Fortune Brands Home & Security Inc

LSE:0IRN

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon. My name is Diego, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Second Quarter 2022 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 Second Quarter 2022 Earnings Call and Webcast.

Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings release and audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website.

I want to remind everyone that the forward-looking statements we make on the call today either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC.

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

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

I will now turn the call over to Nick.

[Nicholas Fink, executive]

Thank you, Dave, and thank you to everyone for joining us on the call today. I hope everyone is enjoying their summer. And it's certainly been a busy 3 months of Fortune Brands, and I would like to personally thank all of our associates who continue to work above and beyond to move our business forward.

Once again, our teams delivered a strong quarter of results, including high single-digit sales, OI and EPS growth versus last year. These results are a continued testament to the strength of our brands, to the hard work of our team servicing our channel partners at industry-leading rights into the power of the Fortune Brands Advantage capabilities. I'm also pleased to report that our previously announced plan to separate into 2 world-class publicly traded companies is progressing ahead of schedule. We have made exceptional progress in a number of key milestones and expect to file the initial draft of our Form 10 with the SEC later this quarter.

Our 9% sales growth compares very well against the stimulus-fueled second quarter from a year ago and reflects improved labor and shipping availability together with higher price realization. Importantly, each segment made year-over-year operating margin improvement in the quarter as price and cost actions more than offset inflation. Consolidated operating margin was in line with our expectations, which included planned investments in our digital strategy to create a transformational platform for future growth and margin expansion.

Our quarterly results were strong, and much of our portfolio continues seeing solid demand levels, which are supportive of our full year financial targets. That said, consistent with the rest of the industry, we are starting to see signs of slowing consumer behavior in response to inflation and higher interest rates.

The rapid rise of the 30-year mortgage rate has cooled the [indiscernible] pace of new and existing home sales. Consistent with prior periods of interest rate increases, we expect a period of adjustment as buyers and sellers realign pricing and value expectations. We believe any slowdown in the housing market will be relatively short term as the fundamental drivers of the housing market remain intact. The U.S. remains millions of homes under built, demographics remain favorable and home equity levels remain at historic highs.

To ensure that we continue to drive value creation, we are taking proactive measures in anticipation of a period of macro-driven softness and will remain agile in the face of changing market conditions.

The long-term outlook for housing, supported by demographics and fundamentals is positive, and we are well-prepared to manage any short-term pauses or softness that we encounter. We have been here before, and we will continue to execute and deliver best-in-class performance, including growing above market while delivering on our cash flow and margin targets. Our team knows how to create value, and our second quarter is another proof point of this.

As I mentioned earlier, I'm impressed by the progress our teams have made on our future separation into 2 world-class publicly traded companies. As evidenced by its continued industry-leading performance the Cabinet's business is increasingly well positioned to stand independently. Importantly, we're also making great progress in our strategic work around the art of the possible for New Fortune Brands, and I look forward to sharing that with you as it unfolds. I am confident that the separation will result in significant value creation opportunities for both companies and their stakeholders.

Now I will turn to each of the businesses to provide some color on what we are seeing. Beginning with Water Innovations, sales were down mid-single digits in the quarter due to the impact of the COVID shutdowns in China. Excluding China, sales growth was up mid-single digits, driven by high single-digit POS. Sales are strong in our core U.S. market for both Moen and House of ROHL as the strength of our brands and innovation continue to resonate with consumers. We delivered these results while facing a period of channel destocking as our continued industry-leading service levels have enabled our customers to reduce safety stock and inventory positions. Our teams have been working hard to overcome the supply chain challenges of the past couple of years and we see signs of improvement across the board. Total backlog and service rates are nearing pre-COVID levels.

Water Innovations' operating margins were nearly 25% in the quarter, driven by price and cost actions offsetting inflation and proactive expense management. We continue to prioritize strategic investments and the business remains well-positioned to outperform in any market environment.

Shifting to Outdoors & Security business. Sales grew 13% driven by price realization and volume growth at Therma-Tru, which continues to gain share of entry openings by its leading portfolio of engineered doors driving conversion from wood. Decking sales grew high single digits, tempered in part by robust wholesale inventories. Security sales were up mid-single digits, driven by strong double-digit commercial sales growth.

Our Security team continues to successfully diversify into broad-based commercial applications, leveraging connected technology to deliver mission-critical safety products to our global customer base. Our work in commercial safety is well aligned with our ESG strategy. We are very excited about how the security portfolio is developing and being received by consumers and customers.

Outdoors & Security operating margin improved 400-plus basis points sequentially and 70 basis points versus prior year as price and cost offset inflation and labor availability, and supply chain constraints improved from an impacted first quarter.

Finally, our Cabinets business delivered an exceptional quarter with sales growth of over 21% and as our pricing actions became more fully realized in the P&L, volume growth remained positive and our transformational efforts continue to deliver. Order patterns remain strong across our stock and semi-custom price bands. Builders' backlogs remain elevated and labor is shifting towards completing homes, which will provide continued tailwinds for our business.

Within our higher-end premium products, market conditions appear to be impacting aggregate demand and our teams are acting to rightsize our capacity and cost structure. Cabinet's operating margin was up 200 basis points sequentially and 60 basis points versus prior year. Price and cost actions more than offset inflation and our operating environment continued to improve as labor availability and supply chain constraints eased. Our transformational work to reposition the business towards the heart of the market with efficient, scalable and flexible capacity continues to generate results.

Our Cabinet team continues to win in the marketplace and its ongoing transformation will position the business for continued outperformance. As the team prepares to lead their own independent public company, they have never been on a stronger footing for future success.

Across the portfolio, as a result of our team's market-leading service levels, channel inventory positions have improved through the past few quarters. We're working closely with our suppliers and channel partners to ensure the right levels of inventory exists throughout the value chain as we move through a period of expected short-term softness. By leveraging our Fortune Brands Advantage capabilities, we will continue to proactively manage working capital and cash flow.

Now I'd like to add some additional thoughts on the current housing market. As I've said before, while the timing of housing can be discretionary, housing itself is not. There has been no change to the fundamental need for millions of more houses to be built in order to satisfy household formation and growth trends over the coming years. However, persistently high inflation and aggressive interest rate increases by the Fed have begun to impact the pace of buying and selling homes. As a result, we do expect some softness or an air pocket in new construction, which could materialize towards the end of this year or into 2023.

In the meantime, builders continue to complete the much-needed starts that were undertaken as demand soared during the pandemic. With much of product portfolio coming in towards the end of the construction process. And with persistently strong R&R interest, we remain confident in the strength of our business. While home affordability due to higher interest rates and price appreciation poses a challenge to home sales, offsets do exist.

Tappable home equity continues to increase from its current all-time high. Additionally, the majority of homeowners have a fixed rate mortgage under 4%. We expect these factors, combined with continued low supply of homes and higher cost to move will provide tailwinds for continued R&R spending, and our portfolio of industry-leading brands remains well-positioned.

Secular growth trends across both Water Innovations and Outdoors & Security propel our strong brands, which are further driven by our innovation engine. The value proposition that we deliver to our consumers is backed by best-in-class innovation, quality standards and service levels, which provides our portfolio with added resiliency and is a significant differentiator versus private label alternatives, which do not deliver upon that same promise.

As we've seen during prior slowdowns, the strength of our total offering continues to attract consumers even in more difficult environments. This formula of strong brand, innovation and service will be the firepower that accelerates performance in what will be the New Fortune Brands.

And within Cabinets, we continue to gain share and improve margin by advancing our transformation through optimizing our product offering in a manner that appeals to customers and enables cost structure improvement. We believe that our ongoing operational efficiency improvements and increasingly flexible capacity will position us well in any market environment.

We are adjusting our full year 2022 guidance to recognize the incremental expenses related to the separation. We're also scenario planning and taking actions where required to preserve and improve margins and generate cash now and into 2023. We're doing so in a thoughtful, measured way and remain committed to maintaining our long-term margin goals while still making important strategic investments to drive future growth.

In summary, our impressive quarterly results support what we expect to be a strong year for the company with above-market topline performance and margin accretion despite ongoing inflation, a less than perfect supply chain environment and dedicated investments in critical Fortune Brands Advantage capabilities. We have successfully navigated challenging environments before, including as recently as 2020 and 2018 and are well equipped to deliver sustainable growth for our shareholders by proactively managing through any slowdown, gaining share and accelerating in areas of opportunity.

We will do so while maintaining our commitment to being a leader in corporate responsibility in ESG as the products we make improve the quality of life every day for millions of people and deliver on our purpose of fulfilling the dreams of home.

I would now like to turn the call over to Pat to go through our quarterly financial performance in greater detail. 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 segment performance. Additionally, all comparisons will be made against the same period last year unless otherwise noted. Let me start with our second quarter results and overall thoughts on the quarter.

Sales were $2.1 billion, up 9% and consolidated operating income was $320 million, up 7%.

Total company operating margin was 15.1% and included year-over-year margin expansion across all 3 segments. EPS were $1.67 for the quarter, up 7%.

As Nick mentioned, the company produced a strong second quarter driven by our leading brands and dedicated teams, delivering high single-digit sales growth, while comping unprecedented levels of government stimulus from a year ago is especially impressive. Labor and supply chain constraints eased during the quarter, enabling our teams to service demand across the portfolio and work through order backlogs to realize incremental price.

Operating margin in the quarter improved year-over-year in each segment and increased sequentially by 210 basis points. Price and cost actions more than offset inflation in each of our segments. Additionally, we continue to invest behind our key strategies, including our digital transformation journey, which will drive future outperformance.

Looking forward, we are committed to delivering a healthy and robust long-term future for what will be 2 strong independent public companies and are keenly aware of the impact the rapid rise in interest rates will have on the consumer in the near term.

While demand remains resilient across much of the portfolio today, we are acting ahead of a potential slowdown to maintain our margin progression and deliver strong cash flow. We have successfully navigated slowdowns before and have the experience to deliver results against any market backdrop.

Now let me provide more color on our segment results, beginning with Water Innovations. Sales were $650 million, down $45 million or 6%, or down 5%, excluding the impact of foreign exchange. The second quarter was impacted by localized coronavirus-related shutdowns in China. Excluding China, growth was up 4%, driven by strong POS for both Moen and the House of ROHL in the U.S. Operating income was $162 million, down 4% or $7 million. Operating margin was 24.9%, the result of better price realization and proactive expense management.

Looking forward, we expect Water Innovations' third quarter sales growth to be down low to mid-single digits due to continued disruptions in China and comping a prior year channel inventory build associated with service level recovery. We expect Water Innovations' margins will remain strong. The Water Innovations' portfolio remains as vibrant and resilient as ever, delivering high single-digit POS during the quarter. Consumers continue to gravitate to Moen as the leader in the future of water in the home and the House of ROHL continues to enjoy growth and expansion as our collection of Artisan brands delights consumers.

Turning to Outdoor & Security. Sales were $605 million, up $70 million or 13%. Therma-Tru sales were up strong double digits as improved labor availability and shipping efficiencies helped drive performance. Single-family new construction completions continue to catch up to starts and builders continue to view Therma-Tru as the composite material alternative to wooden entry doors.

LARSON sales were down low single digits in the period, driven by retail channel destocking and softening retail DIY activity. LARSON continues to work with Therma-Tru to promote a strong future together within our growing doors franchise.

Decking sales grew high single digits in the period. We continue to believe conversion from wood will drive long-term adoption of advanced composite materials in decking as has been the case for our Therma-Tru business. Decking wholesale channel inventories remain robust, and we will continue to monitor demand trends and adjust our capacity plans accordingly.

Security sales were up mid-single digits in the quarter. Commercial sales now accounting for over 1/4 of securities revenue grew over 20% in the period. Our momentum in connected and ESG products will benefit security in a significant way now and into the future.

Outdoors & Securities segment operating income was $93 million, up 19% or $15 million versus a year ago. Segment operating margin was 15.4% up 70 basis points over 2021.

Turning to Cabinets. Sales were $856 million, an increase of $150 million or 21%. Stock cabinets grew strong double digits and make-to-order cabinets grew low teens as labor availability and supply chain improved throughout the quarter. While price primarily drove sales growth, volume growth was also positive in the quarter. Overall, backlogs remain elevated and demand remains resilient across most price points. As we prepare this business to standalone as a public company, MasterBrand continues to execute at a high level and is on track to widen its lead at higher margins over time. It is an exciting time for this business with operations, leadership and execution all heading in the right direction.

Operating income in the second quarter was $99 million, up 28% or $22 million. Operating margin was 11.5% for the quarter, representing a 60 basis point improvement over last year. We expect to deliver further margin progression during the back half of the year as price and continuous improvement offset inflation at accretive margins to support our full year and long-term goals.

Turning to the balance sheet. Our balance sheet remains strong with cash of $361 million, net debt of $3 billion and net debt-to-EBITDA leverage at 2.3x. We finished the quarter with $564 million of total liquidity on our revolver. We also purchased $125 million in stock during the quarter, which brings our total purchases through the first half of 2022 to $505 million. We remain committed to efficient and effective cash and balance sheet management. Our teams are already acting to manage our working capital and capital expenditures in light of the recent and expected future central bank actions.

Continued high inflation and the response from the Fed produced the expected outcome, a near-term slowing of consumer demand, including for home products. While uncertainty exists, we are acting now to maintain our margin journey and deliver strong cash flow. Our teams have executed throughout challenging environments in the past and will do so again to deliver shareholder value.

With that in mind, I'll now provide an update to our 2022 guidance.

Our full year 2022 global and U.S. market outlook remains unchanged. With first half U.S. R&R strength, and new construction and R&R backlogs offsetting challenges in China and slowing retail DIY, our global market outlook remains at growth of 3% to 5% with the U.S. still expected to grow 4% to 6%. With more than half the year behind us, we have tightened our full year net sales growth guidance to 6.5% to 7.5% to reflect strong year-to-date results and a continued dynamic market environment heading into the second half of the year, including expected channel inventory reductions.

We remain committed to achieving OI margin expansion this year and beyond. For 2022, we continue to target approximately 70 basis points of OI margin expansion. We are updating our 2022 EPS guidance to $6.36 to $6.50 per share to account for incremental costs associated with the separation and updated full year interest expense, tax rate and share count.

On a segment-by-segment basis we now expect for 2022, Water Innovations net sales growth of down 1% to up 1%, with operating margins around 24%. Outdoors & Security net sales growth of 10% to 12% with segment operating margins of 15.2% to 15.7%. Cabinets net sales growth of 10% to 12%, with operating margins of 11.5% to 12%.

This updated EPS outlook for 2022 includes the following assumptions: Corporate expenses of about $138 million to $142 million, including digital transformation investments of around $20 million and separation costs of up to $15 million. Interest expense of $120 million to $122 million, a tax rate around 25% and average fully diluted shares of approximately $131 million.

Over the next few years, we will optimize SG&A in both New Fortune Brands and Cabinets as we deploy lean operating models in both companies to enable strategic investment for growth and continued margin expansion.

We expect 2022 free cash flow of approximately $590 million to $630 million and anticipate a cash conversion rate between 70% and 75%. Our free cash flow forecast includes capital expenditures of $300 million to $330 million as we adjust the rate of investment to reflect current market conditions while continuing to enable future growth.

In summary, our strong quarterly results have contributed to a better-than-anticipated first half of the year, and our full year outlook remains intact. We remain focused on proactively managing the business through any market conditions, while actively pursuing our margin objectives. Long-term housing fundamentals supported by demographics remain attractive, and we are well-positioned to capture value across our portfolio for all of our stakeholders for years to come.

I will now pass the call back to Dave to conclude our prepared remarks and open the line for questions. Dave?

[David Barry, executive]

Thanks, Pat.

That concludes our prepared remarks on the second quarter. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I will ask that you limit your initial questions to 2 and then reenter the queue to ask additional questions.

I will now turn the call back over to the operator to begin the question-and-answer session. Operator, can you please open the line for questions? Thank you.

[Operator]

[Operator Instructions] And our first question comes from Susan Maklari with Goldman Sachs.

[Susan Maklari, analyst]

My first question is around the spin. Nick, you mentioned that it's actually moving ahead of schedule. Can you just give us a bit more color on how that's coming together? And any other details that you have that you can update us with?

[Nicholas Fink, executive]

Sure, Sue. And good to hear from you. Happy to talk about it.

I'd say when we announced last quarter's call, we kept it to a very, very tight, very small group of us that have worked on it. And so it was really in a post-announcement that we began really scoping out sort of speed of execution and the granularity of getting through the audit and drafting the Form 10, et cetera. And I mean I'd like to say no surprises because I have a ton of confidence in our team, but we also benefit from the experience of -- this is a team that many of corporate have been through this before and know how to do it, and they just got off to an exceptionally fast start.

I think that coupled with a lot of really good management of our financials on processes and systems over the years has allowed us to move through it pretty quickly. So we're not targeting filing the Form 10 this quarter, which was well ahead of schedule, and that's coming together.

And so that's from a process standpoint, what's happening, I'd say, from a strategy standpoint, you can certainly see in the Cabinets' results, the delivery now against the strategy of really building out this business system of much more flexible and agile capacity really starting to bear fruit. And that team has a ton of energy behind them right now. And I really, really believe they're just getting going in what they can do. And even as they're looking to a slowing down, their reaction to that is great. That gives us more time to really get after some of these business simplification initiatives that they wanted to get after.

And then on the New Fortune Brands side, we've really used the last quarter to start to reimagine out of the possible and what can we do with even more focus on brand and more focus on innovation and more focus on our channel management, and we're excited about how that's coming together. I think we'll update you more as that unfolds and as we get towards the end of this year, but we really believe that it's going to allow us to tightly focus and double down and invest for other things that our investors have appreciated about the business and the things they've been able to deliver. And I think you'll see a really, really strong brand and innovation leader emerge on that side of the house.

And so by and large, we're very excited about where things are heading and the pace at which they're heading there.

[Susan Maklari, analyst]

Yes. Okay. That's great to hear. As a follow-up, there's clearly been a lot of focus on the consumer, and I appreciate all the commentary that you gave. But perhaps could you talk a little further just to the state of the consumer? And how it changed during the quarter, the mix shift that you perhaps saw in there? And then how you're executing on that macro playbook that you mentioned a couple of times? Where we are today and what you're watching for to determine future steps or potential future steps?

[Nicholas Fink, executive]

Yes, I'd be happy to talk about it. I hope it's enlightening for you. I'm not sure. We share a lot of data across our whole portfolio. And over the last couple of years as we've gone through this digital transformation, got that started, we've really been able to pull more and more data into our data lake and really start to get a good section of consumer.

I guess the headline from a starting point is do think the consumer has still been surprisingly resilient. As I said on the last call, we've seen POS dollars tracking along with last year absent a giant stimulus, that continued all the way through the quarter. In fact, all the way through last week, we actually saw an inflection upward in spend. I wouldn't take any one week to the bank, but the fact that you're still seeing that degree of positivity is really interesting.

Now I think as we look forward, you can see some pockets of softness and some pockets of strength. And so we're still waiting, I think, as that unfolds. We certainly do see the home sales data and read about the foot traffic through builders. And I think we're going to gear ourselves for -- as we said in the prepared remarks, an expected air pocket should that materialize if new home construction comes off. But again, I'd say from a consumer perspective, pretty resilient.

And then to answer your question, Sue, how are we executing against that, I think it's twofold. Really, in the first part, it's sort of internally, how do we manage and prepare the business for that. And we have some healthy paranoia here. So we already taking steps to look at expense management, CapEx management, capacity management and really prepare ourselves, and we've been through this before in 2018, we we've been through this in '20. If you recall, in Q2 of 2020, our decremental margin was 12%. And I think that's an example of how the team can execute when they choose to go after it. And so that's really the internally looking piece, and I have absolute confidence that the team can execute through any air pocket really well while still preserving investment in the key strategic parties.

On the externally facing piece, it's really gearing our product at the heart of the market, understanding where the consumer is going, using the insights we have across the whole portfolio and making sure that we have the right product there at the right margins to continue to meet the consumer. And I think that's where the strength of the portfolio has really played out over the last few years, and you've seen it. I mean, go 3 years back when we saw Millennials really coming into entry-level homes, and we have the portfolio there to meet them. And as they started to move up and as dollars flowed in and you saw real trade-off over the last couple of years, we could stretch the portfolio to meet them there. And we have that kind of flexibility in the product set, and we can do so at pretty even margins across.

And so that's how we think about it from a consumer perspective, and we'll continue to meet them where they are. And I think if you look at the home equity that's out there, the amount of mortgage is under 4%. The age of homes, we're going to continue to see some robust on our strength going forward.

[Operator]

Our next question comes from Stephen Kim with Evercore ISI.

[Stephen Kim, analyst]

I believe you made a comment in the Cabinets business when you were going through the various kind of price points. You were talking about the high end, I think maybe being a little bit more impacted by some macro concerns relative to stock and made to order, which seemed like they did much better. And I guess I'm curious, did you see this dynamic or maybe differentiated performance across a different price, maybe at the high end, maybe a little greater weakness at the high end in other segments or across your portfolio or was it simply limited to Cabinets?

[Nicholas Fink, executive]

Yes, it was really much more limited to cabinets and that's sort of a little bit of Sue's question. I wish he could just give a definitive launch is one thing or the other. But no, we saw how to roll -- continue to have some real strength through the quarter, and that seems to be unabated. And so it was more limited to Cabinets. And I think as that machine rolls forward, we've gotten our service levels and quality at a really, really great spot in the [ soccer ] value side of the business, the semi-custom side. And now I think the team is using a little bit of the respite that they're getting because the last couple of years, there hasn't been a whole lot to work on some simplification in the premium side that should allow for even better service and delivery, which we think is going to help drive that part of the business.

[Stephen Kim, analyst]

Okay. That's helpful. And then earlier, I think you also mentioned that you're working to proactively manage to the right level of inventory with your customers, anticipating that there may be a little bit of a hiccup in light of the buyer strike we have going on in housing. And I guess I was curious, I know, obviously, you don't have a crystal ball on exactly whether that's going to materialize or not, but or how severe it might be. But can you talk about what this management process proactively managing to the "right" level of inventory, how might this look different across your different segments? If you can give us some insight into how you're going to be managing that?

[Nicholas Fink, executive]

Yes. I think it's on a couple of vectors. So I'll give you some perspective. Pat may have some color to add. But first and foremost, I think it's seen through and trying to have a good lens of where the consumer is and where the right inventory levels are. And so taking a step back, I think as hard as we were on ourselves through the course of the last 2 years about our service levels where we subsequently learned from customers for us we were serving the customers well ahead of a lot of the competitive set. So as a result of that, we got customers' inventory levels into a good spot, I think, sooner than you'd see across the industry, which also permitted some customers to start to take safety stock down. You see a bit of effect of that in plumbing, right, in the second quarter.

And so as we work through that, part of what we need to do is use the insights that we're getting from the consumer point of sale to make sure -- to work with customers, try to make sure they aren't under inventory and to share that data with them. And we've really been -- as part of the Fortune Brands Advantage, investments building out the category management capabilities that we have to try to provide those insights to our customers and make sure that we're doing it in a rational way and not a knee-jerk reaction. And generally, I think we've been pretty successful with that.

The other piece is, to the extent that they are going to come down, trying to get transparency so we can match working capital to that, match our investments to it and pace accordingly. Now again, I think you've already seen a fair amount come out in this last quarter. I expect there'll be a bit more in Q3 as people anticipate some softness, combined with the ability to take out some safety stocks. But I think as long as we stay close to where the consumer is and help share that information and then help run the business with capacity, expense management, et cetera, to where we see customers going. Those are the couple of vectors that we're treating, we manage that.

[Operator]

And our next question comes from Michael Rehaut with JPMorgan.

[Michael Rehaut, analyst]

First, I just wanted to actually circle back on the inventory but from another angle. I think you kind of mentioned earlier that POS and Water Innovations was up 9% and sales ex-China was up 4%. And so just trying to get a sense in both Water Innovations and perhaps in your other segments. How much the inventory reductions have had an impact on 3Q -- I'm sorry, 2Q from a revenue standpoint and if you're also within your guidance on a full year basis contemplating or incorporating any continued inventory reduction in the back half?

[Patrick Hallinan, executive]

Yes, Mike, I would tell you, in the quarter, it was probably about a point of headwind to sales growth in the quarter. And obviously, it tends to be in the product with the longest supply chains for us and for our channel partners. And we did, in this quarter, start to see across many product lines and channel partners people ordering below POS already. You can imagine not only do people have the uncertainty of the future on their mind, but the cost of inventory has gone up with the inflation of commodities and with interest rates. So people are being as expected, proactive channel partners that are being as expected, proactive on inventory. And I would expect for the balance of the year, for the second half, at least 1 point or 2 of headwind to the second half of the year for the same dynamic.

And that's in our script and what Nick was just referring to with Stephen is we're just going to be proactive and be thoughtful so that we have the right inventory in place to maintain our position to compete for market share, but also be prepared for the likely result of the lack of foot traffic and new construction that is happening right now.

And to put it and as I mentioned, from a balance sheet perspective, probably on the order of $250 million to $300 million of working capital reduction. By the end of the year will be kind of the balance sheet dynamic of it. And that's consistent with what we've been saying is when the time is appropriate, we'll start backing our working capital back down to more traditional levels than we would expect to be doing that throughout the back half of this year and as we head into next year.

[Michael Rehaut, analyst]

Great. No, that's helpful. I appreciate it. Secondly, just to shift gears towards decking, I believe you had 3% growth in the first quarter, you talked about high single digits this quarter. I believe last quarter, you talked about an expectation of still around 20% growth or last quarter, you said 20%-plus growth for the year. I wanted to know if that's still part of your thinking. Obviously, you did raise the full year sales growth guidance for the segment. And if that is the case, we have heard from one of the big players that there is also some concerns around inventory reduction and how you're thinking about the health of that business also from a pricing standpoint given some of the capacity additions that have come on in the business -- in the industry.

[Nicholas Fink, executive]

Yes, I'll give you some color and Pat may jump in with some more color.

I would say, overall, as you look out to the full year, we may have come off that expectation a bit but not a ton. I think it will still be solid double-digit growth, hopefully, mid-to-high teens is kind of the zone that we're targeting and really impacted by what you're describing. I think that's the other place we put it to plumbing here, seen some inventory come out. I think that's the other place where we are watching inventories and making sure they're at the appropriate level. But are hearing that downstream in wholesale, they're pretty full.

Yet at a POS level, we're still seeing some strength in -- quite a bit of strength, I should say, in decking and some healthy pull-through. And also looking across the mix, it's been pretty evenly spread as well. And so we're, I think, being mindful around the capacity adds there, completely committed to the long-term plan that we've discussed and we've set out. But I think it is a little bit less this year, we'll adjust accordingly. And as we pointed out on the last call, the capacity investments we're making are very flexible capacity investments, and so we'll time them with what we see to be the growth.

And so some would say it'd still be a very strong year, maybe not in the 20s, maybe more kind of mid to high teens, but it is pulling through, and we're watching the wholesale inventory as we go.

Pat, I don't know if you have anything you'd add?

[Patrick Hallinan, executive]

Yes. The things that are driving the sales guidance in that segment up for the year is the excellent performance of the Therma-Tru doors product line and the commercial product line and security, right? Those are the things driving the guidance up and more than offsetting a slight reduction in the expectation of decking and that would be true in the quarter as well. Therma-Tru had a particularly strong second quarter. So that's what you're seeing. That product line continues to resonate very strongly. It continues to compete in its respective marketplace very successfully. And builders are trying to get completions done and so that's a nice tailwind for that business.

[Nicholas Fink, executive]

And Mike, the second part of your question was price. We're very committed to the price that we've been able to achieve with decking. And when you look at it either on a total project value or on a product basis, it's still a huge value to the consumer. And so our focus is going to be much more around getting the innovation into market, getting it right, serving our channel partners really, really, really well and making sure that we're going to get paid for it as we move forward.

[Operator]

Our next question comes from Truman Patterson with Wolfe Research.

[Truman Patterson, analyst]

Pat, on last quarter's call, I think you pseudo guided to maybe 6% of pricing, and I think about $450 million of raw material freight and labor inflation. I'm just hoping you can give us some color on how you're viewing inflation and pricing as we sit today? And then we've seen brass costs come down recently. I'm hoping you can help us think through that dynamic as a potential tailwind moving into '23?

[Patrick Hallinan, executive]

Yes, happy to comment on both. So certainly, I think -- I think the last call, the range of material and logistics and inflation that we provided was the dollar amounts you had were roughly correct, it was 9% to 10% of prior year COGS. I'd say it's ticked up 1 point or so. It's like 11% to 12% of last year's COGS would be material and logistics inflation. That probably gets you closer to about $580 million. Again, about $350 million of that was carry-in from last year. So about 60% carry-in and 40% new to 2022. And the drivers, the change from last quarter to this quarter have been predominantly ground freight, hardwoods and resins. So unsurprisingly, things that are oil-related or hardwood. And for the -- and I'd say labor inflation probably across the board, probably adds another $100 million, $110 million to that.

And then from a continuous improvement and price standpoint, we did in this quarter, inflect to fully covering it and avoiding margin dilution and expect that to be the case through the next 2 quarters of the year to persist into '23. That has a high single-digit pricing for the year and roughly price being 80% of the price/cost equation there.

In terms of brass, what you're referring to mostly is copper. Copper has been down about 30% somewhat recently. It will take about 6 months for those dynamics to flow into our financial statements. And so it may show some size at the very end of this year, but it will be mostly an early 2023 phenomenon that, obviously, we would expect to see that type of material deflation starting to hit our financial statements early part of next year.

[Truman Patterson, analyst]

Okay. And then if I'm doing my math correctly, it looks like China plumbing might have been down like 40% to 50%.

[Patrick Hallinan, executive]

Closer to 50% -- closer to 50% in a quarter.

[Truman Patterson, analyst]

I take it that's the primary driver weighing on your new guide for revenue growth in plumbing. And then you all are maintaining of an elevated up margin guide for '22 in plumbing as a whole, but it's been well over a decade since the last downturn. I'm just trying to get an idea of how we should think about decremental operating margin potentially. Whether there's been any real shifts in the plumbing industry or your business that might soften that decremental op margin?

[Patrick Hallinan, executive]

No. We would expect all of our businesses, plumbing included, Water Innovations, to be very proactive in managing their business if there were to be a downturn. And I would tell you, as a team, we would be trying to be at no worse than 20% decremental margin. We'll be working to beat that. But that's really not the dynamic playing out in Water Innovations right now. The change to guide is just, as you stated, it's China. It was down 50% in the quarter. It's probably going to be down 10% to 20% for the year. That's the primary driver of the updated guidance to the Water Innovations group.

I think the other 2 forces that are worth noting is you're probably getting about 40 basis points on a consolidation basis, but it's a Water Innovations level closer to 1 point, 1.25 point that is FX driven. And then it's the one area in addition to our security business where we would expect the destocking to be playing out in the back half of the year. If you really look at something like in the quarter, wholesale POS of plumbing, you're talking high single digits, and you're talking very robust POS across most of that business, and you're just seeing channel partners try to get ahead of uncertainty with destocking. You're seeing FX and you're seeing China.

So the Water Innovations business is very healthy. China is a market we like long term. China is a market that's going to grow at or above U.S. levels. For us, it's a profitable market. It's a great place for us to innovate because we have -- we're much closer to the route to market it and the consumer or we can get new product into that market sooner. And that team has done a great job. As much as they've had the headwinds you read about in China, they've offset the sales headwinds they face with expense management in China.

So yes, we'll navigate China through at least this year, if not into the very early part of next year, but China is a market we like. And there's nothing going on with the Water Innovations business that really kind of changes the dynamic of growing above market and having really strong operating margins. So that's what we would expect going into next year on our [indiscernible].

[Truman Patterson, analyst]

Pat, just for clarity, the 20% decremental op margin, that's kind of for the new Fortune Brands, correct?

[Patrick Hallinan, executive]

Yes. I'll speak for Dave Banyard in his future state, but I'm going to assume that he's going to manage his business aggressively like we do and also be working to have very attractive decremental margin that certainly beat his contribution margin. So I'm sure we'll talk more about that maybe on Investor Day. But I would expect all of our businesses to be managing that way through the uncertainty we face the balance of this year, the early part of next year.

[Nicholas Fink, executive]

If you're sort of working what-if scenarios or worst-case scenarios. And returning to your earlier part of your question, is the structure of the business different than it was in '08. The answer is absolutely. I mean lessons were learned, business was rebuilt in a far more flexible way, and I'd point you to Q2 of 2020, as the proof point when you compare that decremental margin to the decremental margins we saw in '08 is night and day different. And yet, the speed at which we had to respond in 2020 was 10x faster than it was back then. And so we do that because the team is great, but because we built the tools over that time and built the flexibility to be able to do it. And so structurally very, very different.

[Operator]

And our next question comes from John Lovallo with UBS.

[John Lovallo, analyst]

The first one is pricing has obviously been a really solid lever and there hasn't been a trade-down to date that you've spoken of. But do you get the sense that we might be approaching that pivot point where consumers start kind of going for a lower-end product?

[Nicholas Fink, executive]

Yes. It's -- John, it's a great question. I mean you've certainly seen it in consumable categories, right? I think you're hearing about it in other categories where you might have trade downs in daily consumables that consumers view as fungible. But these are products that they research and they're going to live with for a long, long time. And so we haven't -- yes, we haven't seen consumers move off. And I think to the earlier question about -- this question about are we seeing kind of premium price trade down across the portfolio? We're not. We're seeing parts of the portfolio that are premium to luxury and continue to be very, very strong. And so at least substance to this point, think consumers are choosing to invest in these categories and are going to choose quality and innovation and brand over a mere compromise on a trade down.

Now I am glad that inflation is -- it turned out to be more predictable than it was 12 or so months and now being more predictable is also starting to moderate. And so the consumer, I think, is going to have an easier time of it, and I think that's just net positive for the health of consumer.

But all through this process, I mean, as we've had to take price, we've rewarded the consumer with brand and innovation and the net-net has been that we've taken price and taken share. And that says that the equation has been in the favor of the consumer. Not in our favor when they're rewarding us with more share now as saying the fact that we're taking price. So we'll be measured about it going forward, but we completely believe and are committed to the price that we've taken. -- and that we've rewarded the consumer turn and that we can build from here.

[John Lovallo, analyst]

Great. That's helpful. And then you've talked about the improvement in channel inventory tonight. Curious if you could parse out how much of that do you think is demand moderating versus actual improvement in the supply chain or labor availability?

[Nicholas Fink, executive]

Yes, I'll start, and Pat may have some more color, but I think it's much more the latter. So you're having certainly much higher levels of supply chain performance, which allows people to take down safety stocks. I think that's a measure of it. And then you are having some come out, as Pat said, where we're seeing wholesalers, I think, take inventory down in anticipation of softness that may come. But we're not yet seeing it necessarily through POS, right? And so we talked a little bit about inventory management. That's where we're using our category insights to also work with customers to say, "Hey, you don't want to be at a point where you don't have enough inventory to even service level."

So I think there's an element that can come out just because service levels are so high right now as we've invested heavily in service and working capital. But until you're actually seeing that demand slow down, I would be careful at the channel level, not too thin.

[Patrick Hallinan, executive]

No, I would concur. I would say that to date, it feels mostly like people getting ahead of what they perceive as uncertainty that will go on a certain direction.

[Operator]

And ladies and gentlemen, that's all the time we have for questions today. And that concludes today's call. Thank you for joining our conference call. You may now disconnect. Have a great day.