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S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Chicago 'mansion' tax to fund homeless services stuck in legal limbo while on the ballot
Sports analytics may be outnumbered when it comes to artificial intelligence
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Nobel laureate Muhammad Yunus is granted bail in a Bangladesh graft case
South Korean doctors hold massive anti-government rally over medical school recruitment plan
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
What to watch for as China's major political meeting of the year gets underway
Former Bank of Beijing chairman under investigation, part of China's crackdown on corruption
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Chicago 'mansion' tax to fund homeless services stuck in legal limbo while on the ballot
Sports analytics may be outnumbered when it comes to artificial intelligence
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Nobel laureate Muhammad Yunus is granted bail in a Bangladesh graft case
South Korean doctors hold massive anti-government rally over medical school recruitment plan
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
What to watch for as China's major political meeting of the year gets underway
Former Bank of Beijing chairman under investigation, part of China's crackdown on corruption
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Chicago 'mansion' tax to fund homeless services stuck in legal limbo while on the ballot
Sports analytics may be outnumbered when it comes to artificial intelligence
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Nobel laureate Muhammad Yunus is granted bail in a Bangladesh graft case
South Korean doctors hold massive anti-government rally over medical school recruitment plan
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
What to watch for as China's major political meeting of the year gets underway
Former Bank of Beijing chairman under investigation, part of China's crackdown on corruption

Fortune Brands Home & Security Q4 2021 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • David Barry
    Senior Vice President Finance and Investor Relations
  • Nicholas Fink
    Chief Executive Officer
  • Patrick Hallinan
    Senior Vice President & Chief Financial Officer

Presentation

Operator

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

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

David Barry
Senior Vice President Finance and Investor Relations at Fortune Brands Home & Security

Good afternoon, everyone, and welcome to the Fortune Brands Home & Security Fourth Quarter and Full Year 2021 Investor Call and Webcast. Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings release and the audio replay of the webcast of this call can be found in the Investors section of our fbhs.com website.

I want to remind everyone that the forward-looking statements we make on the call today either in our prepared remarks or in the associated question-and-answer session are based on current expectations and market outlook, and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements except as required by law. Any references to operating profit or margin, earnings per share or cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified.

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

I will now turn the call over to Nick.

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Thank you, Dave, and thank you to everyone for joining us on the call today. I hope that everyone had a safe and enjoyable Holiday season and best wishes for 2022. Following an extraordinary 2020, our teams once again delivered outstanding performance in 2021. Our strong fourth quarter results capped a remarkable year at Fortune Brands, including exceptional sales, operating income and earnings per share growth. I'm particularly proud of how we delivered for our employees, customers and consumers, while also achieving 50 basis points of operating margin improvement. We accomplished these results despite facing numerous external headwinds. Including supply chain disruptions and extreme inflation. Importantly, we also made progress in our Fortune Brands Advantage capabilities and continued investing in our leading brands to drive innovation, expand capacity and to serve our customers. As a result of our team's outstanding work in 2021, the company is well-positioned to continue outperforming a strong housing market in the years to come.

In the fourth quarter sales grew over 18%, or 13% organically, with all of our businesses delivering double-digit growth driven by continued strong POS demand across all channels. Operating income grew 7% and EPS grew 6% as operating leverage in the quarter was impacted by labor availability constraints, supply chain inefficiencies and inflation ahead of price. Despite these challenges, we made full-year operating margin progress and delivered a 37% increase in full-year earnings per share versus 2020. Additionally, in 2021, we increased our investments in the business by $85 million, returned over $590 million of capital to shareholders, executed capacity expansions across the portfolio and recently acquired Solar Innovations, a leading producer of wide opening door systems and outdoor enclosures that would join our Therma-Tru family.

The pandemic period now into its ninth quarter continues to cause a variety of challenges, one constant remains our ability to meet these challenges head-on and get results for our shareholders notwithstanding the environment. Our Fortune Brands Advantage capabilities leveraged across the portfolio helped offset extreme inflation by reducing cost, executing strategic price increases and building stronger, deeper, supplier relationships. Our people, driven by our culture of excellence continue to position our portfolio of leading brands to capture the upside in the strong housing market. Additionally, we will remain agile in our response to any short-term headwinds that may come our way.

We continue to see strong demand for our products and our team is working hard at meeting that demand. We're making progress on strategic initiatives and later in the call, Pat will provide details around our 2022 investments, which further position us for profitable growth. The work that we've done to position the company to outperform extends beyond our exceptional financial results. We continue to advance our key environmental, social and governance focus areas. In addition to our work on safety, diversity and inclusion, water conservation and recycling, we recently took an important step in mitigating climate change by setting carbon emission reduction and renewable energy goals. Furthermore, during 2021, we partnered with the W.K. Kellogg Foundation to expanding equity program to enhance our comprehensive equity strategy and further our diversity, equity and inclusion initiatives which will have a measurable impact in 2022 and beyond.

We are acutely aware of the responsibility we have of keeping all of our associates safe. Our safety records among the best in the industry and we invest to ensure that all newly acquired companies meet our extremely high safety standards as quickly as possible. This is one of ESG synergies that we bring to bear when we acquire a business. Our safety performance is a point of pride for us and our entire team is committed to keeping the bar high. We look forward to highlighting our full ESG progress in our upcoming 2021 ESG report, which will be released next quarter.

All of our work is being recognized. We've seen consistent improvement in our scores by key ESG raters. For the third consecutive year, Newsweek's named Fortune Brands as one of America's Most Responsible Companies. And just today, we have once again been named as one of Fortune Magazine's World's Most Admired Companies. I'm proud to lead a company where our associates are so passionate about realizing our purpose and Fulfilling Dreams of Home in an ethical, responsible and sustainable way.

As we look to the year ahead, all of the progress that we have made over the past 2 years has positioned us extremely well to create further value for all of our stakeholders. POS demand remains strong, and our commitment to further expand and develop our Fortune Brands Advantage capabilities will bolster our operating model and create extra fuel for growth. We aim to further our momentum in 2022 by identifying additional strategic investment opportunities, including our digital transformation. This initiative will be the next core competency in our suite of Fortune Brands Advantage capabilities, and we are developing a Digital Centre of Excellence to further enhance brand and innovation, accelerate growth and improve operating efficiency. This strategy developed in earnest in 2021 will be executed in 2022 and beyond.

I'm very excited to announce that May Russell will be joining our company in the coming weeks as our first ever Chief Digital Officer. May joins us from Ford, where she was a senior technology executive serving as the Chief Technology Officer for Ford Commercial Solutions and had global responsibility for the award-winning Ford and Lincoln apps, the digital consumer interface for all vehicles, vehicle connectivity safety and security products and for the digitization of fleet management. Our ability to attract a talent like May speaks to the tremendous opportunity that we have to transform Fortune Brands into a consumer-first digitally enabled growth platform. We believe the potential for digital transformation within our portfolio is remarkable, and I'm excited to speak more about our digital initiative throughout the year.

Finally, I want to sincerely thank our dedicated team members who continue to work so hard to keep our people safe and our facilities operating. I am so proud of our teams who were not only caring for each other, but who are doing so while serving strong demand for home products. Our people are the foundation upon which our business is booked and they drove our outstanding results in 2021.

Turning to the remainder of our remarks today. First, I will share what we are seeing in housing and the home products market. I'll then highlight key takeaways from our fourth quarter and full year results as well as discuss our key initiatives across the portfolio and how we expect these to evolve over time. Pat will then provide highlights on our financial results and thoughts around our future financial performance expectations for 2022.

Now turning to some thoughts on the housing market. As I've mentioned, demand remain strong due to demographic and fundamental trends favoring both new construction and repair and remodel, we expect the long term expansion of housing and building products to continue. New construction activity had a robust year in 2021 and would have been even stronger if unimpeded by labor availability and supply chain inefficiencies, with all time record low existing housing inventory in the US. inventory is turning over nearly as fast as it is becoming available. There are simply not enough homes to purchase.

Our wholesale and builder momentum which persisted through all of 2021 is showing signs of continued strength as we begin 2022. Our exposure to the new construction industry continues to give us incremental tailwinds and a powerful installed base. Repair and remodel activity remains robust across our product categories and our POS was strong during the fourth quarter. With record low supply and and aged housing stock more homes are requiring significant R&R spending. We saw clear above market growth across our portfolio as our leading brands are centered around the most in-focused spending areas of the house, the kitchen, the bathroom and the outdoors. R&R has been supported by tremendous home equity wealth which has grown by trillions of dollars in the past year. While we expect interest rates to increase as the Federal Reserve works to combat inflation, 30-year mortgage rates which currently hover around 3% remain attractive. Coupled with compelling demographics, this financial backdrop is supportive of continued new construction and R&R spend.

We continue to believe in the long term run rate for housing expansion driven by demographics and fundamentals and underpinned by low supply and aged homes. This multi-year run rate for growth provides a significant long-term opportunity for new construction and R&R; we intend to outperform the strong market and will stay agile to both capture opportunities and quickly respond if short-term headwinds arise.

Now let me turn to our performance in the fourth quarter and full-year as well as how we're positioning ourselves to be even stronger across our portfolio. Total company sales were up over 18% for the fourth quarter, capping off a superb year of 26% revenue growth versus a year ago. This performance is demonstrative of strong demand, but also of our ability to source, manufacture and ship in a complex supply chain environment. Sales were up double digits across all businesses during the quarter compared to a strong fourth quarter last year. Operating margins were 13.4% for the fourth quarter and 14.6% for the full year. As I mentioned earlier, consistent with our long-term strategy to deliver for shareholders, we made 50 basis points of overall margin progression in 2021 despite numerous headwinds during the year and investing an additional $85 million in strategic initiatives.

Now turning to our individual businesses, starting with Plumbing. Our Global Plumbing Group continue to outperform its global and U.S. markets with sales up double digits in the quarter, by the wholesale channel in the U.S. for both Moen and House of Rohl brands. Operating margins were 20.8%, we experienced sales growth across all brands and regions, including growth in China despite the slowing market. Full year results were exceptional, delivering sales growth of over 25% and operating margin of 22.9%, momentum remained strong across the group.

We invested heavily in Plumbing in 2021 further perpetuating the flywheel of top and bottom line outperformance for this world-class business. Investments in marketing and innovation clearly resonate with consumers and continue to fuel our remarkable results. Additional investments in capacity and distribution will further elevate customer service and provide additional opportunities for growth. In the fourth quarter, we opened a new retail-focused distribution center. And in 2022, we expect to invest in the new West Coast distribution center and to expand capacity for growth at our UK manufacturing sites.

We are also very excited about the innovation taking place in Plumbing today. Our Moen Smart Water Network was unveiled at the Consumer Electronics Show and is the first step in enabling consumers to digitally controlled water throughout home. We have a strong leadership position and are in the early stages of what we expect to be widespread adoption of Smart Home Water Management by consumers, builders and insurers. Our growing Smart Water Ecosystem will continue to add inventive products and services at an increasing rate leveraging our growing digital capabilities.

Turning to Outdoors & Security. For the fourth quarter and full year, sales were up over 40% or high teens excluding LARSON. doors, decking and security, all grew double-digits in the quarter and for the full year highlighting widespread strength across the business. Operating margin was 15.9% for the fourth quarter and 14, 9% for the year increases over previous year in both cases. Outdoor living continues to show the same momentum and we are focused on expanding our presence in this attractive category. Sales in our legacy door operations grew high teens in the quarter, driven by strong wholesale sales. Our robust distribution network is a differentiator in both our doors and decking brands and we continue to deepen our ties with our key channel partners.

At LARSON, we delivered a successful year of integration performed ahead of our acquisition expectations and are enthusiastic about the ability for LARSON and Therma-Tru to work together to achieve further synergies in 2022 and beyond. To further expand our leadership position in entry openings, we recently acquired Solar Innovations, a leading producer of wide opening door systems and outdoor enclosures. We are excited to bring their leading product innovations into our door portfolio and to welcome their employees to the Fortune Brands family.

Our Fiberon decking brand continues to perform very well growing above 20% for the quarter and the full year. Our success in decking is the result of the strong channel building and product development that we have executed since acquiring the brand. Conversion from wood to advanced composite materials accelerated over the past few years as the benefits are increasingly resonating with consumers. Additional capacity has come online during the fourth quarter and we will expand capacity incrementally throughout 2022. To further accelerate our growth, we will be developing a greenfield facility with construction beginning in 2022. This investment will be executed in phases, and we will control the pace of capacity additions based on the demand outlook which we forecast to be very strong for years to come.

Turning to Security. Strong performance continued as sales increased low-double digits in the quarter, driven by continued recovery and outperformance in commercial and international channels bolstered by solid performance in our core North American retail market. The Security team continues to make progress towards its strategic goals, including innovation-led growth and margin expansion. As you can see, the Outdoors & Security team executed well across multiple initiatives in 2021 and are set-up to achieve even more into the future.

Finally, turning to Cabinets. Sales increased at mid-teens for the fourth quarter and full year with growth across product lines at all price points. Full-year operating margin was 10.1%. The cabinets industry has been exposed to particularly high levels of variability during the pandemic, and yet our team is overcoming labor availability challenges, supply chain constraints and extreme material and freight inflation. While our margin performance was short of the targeted progress that we wished to make in 2021, it is also a testament to how agile the business has become given the challenges it faced and overcame in a very short amount of time. Demand remained strong and we continue to work through our elevated order backlog. We are progressing well with our margin enhancement initiatives and the results will be even more evident as the pace of supply chain volatility subsides.

Our business is well-positioned across price points to win the share that we want and we are executing strategies to increase efficiency and to align our growth with the highest returning opportunities. Within our value price point cabinets, we continue to win versus both domestic players and from importers who are shipping into the U.S. at longer lead times and at significantly higher costs. Our MANTRA line continues to take share and the sales of this brand more than doubled in 2021. Demand remains strong in our make-to-order segment especially within premium, though operations were impacted by labor availability and freight costs in the fourth quarter.

We continue to make progress on our strategic initiatives, and we expect to drive margin progression in 2022. The trajectory of this margin progression will be concentrated in the back half of the year as we continue to work through labor and supply chain headwinds and realize incremental price as we reduce our backlog. We are deploying Fortune Brands Advantage tools, including complexity reduction to advance our margin progress and we remain on-track to achieve our long-term margin targets.

In summary, in 2021, we celebrated 10 years as a public company. We have consistently produced exceptional results while simultaneously investing in key strategic initiatives that will drive the business for the future. We have the team to continue to deliver above-market growth and outperformance and we will maintain the discipline, agility and execution for which we have become known. Our future looks every bit as bright or brighter as we look forward to the next 10 years. As noted, the U.S. remains millions of homes short of demand and Fortune Brands is well-positioned to capture an increasing share of that expansion. We will undoubtedly face challenges in the future, just as we have over the past decade. However, in the face of those challenges, our team will do what we do best, leverage our amazing brands, innovation and operating efficiency to produce products which enrich the lives of millions are delivering for stakeholders.

Our 2022 outlook, which Pat will speak to in greater detail, reflects our confidence in the strength of our markets and business we expect continued top-line growth driving leverage through the P&L, increasing margins and creating further value for our stakeholders. Our investment in CapEx outlook is reflective of our burgeoning opportunity set with profitable growth levers to pull at each of our brands. Our balance sheet is strong and positions us to continue to drive incremental value organically and inorganically. We are very excited for the future.

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

Patrick Hallinan
Senior Vice President & Chief Financial Officer at Fortune Brands Home & Security

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. Additionally, all comparisons will be made against the same period last year, unless otherwise noted.

Let me start with our fourth quarter and full year results. Sales were $2 billion, up 18% and consolidated operating income was $264 million, up 7%. Total company operating margin was 13.4%, EPS were $1.32, up 6%. For the full year, sales were $7.7 billion, up 26% and consolidated operating income was $1.1 billion, up 30%. Total company operating margin improved 50 basis points to 14.6% and EPS grew 37% to $5,73. Our teams continue to overcome pandemic-related challenges to serve our channel partners and consumers amid a dynamic operating and supply chain environment. These remarkable results are a testament to their commitment.

We remain highly focused on driving outperformance including above-market growth and margin progression, achieving both in 2021 was an extraordinary accomplishment and positions us to continue doing so in 2022. Our portfolio of innovative and quality brands with leading market positions continues to resonate with homeowners. Our value creation journey is fueled by a strong market and deployment of our Fortune Brands Advantage capabilities driving incremental investment dollars and increased operating margin.

Mow let me provide more color on our segment results, beginning with Plumbing. Sales for the fourth quarter were $704 million, up $66 million or 10%, or up 9% adjusted for FX. Fourth quarter growth was driven by U.S. wholesale and strong double-digit growth at the House of Rohl. Importantly, POS remained strong during the quarter, including in retail. For the full year, sales were up over 25%. Plumbing operating income increased 6% to $147 million in the fourth quarter. Operating income for the full year was $633 million, an increase of 29%. Operating margin was 20.8% for the quarter and 22.9% for the full year, materials inflation and elevated freight cost continued in the quarter and we expect price to fully offset inflation around the end of the first quarter. Our Plumbing business continues to outperform expectations and the team delivered an outstanding year in the face of numerous challenges. We are carrying strong momentum into 2022 for continued above-market growth and strong margins.

Turning to Outdoors & Security. Sales for the fourth quarter were $514 million, up $148 million or 40% driven by the addition of LARSON and double-digit growth in doors, decking and security. Excluding LARSON, organic growth was 17%. Full year sales were $2 billion, an increase of 44%. Organically, sales increased 15%. We expect this strong growth to continue in 2022 led by decking and doors. Doors sales benefited from a continued strong new construction environment as sales were up high teens in the fourth quarter and mid-teens for the full year. We expect strong sales growth to continue in 2022 as housing supply remains low favorable demand fundamentals persist and new construction completions catch-up with orders as supply chain and labor availability constraints ease throughout the year.

Decking sales growth exceeded 20% for the quarter and the full year as consumers continue to prioritize outdoor living and increasingly choose advanced composite materials over traditional wood decking. We added incremental capacity in the fourth quarter and we'll continue to increase capacity in 2022 by further optimizing our existing footprint. Additionally, we will begin construction in 2022 on a greenfield expansion to further accelerate our growth. We will phase investment dollars and capacity over a number of years flexing with the pace of expected strong underlying growth. Demand remain strong, we expect Fiberon to grow above 20% in 2022.

Security sales momentum continued in the fourth quarter with low double-digit sales growth contributing to mid-teens growth for the year. North American retail sales remained solid and outperformance in commercial and international led to continued above-market growth. 2021 was a strong year for Security. We expect growth momentum and incremental margin progress to continue in 2022. Outdoors & Security segment operating income was $82 million during the quarter, up 41% driven by strong performance across the segment. Operating income for the full year was $305 million, an increase of approximately 49%. Segment operating margin for Outdoors & Security increased 10 basis points for the quarter to 15.9% and was 14.9%percent for the full year, up 40 basis points.

Turning to Cabinets. Sales for the fourth quarter were $745 million, an increase of 14%. Full year sales were $2.9 billion, up 16%. Growth was strong in both stock and make-to-order. Operating income in the fourth quarter was $67 million, down 13% or $10 million, and full-year operating income was $287 million, up 12% or $31 million. Operating margin was 8.9% for the quarter and 10.1% for the full year. Cabinets margin performance, especially in the second half was impacted by extreme material and freight inflation ahead of price. Further, labor availability and supply chain challenges resulted in operating inefficiencies and shipments below forecast. We expect labor availability and supply chain effectiveness to improve throughout 2022 and price to start fully offsetting inflation in the middle of the first half of the year. We expect margin progress to reaccelerate in the second quarter and increase throughout the second half of 2022.

Turning to the balance sheet. Our balance sheet remains strong with cash of $472 million, net debt of $2.2 billion and our net debt to EBITDA leverage is now 1.7 times. We finished the year with $730 million of total liquidity on our revolver. Our 2021 free cash flow of $518 million includes increased investment in our inventory to service customers and 2022 growth, while our cash conversion of 65% was below our 3-year average of around 100%, we expect our conversion rate to improve in 2022 to between 70% and 80%, when the progress higher beyond 2022 when inventory returns to normal levels as supply chains heal.

In summary, our teams delivered exceptional 2021 results in the face of numerous challenges. In addition to making 50 basis points of operating margin progress, we continue to invest in the business to accelerate our opportunities for future growth and margin expansion across the portfolio. We are committed to investing further, including in our digital transformation to pursue increasing growth and to better connect with customers and partners in a more meaningful way.

Before turning to the details of our outlook for 2022, let me first provide some thoughts on the market backdrop and our approach to creating value regardless of the environment. We believe that strong demand fundamentals in our core market support a multi-year housing expansion, still the challenges of labor availability and supply chain constraints continue in early 2022. Additionally, if Fed rate actions surprise the housing market, it could create near-term distortions to this long-term market strength. We will confront such instances in 2022 as we have the past 2 years, by aggressively managing our P&L and balance sheet. We will maintain investment in top priority growth and differentiation initiatives such as in our Fortune Brands Advantage capabilities and we'll deploy capital with a focus on long-term value creation.

With that backdrop, let me discuss the specifics of our 2022 outlook. Based on the global market for our products growing 3% to 5% with the U.S. housing market growing 4% to 6% and within this market forecasts, we expect U.S. new construction growth at or above 6% to 7% and U.S. R&R growth at or above 3% to 5%. Based on those assumptions, we expect full-year sales growth of 5.5% to 7.5%. We expect full-year EPS within the range of $6.35 to $6.55 on a before charges and gains basis of which the implied midpoint equates to an increase of 13% versus our record 2021 results. This EPS range includes the impact of approximately $0.05 from an additional fiscal week in the fourth quarter at our Plumbing and Outdoors & Security segments. This outlook assumes COVID-driven challenges continue to impact the first half of 2022 in a manner similar to the second half of 2021. We believe underlying demand is greater, if these challenges abate more quickly, this would create upside to our forecast. Better insight to these upside opportunities will unfold during the first half of 2022 and we will refine our guidance as merited.

Specifically, our outlook for each business as it relates to our overall guidance, Plumbing net sales growth of 5% to 7% with operating margins around 23%. Outdoors & Security net sales growth of 8% to 10% with segment operating margins around 16.5%. Our Solar Innovations acquisition will not contribute meaningfully to Outdoors & Security income in 2022 as we invest to integrate their product line into our doors offering. Cabinets net sales growth of 4.5% to 6.5% with operating margins of 11% to 12%. We expect 2022 free cash flow of approximately $615 million to $700 million and anticipate a cash conversion rate between 70% and 80%. Our free cash flow forecast includes capital expenditures of $375 million to $425 million inclusive of growth investments in our decking plumbing and doors operations that enhance capacity and capabilities meaningfully.

Our balance sheet and cash flow remain strong and we expect to actively deploy capital for value creation consistent with our track record. Following our organic investment priorities, M&A and share repurchases remain our other top allocation priorities with the continued Plumbing and Outdoors & Security focus for M&A. The annual EPS outlook includes the following assumptions: Corporate expenses of about $125 million to $135 million including digital transformation investments of $15 million to $25 million. Interest expense of approximately $89 million to $94 million, a tax rate between 24.5% and 25%, average fully diluted shares of approximately 137 million to 138 million.

We have put together a strong 2022 plan that builds off 2 robust years for our housing markets. We anticipate solid sales and double-digit EPS growth as well as an acceleration of operating margin. As discussed, we expect several of the challenges that govern growth and margins during 2021 to continue into 2022. We have price and cost actions in place to offset inflation and we expect margins to inflect positively by the second quarter and accelerate through the balance of the year.

To be clear, we are in the midst of a long runway of fundamental housing growth, and we expect prolonged market strength for our products. Supply of available housing remains extremely low and the importance of the home remains top of mind for consumers. We expect our sales to continue outperforming the market and our margin progression to remain accelerated, averaging 70 basis points to 100 basis points in 2022 and targeting 75-plus basis points each of the next 2 to 3 years. We are excited about the future and thankful for the commitment from all of our associates who contributed to a strong 2021. We are as excited about the next 10 years as we were about the last.

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

David Barry
Senior Vice President Finance and Investor Relations at Fortune Brands Home & Security

Thanks, Pat. That concludes our prepared remarks on the fourth quarter and for the full year. We will now begin taking a limited number of questions. Since there may be a number of you would like to ask a question, I'll ask that you limit your initial questions to two and then re-enter the queue to ask additional questions.

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


Questions and Answers

Operator

Thank you, Dave. [Operator Instructions] And our first question is going to come from the line of Phil Ng with Jefferies.

Philip Ng
Analyst at Jefferies Financial Group

Hey guys, a solid quarter in a challenging backdrop and Pat, appreciate you giving us a full-year outlook. But wanted to see if you could drill down on the shape of the year. Any color on orders and what your customers are saying since comps are a little tougher to begin the year. And then on a price cost standpoint and margins, how should we think about that cadence through the course of the year and what's embedded in that assumption, are you assuming inflation kind of levels off and you effectively have all the pricing that you need out there are ready?

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Hey Phil, good to hear from you, why don't I just kicked off, I'll answer the first part of your question, what we're seeing from a demand perspective, impact and speak to the shape of the year and some of the assumptions that we made in our expectations. I'd say demand as we just indicated for all '21 remained robust through the end of the year and remains robust into '22. And so looking over some of the POS dollars, we're seeing strength through the start of the year. I would say at or slightly above '21, which had a pretty robust start to the year. Now we're going to get into some funky comps over the course of the next few quarters, and so we expect some swings and roundabouts. But that fundamental strength that you're seeing persist in demand both in retail and wholesale is there. And so that gives us a degree of confidence around the market both from a new construction and R&R perspective.

Patrick Hallinan
Senior Vice President & Chief Financial Officer at Fortune Brands Home & Security

Yes, so I concur with Nick, a lot of good signs from a end-market demand perspective in both retail and wholesale. A few things to think about though as you think about the shape of the year and where we kind of ended last year, because we did have a lot of the inflation come about in the back half of the year, and important note, we do have, I'd say over 90% maybe even above 95% of the pricing and cost actions in place to drive the margin profile for 2022, but it will flow from about the second quarter through the back half of the year. So a few important things to appreciate, last year '21, we had about $290-ish million of inflation, which is about a 7.5% of COGS, just a little bit less than that. But 80% of that inflation hit in the back half of the year and 40% of that inflation hit in the fourth quarter. So we'll come out of the gate in Q1 with a lot of that type of inflation hitting businesses that have the longer supply chains like Plumbing and Security. And so we'll have a margin profile in the first quarter. That's a little bit like the margin profile we had in the fourth quarter like 13%-ish. We're going to be 15% to 15.5%-ish in the second quarter and then above 16% in the back half of the year and that's the way the margin profile will play out. And even with strong demand in the first quarter that we're experiencing, I do expect Omicron absenteeism in a broad range of our facilities to keep shipment based volume in the quarter more like at mid-single digits sales growth in the first quarter. But as Nick was saying, we feel very good about the year from early signs of demand and from preparation against price and cost, but I do think we will carry in some of what you saw in the fourth quarter and into the first quarter of the year.

Philip Ng
Analyst at Jefferies Financial Group

Got it. That's really helpful. And just one last one for me. You're guiding to a pretty sharp step-up in CapEx. Can you kind of unpack what's driving that? I mean you talked about this greenfield facility for decking, give us some color how much that could unlock and how that kind of ramps up? And any color on that digital investment you've talked about as well in terms of the CapEx for that investment?

Patrick Hallinan
Senior Vice President & Chief Financial Officer at Fortune Brands Home & Security

Yeah. I'll talk to the numbers of both of those topics, Nick might want to add some color commentary, especially around digital, but our CapEx profile, we spent until about the middle of last year being somewhat fiscally conservative on CapEx, but have been seeing such strong growth since the back half of 2020. We're now at a point in time where we have to invest both to accommodate the growth that's kind of immediately in front of us, and then the longer-term growth objectives. So we will have elevated CapEx in '22 and '23 about $400 million plus or minus $25 million and of that $400 million, about $200 million of that will be in decking, call it maybe $110 million, $120 million of that, the earliest portion of that greenfield facility in Tennessee, and then another $50-ish million or so on getting additional capacity out of existing facilities with technology that helps the throughput of our existing footprint in decking.

And then we're making a greenfield facility investment in the UK for our Luxury Plumbing brands and eventually that site will be servicing in one form or another a number of our brands for the EMEA market and we'll be adding a DC in Plumbing on the West Coast and expanding our door facility. So all I'd say bigger than would be just our typical nudge a wall out and put one more line in the facility type investments in decking, plumbing and doors for 2022. But all in concert with our near-term and long-term growth plans and all that will be productive pretty, pretty quickly. And as it relates to the greenfield facility, we will phase that in very thoughtfully, that facility has the potential to be quite a hub for production and volume for us over time, but we will grow it thoughtfully as demand and market factors merit.

And then in terms of the digital transformation we've been talking to you now for a number of years of a set of Fortune Brands' capabilities, whether it's strategic sourcing or revenue growth management and supplier development and so forth, digital transformation is just the next wave of that and in fact this year, we invested $5 million this year to get that initiative started so '22 is not starting from a cold start from ground-zero and we're going to be making a range of investments, some of them will benefit our connected products, some of them will benefit our e-commerce capabilities and some of will unlock data and market insights to help us better understand and balance supply and demand and also to source more effectively. So we'll be making a range of investments and we're going to be making them as much we can in a central fashion, so we can leverage both our market insights and our capabilities across the portfolio.

Philip Ng
Analyst at Jefferies Financial Group

Got it. Super.

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

I'll just emphasize a couple of points from what Pat said. One is, I mean from that, on the CapEx investments, we said it, to be at a point that we're making these investments. So if you look at close to 20% organic growth next year and what we forecast going forward. This is going to allow us not just to serve customers well, but to do so more efficiently, and we alluded to the fact that we opened a new retail-focused DC in Plumbing right at the end of the year and you could see the relief from the supply chain is I think started to flow and do so at more and more efficient levels. And so, and these are the best investments we can make with the highest returns associated with them. As Pat said, we're going to be careful. We're going to govern the pace of the investment, particularly the greenfield facilities so we're feathering the dollars, and as we are seeing the demand come and we are very careful about that.

On the digital piece. I'd also say that I mean we've kind of shown our ability to leverage capabilities across the enterprise over the last couple of years both to accelerate growth and strong margin expansion and to create more fuel for growth and so digital is really just the next logical pillar of our Fortune Brands Advantage capabilities and as Pat referred to, we spend about $5 million in '21 and piloted a couple of things and are already starting to see the results, I mean if you look at our e-commerce share for example in Plumbing, Cheri Phyfer and her team really led e-commerce Center of Excellence under these principles kind of starting in Q4 of last year and we've made material share gains in this space and now sit in the number one sure spot in 4 short quarters. So it really encourages us about building these capabilities and the kinds of impact that we can have when we dedicate ourselves to them. And, of course, you know when you're doing things like mobile, cloud, we will be doing procurement data, having the benefit of scale to be able to make the investments essentially develop the talent essentially, leverage it across the entire enterprise really can turbocharge the results that we expect to get out of this.

Philip Ng
Analyst at Jefferies Financial Group

Got it. Really helpful. Very exciting.

Operator

Thank you. Our next question will come from the line of Susan Maklari with Goldman Sachs.

Susan Maklari
Analyst at The Goldman Sachs Group

Thank you. Good afternoon, everyone. My first question is -- hello. My first question is around, when you think about growth for 2022, can you talk to how much of that will be led by volumes relative to prices, some of those actions that you took last year, actually start to take effect and come through in the results? And then I guess with that can you also discuss how you're thinking about perhaps a change in the rate environment and what that could mean for housing and across the business, when you think about the different products and price points that you have, any sort of areas where we could see relative gains or incremental weakness in demand as that some of that could come through?

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Yeah, sure, I'd be happy to touch on a couple of those I'm sure Pat will give some more color. When you look at sort of our growth assumptions, I would say, we've got a lot of pricing for the year and as Pat mentioned 90% of that is in market and so while it takes us a lot of the work done, the backlog from actually access that new price, that in, and that is the majority of the driver of growth that we would expect, so we're not baking on a ton of volume and you heard our kind of market forecast, but we're conservative this year; we'll see as the next couple of quarters unfold what the market actually does, and by the way we're gearing our supply chain and inventory and you've seen that in our cash flow numbers to be able to service more should it arise. But we're not baking on a ton of volume growth and so really it's a very modest volume growth and price driving growth in '22 with opportunity there should it go quicker.

Yeah. And then from a perspective of what we're seeing demand, we're not really seeing come off anywhere. I mean, it would be easy to just to say, it seems very strong here not there, but it's just really continue to be very consistent and obviously a lot of the things we've discussed before, demographics, the low housing supply, the aging housing stock, record levels of home equity I think are all playing into that, and if you think about rates, firstly that bumped up already 50 basis points, and at 3.5%-ish on the 30 year, I mean they are still materially below even where they where if you think about the end of '18, it came in like a 4.9%, Mortgage Bankers Associations are forecasting 4% by the end of the year and so there's quite a lot of room we feel in rates for them to go up and so affordability to stay in check, and I think what is somewhat different right now is the very, very low inventory that's in the market, 1.7 times monthly supply of existing homes. The demand that's there and homeowners equity. And so should we shock the market with foreseen rate increases that aren't telegraphed. Well, I think there's always a danger of that, and if that's the case, this team will be prepared to manage our business and manage our investments to manage our P&L to continue to deliver for stakeholders. I think that's a hallmark of this company. But if it should grow at a reasonable rate and be well-telegraphed to the market, we think that there is quite a bit of room.

Susan Maklari
Analyst at The Goldman Sachs Group

Okay, that's very helpful color. Thank you. And then I'm hoping if you can also speak a little bit about the Solar Innovations deal that you announced yesterday. Can you perhaps just give us an overview of the business and talk about what made this attractive for you and perhaps how this furthers the Outdoor segment that you've been growing on and some of the core innovations and focus that you have across the company?

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Yeah, we are very excited about Solar Innovations, and it's a company that we've been covering for some time and entertaining conversations with their founders. We've done a remarkable job, and it is a very fast growing segment of the doors market, right? And so it's the big wide opening doors, you think about, particularly in commercial space as you see the big wall that opens fully, it's about 50-50 commercial, residential application and the CAGR of the category has been double-digit for the last 3 to 5 years, perhaps even, and then beyond that.

Now what's interesting is it's very highly engineered technology-driven in the sense that there are a lot of patents protecting the technology. And so you know I visited and it's kind of amazing to move the 2000-pound door with a finger, right, and you don't just do that and how the technology that works, how the feeling works, the ability to build the door that's flushed to the ground and have a train to the outdoors. I mean all of this is highly technical stuff and what we see and opportunities to take that technology and combine it with Therma-Tru, which is the leading exterior door brand by the way, the number one builder brand in our entire portfolio and really start to lever some standardized product and embrace this growing segment of the market. And what you really do, then you start to create indoor-outdoor space. So not the entire living space to the outdoors integrated with the decking products, all the screening products that we have through LARSON and really start to create much, much more of an integrated portfolio. So very excited about the ability to access it through this acquisition.

The other thing that allows us to do is build on our more nascent commercial capability because this does with the commercial application and you might have noticed as well Fiberon is also getting into some of the commercial space with higher wood product, which is some of the cladding, phenomenal product in a much better application for exterior siding than wood in that decorative architectural space. And so we planning on combining all of that to really going to turbocharge both the commercial space, but also our ability to access this high and sophisticated area of large opening.

Susan Maklari
Analyst at The Goldman Sachs Group

Okay, that's very helpful color. Thank you and good luck.

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Thanks.

Operator

Our next question is going to come from the line of Adam Baumgarten with Zelman.

Adam Baumgarten
Analyst at Zelman & Associates

Hey, everyone. Good afternoon. Thanks for taking my questions. I guess, maybe starting on margins, if you could talk about what gives you the confidence that margins will start to inflect positively in 2Q? I mean it seems like that may be was pushed out a little bit here. I mean you're starting to see supply chain improvements or is it really simply just starting to lap some of that meaningful cost inflation as you get into mid-year? And then just on that same vein, just on COGS inflation, you talked about the $290 million in '21. How should we think about the dollar inflation in '22 that's embedded in guidance?

Patrick Hallinan
Senior Vice President & Chief Financial Officer at Fortune Brands Home & Security

Adam, I'd say, there's a number of things that give us confidence in margins for '22. One is, most of the actions as we've said are in place now, some of them start to take effect late Q1 early Q2 whether that's because of negotiated timing with channel partners or whether that's because of backlog and working the backlog down until the new price takes effect. But that is what pushes that out a bit longer than we thought, and also some of the inflation we brought in from '21 was a bit higher than we would have expected in the third quarter, but we will be about breakeven on price versus cost by the end of Q1 and we will reflect positively by Q2. And so we see the fact that we have those actions in place that we've been leveraging SG&A very effectively for the last 3 years, and when you look at how we really leveraged SG&A this year, while still making $85 million of capability investments, we expect to be leveraging SG&A that effectively next year and we still see our brands resonating very, very well and they're not having to compete by promotion or discounting. So I think all of those things give us the confidence that we're on our both near-term and long-term margin trajectory. We just have to work through some of the heavy inflation we took in from the quarter and get the new pricing in on new orders.

And I would also say I wouldn't, we're not saying we're on inflation, many areas have stabilized. I'd say about the areas that haven't, you have hardwoods some wood board, whether it's particle board, plywood spot market freight and aluminum. But outside of those elements, a lot of stability now, not declines, but stability. So the rate at which things are coming at us anew has gone down. In terms of the COGS inflation in the plan. I would think of it as our COGS went from $3.9 billion in 2020 to $4.9 billion in 2021 and we're going to expect at least mid-single-digit level percentage COGS inflation. So at least $300 million. I'd say that we, the low side of what we would expect. We're prepared if more emerges, but that would be the low side of what we would expect and we will act if more does emerge.

Adam Baumgarten
Analyst at Zelman & Associates

Got it, thanks. And then just on maybe if you think about inventory levels across your retail and wholesale customers. Is there still an opportunity in certain businesses or maybe all businesses for that matter to for some restocking in '22 if demand holds in supply and supply improves?

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Yeah, I'd like to say there is some, it definitely got better over the course of the year. And so we've been trying to be very strategic about servicing the high runner SKUs and getting those where consumers need them. So I'd say they are still behind on kind of CD SKUs, there still some of our businesses that frankly if you had to have customers and allocation all of '21 and so we do think that there is continued restocking in '22. But we are in a better spot than we were at this time a year ago.

Adam Baumgarten
Analyst at Zelman & Associates

Great, thanks. Best of luck guys.

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Thank you.

Operator

And we have time for one final question. Our last question that we will take for the day will come from the line of Truman Patterson with Wolfe Research.

Truman Patterson
Analyst at Wolfe Research

Hey, good afternoon everyone and thanks for taking my questions. So just wanted to follow up on the prior question on second quarter margins being up year-over-year. Is this the case for your thoughts on each of the segments, I'm really hoping you can walk us through those or any of the segments catching up with inflation a little bit faster, taking a little bit longer than that 2Q timeframe? And then I wanted to dig in a little bit more into what's incorporated in the guidance assuming that cost inflation does tick higher from here? Are there any incremental levers that you can pull to offset continued inflation without really impacting guidance?

Patrick Hallinan
Senior Vice President & Chief Financial Officer at Fortune Brands Home & Security

Yeah, I'll touch on a few things. Nick may add. Yes, your first comment on Q2 margins, what I would expect is Q2 margins to be in a similar zip code as Q2 of 2021, though recall Q2 margins in 2021 where we're quite strong. They were 15.4% in 2021. I mean, you would expect a 200-plus base sequential margin improvement from Q1 '22 to Q2 '22. So that's where you're going to see Truman as we move sequentially, from Q1 to Q2 you are going to see a big uptick driven by pricing fully coming into effect. But when you look year-over-year, we had exceptionally strong first half margins in '21 and in particular in 'Q2, I think, across the board, you would expect strength in margins across the business. So always remember in Plumbing depending on when we're phasing investments, Plumbing is always going to be dancing around its margin, Plumbing for the years around 23%. It might be closer to 22% in the first quarter and then 23% plus or minus for the balance of the year.

In terms of how would we adjust as the year went on. If different things unfolded, all of our teams, we are pretty darn good at managing the P&L; I think we've kind of had that as a trademark for quite some time and especially when the downturn hit in Q1, Q2 of 2020, we managed the P&L very effectively on the way down, as well as we have on the way up since. And I'd say the last 2 years have really gotten all of our businesses into a much tighter cadence on monitoring inbound costs, both materials and freight and labor, and then you know, for better or worse, we're just in a much tighter coordination with our channel partners to be prepared to take price more frequently than would be typical in the building products industry and that's the capability we will carry forward into '22 and we will move nimbly throughout '22 to hold to our guidance. I mean we've tried to anticipate in our guidance, as we mentioned in our prepared remarks that we're at least for the first half carrying many of the same dynamics and we do expect there to be things that unfold throughout the year, but we will manage them effectively and make the margin progress we've signaled.

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

And Truman just a couple of thoughts on that, your questions about margin evolution. I mean as you think about it, it's hard to overstate the impact that the backlog has had on ability to chase margin, and if we could push a button and reprice backlog you would have seen pretty strong margins in Q4 because the prices in aren't great, but we're working down the stuff, we're building the business for the long-term, we're building channel relationships for the long-term. And so we're trying to do things in a constructive way over time and to gain and hold share. And so that just takes time to work through the system. And as you work through that, you really do see us come through.

And then the other part of your question about if should bigger risks materialize, I really think one of the hallmarks of this team has been its ability to manage risk and to respond to risk rapidly. And I think back to Q2 of '20, I mean a detrimental margin was 12% when you saw the world come to an end. And why is that, because our financial priorities to grow above market and to grow our margins, and we've been able to invest over the last couple of years to really catapult both the growth above market and the growth in margins, but say, make no mistake in the face of challenge, we will work to offset cost, we will take prices in it and we'll pace investment as environment warrants, and we will do other things to continue to deliver for shareholders, no matter the environment is one of the things we take a great deal of pride. And so we said a lot of exposure growth and earnings growth on the upside, but a lot of leverage in the business to manage any short-term challenges we may face.

Truman Patterson
Analyst at Wolfe Research

Okay. Okay. Thanks for that. And then in Plumbing, I believe you all mentioned you grew in the quarter, gained market share, you all been gaining share in China, specifically for the past handful of years, I'm hoping to get an update on the Chinese real estate market, your expectations in '22, because I believe last quarter you all were still expecting growth in China, just seeing if anything's changed there?

Nicholas Fink
Chief Executive Officer at Fortune Brands Home & Security

Yeah, we did see I'd say modest growth in China in Q4. And so the business continue to plug along, and as we look to 2022, we've obviously moderated our expectations as compared to the last few years, but we expect that business to continue to perform, and for a few reasons. I mean, one is, you'll recall that our business is really outperformed both upswings and down troughs largely because we are continuing to innovate and expand into new categories and new channels, and that's really been one of our calling cards of that business. So for example, we very successfully launched Moen sanitary ware and smart sanitary ware in China. It's been a really good success, we're probably only at a point where to share in the total market, which is a huge opportunity. And so through that expansion outside of just riding the market of the housing market wave, gives us a lot of opportunity.

And then the second part is, while the government have taken a lot of steps to cool the market and take speculative buying out of the market, now you have seen some easing of that sense, but I think that easing is going to take a while to work through, that hasn't really been our exposure. Recall, we are much more exposed to Tier 1 and Tier 2 cities, Shanghai is our leading share market. And so we're in a market like that. We're seeing a lot more R&R as people just have to upgrade aging homes, and one of the first things that the Chinese consumer touches when they move into a home is the bathroom, done a lot of consumer work there. And so our exposure is a lot more favorable deliberately still by the way we've chosen not to chase the secular business, exposures are a lot more favorable than the totality of the Chinese market. So we've created room this year to allow that business to experience slower growth and continue to make the investments it needs to make as it continues to grow, but we're confident that we'll work through this year and whatever may throw at us, and then we'll continue to put up the kind of performance we put up over the last few years, and I think this maturation from speculation to more normal regular way growth in R&R in the Chinese market is probably not a bad thing in the long run for a business like ours.

Operator

[Operator Closing Remarks]

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