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Fortune Brands Home & Security Inc (NYSE:FBHS)
Q3 2020 Earnings Call
Oct 28, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Fortune Brands' Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would like to turn the call over to Mr. Brian Lantz, Senior Vice President of Communications and Corporate Administration. You may begin our conference call.

Brian Lantz -- Senior Vice President, Communications and Corporate Administration

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security third 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 a 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 Form 10-Q. The Company does not undertake any obligation to update or revise any forward-looking statements, which speak only to the time at which they are made. Any references to operating profit or margin, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified.

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

I will now turn the call over to Nick for his remarks.

Nicholas Fink -- Chief Executive Officer

Thank you, Brian, and thanks to everyone for joining us today. We hope that you and your loved ones are all managing well and staying safe during these challenging times. In the quarter, total company sales increased 13% over last year and operating margin was up 90 basis points to 14.8%. This performance was the result of excellent operational execution in the accelerating market while still managing a pandemic environment and prioritizing our employees safety.

I'm extremely pleased with the strong sales and profit results that we delivered in the third quarter, which built upon an impressive year-to-date performance in the face of unprecedented challenges. Performance was strong across our businesses while our teams delivered on our efforts to keep our people safe. We're working hard to serve our customers' needs as the fundamentally strong housing market is accelerating further as consumers invest on their home.

While we are delivering ahead of expectations this year, we're also making long-term investments in our brands, innovation, core capabilities and supply chain capacity that will enable us to capture future opportunities and accelerate our share gains. I want to thank all of our dedicated team members who continue to work so hard to keep our people safe and our facilities operating. I'm so proud of our teams. We're not only caring for each other but we're doing so while serving increasing demand for home products.

In the third quarter, all of our businesses saw impressive double-digit growth and we drove overall margin improvement for the company by leveraging efficiencies enacted since the second quarter as well as delivery progress against our planned efficiency roadmap for the year. Our efficiency initiatives to create fuel for increased investment as we continue to improve the overall margin profile of Fortune Brands. We are ahead of our expectations on these assets, which should accelerate share gains at higher margins over the next few years. Through our operational agility and strict focus on safety, we were able to generally serve our customers' needs, which resulted in significant share gains. In many cases, we invested heavily to keep customers supplied in this accelerating market. Our channel partners continue to coalesce around our strength and those deepened partnerships are leading to further opportunities to grow profitably.

Turning to the remainder of our remarks today. First, I will discuss what we are seeing in the home products market. I'll then highlight key takeaways from our third 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.

Now turning to our view on the housing market. Our U.S. home products market is underpinned by robust fundamentals, including very favorable demographics, raw inventory and attractive affordability thanks to low mortgage rates. As noted on prior calls, we saw strong demand across the board in the first quarter. This was followed by very robust activity in open channels in the second quarter. It has been encouraging to us but as other channels open further in the third quarter demand for our products continue to increase, in fact we continue to see strong retail POS, even as wholesale and build activity bounced back from the second quarter shipments.

Key consumer trends have been expedited by the pandemic, which appears to have accelerated the movement of the key millennial generation toward household formation, sub-urbanization and investment in the home. These trends, which were already in place prior to the pandemic should drive new construction repair and remodel demand, especially at the entry price point part of the market where there is a short supply of available homes repurchase.

The current environment has also accelerated trends for the large baby boomer generation. We have long identified that more and more seniors prefer to thrive in place in their homes. We expect that the pandemic's disproportionate impact on senior living facilities will only add to this trend. Repair and remodel activity during the quarter remained elevated, as home purchasing activity was high and consumers focused on home improvement. Additionally, as more people work-from-home and entertain at home, they have reconfigured and upgraded their homes to accommodate an expanded set of needs.

With the existing housing sales accelerating, in aged housing stock and U.S. homeowners sitting on near all-time highs in home equity levels, we expect that the R&R market should continue to benefit from these underlying tailwinds. The market for single-family new construction also remains fundamentally strong as inventories slow. Our advantage exposure to new construction provides a tailwind to our growth with strong fundamentals such as high household formation, affordability and current supply at or near record lows. We expect this momentum to persist over the next few years.

We believe our advantage mix of exposure to the stable repair and remodel market, combined with the torque of a strong housing construction market gives us an unparalleled opportunity to add long-term value for our stakeholders. We've demonstrated our ability to capture the upside, afforded by new construction exposure and manage the downside if or when it materializes. Given the market fundamentals and very favorable demographics, low inventory and aged housing stock, we see a very positive multi-year tailwind powering the U.S. housing market back to consistent mid-single digit R&R growth and high-single digit single-family new construction growth. Consistent with our long history we intend to outperform in this market and continue to gain share.

Based on our view of a sustaining positive backdrop for U.S. housing, we will continue to position Fortune Brands for long-term profitable growth. The current pandemic, while unwelcome, has served as a catalyst for the consumer to focus on the critical importance of the home, which has only emphasized and unlocked this fundamental housing market strength. With that market backdrop, some thoughts on the recent quarter.

As I mentioned, total company sales increased 13% over last year and operating margin was up 90 basis points to 14.8%. This performance was the result of excellent operational execution in an accelerating market while our team worked tirelessly to prioritize employee safety and our customers' needs while still managing a pandemic environment. This operational outperformance across the company is leading to accelerated share gains as we have been rewarded with additional opportunities as consumers gravitate to trusted brands and customers coalesce around the most dependable supplier partners.

We drove solid margin accretion as we saw the early benefit of our efficiency efforts. Consistent with our strategy, a portion of those efficiency gains were used to invest in key strategic growth initiatives including the Moen brand, decking capacity and distribution rollout, and value-priced cabinetry capacity. We also continue to invest in common core competencies across our businesses, including innovation, category management and global supply chain management. We are accelerating investments in the most critical priorities as we position the business for 2021 and beyond.

Last quarter, I mentioned the cross Fortune Brands initiatives that we're taking to create permanent efficiency in our business to free up additional funds for investment in our key priorities and to drive incremental margins. As you can see from our performance, the effects of margin accretion are being felt in our 2020 results with increasing margins, both quarter-over-quarter and year-over-year for the total company. We continue to take permanent cost reductions in the quarter as we replatform the company using a common set of capabilities in a unified approach to fuel growth and reset our base cost structure for the long-term.

Our teams have delivered ahead of expectations but we are not going to rest on our laurels. We will continue to position our company to generate increasing value through sustainably higher top and bottom line performance while increasing investment in core strategic initiatives.

Now let me turn to our individual businesses and how we're positioning to be even stronger long term, starting with plumbing. During the third quarter, our Global Plumbing Group continued to outperform the global and U.S. markets with third quarter sales up 15% compared to last year, and operating margins of 20.8%. Strong double-digit growth in both U.S. retail and e-commerce and in China, drove the quarter. This quarter, we continue to invest heavily in our brands and consumer-led innovation. We also incurred meaningful one-time costs for items such as air freight and employee recognition to meet the increasing needs of our customers.

Even with the incremental investments in costs, we are on track to deliver approximately 22% operating margin for GPG in 2020. Investments for plumbing continue to deliver results. In addition to our continued share gains as North America's number one faucet brand, Moen continued to record market leading scores in brand awareness, purchase intent and customer loyalty, particularly with our key millennial consumers.

Our Global Plumbing Group's ability to pursue growth in both core and new segments keeps opening up new opportunity sets for this business to continue to outperform in the market. Our sustained investment in newer channels such as e-commerce and in on-trend innovation sets GPG up for long-term profitable growth. We also experienced solid growth in China in the third quarter. Moen continues to outperform its market through channel and category expansion driving excellent leverage to the bottom line. The Chinese economy has stabilized quickly and is continuing to show strong support for housing.

Turning to Doors & Security. Sales increased 14% over this quarter last year and operating margin increased by 190 basis points to 16.4%. These exceptional quarterly results were defined by operational outperformance in decking and doors and the return to growth for our suite of security products after a COVID-impacted second quarter. Importantly, our Fiberon decking brand grew by over 40% in the quarter. It continues to benefit from our distribution wins and execution as we position the brand for long-term growth in a market fueled by trends in housing, outdoor living and 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 we have incremental capacity coming in the fourth quarter and through 2021.

Sales in doors experienced strong growth as retail remained robust and home-builders accelerated activity that began in the second half of Q2 and continued through the summer months and into the fall. Both the wholesale and retail channels recorded double-digit growth in the quarter. The synergies and scale emerging from our shared wholesale channel distribution for doors and decking has been particularly advantageous to our growth.

Turning to Security. Sales returned to a more normal mid-single digit growth rate for the quarter, despite an expected softer back-to-school and commercial market. We continue to innovate in our security product lines with touchless and connected products for residential and commercial applications.

Finally, turning to cabinets. In the third quarter, our cabinets team delivered excellent performance as they outgrew a strong market and continued to deliver on our margin initiatives. This year, the business has demonstrated how our pivot plan can produce outperformance in vastly different market environments. After more than two years of aggressive repositioning, this business is now squarely centered on the heart of the market and has proven it can be defensible in the macro it dictates but can also grow above market in times of strong activity with excellent leverage.

Sales versus a year ago increased 11% with value-priced products continue to drive strong growth while we saw improving trends in our make-to-order business. The operating margin expanded to 12.2% and increased over last year of 200-plus basis points. Strong demand in retail big box and further momentum in our advantage dealer network drove the results.

Make-to-order showed stabilization in the quarter and was up in September. Our initiatives are driving scale efficiency in our make-to-order operations through a commonization of key components, which is contributing nicely to our cabinets business performance. Our team has been aggressive in capturing operational efficiencies across the operating platforms to drive our margin improvement. And while we've made progress, we have plans to capture more opportunities in the future.

With our focus on value price point cabinets, we continue to gain share from both domestic players and from the absence of Chinese suppliers who have exited the market over the past few months or have been replaced to a lesser extent with other importers with higher costs and longer lead times. While we saw imports increase from certain Southeast Asian countries that are well below 2018 highs and more importantly are at a higher cost and come with longer lead times than the directly subsidized Chinese cabinetry that was in the market prior to the antidumping case.

Our low-cost country supply chain is equipped to compete in this environment and we are winning share on a more even playing field.

We're well on our journey to drive this business toward our long-term goal of mid-teens margins. We have the ability to not only grow value cabinets at above market but expect to do so at higher margins. Our performance initiatives across our make-to-order business are delivering and we're being rewarded with incremental business from advantage dealer network.

We continue to further optimize operations and add more network flexibility to prepare for additional sales upside at higher margins over the next few years, basically gaining capacity and flexibility to advantaged low cost global supply chain as well as adding economies of scale, less variability and product configurations and more consistent packaging solutions across our offerings.

In summary, we continue to outperform a strong home product market driven by long-term fundamentals. The pandemic has served as a catalyst for these strong fundamentals by driving renewed consumer interest in household formation and renovation. While the immediate economic outlook remains uncertain, we expect housing will continue to benefit from demographic tailwinds in the long term, both by increased consumer interest in investing in their homes.

In the meantime, we will continue to operate the business with agility, managing costs in an uncertain environment while investing in key strategic initiatives to deliver excellent long-term returns for stakeholders. Our teams, yet again, delivered excellent results in a challenging environment. We remained focused in keeping our people safe and serving our customers. We're investing for the long term and continue to demonstrate that this business and management team can deliver exceptional results in a variety of market environments. I could not be prouder of their performance.

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

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

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 very pleased with our team's performance. They prioritized safe operations, addressed accelerated demand and delivered exceptional results.

Last quarter, I mentioned our priorities to build an even stronger company remained including protecting the health and safety of our teammates, servicing our customers and positioning our business for share gains, delivering strong margin performance this year and accelerating progress on our profit objectives while investing to sustain competitive advantages and maintaining a strong balance sheet. Our teams executed against these priorities across the board in the third quarter, which led to exceptional sales and margin performance. This high level of execution positions us to continue capturing share and increasing margins for the balance of 2020 and beyond.

Now I will cover the specifics of our third quarter results. For the quarter, sales were $1.65 billion, up 13% from a year ago. We experienced double-digit sales growth in every business segment a sign of the widespread consumer interest in R&R and new construction.

Consolidated operating income for the quarter was $244 million, up 20% or $41 million compared to the same quarter last year. Operational excellence and volume leverage drove this strong income growth. Total company operating margin was 14.8%, up 90 basis points over the same quarter last year. Building on the efficiency gains initiated earlier in the year, we continued to accelerate our margin improvements and are on track to exceed our original margin plan for 2020. We expect to deliver full-year operating margin of approximately 14%. EPS were $1.19 for the quarter, up 25% versus the $0.95 in the same quarter last year.

Now on to segment results. Plumbing sales for the third quarter were $591 million, up 15% versus the same quarter last year. Strong U.S. retail and e-commerce sales as well as continued growth in China drove the quarter. Plumbing operating income increased 10% to $123 million for the current quarter. Operating margin for the quarter was 20.8% reflective of investments in brand, innovation and customer service to enable continued market-leading growth. Full year margins for plumbing continue to track to approximately 22%.

Turning to Doors & Security. Sales for the third quarter were $407 million, up $51 million or 14%. Importantly, decking sales grew over 40% during the quarter. We continue to sell every door we can produce with additional capacity coming online during this fourth quarter.

Sales in doors grew mid-teens as trade channels and new construction activity reaccelerated during the quarter. Sales in security grew mid-single digits despite headwinds caused by this year's COVID challenged back-to-school season and continued softness in commercial markets. Doors & Security operating income was $67 million during the quarter, up 29% over the same quarter last year. Segment operating margin for the quarter increased 190 basis points over last year to 16.4%. Our doors and decking operations ran with exceptional efficiency during the quarter and our security operations moved beyond the most challenging COVID inefficiencies.

Now turning to Cabinets. Sales for the third quarter were $655 million showing a year-over-year increase of 11%. We continue to experience strong interest in value-priced products in all channels and are seizing share gain opportunities. Make-to-order sales for the quarter were almost flat and have started the fourth quarter with sales up low-single digits.

Operating income in the third quarter was $80 million, up $21 million versus the prior year. Operating margin for the quarter was 12.2%, up 220 basis points. Our cabinets team continues to elevate at strong execution. The team delivered continued cost structure improvement and leverage volume effectively. More opportunities lie ahead and we look forward to a continued competitive sales performance and margin improvement.

Our Cabinets business is deploying a winning value proposition with a business model and cost structure designed to capture share in the marketplace and deliver attractive margins. Our supply chain is positioned advantageously to compete with domestic and non-subsidized importers and we are delivering.

Turning to the balance sheet. Third quarter results have enhanced our already strong balance sheet. At the end of the third quarter, we had cash on the balance sheet of $465 million, net debt of $1.6 billion and our net debt to EBITDA leverage stood at 1.7 times. We now have $1.35 billion of total liquidity available between our $1.25 billion revolver and supplemental $400 million one-year revolver.

We have the ability to make investments and deploy capital to accelerate growth and stakeholder value creation and are assessing opportunities to do so. Consistent with prior practices we will remain opportunistic as opposed to programmatic and we'll be mindful of pandemic uncertainties.

Turning to the topic of financial guidance. While COVID and macroeconomic uncertainties remain, we are reinitiating 2020 full-year financial guidance. We expect full year net sales growth between 4% and 5% and earnings per share of $4.03 to $4.11 with a full-year operating margin of approximately 14%. We expect full year free cash flow of $590 million to $620 million reflecting a cash conversion of approximately 105% to 110%. This EPS outlook includes the following assumptions.

Interest expense of $82 million to $86 million, a tax rate between 24% and 25%, average fully diluted shares of approximately $140 million to $140.5 million. We expect the new phase of demographic-driven housing growth to result in prolonged market strength with market growth averaging 5-plus percent per year over the next few years assuming the current level of unemployment continues to stabilize then improves. We expect our sales to continue outperforming the market and our margin progression to remain accelerated averaging annual improvement above 50 basis points in 2020 and each of the next few years.

While COVID uncertainties remain, we will continue to prioritize associate safety and manage expenses thoughtfully. Our balance sheet strength supports capital deployment and we will continue to assess opportunities to deploy capital. We see promising value potential ahead.

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

Brian Lantz -- Senior Vice President, Communications and Corporate Administration

Thanks, Pat. That concludes our prepared remarks on the third 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'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.

I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Michael Rehaut from J.P. Morgan. Your line is open.

Michael Rehaut -- J.P. Morgan -- Analyst

Thanks. Good afternoon, everyone, and congrats on the results and hope everyone's safe and healthy.

Nicholas Fink -- Chief Executive Officer

Thanks, Mike.

Michael Rehaut -- J.P. Morgan -- Analyst

First question I had was on the cabinet division. Obviously continued great progress there, solid progress and your comments around gaining share from both domestic and international competitors, I think is pretty important. Obviously still concern or question that we receive a lot around import competition.

I was hoping if you could delve a little bit deeper into where you feel you're gaining share from domestic competitors, in which channels and perhaps new products as well as what you're seeing on the import market since the Chinese imports have diminished. Where does that stand right now in terms of a percent of the market and you're saying that you're much more competitive with the remaining set of importers as you talked about non-subsidized with higher cost structures?

Nicholas Fink -- Chief Executive Officer

Sure. I'd be happy to talk about that. So at a high level, to answer your first question, I mean the share gains really are across the board and you'll see that come through with 11% sales in the quarter and still building backlog in certain elements of the portfolio. And so you look on the one side of that value cabinetry that performed really well across all channels and continue to double-digit growth rate that we've seen for a while.

But then as we said in the prepared remarks, make-to-order really saw a recovery in the quarter and then actually returned to growth. And I'll tell you its coming into the fourth quarter with some backlog built there as well and is performing -- that part of the business is performing very, very well from a margin perspective with excellent capacity utilization. So we look at that and go well, we're pretty confident that the share gain is across.

Now why. Well, if you go back, I mean, we've talked a long time about the pivot plan. The pivot plan is reaching its inflection point. I mean it is now delivering for us and part of the pivot plan was not just rebalancing of capacity. It really was to launch a suite of products at the heart of the market, right. And so the antidumping case is ongoing, we weren't sort of sitting on laurels going, well if this happens volume will flow back to us. We were really launching products at that sweet spot in the marketplace where we had to win whether that case was successful or not, right.

And as we've done that we've really found that a lot of volumes fall back to us and that whether it'd be in big box retail or through our 4,500 dealer network, they really are kind of looking to us for price, quality, value and service, right and it's all of those things. And as we've progressed here through the year, we have seen increased imports from places like Vietnam and Malaysia. Those levels are still materially below where they were in 2018.

But more important than that, those products are coming in at higher price points with longer lead times and without a full assortment. So it's a different competitive picture and whether that's because they're actually produced in those countries or whether because people are cheating and shipping stuff around and cross stocking it, it's adding enough cost and complexity to that market to put us in a much, much better position.

And as we've always said our supply chain, which has the low-cost country kind of componentry supply plus our manufacturing mix with or comes together in the U.S. and then is in the network through our distributed assembly, we always felt that that was a very competitive footprint that would be successful against any kind of low-cost country set up and we're seeing that come through.

And even as those imports have increased, I think they will high price enough with long enough lead times in spite the[Phonetic] that we continue to see share gains whether that's coming through big box or in our dealer network. And you asked about new products I mean, you've heard us talk about Mantra. We launched that last year in the Northeast really to get at this part of the market is hugely successful now rolling out into other parts of the country.

Our dealers are asking for it but beyond that, there is an entire suite of products whether it's through our Aok brand, whether it's through our Homecrest brand that are really geared at this part of the market where we're getting a lot of reception as well as innovation that we're driving into our retail partners that is creating really along the market.

So that's an entire portfolio of products. It's backed by I think, a much more efficient network within the cabinets business. And so it's giving us a lot more network flexibility to move things around and I'd just say overall we're really, really happy with the performance both on the top line and particularly, with that margin accretion coming through. Notwithstanding the fact that there still were inefficiencies in Q3 that we think we're going to get beyond as we move into Q4 and into 2021.

Michael Rehaut -- J.P. Morgan -- Analyst

That's great. Thank you, Nick for that rundown. It's very helpful. I guess secondly, just to switch to plumbing. Obviously another -- very strong top line results. The margins continue to be plus-20 but a little bit down sequentially, still kind of on track as you alluded to around a 22% full year margin goal but you talked about a little bit about some one-time costs impacting the third quarter. I was hoping maybe you could give a little bit more kind of numbers around that. What was the rough impact and -- but also bigger picture, should we expect this 22% to persist and you just have this continued strong reinvestment into growth?

Nicholas Fink -- Chief Executive Officer

Sure. Why don't I take it off. I'll give you some perspective and then I'm going to hand it to Pat and he can give you some more particulars around the numbers. But I would start -- obviously, really pleased with the top line -- continued top line performance and not just a blip but I mean this business is now into its fourth year of this time in a market-beating performance. And we saw it continue to gain share and a credit to Cheri Phyfer and her team, I mean working so hard to satisfy our customers and to meet the demand.

And it will be a while before we've kind of fully rebuilt customer inventories. And so a lot of that in the backdrop. Now, notwithstanding that when we have a business that can perform at this kind of level as consistently as it has and we have seen the strength come through really even in the latter part of Q2 into Q3 and what we see ahead of us, we're going to take the opportunity to invest and drive the business and so that is the starting point. Now there are also some inefficiencies we can touch and in fact, give you a little more color on but we saw an opportunity to accelerate investment in this business because we want to continue to drive that top line growth and we did. Material increases in investment in sales and marketing, investments in capabilities particularly on e-commerce, some supply chain capabilities, some things that you see us do around the innovation and we expect those to deliver.

And to be able to make the step-up in investment that we did and still deliver a 22% margin for the year is something we're really pleased with. And so that's where I'd really focus as kind of the landing point for the year and the direction of the business is I think, going forward while we are really investing heavily to continue to drive that top line and just before everything settles I think we're also seeing pretty big returns on those investments.

I mean Moen for long time has been the number 1 brand in the market in terms of awareness, purchase intent and loyalty. I mean we've even now seen a step change higher in our data on the brand's performance particularly as we drove to refresh to really focus it on the key millennial consumer. And so we are really pleased with those investments and it gives us confidence to lean in further. Pat?

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Yeah. Hey, Mike, I can speak a little bit of the numbers but I'll come back to the key point is, we feel confident. We're positioned to deliver 22% this year and that's after delivering 21.5% last year and we do think the business is positioned to drive above that 21% percent we've been talking about for a while. So I think you should expect that the margin in this business to remain strong, healthy and consistent.

The variance to 22% in the quarter was roughly $7 million. So that's the delta between 22% and 20.8%. If we look at one-time item, things like air freight that we're absorbing to support our channel partners or things we're doing to recognize our associates during this COVID period, that alone there was more than the $7 million. And then if you add incremental increase in brand investment during the quarter, you're more than 2x that $7 million. The cost structure very much impact in absorbing some one-time items in this quarter and some increased brand investment but very much positioned to deliver 22% to have that kind of cost structure in place or our profit structure in place, going forward.

I think the other thing I'd say is, if you pan out a bit and you look at quarterly performance from the beginning of 2018 all the way through the third quarter this year, 11 quarters in a row and you look at that performance, we basically have been performing every single -- between 20% and 25% operating margin in every single quarter for over 11 quarters.

So when you look at the consistency or the performance of this business, it's absolutely breathtaking because over that 11 quarters, we've had multiple tariff waves, we've had order shut down between the U.S. and Canada, and Mexico and we've got global pandemic. So I think the team has done just an exceptional job of not just driving industry-leading margins but delivering it with unbelievable consistency in the face of really, really astounding macroeconomic challenges over the last almost three, fours years.

Michael Rehaut -- J.P. Morgan -- Analyst

Great. Thanks so much. Good luck for the rest of the year.

Nicholas Fink -- Chief Executive Officer

Thank you.

Operator

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

Philip Ng -- Jefferies Group -- Analyst

Hey. Good afternoon, everyone. Congrats on a very strong quarter. Top line was really, really robust. So my question is, just from a capacity standpoint as well as inventory, if we see continued momentum and let's say a spike in 2021, how are you guys set up from a capacity standpoint? I think the areas that I am a little more concerned about would be decking and maybe even cabinets but any color there would be helpful.

Nicholas Fink -- Chief Executive Officer

Phil, you're asking specifically -- you said spikes are going to continue, COVID spikes or just capacity generally?

Philip Ng -- Jefferies Group -- Analyst

Just spike in demand, if we see really strong continued momentum in demand, do you have enough capacity to kind of meet that and then from an inventory standpoint are you well set up because I heard -- if I heard you correctly 40% growth in decking sounds pretty impressive. And obviously you've done some restructuring on the cabinets. So I just want to make sure you guys have enough supply to kind of meet that demand if that continues?

Nicholas Fink -- Chief Executive Officer

Yeah. It depends specifically where you look. I mean, as Pat said in his remarks, I mean in decking capacity really stretched in the third quarter but more capacity coming online here in the fourth quarter. And so what I'd tell you is, we certainly have the capacity to hit the guidance that we just gave and we're working very hard to add capacity and supply chain flexibility, right.

It doesn't just has to be sort of big capex investments, it's a lot of supply chain flexibility and making our network more agile as we go through here into 2021. And I think that with the work that our team has been doing and I'll tell you our supply chain team has been nothing short of heroic this year in both managing COVID, keeping people safe and building in capacity, I'm pretty confident that we will have the capacity to manage what comes at us in 2021.

Philip Ng -- Jefferies Group -- Analyst

Okay, great. And in plumbing, really strong growth. You called out the retail channel, China and I think e-com in particular, are you starting to see momentum rebuild in the trade channel as well the builder side of things? And have you seen any restocking as of 3Q and maybe potentially in the fourth quarter as well? Thanks a lot.

Nicholas Fink -- Chief Executive Officer

Yeah. So, obviously as I mentioned, very strong growth in those three areas, U.S. retail, e-commerce and China. The wholesale channel and a lot of that builder business goes through -- all of that builder business goes through the wholesale channel really did start to pick up and so we saw it come back and then accelerate as we went into the quarter. Not quite at the pace of retail or e-commerce but what was really encouraging was as wholesale opened up and these builders really sort of got to work, we didn't see much let up in the retail channel at all or in e-commerce.

One of the questions we had for ourselves in kind of Q2 as channels reopened up or is it you're just going to see a lot of channel step back and forth and then we saw a really sustained amount of performance in retail, which was really encouraging. As the wholesale and trade channels opened back up, we were able to meet demand and I probably saw a little bit of the inventory hole that had been created but I think by no means was there a big inventory build in the quarter.

To be honest, just from a customer service perspective, we'd like to be able to help our customers pull back. But I think as I said on the last call, it's probably going to be a few quarters and I think all the way through Q1 if not into Q2 of next year to really build back inventories that were pretty severely depleted. And so -- and I think it's going to happen at a pretty steady pace versus a spike and so we work hard to really track to point of sale growth and we've been satisfied with our ability to do that and keep people tracking to the point of sale and then rebuild that inventory slowly over time as our supply chain permits.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Yeah, so....

Philip Ng -- Jefferies Group -- Analyst

Got it. Thanks.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Wholesale was probably mid-single digit POS to give you a kind of a feel for kind of, where they were running from POS in all North America shipments like all brands, all channels were approaching the team. So the health was across the business just being led by retail and China.

Philip Ng -- Jefferies Group -- Analyst

Got you. Yeah, that's really encouraging, you still have that opportunity on the retail and the builder side coming back and some restocking optionality. Got it.

Nicholas Fink -- Chief Executive Officer

We are seeing...

Philip Ng -- Jefferies Group -- Analyst

Thanks a lot.

Nicholas Fink -- Chief Executive Officer

Much more confident. We really are seeing a very strong wave of both home building and renovation because I mean, you've seen the stuff from the homebuilders and you are going to see that pull through the wholesale channel but you're still seeing consumers and products come into the wholesale channel and other channels and they're doing projects at a level we haven't seen in a long time.

Operator

Your next question comes from the line of Ken Zener from KeyBanc. Your line is open.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Afternoon, gentlemen.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Hey.

Nicholas Fink -- Chief Executive Officer

Hey, how are you?

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Good. I would like you to perhaps because you have obviously DIY product, let's say plumbing at Home Depot but you also have the higher ticket project costs that require labor and comfort with COVID to have things installed like cabinets. Can you talk about if the nation started shutting down in March, it's now October, we have seven months, can you talk to your experience here about how that cabinet demand and the dealers being opened is reflecting customers and contractors ability to actually deliver the product into the customer's house because it seems like there is a large tailwind building up not only on the inventory that you talked about in plumbing, but really just about these deferred projects and cabinets is not a better category to assess that. So can you talk to the comfort of customers as opposed to the macro trends that drive demand like home appreciation?

Nicholas Fink -- Chief Executive Officer

Yeah, sure. I'll give you a couple of perspectives on that because then It's actually a fascinating question as you tear the data apart. I'll tell you perhaps a kind of maybe -- the exception of maybe a week or two in March and I'm not even sure there was that much, we really didn't see cabinet sales let up in open channels.

And so if you go back to kind of March, April and the first wave and what happened, we had dealer channel shutdown, we had a lot of designers shutdown even within retail. And so you weren't getting orders through kind of make-to-order part of the business and as you suggest they're probably building quite a bit of backlog. But we were seeing our in-stock cabinetry really fly off the shelves.

And so that told us that notwithstanding a shutdown to shelter at home, there is some -- either some very advanced DIYers out there or a lot of consumers that were figuring out how to get contractors into their home safely. And what we heard back through the channel is that they were figuring it out. They were, OK, you go work over there and -- by the way the trades have to be comfortable too and the trades are saying, look I'm going to be in the kitchen for the next seven hours, don't come in here. This kind of part of your house is now off limits while I work.

And so we really saw some continued strength, which suggests to us that people were comfortable with products and I think way more comfortable than a lot of people may have expected fairly early on in and they figured out how to make it work. That however did not change the fact that a lot of designers were shut down and a lot of dealers were shut down, and as those started to open up we saw that business kind of flow back into dealers and we saw it flow back into the retailers in their make-to-order desks as they brought their designers back.

And I'd agree with your sentiment there that a lot of those projects that require designers probably had an air pocket in Q2 where they just didn't get done and are probably backlogged as people now have to sort of not just coming to get the design work done, get them manufactured and through the whole supply chain but then they actually have to get people to be able to come in and solve it. Pat any other perspectives on that?

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

No, I would say -- I mean, I'd say in the case of cabinets that you picked up that it was a twofold complexity because you have to sit down with the designer that's almost in closer proximity than a contractor. And so the cabinets business had to work through both of that, but we can really see the acceleration now and the interest in make-to-order, especially as you've seen two months of really, really strong existing home data -- existing home sales data. So to your point that existing home sales data stayed strong in purchases that's a great tailwind for the cabinet business.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Great. And just the next question for Fiberon given your basically selling out, obviously a lot of the large competitors are adding capacity. How are you balancing this secular growth with execution risk? Thank you.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Yeah, I mean and we've been saying for the last couple of years as we were and still are working to get that business to $300 million by 2022 or sooner, which has been the game plan we've be talking to for the better part of the last two or so years since we acquired Fiberon. We already had a capex plan in place that was pretty significant. We've talked about $35 million to $45 million a year of capex as early as 18-plus months ago. We're probably accelerating that considerably being at the $50 million plus a year.

So I think it's marginal acceleration from an aggressive plan we already had to support the businesses growth but you're seeing this year the business outperform its annual plan and do so in the face of a pandemic that was quite disruptive to absenteeism in plants and so forth. So it's always non-trivial to grow a business at that pace, especially when you have to layer in the capex to do so. But I think this year demonstrates the team's ability to do so and do so facing quite a jolt from a pandemic.

Nicholas Fink -- Chief Executive Officer

And I'd just add that we've talked a lot about the synergies that we've unlocked from the shared route to market between doors and decking and the power of putting those two things together and we've talked less about the synergies that we've unlocked by putting that operations team together. And at door -- the doors team absolutely best in class, the decking team is phenomenal at what they're doing and I think that's proving out in the marketplace by bringing those two teams together and having them work together that we've been able to unlock additional capacity out of what we had in addition to the capital that we're putting in to add kind of more extrusion capacity to the business.

And so it's operating at an even more efficient level while we add more to it, and so we're feeling pretty good about our ability to execute and the kind of the sweet spot of the market on which this business was built, which is that sort of entry level composite deck board is what Fiberon's really been built on. And so it's something that we do very, very well and we've done for a long time, and we've been able to continue to supply the market with what I'd say are industry-leading lead times even throughout this pretty disruptive few months.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Thank you.

Operator

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

Stephen S. Kim -- Evercore ISI -- Analyst

Yeah, thanks very much, guys. Appreciate it. Just one quick question here on the commodities. I think last quarter you suggested the commodity headwind might be in the neighborhood of $25 million to $30 million. Was curious if you could give us an update on that. And then in answer to, I think Mike's question about investments, I thought I heard you mention air freight employee recognition, that you threw out $7 million and $15 million. Together that would be about 370 basis points in the margin. So I was just wondering if you could just clarify that? I thought maybe I took it out of context or something.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Yes, Stephen. For inflation in total, we're still consistent -- our full year outlook is still consistent with where we were for the last call, which is we have about 1 percentage point of full year inflation, which is still in that zip code of 30-ish million dollars that you referenced. I'd say this year it's turning out to be predominantly driven by tariffs annualizing and logistics costs. I'd say there's select puts and takes inside of commodities separate from tariffs that are relatively neutral.

Obviously, anybody watching copper and zinc off late will see it's up about 10%, 11% over prior year at this time. But that cost will rear its head more next year than in the present income statement but we'll be able to handle that with a combination of cost and price actions like we always do. So I would say, this year we're managing that level of inflation including some of the recent logistics inflation very handily with a mix of supply chain and pricing actions as we typically do.

In terms of cabinets margin -- our plumbing margins as you were referring. Yeah, I was -- we always know whenever we're one millimeter below 21% there is lots of interrogation on the plumbing margin. And so what we're trying to do is simply say if you do the simple math on a 590-ish million dollars sales quarter, the variance the 22% was about $7 million of expense and we had more than $7 million of expense for things like air freight and things we're doing to keep our employees safe and recognized. And then we did have, as we will, for the year have investments increase in brand investment. You put those two things together, it's over $14 million. So yeah, you're talking over 200 basis points. I don't know that I'd get quite to the 300 basis points, but...

Stephen S. Kim -- Evercore ISI -- Analyst

Yeah.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Within that.

Stephen S. Kim -- Evercore ISI -- Analyst

Okay, got it. Yeah, I just wanted to clarify that. Appreciate it. And then you mentioned in Doors & Security, the Security segment had a back-to-school effect, which obviously makes sense. I was curious if you could quantify that in any way in terms of the sales impact and, or the profitability impact.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

So it's many moving parts. What I would say we're not going to because then we start breaking stuff like that up, we end up having to do it in perpetuity. As the business we would expect that business to grow mid-single digit full year basis and in most quarters and it grew in that mid-single digit range in the quarter and that was with back-to-school being less than half of its normal self and the commercial business, which is safety and security in sight of mostly factories being negative. So the rest of that came from retail growth that was not back to school growth.

Philip Ng -- Jefferies Group -- Analyst

Got it. Okay, well that's impressive. Thanks a lot guys. Appreciate it.

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

Your next question comes from the line of Adam Baumgarten from Credit Suisse. Your line is open.

Adam Baumgarten -- Credit Suisse -- Analyst

Hey, guys, thanks for taking my questions. Just curious if lower promotional activity played a role in the margin performance in cabinets this quarter?

Nicholas Fink -- Chief Executive Officer

I don't -- there was -- I don't think it was an overly promoted quarter particularly given a, safety concerns are not driving people into some stores and then b, the fact that the top line has been so strong I think the channel probably feels less need to promote. But that the driver has really been all the work that we put into the pivot plan around getting the portfolio centered at the right point of the market and getting our benefit of scale across the entire portfolio, commonization of the chassis and the ability to then kind of shift volumes around.

And so we saw a lot of that come through, which really excited by -- it's by no means done. There is a lot of opportunity ahead of us and David and his team have gotten out of that's had an accelerated pace. But what we're really feeling is the benefit of all that work over the last couple of years really starting to delivering and bear fruit now but identifying more yet to go.

It's not inconsistent with some of the work that we're doing across the entire portfolio now. If you look at how we've taken approach on, I'd say a leaner and more choiceful operating model at the core and then rolling out some core capabilities across the entire portfolio to drive things like global supply chain management, category management, business simplification. Those are being applied cabinets but they're actually being applied across the entire portfolio.

And as we do that we'll continue to free up incremental margin, some of which will be reinvested to take share and drive top line consistent with our strategy and some of which will be delivered to the bottom line. But it's a -- it's really paying dividends at cabinets but it's a consistent approach across the entire portfolio.

Adam Baumgarten -- Credit Suisse -- Analyst

Got it. That's helpful and then just on the acquisition pipeline, maybe what that looks like? Your appetite to do deals going forward, if you're focused in any specific part of the portfolio that would be helpful.

Nicholas Fink -- Chief Executive Officer

Sure. Was that mentioned, the strong cash flow and the health of the balance sheet for one, put us in a position to really manage the business prudently and weather the storm as we've come through it, but the cash generation and free cash flow also those create the opportunity to accelerate shareholder value.

Now our priorities have not shifted and we will continue to focus on capex and investment within our own business. Those tend to drive the highest returns and next, we'll look at accretive M&A. And third, we will return cash to shareholders. What I will tell you never kind of predict on a single thing but we do look at the pipeline and sort of judge the activity and it was dead in Q2.

We have seen the pipeline heat up quite a bit as we've come toward the end of the year here and what's interesting about it is, it really does give you some insight into how businesses perform in a variety of circumstances. We kind of hold it against our own portfolio, I mean our portfolio has performed well. I think we're demonstrating that now that the portfolio in this management team can deliver in markets where a lot of volumes coming at us, and we can deliver in markets that are more anemic.

And as we look at the M&A pipeline we're now able to see how companies have performed through some pretty challenging quarters. So it is heating up. I want to predict whether we get something or not, we will be disciplined about it and we have to do it on the right terms and as to whether there is a particular area, we will look across the portfolio and in addition to having get a business to fair value, the other standard we hold ourselves to it is we have to be able to create value with it. It's not enough just to get it.

And so we look across the portfolio and say, where do we think we can leverage either our brands, our routes to market or these common core capabilities to drive value and I think the most recent one is Fiberon and that's a great example of having taken something that was actually somewhat adjacent to what we were doing but it has shared route to market and by bringing it in, sharing that route to market, sharing some ops capability and other core capabilities we've been able to create a lot of value to shareholders, and we'll continue to look for other opportunities like that.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Brian Lantz -- Senior Vice President, Communications and Corporate Administration

Nicholas Fink -- Chief Executive Officer

Patrick Hallinan -- Senior Vice President and Chief Financial Officer

Michael Rehaut -- J.P. Morgan -- Analyst

Philip Ng -- Jefferies Group -- Analyst

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Stephen S. Kim -- Evercore ISI -- Analyst

Adam Baumgarten -- Credit Suisse -- Analyst

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