Fortune Brands Home & Security, Inc.

Good afternoon. My name is Sachi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Second Quarter 2024 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. I would like to turn the call over to Lee Apsek, Vice President of Investor Relations and Corporate Affairs. You may begin the conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Innovation's second quarter earnings call. Hopefully, everyone has had a chance to review the earnings release. The earnings release and the audio replay of this call can be found on the investor section of our fbin.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 free cash flow on today's call will focus on our results on a before charges and gains basis. unless otherwise specified. Please visit our website for reconciliations. With me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry, 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. Nick?

Thanks, Leigh, and thank you to everyone for joining us today. On this call, I will walk through the highlights of our second quarter performance, give some color on the drivers of this performance, including progress on our digital strategy and offer some thoughts on the macro environment. I'll then turn the call over to Dave for discussion of our financial results, including our updated full year 2024 guidance. Our teams continue to execute at a high level amidst the dynamic and uneven market and delivered solid sales and strong margin results in the second quarter. Our digital products portfolio saw some exciting wins this past quarter, and we are seeing accelerating growth in this key market, which I will detail shortly. The benefit of our organizational realignment continues to generate real results, as evidenced by our market beating sales and margin performance this quarter. These actions all support our position as a growth-focused company, powered by secular tailwinds, underpinned by leading brands, innovation, and channel management, and fueled by our Fortune brand's advantage capabilities. Turning to our second quarter performance, our teams delivered solid top line and strong bottom line results with areas of organic growth in our core North American market. Net sales of 1.2 billion were up 7%, while organic sales were 1.1 billion, down 3% versus the second quarter of 2023. Excluding China, which was impacted by lower sales as the Chinese consumer remained very cautious, our organic sales growth was positive in the second quarter, including low single-digit growth in our outdoor segment and Moen North America. Looking to the remainder of 2024, we expect continued outperformance in our Moen North America and outdoors business, as well as accelerated growth in our digital portfolio. Our operating income increased 9% and our operating margin was 40 basis points higher than the second quarter of 2023, bringing our year-to-date operating margin improvement to 110 basis points. Our sales and margin performance generated earnings per share of $1.16 in the second quarter, an 8% increase over the second quarter of 2023. Turning first to our digital portfolio. We saw approximately 200,000 device activations in the second quarter, and the overall digital business continues to accelerate. In the second quarter alone, we added around 20,000 users of our Flow smart water monitor and shutoff, and retail and e-commerce point of sale performance far exceeded our expectations as the consumer increasingly gains awareness of this powerful product. Perhaps even more importantly, During the second quarter, we achieved several significant milestones across our digital portfolio, which will accelerate our overall strategy. Our digital business is now expected to add over 150 basis points of organic sales growth to the second half of 2024, and which we expect to accelerate in 2025 as the newly established partnerships continue to ramp and awareness increases. We see a path for well over a billion dollars in digital sales by 2030 we're also evolving our revenue opportunities towards data monetization and reoccurring revenue, which will provide incremental growth and further margin expansion opportunities as we continue to scale. First, we announced key partnerships with several large insurance companies this quarter. including entering into a nationwide agreement with Farmers Insurance to provide flow smart water monitor and shutoff devices to their customers. Under this agreement, Moen is providing farmers policyholders a bundled product and installation solution supported by dedicated infrastructure, which will allow policyholders to save money on their premiums. This agreement will be especially impactful in states like California, where farmers and other insurers are now requiring a significant number of new and renewing policyholders to equip their homes with an inline leak detection system. After this new requirement went into effect, farmers sought out a partner to create a seamless customer experience for the purchase, installation, and support of an inline water monitor and shutoff device. Moen won this precedent-setting opportunity because of our exceptional product, ability to deliver lost-mile installation at a national scale, and our brand's reputation for quality, service, and innovation. Importantly, we were also selected as the partner of choice because of our ability to scale our supply chain as this opportunity grows, and we are already preparing for rapidly accelerating growth. In addition to Farmers Insurance, This past quarter along, we have signed three other agreements with insurance companies where the providers will promote the use of our flow in connection with sizable policy rate reductions for their policyholders. Our pipeline of insurance discussions is robust, and we expect further progress throughout the year. In June, we also announced an agreement with the California Water Efficiency Partnership which will help us raise awareness of flow directly with municipalities and residents across California and will facilitate government rebates of our flow devices. As water scarcity becomes a major concern in California and beyond, we expect this partnership will help accelerate both sales and awareness of flow and serve as a template for other similar partnerships across the United States. In addition to the added expected revenue and exposure to our products, These agreements are important because they prove we can help enable the insurance industry to mitigate risks and issue cost-effective policies as they face a crisis of rising costs. In doing so, we can also help their customers save money and avoid disruption by preventing catastrophic water damage. And of course, these partnerships benefit our communities and environment by reducing wasted water and energy. Finally, enacting agreements like the one with Farmers Insurance or California Water Efficiency Partnership requires us to quickly and effectively work across our full organization, from our sales and marketing teams to our connected products group to our supply chain and digital teams. These agreements are yet more proof points of how Fortune Brands Innovation's new organizational structure is enabling us to capture opportunities at an accelerated rate. In addition to our agreements centered on smart water leak detection, we also recently announced a minority investment and strategic partnership with Value Hybrid, a leading software startup focused on the delivery of connected lockout tagout solutions. This partnership will expedite Moss Deluxe's ability to bring to market new and innovative products in the emerging field of connected lockout tagout and expand our leadership position in commercial safety solutions. Connected lockout tagout is a significant and attractive opportunity for Fortune brands. Given our highly recognized monster-like brand, large installed base, and lockout tagout expertise, we are very well positioned to convert mechanical lockout tagout systems to connected lockout tagout solutions and grow the addressable market. We estimate... that the global addressable market for connected lockout tagout is around $3 billion, as keeping associates safe is an increasing key priority for manufacturers and regulatory agencies across the globe. And finally, we are excited to announce that we recently entered into a new partnership with ADT. Under this agreement, the Yale AssureLock 2 collection will be the preferred smart lock for ADT customers across the country. the lock collection will be compatible with the ADT security platform, including the ADT Plus app, within which ADT will launch a new feature called Trusted Neighbor. This innovation allows customers to seamlessly grant trusted individuals secure and temporary access to their homes through either scheduled access or, in the case of events, by leveraging capabilities of connected home devices, including our Yale smart locks. Once again, This agreement is a great example of the potential of our connected product portfolio as we are increasingly exploring new channels and distribution partners to accelerate growth. These are just some of the many examples of how our digital portfolio is expanding, and I am encouraged and excited by our unique right to win in this exceptionally high growth space. While we cannot predict the exact timing or trajectory of our digital products, we believe periods of exponential growth will be preceded by key milestones like the ones we saw this past quarter. These milestones are significant, not just for the revenue that they are expected to bring in, but also because they represent key foundational steps in our journey toward widespread adoption of our products. Our results this quarter and the exciting developments that we are seeing give me full confidence Fortune Brands Innovation's ability to deliver growth and sustained value creation through the cycle, and we remain committed to achieving our long-term goals. Turning now to some additional thoughts on the current housing market and the market for our products. On a macro level, favorable long-term housing fundamentals remain in place, with the need for housing remaining strong, home prices largely holding steady, and equity levels remaining high. Importantly, inflation appears to be easing, and the likelihood that the Fed will lower interest rates in the coming months is increasing. However, we are aware of offsetting factors in the very near term, including consumer confidence and continued affordability challenges. We expect many of these macro trends will inflect positively soon, but until we see tangible evidence of improvement, we will continue to manage the business tightly. Looking at our products specifically, we believe that we are well positioned. We have strong brands in categories where brands and innovation matter. Most of our brands do not play in opening price points, which tend to be more sensitive to pricing pressures. And finally, we are strong with the pro, and pro-led projects have held up better than DIY. Turning to new construction, Single-family new construction remains strong and large production builders remain optimally positioned to continue to be able to address the need for housing, and we are a trusted partner to a very significant number of these home builders. This quarter, we continue to see encouraging growth in our products, which serve the single-family new construction channel, including Moen and ThermaTru. We expect this tailwind to remain through 2024 as builders complete their starts. Turning to R&R, consistent with what we anticipated, the R&R market has stabilized, but at a level still below prior year, and we expect the R&R market to remain dynamic throughout 2024. However, there are some positive leading indicators in the R&R space. Google search results show that search terms around home renovations are once again up versus a year ago, indicating the continued interest in our products. with particularly high increases in searches around connected home products. Existing home sales, while not a major driver of our R&R sales, are expected to improve versus the continued softness we've seen year to date. Finally, as interest rates recede, HELOC loans may be increasingly utilized as they enable consumers to leverage high equity levels to make significant upgrades to their homes. The market in China continues to remain challenged. As a reminder, the impact is isolated and independent from the rest of the portfolio, and the China business provides attractive optionality for growth and innovation. We continue to re-platform the business and will be well prepared for R&R-led growth once the market recovers. We believe that our brands and products are well positioned to outperform, including in the current dynamic and uneven macro environment. We saw examples of growth in many core and new product areas, and we will take advantage of the current period to further align our business behind those areas with higher growth opportunities, including investing in a key set of strategic priorities, while also continuing to optimize our business to be even more agile and efficient. Turning now to our individual business results. Starting with water innovations, this segment delivered 7% sales growth versus the prior year quarter, with organic sales down 5%, while generating 10 basis points of operating margin improvement. Excluding China, our water segment saw excellent performance in an uneven market, with organic sales up low single digits, led by Moen North America. Our core Moen business continues to outperform the market and take share, particularly in our wholesale business. Recent consumer brand metrics data indicate that we continue to be the highest rated brand for both quality and innovation. Our point of sale for Moen North America saw impressive mid-single digit growth with all channels showing growth, outperforming a larger market for our products, which we believe was down low single digits. Our strong relationships with the largest production national homebuilders are expected to be a tailwind for the Moen business throughout the remainder of 2024 and beyond. Our U.S. luxury business again performed well as the luxury consumer remains more resilient. Our House of Roll brand is number one with designers in awareness and consideration, and brand perception data indicates that we also lead our peers for luxury, trust, and innovation. Our point of sale for our House of Roll business was roughly flat year over year versus a market which we believe was down mid-single digits. We are now one year into our acquisition of EmTech, and the work to integrate the brand into our comprehensive and complementary luxury portfolio, including showrooms, is progressing very well. As I mentioned earlier, Flow by Moen continues to gain traction with insurance companies, municipalities, and consumers. While the new insurance and municipality partnerships are beginning to ramp up, Our retail and e-commerce point of sale accelerated 130% in the second quarter, highlighting the continued adoption by consumers. We expect sales of our connected water business to accelerate through the back half of 2024. Finally, China sales were down more than 35% this quarter as the Chinese consumer remains cautious. Our team in China has done an excellent job managing costs and margins. Looking to the remainder of 2024, we expect our water segment to continue to execute on our commitment to deliver above market sales performance by focusing on those parts of the market with the greatest potential for growth. We plan to continue to make thoughtful investments in our key priorities, including branding and digital initiatives. We remain very excited about our water business, particularly the opportunities we see to capture growth in digital, luxury, and water filtration. Turning to outdoors, we had a strong second quarter with 4% sales growth and operating margins that improved sequentially over 420 basis points. We continue to focus on leveraging our expertise and investing behind our core categories and in those areas which we expect will offer the most attractive growth opportunities. Our outdoors business has exposure to many key secular growth tailwinds, including material conversion in our fiberglass and composite decking businesses, outdoor living, and even luxury as we increasingly integrate our solar innovations technology and our M-TECH products into our doors. Our door brands delivered mid-single-digit sales growth as tailwinds from new construction and recent retail wins continued to drive sales. Thermature continues to see the benefit of the increase in starts and completions which began last year, and Larson is seeing nice performance as we begin to see the benefits of new innovation. Decking sales were up low single digits in the quarter. And once again, our Fiberon business is a great proof point of the power of our strong wholesale channel relationships. Like our leading Firmatru business, our Fiberon business has a strong conversion story, backed up by strength with the pro and the Fortune brand's expertise in multi-channel distribution. We are seeing encouraging brand metrics, especially with the pro, and continue to be excited by the ability of this product to harness the powerful secular tailwinds of material conversion, sustainability, and outdoor living. Finally, turning to our security business. Our security segment grew sales 12% in the quarter and was down high single digits on an organic basis, primarily due to continuing softness of consumers in retail and e-commerce. Encouragingly, we saw an improving point of sale as the quarter progressed. The segment also saw 330 basis points of operating margin improvement, inclusive of the technology investments in the Yale and August residential Smart Lock brands, as the work we did around continuous improvement and supply chain continues to pay off. Our Master Lock brand is incredibly strong, and we believe our recent organizational redesign will allow us to further strengthen this powerhouse brand. Finally, our Master Lock security business is now around one-third industrial and commercial, and we have developed a niche in the critical and growing remote access portable security space across the globe. We are proud of how our business is helping companies around the world protect their people and their assets. As we accelerate our leadership in connected industrial security through our lockout-tagout investments, we expect this portion of the business to see future outsized growth. Over the past few years, We have evolved from mechanical-only products into innovative and growth-oriented businesses with a much more strategic portfolio. We will reinvest the efficiencies gained from our recent optimization of the business to leverage strong secular trends like digital products and safety. As a result of our new aligned structure, we have substantially improved the segment's supply chain and sourcing capabilities, accelerated our branding work, and have made significant progress in building our digital security portfolio. A year into the acquisition of Yale in August, we are delighted with these accelerants to our business. In addition to being great assets, which we acquired at a very attractive price, we continue to be impressed by the strength of their teams in key areas, including digital. We are utilizing their skills and knowledge throughout the business and their expertise is being deployed across our portfolio as we continue to accelerate our digital strategies. In 2022, our digital security sales comprised just 2% of the segment's sales. This past quarter, they represented close to 20% of security sales, and we see a pathway to over 40% of this segment's sales coming from digital products as we continue to convert mechanical products to digital products and explore new-to-world technology in our spaces. As we turn to the second half of 2024, we remain fully confident in Fortune Brand's ability to deliver above-market growth, drive margin improvement, and continue the acceleration of our digital portfolio. Looking at our end markets, U.S. single-family new construction and luxury continue to be tailwinds. R&R has firmed, though not yet improving year over year, and China is weaker than expected as the push to complete homes has ended and the Chinese consumer remains cautious. We continue to lead through the current environment well, while still investing in critical priorities like our digital strategy and our brands and innovations. To recap, in the second quarter, we executed our priorities of focusing on the core and accelerating digital products, and delivered impressive organic growth in our core more North America and outdoors businesses. In doing so, we delivered solid sales and strong margin results. We will continue to strategically manage the business in light of the uneven market backdrop, and we'll focus on those areas where we have the greatest potential for above market growth while continuing to make margin improvements. By taking decisive actions now, I believe we will be best positioned for accelerated growth when external market conditions improve. I will now turn the call over to Dave.