Fortune Brands Home & Security, Inc.

Good afternoon. My name is Diego, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To queue up for a question, you can press star 1 on your telephone keypad, and you can press star 2 to remove yourself. from the question queue. I would now like to turn the call over to Mr. Dave Barry, Senior Vice President of Finance and Investor Relations. You may begin our conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Home and Security Second Quarter 2022 Earnings Call and Webcast. Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings release and audio replay of the webcast of this call can be found in the investor section of our FBHS.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session, are based on current expectations and market outlook. and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements except as required by law. Any references to operating income or margin, earnings per share, or cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. With me on the call today are Nick Fink, our Chief Executive Officer, and Pat Hallinan, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions. I will now turn the call over to Nick.

Thank you, Dave, and thank you to everyone for joining us on the call today. I hope everyone is enjoying their summer. It has certainly been a busy three months at Fortune Brains, and I would like to personally thank all of our associates who continue to work above and beyond to move our business forward. Once again, our teams delivered a strong quarter of results, including high single-digit sales, OI, and EPS growth versus last year. These results are a continued testament to the strength of our brands, to the hard work of our teams servicing our channel partners at industry-leading rates, and to the power of the Fortune brand's advantage capabilities. I'm also pleased to report that our previously announced plan to separate into two world-class publicly traded companies is progressing ahead of schedule. We have made exceptional progress in a number of key milestones and expect to file the initial draft of our Form 10 with the SEC later this quarter. Our 9% sales growth compares very well against the stimulus-fueled second quarter from a year ago, and reflects improved labor and shipping availability, together with higher price realization. Importantly, each segment made year-over-year operating margin improvement in the quarter as price and cost actions more than offset inflation. Consolidated operating margin was in line with our expectations, which included planned investments in our digital strategy to create a transformational platform for future growth and margin expansion. Our quarterly results were strong, and much of our portfolio continues to see solid demand levels, which are supportive of our full-year financial targets. That said, consistent with the rest of the industry, we are starting to see signs of slowing consumer behavior in response to inflation and higher interest rates. The rapid rise of the 30-year mortgage rate has cooled the torrid pace of new and existing home sales. Consistent with prior periods of interest rate increases, we expect a period of adjustment as buyers and sellers realign pricing and value expectations. We believe any slowdown in the housing market will be relatively short-term as the fundamental drivers of the housing market remain intact. The U.S. remains millions of homes underbuilt, demographics remain favorable, and home equity levels remain at historic highs. To ensure that we continue to drive value creation, We are taking proactive measures in anticipation of a period of macro-driven softness and will remain agile in the face of changing market conditions. The long-term outlook for housing, supported by demographics and fundamentals, is positive, and we are well prepared to manage any short-term pauses or softness that we encounter. We have been here before, and we will continue to execute and deliver best-in-class performance, including growing above market while delivering on our cash flow and margin targets. Our team knows how to create value, and our second quarter is another proof point of this. As I mentioned earlier, I am impressed by the progress our teams have made on our future separation into two world-class publicly traded companies. As evidenced by its continued industry-leading performance, the cabinet's business is increasingly well-positioned to stand independently. Importantly, we are also making great progress in our strategic work around the art of the possible for new Fortune brands, and I look forward to sharing that with you as it unfolds. I am confident that the separation will result in significant value creation opportunities for both companies and their stakeholders. Now, I will turn to each of the businesses to provide some color on what we are seeing. Beginning with Water Innovations, Sales were down mid-single digits in the quarter due to the impact of the COVID shutdowns in China. Excluding China, sales growth was up mid-single digits, driven by high single-digit POS. Sales are strong in our core U.S. market for both Moen and House of Roll as the strength of our brands and innovation continue to resonate with consumers. We delivered these results while facing a period of channel destocking as our continued industry-leading service levels have enabled our customers to reduce safety stock in inventory positions. Our teams have been working hard to overcome the supply chain challenges of the past couple years, and we see signs of improvement across the board. Total backlog and service rates are nearing pre-COVID levels. Water Innovation's operating margins were nearly 25% in the quarter, driven by price and cost actions offsetting inflation and proactive expense management. We continue to prioritize strategic investments, and the business remains well-positioned to outperform in any market environment. Shifting to our outdoors and security business, sales grew 13%, driven by price realization and volume growth at Thermature, which continues to gain share of entry openings via its leading portfolio of engineered doors, driving conversion from wood. Decking sales grew high single digits, tempered in part by robust wholesale inventories. Security sales were up mid-single digits, driven by strong double-digit commercial sales growth. Our security team continues to successfully diversify into broad-based commercial applications leveraging connected technology to deliver mission-critical safety products to our global customer base. Our work in commercial safety is well aligned with our ESG strategy. We are very excited about how the security portfolio is developing and being received by consumers and customers. Outdoors and security operating margin improved 400 plus basis points sequentially and 70 basis points versus prior year as price and cost offset inflation and labor availability and supply chain constraints improved from an impacted first quarter. Finally, our cabinets business delivered an exceptional quarter with sales growth of over 21% as our pricing actions became more fully realized in the P&L, volume growth remained positive, and our transformational efforts continued to deliver. Order patterns remain strong across our stock and semi-custom price bands. Builders' backlogs remain elevated and labor is shifting towards completing homes, which will provide continued tailwinds for our business. Within our higher-end premium products, market conditions appear to be impacting aggregate demand, and our teams are acting to right-size our capacity and cost structure. Cadmus operating margin was up 200 basis points sequentially in 60 basis points versus prior year, Price and cost actions more than offset inflation, and our operating environment continued to improve as labor availability and supply chain constraints eased. Our transformational work to reposition the business towards the heart of the market with efficient, scalable, and flexible capacity continues to generate results. Our cabinet's team continues to win in the marketplace, and its ongoing transformation will position the business for continued outperformance. As the team prepares to lead their own independent public company, they have never been on a stronger footing for future success. Across the portfolio, as a result of our team's market-leading service levels, channel inventory positions have improved through the past few quarters. We're working closely with our suppliers and channel partners to ensure the right levels of inventory exist throughout the value chain as we move through a period of expected short-term softness. By leveraging our Fortune brand's advantage capabilities, we will continue to proactively manage working capital and cash flow. Now, I'd like to add some additional thoughts on the current housing market. As I've said before, while the timing of housing can be discretionary, housing itself is not. There has been no change to the fundamental need for millions of more houses to be built in order to satisfy household formation and growth trends over the coming years. However, persistently high inflation and aggressive interest rate increases by the Fed have begun to impact the pace of buying and selling homes. As a result, we do expect some softness or an air pocket in new construction, which could materialize towards the end of this year or into 2023. In the meantime, builders continue to complete the much-needed starts that were undertaken as demand soared during the pandemic. With much of our product portfolio coming in towards the end of the construction process, and with persistently strong R&R interest, we remain confident in the strength of our business. While home affordability due to higher interest rates and price appreciation poses a challenge to home sales, offsets do exist. Tappable home equity continues to increase from its current all-time high. Additionally, the majority of homeowners have a fixed-rate mortgage under 4%. We expect these factors, combined with continued low supply of homes and higher costs to move, will provide tailwinds for continued R&R spending, and our portfolio of industry-leading brands remains well-positioned. Secular growth trends across both water innovations and outdoors and security propel our strong brands which are further driven by our innovation engine. The value proposition that we deliver to our consumers is backed by best-in-class innovation, quality standards, and service levels, which provides our portfolio with added resiliency and is a significant differentiator versus private label alternatives, which do not deliver upon that same promise. As we've seen during prior slowdowns, the strength of our total offering continues to attract consumers even in more difficult environments. This formula of strong brand, innovation, and service will be the firepower that accelerates performance in what will be the new Fortune brands. And within cabinets, we continue to gain share and improve margin by advancing our transformation through optimizing our product offering in a manner that appeals to customers and enables cost structure improvement. We believe that our ongoing operational efficiency improvements and increasingly flexible capacity will position us well in any market environment. We are adjusting our full year 2022 guidance to recognize the incremental expenses related to the separation. We're also scenario planning and taking actions where required to preserve and improve margin and generate cash now and into 2023. We're doing so in a thoughtful, measured way and remain committed to maintaining our long-term margin goals while still making important strategic investments to drive future growth. In summary, our impressive quarterly results support what we expect to be a strong year for the company, with above-market top-line performance and margin accretion despite ongoing inflation, a less-than-perfect supply chain environment, and dedicated investments in critical Fortune Brands Advantage capabilities. We have successfully navigated challenging environments before, including as recently as 2020 and 2018 and are well equipped to deliver sustainable growth for our shareholders by proactively managing through any slowdown gaining share and accelerating in areas of opportunity. We will do so while maintaining our commitment to being a leader in corporate responsibility and ESG as the products we make improve the quality of life every day for millions of people and deliver on our purpose of fulfilling the dreams of home. I would now like to turn the call over to Pat to go through our quarterly financial performance in greater detail. Pat?