Earnings Call Transcript - FBIN Q3 2020

Operator, Operator

Good evening. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to Fortune Brands Third Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. 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 of 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 the market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC, such as our annual report on 10-K and our most recent 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.

Nick Fink, CEO

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 an accelerating market while still managing a pandemic environment and prioritizing our employee 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 in the 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 who are not only caring for each other but who are 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 delivering progress against our planned efficiency roadmap for the year. Our efficiency initiative is to create fuel for increased investment as we continue to improve the overall margin profile of Fortune Brands. We're ahead of our expectations on these efforts, 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, low 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 that as other channels open further in the third quarter, demand for our products continues to increase. In fact, we continue to see strong retail POS even as wholesale and builder activity bounced back from the second quarter shutdowns. Key consumer trends have been expedited by the pandemic, which appears to have accelerated the movement of the key millennial generation toward household formation, suburbanization and investment in the home. These trends, which were already in place prior to the pandemic should drive new construction and repair and remodel demand, especially at the entry price point part of the market where there is a short supply of available homes for purchase. 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 existing housing sales accelerating and 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 inventory is low. 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 2 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 of very favorable demographics, low inventory and aged housing stock, we see a very positive multiyear 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 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 in the recent quarter. As I mentioned, total company sales increased 13% over the 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 are being 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 our most critical priorities as we position the business for 2021 and beyond. Last quarter, I mentioned across Fortune Brands' initiatives that we are 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 on 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 airfreight and employee recognition to meet the increasing needs of our customers. Even with the incremental investments and 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 #1 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 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 through 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 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. The sales in Doors experienced strong growth as retail remained robust and homebuilders 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're continuing 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 2 years of aggressive repositioning, this business is now squarely centered on the heart of the market and has proven it can be defensible when the macro 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 continuing to drive strong growth, while we saw improving trends in our make-to-order business. Operating margin expanded to 12.2%, an increase 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. It 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, they are well below 2018 highs and, more importantly, are at a higher cost with longer lead times than the directly subsidized Chinese cabinetry that was in the market prior to the anti-dumping case. Our low-cost countries' supply chain is equipped to compete in this environment, and we are winning share on a more even playing field. We are well on our journey to drive this business towards a 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 are being rewarded with incremental business from our 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. This includes adding 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 products market, driven by the 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, bolstered by increased consumer interest 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 remain focused on 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?

Pat Hallinan, CFO

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 remain, 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 continue 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 board 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 challenge 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 its strong execution. The team delivered continued cost structure improvement and leveraged volume effectively. More opportunities lie ahead, and we look forward to 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 nonsubsidized 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 1.7x. We now have $1.35 billion of total liquidity available between our $1.25 billion revolver and supplemental $400 million 1-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 will 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 of Communications and Corporate Administration

Thanks, Pat. That concludes our prepared remarks on the third quarter. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Operator, Operator

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

Michael Rehaut, Analyst

Congrats on the results, and hope everyone is safe and healthy. 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 questions 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 and 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 nonsubsidized with higher cost structures?

Nick Fink, CEO

Sure. I'm glad to discuss that. At a high level, regarding your first question, the gains in market share are widespread. This is reflected in our 11% sales growth in the quarter and the ongoing backlog in certain segments of our portfolio. For instance, our value cabinetry performed exceptionally well across all channels, maintaining a double-digit growth rate. Additionally, we observed a recovery in make-to-order, which has returned to growth and is entering the fourth quarter with a healthy backlog. This segment of our business is also achieving strong margins and excellent capacity utilization. We feel confident that our market share gains are comprehensive. The reasons for this progress stem from our pivot plan, which has reached a critical turning point and is now yielding results. The pivot plan involved not just reorganizing our capacity, but also launching a range of products that cater to the core market. While the antidumping case was ongoing, we did not pause our efforts, and instead focused on creating products that would succeed regardless of the case outcome. This strategy has led to significant volumes returning to us, with both big box retailers and our 4,500 dealer network looking to us for competitive pricing, quality, value, and service. Over the past year, we have seen increased imports from countries like Vietnam and Malaysia, though these levels remain significantly lower than in 2018. More importantly, these imports are arriving at higher price points and with longer lead times, lacking a full product range. This has altered the competitive landscape in our favor. Regardless of whether these countries are producing legitimately or engaging in deceiving practices, the added costs and complexity have strengthened our position. Our supply chain, which integrates low-cost foreign components with our own U.S. manufacturing, coupled with our distributed assembly network, has proven to be a competitive advantage. Even with the rise in imports, their high prices and extended lead times have allowed us to continue gaining market share through both big box outlets and our dealer network. Regarding new products, we've previously discussed our successful launch of the Mantra brand in the Northeast last year, and we're now expanding it to other regions due to dealer demand. Additionally, we offer a full suite of products under our AOK and Home Crest brands, which are well-received in the market. Overall, we are very pleased with our performance in terms of sales and particularly with the margin growth, despite some ongoing inefficiencies in Q3 that we expect to overcome as we transition into Q4 and 2021.

Michael Rehaut, Analyst

That's great. Thank you, Nick, for that rundown. It's very helpful. Secondly, let's talk about Plumbing. There was another very strong top line result. The margins remain above 20%, although there was a slight decline sequentially. We're still on track for the 22% full year margin goal, as you mentioned. However, you brought up some one-time costs affecting the third quarter. Could you provide more details on that? What was the estimated impact? Also, looking at the bigger picture, should we anticipate that the 22% margin will continue, considering the ongoing strong reinvestment in growth?

Nick Fink, CEO

Sure, I'll start by providing some perspective before handing it over to Pat for more details on the numbers. I want to express how pleased we are with the ongoing top line performance, which has not only been strong in the blood products, but this business is now in its fourth year of outperforming the market. We've continued to gain market share, thanks to Sherry Pfeiffer and her team's hard work to meet customer demand. It will take some time to fully rebuild our customer inventories, which is part of the bigger picture. Despite that, with our business consistently performing at this level and showing strength even towards the end of Q2 and into Q3, we see an opportunity to invest further to drive growth. We've made significant increases in our investments in sales and marketing, enhanced capabilities, especially in e-commerce and supply chain, as well as innovations that we expect will yield results. Achieving a 22% margin for the year while increasing our investments is something we are very pleased about. This is the key focus for the year and the direction we are heading, as we heavily invest to continue this top line growth. Additionally, we are witnessing strong returns on these investments. Moen has long been the leading brand in awareness, purchase intent, and loyalty, and we have seen a notable improvement in our brand performance data, especially as we targeted the millennial consumer with recent changes. We are excited about these investments and confident in our strategy moving forward. Pat?

Pat Hallinan, CFO

Yes. Yes, Mike, I think, speak a little bit to 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. We do think the business is positioned to drive above it 21% we've been talking about for a while. So I think you should expect that the margin in this business remains 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 you look at one-time items, things like airfreight 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 increases in brand investment during the quarter, you're more than 2x of that $7 million. The cost structure is very much intact and 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 a 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've basically been performing every single quarter between 20% and 25% operating margin in every single quarter for those 11 quarters. So when you look at the consistency of the performance of this business, it's absolutely breathtaking because over that 11 quarters, we've had multiple tariff waves, we've had order shutdown between the U.S. and Canada and Mexico and we've had a global pandemic. So I think this 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 3, 4 years.

Operator, Operator

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

Phil Ng, Analyst

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

Nick Fink, CEO

So you're asking specifically about continued COVID spikes or just capacity in general?

Phil Ng, Analyst

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

Nick Fink, CEO

Yes. It depends, particularly, where you look. I mean, as Pat said in his remarks, 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 have to be sort of big CapEx investments. It's a lot of supply chain flexibility and making our network more agile as we go 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.

Phil Ng, Analyst

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

Nick Fink, CEO

Yes. As I mentioned, we are experiencing strong growth in three areas: U.S. retail, e-commerce, and China. The wholesale channel, which includes a significant portion of our builder business, has begun to pick up. We saw a return and acceleration as we progressed through the quarter, although not at the same pace as retail or e-commerce. What was encouraging was that as wholesale reopened and builders got back to work, there was minimal decline in the retail and e-commerce channels. In Q2, we wondered if the opening of channels would lead to a shift back and forth, but we observed consistent performance in retail, which was promising. With the reopening of wholesale and trade channels, we were able to meet demand and likely addressed some of the inventory shortages that had developed. However, there wasn't a significant inventory build during the quarter. From a customer service standpoint, we want to assist our customers in restocking, but as I mentioned in the last call, it may take a few quarters, extending through Q1 or possibly into Q2 of next year, to fully restore inventories that were greatly reduced. I believe this will happen at a steady pace rather than through a sudden spike in sales. We are committed to tracking point-of-sale growth and are pleased with our progress in managing this, allowing us to gradually rebuild inventory as our supply chain allows.

Patrick Hallinan, CFO

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

Phil Ng, Analyst

Okay. Yes, that's really encouraging. You still have that opportunity on retail and the builder side coming back and some restocking optionality en route.

Nick Fink, CEO

There is much more confidence as we are witnessing a strong surge in both homebuilding and renovation. The homebuilders are making noticeable progress, which will translate into the wholesale channel. Consumers and professionals are increasingly engaging with both wholesale and other channels, taking on projects at a level we haven't experienced in a long time.

Kenneth Zener, Analyst

I would like you to discuss the DIY products, such as plumbing at Home Depot, as well as the larger projects that require labor and comfort with COVID for installation, like cabinets. Can you share your experiences regarding cabinet demand and how the openness of dealers is affecting customers and contractors' ability to deliver products to homes, especially since the nation began shutting down in March and it's now October? It seems there is a significant tailwind not only with inventory but also in plumbing. This is particularly relevant for deferred projects, and cabinets might be the best category to evaluate this. Can you speak to customer comfort levels as opposed to the broader macro trends like home appreciation that drive demand?

Nick Fink, CEO

Sure, I'll provide some insights on that topic. It's quite interesting when we analyze the data. Aside from possibly a week or two in March, we didn’t notice a decline in cabinet sales through open channels. If we look back to March and April, during the initial wave of disruptions, there were shutdowns for dealer channels, and many designers within retail also paused operations. This meant that there were fewer orders coming through the make-to-order segment. As you suggested, it likely led to a significant backlog, but our in-stock cabinetry was selling very well. This indicated to us that in spite of shutdowns and shelter-in-place measures, there were either skilled DIY enthusiasts or many consumers managing to bring contractors safely into their homes. Feedback from the channel indicated that they were adapting, arranging for workers to operate in separate spaces, while also ensuring the contractors felt secure with measures like keeping areas off-limits for their work duration. We continued to witness strong demand, suggesting that people were more at ease working with professionals than many anticipated early on and found ways to make it work. That said, the reality remained that many designers and dealers were still shut down. Once things began to reopen, we observed a resurgence in business directed towards dealers and retailers as they reinstated their designers. I share your view that many projects needing designers probably experienced a delay in Q2 and are now in backlog, as people need to not only complete the design but also navigate through manufacturing and the entire supply chain, followed by arranging for installation.

Patrick Hallinan, CFO

I would say that in the case of cabinets, there was a twofold complexity because you have to work closely with the designer, which is almost more immediate than with a contractor. The cabinet business had to navigate both aspects. However, we are now seeing a significant increase in interest in make-to-order, particularly with two months of very strong existing home sales data. If the existing home sales data continues to remain strong, that will be a great advantage for the cabinet business.

Kenneth Zener, Analyst

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

Patrick Hallinan, CFO

Yes, we have been aiming to grow that business to $300 million by 2022 or sooner, a plan we've discussed for over two years since acquiring Fiberon. We initially set a significant CapEx plan of about $35 million to $45 million annually, but we are likely increasing that to over $50 million per year. This reflects an acceleration of our already aggressive strategy to support growth. This year, the business exceeded its annual targets despite facing challenges from the pandemic, which caused absenteeism in our plants. Growing a business at this pace is always challenging, especially when factoring in the necessary capital expenditures. However, this year demonstrates the team's capability to navigate such obstacles while still achieving growth amidst the pandemic.

Nick Fink, CEO

And I'd just add that we 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 2 things together. And we've talked less about the synergies that we've unlocked by putting that operations team together. And the Doors team absolutely is best-in-class of the decking team are phenomenal at what they do, and I think that's proving out in the marketplace. By bringing those 2 teams together and having them work together, 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 in which this business was built, which is that sort of entry-level composite board is what Fiberon has 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, our industry-leading lead times even throughout this pretty disruptive few months.

Operator, Operator

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

Stephen Kim, Analyst

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. I was curious if you could give us an update on that. And then in an answer to, I think, Mike's question about investments, I thought I heard you mention airfreight employee recognition that you threw out $7 million and $15 million together, that would be about 370 basis points on 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, CFO

Yes, Stephen. Regarding overall inflation, we remain aligned with our previous outlook from the last call, projecting about 1 percentage point of inflation for the full year, which aligns with the approximately $30 million you mentioned. This year, the inflation is primarily influenced by the annualization of tariffs and logistics costs. There are some minor ups and downs within commodities, excluding tariffs, that balance out. Anyone monitoring copper and zinc recently will notice increases of around 10% to 11% compared to this time last year. However, these costs will be more impactful next year rather than in our current income statement, but we are prepared to manage this through a combination of cost adjustments and pricing strategies, as we typically do. This year, we are successfully managing the level of inflation, including some recent logistics inflation, with a blend of supply chain and pricing strategies as we've always done. Regarding our Plumbing margins, we are aware that whenever we dip just below 21%, there is intense scrutiny on the Plumbing margin. To clarify, looking at sales of around $590 million for the quarter, the difference to the 22% margin was approximately $7 million in expenses. We incurred over $7 million in costs related to airfreight and other measures to support our channel partners. Additionally, we have made brand investment increases during the quarter, which adds up to over $14 million combined. So, yes, we are discussing over 200 basis points. While I wouldn’t quite reach 300 basis points, we are definitely within that range.

Operator, Operator

Your next question comes from the line of Adam Baumgarten from Crédit Suisse.

Adam Baumgarten, Analyst

I'm just curious if lower promotional activity played a role in the margin performance in Cabinets this quarter?

Nick Fink, CEO

I don't believe it was an overly promoted quarter, especially considering that safety concerns are not luring many people into stores, yet the top line has been quite strong. The channel seems to have felt less pressure to promote. The real driver has been the efforts we've made with the pivot plan to align our portfolio with the market, leverage our scale across it, standardize our chassis, and improve our ability to shift volumes. We have seen significant results from that, and we are excited about it. However, there is still much work to be done and many opportunities ahead. Dedani and his team have been working at a fast pace. We are starting to see the benefits of our efforts from the past couple of years, but there is still more to achieve. This is consistent with the work happening across our entire portfolio. We have adopted a leaner and more selective operating model at the core, rolling out essential capabilities across the portfolio to enhance global supply chain management, category management, and business simplification. These strategies apply not only to Cabinets but to the entire portfolio. As we implement them, we'll continue to unlock incremental margin, some of which will be reinvested to gain market share and boost the top line in alignment with our strategy, while the rest will contribute to the bottom line. The approach is yielding positive results for Cabinets and is consistent across the whole portfolio.

Adam Baumgarten, 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.

Nick Fink, CEO

Sure. As Pat mentioned, the sound 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 gone through it. But the cash generation and free cash flow also does create the opportunity to accelerate shareholder value. Now our priorities have not shifted. And we'll 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 is, never predict that on a single thing that, but we do look at the pipeline and sort of judge the activity. It was dead in Q2. We have seen the pipeline heat up quite a bit as we come towards 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 and 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 won't predict whether we get something or not, we'll be disciplined about it, and we have to do it on the right terms as to whether there's a particular area we will look across the portfolio. And in addition to having to get a business at fair value, the other standard we hold ourselves to 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 is shared route to market and by bringing it in, sharing that route to market, sharing some ops capability and our 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

We have reached our allotted time for questions. Thank you for joining today's conference call. You may now disconnect.