 21%. And as we've said in the past, we can balance 100 basis points around that or more from any given quarter. This obviously was an incredibly volatile quarter, which is an outsized result from cost management relative to sales.

And all I would say is in our 3-year margin progression, where we've been talking about making 50 to 100 basis points of margin improvement each year that's based on the pivot strategy in cabinets. Growth in doors and decking margin improvement in security and maintaining that high industry-leading margin in Plumbing, and all of those strategies remain the same. And all we're saying is, we -- as long as we end up with a market that allows the sales result plus or minus low single digits, we're not going to have 2020 be a lost year. We're going to, as Nick has been talking about, drive the permanent improvement in our business that allows us to keep leveraging even in a soft year, and we could stay on our 3-year progression track without having a disruptive year like 2020 throw us off that path.

[Nicholas Fink, executive]

And Seldon, with respect to Plumbing specifically, that business has taken aggressive cost actions, not just this year but last year as well. And the real purpose for it was to free-up incremental investment dollars to drive growth because it's a business with an incredibly powerful brand and suite of brands and channel position, and we see a lot more growth ahead as we're able to expand and leverage those assets. And so we've got that compounding, you've got investment -- our investment in the Moen brand up year-on-year, both for the quarter and the half. And if we did nothing else at GPG, the margin would naturally drift up. We're choosing to invest it sensibly but aggressively to drive the top line well above the market. We now have in excess of 3-year track record of doing that. We think there's a massive opportunity ahead. And so we're going to continue to do that, which is why we're keeping the target around the 21.5%. But the business itself is operating very efficiently and benefiting from the scale that's built over the last few years. It's just an exciting place to be where it's got that flywheel going and it's generating investment dollars that we're going to put to work.

[Seldon Clarke, analyst]

Okay. And then just switching gears for a second. Now that you have a more established position in the value-priced cabinets market. I think going back to late last year, you're talking to that being a $200 million to $300 million opportunity over the next couple of years. So could you just give us an update on the size of this opportunity or help contextualize how you think your market share is trending relative to your position in the broader cabinets industry?

[Nicholas Fink, executive]

Yes. I think that's still about right. As we kind of look at the opportunity following the antidumping suit and kind of size and size what parts of that market would actually be attractive to us and then what our fair share would be, that $200 million to $300 million number is about right. And we're seeing a lot of interest pulling on that part of the portfolio across all channel segments. And so it is really encouraging. And even as some imports from low-cost countries come back in, they tend to be higher-priced, longer lead times and fewer selections, which is consistent with what we always said. We always said, our supply chain was very well set up to compete with low-cost countries. In fact, some of it is sourced from low-cost countries. It wasn't set up to compete with the legal subsidy. And so now that we're in kind of that post the legal subsidy era, it is set up to compete and is competing really, really well. And so I think that is a good sizing. I think we'll get clearer over the next few months as we come out of such a disruptive quarter where we've had channels closed. And bear in mind, there was supply chain disruption in Q1 coming out of some of the low-cost countries as well. And so I think that will settle out, but we're feeling very encouraged, and we're continuing to invest and invest strategically in building out the capacity there because we believe we can do it in a way that's going to be very flexible and kind of serve across the market very efficiently.

[Operator]

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

[Philip Ng, analyst]

Congrats on a really strong quarter in a tough environment. When we look at the KCMA data for cabinets, recovered pretty nicely in June. Just curious how your sales have progressed in that June, July timeframe. And wanted to get a little more comfort around whether you guys have done around -- done with the capacity realignment at this point? So does that kind of free-up some ability to kind of meet some of that demand? And Pat, did I hear you correctly, you're talking about low single-digit growth in cabinets in the back half?

[Nicholas Fink, executive]

Okay. Why don't I start? Hey, Phil, thanks. I'll start, and then I'll kick it to Pat. As you saw, I mean, we tracked pretty well in line with that data. And I'll tell you the actions from our team. I mean they have a lot coming at them in this quarter, and they were simply heroic in, firstly, operating safely and keeping people as safe as we did, which turned out to be an efficiency play as well. I mean because we prioritize safety, we were able to keep operating. And as they did that, I mean, they had to work hard to move stuff around to try to fill the demand where we saw it. And so that's where it sort of gets you back to having our sales were in line with the KCMA numbers. Our orders coming in were actually better than that. And then, as Pat said, it kind of improved by about 20 percentage points as you moved through the quarter and continues to improve into July. The value part is very strong. And then the semicustom make-to-order product closer to flat, which frankly, given the volatility, we were very happy with just because of the volumes through the system. From what it does from a capacity standpoint, we're now a couple of years into our pivot plan and really reaching an inflection point that's really delivering for us. And that is predicated on commonizing a lot of platforms and developing much, much more of a network effect around our facilities so that we do have that capacity flexibility. We have benefited from some of that, and we were very pleased with the margin delivery in the quarter, the business suffered through. But there is plenty of road ahead to continue that journey, and Dave Randich and his team have been phenomenal at getting off very, very aggressively and then continuing to identify more opportunity for further commonization, further kind of competitive network build that we think will yield some really great margin for the business over time.

[Patrick Hallinan, executive]

Yes. And Phil, all I was doing was answering Mike's question about the early third quarter momentum and the potential outcome of the third quarter. And I would say across all of our businesses, if the current momentum stayed and was not disruptive, we expect the third quarter to be a growth quarter. It's obviously with the level of uncertainty out there, it's difficult to say what that would be precisely. As Nick said and said accurately about the make-to-order chunk of the business, which, again, is now at this point, roughly half the business has kind of returned to flat. And the value price point part of the business, which is roughly flat return to growth in June and is growing now in July. So if that persisted cabinets would be in a growth mode for the quarter as well. We're not trying to buy business, project the specific growth rate for the whole back half of the year. But all the businesses right now are growing in the quarter would be set up to be a growth quarter, assuming nothing disrupts the momentum.

[Philip Ng, analyst]

Got it. And then demand was particularly strong in your retail channel. And Nick, I think you mentioned you're seeing that strength continue. So just curious, what's driving that outperformance? Is it just a function they're open and wholesale may not be open or more [y-work]? And are you starting to see that wholesale channel converge going forward? And will that have any mix impact that we should be mindful of?

[Nicholas Fink, executive]

It's a great question. The -- if you'd asked us kind of April May, we were wondering if they are just open. I think it's now clear that it's a combination of what you saw then was they were open to plus. It's just looking like it's a really good time to be in housing. Because as the other channels have opened up, volumes were back into our wholesale and dealer channels, and retail may not be tracking at some of the astronomical numbers we saw. It's really, really, really strong, which converges nicely with the consumer data we're seeing around -- searches around home renovation and home purchase, and there just is a lot of interest in the home. And what we -- as you know, we are well-positioned coming into this as a sector. I mean supply and inventory was low, record levels of home equity, low interest rates going even lower. You've had people experience really resilient house pricing through something that's been very volatile elsewhere. But then we're starting to see more now in our consumer research is this is pushing people to think more about the home they live in, the shelters, are they in the [indiscernible] projects that they're doing. I think you may see another tailwind with boomers choosing to stay in their homes and in agent place, and that will drive some renovation.

And so there is something more there than just they were open. There's double-digit strength that's kind of continued through in retail from a POS perspective, while wholesale dealers opened up and are looking pretty healthy.

So I think we started with the sector that as we said a quarter ago, it was fundamentally healthy going into this. And I think it's one of the more fortunate sectors that we're just driving some real interest in home and housing at a time in a safe place for people to put their money. And when you take that and then you take our portfolio, which we've done 2 years of core portfolio repositioning to the most attractive parts of the market, the exposure that we now have to where we need to be to capture those consumers is so much wider. And so we're really seeing the benefit come through our business.

[Operator]

That concludes our allotted time for questions and answers today. I'll turn the call back over to management for closing remarks. That concludes today's conference call, you may now disconnect.