Fortune Brands Innovations, Inc.

Good morning. My name is Camilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands First Quarter 2023 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 Avsek, Vice President of Investor Relations and Corporate Affairs. Lee, you may now begin our conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations first 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 SBIN.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 reference 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 our 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?

Thank you, Lee, and thank you to everyone for joining us today. On this call, I will walk through the highlights of our first quarter performance, give some color on the drivers of this performance, and offer some thoughts on the macro environment. I'll then turn the call over today for discussion of our financial results and how we're thinking about the remainder of 2023, including the increase to our full year 2023 EPS guidance.

As a reminder,

This is our first quarter as the new, fully separated Fortune Brands Innovations. Our results in the tough market are testament to our compelling new investment thesis. We are a resilient and growth-focused company, powered by secular tailwinds, underpinned by leading brains, innovation, and channel management, and fueled by our Fortune Brands Advantage capabilities. All of this is enabled by our new organizational structure, which was thoughtfully designed to accelerate growth. Our company is driven by a highly focused, aligned, and motivated team who are keen to build even further on our long history of market outperformance. Collectively, over the last year, our teams have led through a period of immense change to emerge as an even leaner and more ambitious growth engine, and I thank them for their dedication. Turning to our first quarter performance, our teams delivered solid results amid a challenging external environment. As we anticipated, reduced demand and a return to typical seasonality impacted our industry. Thanks to the proactive steps we took in preparation for the downturn and the inherent strength of our newly refined portfolio, our brands performed well. As a result, sales and margins outperformed our initial expectations for the quarter. Net sales of $1 billion were down 9% versus the prior year, and our operating margin was 13.1%. Our sales and margin performance generated earnings per share of 69 cents in the first quarter. Our first quarter results look even stronger in the context of lapping the exceptional performance from the first quarter of 2022. Putting our results in a broader context, our first quarter organic sales results were 24% higher than in the first quarter of 2019. These results highlight the long-term strength of our portfolio, which is now more focused on smaller-ticket branded products. Our results also reflect the team's focus on outgrowing the market, preserving margins, and generating cash while prioritizing key investments, including in brand building, meaningful innovations, and our digital transformation. Looking at the overall market, and consistent with what we anticipated on our fourth quarter call, we encountered macro challenges driven by lower rates of new construction starts, reduced consumer spending, and channel partner and order patent inventory normalization in parts of the business. We continue to expect headwinds through the remainder of 2023 and the teams are prepared to act proactively and with agility as part of our commitment to our stakeholders to outperform in all environments. Specifically, as part of the reorganization work that we initiated last year, we also took concrete actions to right size the cost structure of the business and improve our overall efficiency. including by reducing inventory, driving efficiency in our operations, and reducing duplication throughout the company. This new structure enables acceleration of our focus on branding and innovation, and we will continue to provide our customers with the high levels of service and partnership for which we are known. Most importantly, our new structure is a catalyst for accelerated growth. It allows us to deploy the Fortune Brands Advantage capabilities across the whole organization while fueling growth by removing duplication and non-value-added activities. The opportunities unlocked by our new structure will become even more evident as the market returns to growth. In the interim, we will closely monitor the trends in data across our business and will respond to market conditions with additional actions as necessary. I have full confidence in Fortune Brands Innovation's ability to deliver long-term growth and sustained value creation through the cycle. And we remain committed to achieving our long-term goal of a net sales growth CAGR of 6% to 9%, operating margins of 20% to 22%, and EBITDA margins of 23% to 25%. Fueling this confidence is our strong belief in the medium to long-term market opportunity underpinned by attractive demographics and a significant shortage of U.S. housing, which has only been exacerbated by the current interest rate environment. The recent acceleration of mortgage underwriting following rate drops demonstrates how much pent-up demand exists for housing. Our business is optimally positioned for acceleration once the housing market returns to growth. Turning now to some additional thoughts on the current housing market and the market for our products. As anticipated, The first quarter was marked by decreased demand driven by lower new construction starts, lower consumer spending, and continued inventory reductions as more typical seasonal demand patterns return. Compared to the prior year, new construction remains challenged. However, certain metrics are showing signs of improvement when viewed on a sequential basis. Single-family new construction permits, starts, and completions were all up sequentially in March. although down significantly year over year. Over the last few months, mortgage applications increased significantly in response to a relatively small decrease in mortgage rates. This speaks to our previously communicated and well-accepted thesis. The market remains under bolt, and pent-up demand is only being exacerbated by the slowdown in construction. Once the market is confident that the Federal Reserve has stopped raising rates, we expect consumers and builders will react positively. Ultimately, the only solution for the supply and demand imbalance in housing is to build more homes. And with our balanced exposure to new construction, we are well positioned to capture the opportunities that will result when the market returns to growth. All that said, we are cognizant and prepared for future volatility as long as challenging macroeconomic conditions persist. Turning to R&R, we saw the R&R market decelerate over the first quarter and into April. in response to inflation and general economic uncertainty. Although the overall R&R market is expected to be down for 2023, there are some important nuances. For example, recent credit card data indicated that while spending decreased across the home product space, the declines were most pronounced in big-ticket and more commoditized products. Further, while down on a year-on-year basis, both spend and keyword search data are significantly higher than pre-COVID levels. We believe our products are relatively more insulated because of their smaller ticket price, are less disruptive to install, and therefore less tied to housing turnover, and offer a higher return on investment potential for the cost. Supporting this was a recent study conducted by ThermaTru, showing that replacing an outdated door with a ThermaTru door offers one of the best returns on investments in the home and can even raise a home buyer's perceived value of a home by up to 7%. We expect the softness in our to continue throughout 2023 as macro economic uncertainty persists, however, the fundamentals of the market point to a favorable mid to long term future for the on our market. The combination of high home equity levels below supply of homes and aging housing stock and the fact that many homeowners are living in homes they purchased with no mortgage or with record low interest rates is causing many people to rethink their existing space. and undertake R&R projects to turn what they have into what they need. Finally, in China, the market remains soft, but we believe it is starting to find a bottom. As has been widely reported, the Chinese economy is showing signs of a steady recovery, including strong new home sales growth in March. However, as a reminder, many Chinese homes are sold before they are completed, and our products are used later in the building cycle. As a result, we would expect to see positive impact 12 to 18 months from the point that home sales inflect positive. We have confidence in our team's ability to successfully navigate short-term disruptions and remain focused on creating long-term value in China, including in the emerging and high potential R&R space. In short, while these are certainly challenging times for our industry and for the overall global economy, Fortune Brands Innovations is well positioned. Our branding power meaningful and value-add innovation and channel strength are powerful moats in uncertain times. Our consumers continue to reward us with growing market share, and our customers continue to view us as valued partners with unique insight and category management expertise. Our products and brands are uniquely positioned to outperform the market in all environments, as our results demonstrated this past quarter. Starting this quarter, we began reporting on three segments, water innovations, outdoors, and security. All of our segments are unified by their strategic focus on brand, innovation, and channel, and their opportunities for supercharged growth. Our water innovation segment includes our leading Moen and House of Roll brands. As the world increasingly focuses on the power and importance of water, we've positioned ourselves to capture the powerful growth associated with this category, including water management, sustainability, and connected products tailwinds. Our core suite of faucets and showers employ sophisticated technology to maximize water savings while still delivering an enjoyable water experience. And our pioneering connected water products have phenomenal potential to change the way residential water is managed. Our outdoors segment includes our leading door brands, ThermaTru, Larson, and Solar Innovations, as well as our fiber on decking brand and our Fipe on Decorative Millwork brand. This segment is exposed to key growth drivers, including outdoor living, sustainability, and material conversion trends. We're excited about the opportunity ahead to continue converting consumers and pros away from commoditized lumber products as they increasingly understand the performance characteristics and advantage value proposition of our brands. Finally, Our security segment is comprised of our iconic Master Lock and Sentry Safe brands and is also driven by high-growth secular tailwinds, including connected products and commercial safety. Companies across the globe are increasingly focused on the importance of worker safety as something that is both the right thing to do and good for business. We believe we have a unique opportunity to grow in this space as we look to leverage our subject matter expertise, focus on innovation, and unparalleled brand recognition. Turning now to our individual business results. In the first quarter, water innovation sales declined 8 percent compared to the prior year, driven by volume declines across the segment, partially offset by price. These results were stronger than we initially projected and reflect higher than expected sales across the Mo and North America business, particularly in wholesale. Our margins for the segment were 21.6 percent, reflecting lower operating leverage from lower volumes and our inventory reduction efforts. In the quarter, Mo North American POS outperformed the market and was particularly strong in the wholesale and e-commerce channels. However, POS on both a unit and dollar basis trended down toward the back half of the quarter and through the first part of April, in line with the overall market softness and a significant lap from prior year. The pricing actions we took at the beginning of the year have remained in place as the value proposition of our products is increasingly well understood. As we highlighted during Investor Day, over the past few years, we've simultaneously increased price, elevated the perception of Moen as a high-end brand, while also significantly increasing the perception of delivering high value for price. This is an example of our brand building capabilities, which are now being deployed across the entire organization. We feel confident that our attractive, trusted, and innovative products will remain the choice of consumers and pros in any environment. Our House of Roll brands also delivered market-beating performance, with total sales up 20% for the quarter, including Aqualisa, and US POS was up low single digits. The higher-end consumer remains strong. and we continue to outperform in this attractive market as our story of crossmanship and unique designs continues to resonate. In China, as expected, we saw sales decline near 30%, excluding FX. Our China business is exceptionally well-run and is taking into account prevailing market trends and assessing new growth opportunities, including pivoting toward the emerging R&R market and pioneering new markets and service models. In addition, our China business continues to serve as an incubator for innovation introduced across the water portfolio. In outdoors, we saw sales declines of 16%, reflecting expected new construction market softness and the lapping of prior year as the market returns to more typical seasonality. The lower volumes were partially offset by price. Operating margin was 5.2%, reflecting stranded production costs from lower volumes and our inventory reduction efforts. In decking, we saw an expected sales decline as inventory levels rebalanced and seasonal buying patterns returned. While the first quarter had a lower-than-expected inventory build as distributors maintained leaner levels of inventory, POS was still strong in the quarter. Retail POS was up high single digits, and wholesale POS was down low single digits. We are responding to the current environment by maximizing our operational efficiency and optimizing our Fiberon brand for future growth By making strategic and discipline capacity investments and leveraging our newly aligned organizational structure to accelerate our branding and innovation strategy. All these investments impact margins in the short term, especially as we compare them against prior periods marked by an unusual lack of seasonality. Mid to longer term these thoughtful and stage investments will help us capitalize on a long term growing market. We remain laser-focused on taking profitable share by converting a commoditized lumber market into a brand and innovation-led market, and we remain disciplined in our pricing actions. Indoors, we saw sales decline in the mid-teens as the overall market softened. The wholesale channel saw some regional destocking in the quarter, which we now believe is complete. We are confident in the strength of our product offerings and our long-standing advantage relationships with our key customers and channel partners. and thoughtful as we look to maintain and grow market share in the most attractive parts of the market. We continue to leverage our recent acquisitions to drive innovation across the portfolio. We recently unveiled the exciting new Veris collection, a contemporary entryway product line that incorporates the technology we acquired as part of the solar innovations acquisition. With Larson and Thermature, we are continuing to expand our offerings under our Impressions door systems, which are the first of their kind, a fully integrated storm and entry door system Lastly, in security, sales increased 2%. These results were driven by price, together with new business wins, inventory replenishment at customers, and strong demand in the commercial safety and security space. Operating margin increased 70 basis points to 14%, reflecting the implementation of the strategic improvement initiatives that have been in place for the past few years. Our security business is powered by our iconic Master Lock and Century Safe brands. and we believe it has significant growth opportunities as we begin to leverage these world-class brands in new ways, including in the connected and rapidly growing commercial safety space. We expect our security business will see outsized benefits from our new organizational structure as we focus on driving the brand, augmenting our connected product capability and offerings, and increasing operational efficiencies in the business. Lastly, we are very excited about the potential of commercial safety and security which has seen impressive growth over the past several years and now accounts for around one-third of our overall sales for the segment. Finally, we remain optimistic and very excited about the potential acquisition of two world-class businesses from Assa Abloy, the Amtek premium and luxury door and hardware business, and the U.S. and Canadian Yale and August residential smart locks business. These businesses will be strong accelerants to our connected product and luxury portfolio strategies. We continue to expect this highly disciplined and strategic acquisition will successfully close mid-year, and we will update you as we know more on that front, including on the potential synergies associated with the transaction. Before I turn the call to Dave, let me share a few final thoughts. As we highlighted last quarter, we expected and planned for a challenging 2023. Beginning in mid-2022, we took steps to prepare by streamlining our cost structure, reducing our inventory, and prioritizing cash generation while continuing to invest in the key strategic priorities that will fuel our future outsized opportunities when the market returns to growth. These proactive steps generated around $50 million in annualized fixed cost and SG&A savings and reduced inventory ahead of plan, including over $150 million of inventory reduction since the third quarter of 2022. Importantly, we saw no negative impact on our best-in-class service levels and our lead times have returned to normal levels. In our 2023 outlook, which Dave will discuss in a moment, we've developed a plan to deliver market-beating sales performance, preserve margins, and generate cash regardless of the headwinds we may face. We are prepared to confront challenging end markets in the short term while we position ourselves for accelerating long-term outperformance in a market supported by fundamental growth characteristics. With that, I'll turn it over to Dave.

Thanks, Nick. As a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year unless otherwise noted. Let me start with our first quarter results. As Nick highlighted, our teams executed well against a challenging and dynamic environment. Sales and operating margin came in higher than what we initially anticipated during our call last quarter. Sales were $1 billion down 9% and consolidated operating income was $137 million down 22%. Total company operating margin was 13.1% and earnings per share were 69 cents. Our first quarter performance was driven by higher than expected sales in our water and security segments and resulting margin flow through. However, we are still anticipating a volatile remainder of the year and will remain agile and proactive in response to any changing market conditions. For the quarter, the 9% sales decline included a 3% unfavorable impact from our China business on our consolidated results. Excluding China, sales were down 6%, with POS down low single digits and a mid-single digit unfavorable impact from current year channel inventory reductions and prior year service recovery, predominantly in our outdoors segment. As we discussed last quarter, we expected first quarter operating margin to be most acutely impacted by production inefficiencies and stranded fixed costs related to our inventory reduction efforts. As Nick mentioned, we have made very good progress against our near-term inventory reduction target of $175 million. We remain focused on driving outperformance including above-market growth, preserving and enhancing margins, and generating cash. Our teams continue to focus on appropriately managing our P&L and balance sheet while maintaining key strategic growth investments. Now, let me provide more color on our segment results. Beginning with water innovations. Sales were $594 million, down $49 million, or 8%, and also down 8%, excluding the impact of the Aqualisa acquisition and FX. Net sales results reflect the impact of lower volumes, partially offset by price. Importantly, our Moen USPOS was down low single digits in the quarter, reflecting a better-than-expected start to the year. China sales declined around 35%, or 30% excluding FX, driven by the prior year's decline in housing activity. While new home sales are improving, the Chinese consumer remains cautious in the housing space, and as Nick indicated, based on the timing of when our products are installed during the construction cycle, we don't expect to see the benefit of these improving indicators for another 12 to 18 months. Water Innovation's operating income of $128.6 million was down 14%. operating margin was 21.6%, reflecting the impact of production inefficiencies and lower volumes. Turning to outdoors, sales were 290 million, down 54 million, or 16%, driven by lower volumes and channel inventory destocking, partially offset by price. Door sales were down mid-teens, as expected, Sales were impacted by lower volumes and channel inventory reductions at ThermaTru as production builders worked through their completion backlog and new starts softened. Decking sales declined mid-teens, driven by channel inventory rebalancing and expected lower volume. Outdoor segment operating income was $15.2 million, down 57%. Segment operating margin was 5.2%. Segment operating income declines were driven by unfavorable volume leverage in our businesses due to production inefficiencies and stranded fixed costs in support of our inventory reduction efforts. We expect outdoors margin will improve to mid-teens or higher in the second quarter, as expected seasonal volume increases drive scale through the P&L. Importantly, outdoors remains on track to deliver their 13.5% to 14.5% operating margin guidance for the year. In security, momentum in the segment continued with low single-digit sales growth driven by price and new business wins in locks and commercial safety and security. Segment operating income was $21.8 million, up 7%. Segment operating margin was 14.0%, an increase of 70 basis points versus the prior year, and was driven by price and continuous improvement initiatives. Turning to our balance sheet. Our balance sheet remains strong with cash of $539 million, net debt of $2.1 billion, and net debt to EBITDA leverage at 2.3 times. We finished the quarter with full availability under our $1.25 billion revolver. As mentioned, This past quarter, we continued our efforts to drive improved cash flow, including reducing our inventory levels. In line with our disciplined capital allocation strategy, this enhanced cash generation enabled us to opportunistically repurchase $100 million of shares in the quarter. Further capital deployment will depend on the timing around the closure of the potential ASSA ABOI transaction, our leverage ratio in the context of the external macro environment, and business performance and the attractiveness of other value-creating opportunities. We continue to be committed to maintaining a strong financial profile, enabling pursuit of above-market growth while prioritizing the best returning opportunities for value creation. To summarize the quarter, we delivered sales and margin results above our initial expectations in a very challenging environment. While our Q1 results were certainly encouraging and speak to the strength of our business, we are anticipating and preparing for continued headwinds and volatility. As a reminder, our initial financial guidance included prudent market and demand forecasts, the ability to maintain price while achieving reasonable continuous improvement actions, and the impact of production inefficiencies and stranded costs from our inventory reduction actions. With that in mind, I'll provide an update to our 2023 guidance. As today's press release indicated, we are increasing the midpoint of our EPS guidance by 5 cents to the range of $3.65 to $3.85, reflecting our higher than anticipated operational performance in the first quarter, as well as the impact of first quarter share repurchases. We are mindful of the ongoing uncertainties inherent in the external macro environment, and we continue to expect full-year net sales to be down in the range of 5% to 7%, operating margins to be between 16% and 17%, and EBITDA margins to be between 19% and 20%. We continue to expect to generate free cash flow of approximately $475 million during the year, with a cash conversion rate of around 100% of net income. During the quarter, we generated positive free cash flow driven by our working capital and inventory reduction efforts. Our teams are off to a great start against our full-year targets and will remain agile in the execution of our key priorities. I will now pass the call back to Leigh to open the call for questions. Leigh?

Thanks, Dave. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I will 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 to the operator to begin the question and answer session. Operator, can you open the line for questions?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we pull for questions. And our first question is from John Lovallo with UBS. Please proceed with your question.

Thank you for taking my questions. Maybe just starting from a high level strategic one first. Nick, I mean in your opening comments you talked about construction starts and consumer spending, you know, how they've moderated, but there's been some positive green shoots in different housing metrics, whether it's, you know, mortgage apps or new home sales, and even in some, you know, renovation initiatives. Curious, you know, how Fortune sees demand for both R&R and new construction evolving over the coming quarters, given the, you know, its presence in both markets, R&R and new construction, and, you know, how you view Fortune as being positioned to capitalize on this?

John, happy to talk about that, and I'll give you some perspectives. Dave may want to add a few other perspectives here. But, you know, look, without a doubt, 2023 is a challenging environment, and we've prepared the business to navigate a challenging environment, and I think it's going to remain so as long as you have economic uncertainty, as well as this return to seasonality on shoulder quarters that we're experiencing. You've got lower consumer spending. You've got lower starts. But if you step back for a second, I think, and put it in the context of the macro demand levels, I mean, as we see it from a number of, advantage points, you know, the fundamental demand that we all talk about is still there. You know, for starters, as I think Dave said in his remarks, you know, organically, this quarter is still 24 percent up on the same quarter in 2019, pre-COVID, right? And so, notwithstanding all the noise and all the economic uncertainty and everything that you hear in the marketplace, it's still a 24 percent increase. And it tells you that, you know, it takes a consumer to be there. It takes pros to be there in order to drive that. And then, you know, where you see any sort of positive, a little bit of positive inflection, certainly around traffic, orders, and even new home sales, you know, you see the consumers have shown up even with a little bit of easing. And so, you know, we take that and we just remain pretty sanguine about the whole marketplace, stepping back and looking at the fundamentals, the demographics, the fact that the market is free under both, the fact that a lot of existing home product is very old out there and that you have an environment that I think is primed for consumers to spend against. And I think there's enough evidence, even in a quarter like Q1, which we don't like because we're down, of that happening. Now, how we play the portfolio against that, I just start by saying we really, really need aim to gear the portfolio where the consumer is right and i think you've seen us move up and down um the price and premium spectrum as we built up the portfolio we saw you know the large amount of millennial home buyers coming through we made sure we kind of had that heart of the market set very innovative product um that served us really really well as they've started to mature into some second homes or even third homes, you know, we've kind of positioned a portfolio like House of Roll or sort of the premium parts of our other portfolio to be able to capture them. And you see in the House of Roll results how resilient those consumers have been. So, you know, from a product perspective and a brand perspective, we really, really aim to leverage the innovation insights machine to meet the consumer where they are. From a market-back perspective, you know, we are approximately two-thirds R&R, and fundamentally, that's going to be a market that, you know, grows nicely over the long run. And then we like the torque that we get from new construction because, as I said in the prepared remarks, the only way to rectify the imbalance in spline demand is to build more homes. And so, we want to give investors the benefit of that exposure to new construction. And we view it as the responsibility of this management team to manage, you know, any downdrafts and to manage the cost structure appropriately. And I think that you're seeing us do that, and you'll see us do that through the rest of the year. And so, we really aim to have a portfolio of both our product, brand, and then channel perspective, you know, really exposed at, you know, where the market is and where we think the long-term growth will be. And then a final comment that I'll make is, you know, we're putting more and more emphasis on, you know, finding these secular growth pockets, these supercharged kind of subcategories in our categories. where you're going to have growth no matter what because you just have underlying trends pushing them along. And I think that was evident in some of the security results where you've got a really nice tailwind in the commercial safety space. You've got a really nice tailwind in the connected space. And that's now pushing on a third of that business. And you see it kind of power through a tough macro environment notwithstanding. And we aim to turn that dial more and more in the whole portfolio.

And, hey, John, this is Dave. Let me add a bit about just our market view for the rest of the year. And if you recall, our market guidance that we gave last quarter was for the global and U.S. markets to be down between 6.5 and 8.5 percent, with U.S. R&R down 4 to 6 and U.S. single-family new construction down 18 to 22 percent. As we look at the first quarter and some trends into the rest of the year, I think there's probably a bit more momentum in single-family new construction. that maybe leans us more towards the better end of that range. And while R&R was better in the quarter, especially in the first half of the quarter, I think it's too early to call any full-year improvement on our R&R market right now, even though the first quarter was a bit better than expected. And I remind you, as we talked about last quarter, I mean, there's a pretty significant lap in our POS that we see in our data from, you know, March through June. And so we want to get through that period of time and understand how the business is performing because we're comping, you know, 2021 stimulus effects that were then, you know, lapped in full by 2022 price and demand. So I think too soon to kind of give any new color around R&R, but single family seems to be a little bit better.

Okay. Thank you for that, guys. And then the second question is, you know, the first quarter decremental margins were around 40%. And I think you articulated last quarter that The first half would be under more pressure, particularly in the first quarter, given production curtailments and stranded costs. With that said, though, it looks like inventory only came in by about 9% sequentially. And just curious if you guys reduced production as much as you anticipated and how we should sort of think about the progression of decremental margins as we move through the year.

Yeah, John, this is Dave. So as we said on the last call, when we gave a bit more color around the first quarter than usual, You know, we expected margins, operating margins, to be between 12.5% and 13%. You know, we came in at 13.1%, so a bit higher than the range, really driven by better sales. On the inventory side, we're actually a bit ahead of our plan in what we were able to take out in the quarter. Now, some of that was because of our internal efforts, and some of that was because of the sales being a bit better. So we're ahead of inventory coming down significantly. And, you know, as we look forward, I think we've set up the year on the last quarter, first half, second half, talking about, you know, first half sales declined between 7% and 9% with operating margins between 15% and 15.5%. And we still see that as the right expectation for the first half. And then similar with the second half, with sales down 3% to 5% in operating margin, 17% to 18% still feel like that's the right expectation for the second half. In terms of your question on decrementals, we're targeting 25% to 30% OI decremental margin for the year and still see that as the right range for the business. And I think we'd look to achieve that even if the market were a bit softer than what we're projecting. So that's how the company and the portfolio is geared towards that 25% to 30% decremental. Thanks, Dave.

Thank you. Our next question is from Matthew Bully with Barclays. Please proceed with your question.

Hey, good evening, everyone. Thanks for taking the questions. Maybe a question on outdoors. You know, you had the 5% margin result there in the quarter, and I think I heard you say at the top that you still expect that to improve to mid-teens by Q2, and correct me if I misheard you, but... You know, any sort of detail on what kind of underlies that, you know, confidence in the sequential margin improvement in that business? And then, you know, how you think about the margin progression in outdoors through the balance of the year? Thank you.

Yeah, Matt, this is Nick. I'll just kick it off with a little perspective on outdoors and then hand it to Dave. He can walk you through the margin story. I would say, you know, outdoors, POS was down around single digits. Um, and that business is probably of all the businesses sort of most impacted by kind of a return to seasonality. And the fact that with respect to the doors business and to degree decking business, you know, you're lapping a period where things are, uh, not just going full board, but we're on allocation. Um, and people are taking everything that they could. And so that's a little bit of the effect we saw last year, also in the business kind of now rolling through here, because it was the last thing to come off of allocation. But as it does, you know, it's good to see sort of POS kind of hanging in there. But I would just add to that as a reminder, you know, this is a materials conversion business, right? Whether it's on the door side, on the decking side, or even on the mall work side, like it's all about, you know, that material science, investing in the material science and having the capacity. And so... As we've worked through this, we've continued to, I think, be very strategic about how we feather in capacity increases. But with the long-term view that this is a growing category and we need to be able to capture the growth. And so in a period where you're going to have an inventory coming off or some lower volume, you're going to see the impact through the bottom line. But over the long run, we're very confident in the margin progression that we expect this business to make. Dave, want to give a bit more detail?

I think that's it, Matt. It's really a quarter with some volume deleverage. If we look at the sales results for outdoors, you know, down 16%. As Nick said, POS was down mid-single digits. Volume was actually down mid-teens from a POS perspective. And then there was a low double-digit impact from channel inventory. So as we signaled a quarter ago, we expected outdoor margins in the first quarter to be high single digits. You know, they were mid-single digits, I think a bit more channel inventory came out than expected. We were anticipating some of that indoors, and that occurred. So looking forward, this would be the lowest volume quarter of the year, and as volume returns to that business, we'll gain operating leverage pretty quickly and get that margin back up into the mid-teens.

Gotcha. Okay, that's helpful. Thanks for that, guys.

And then I guess on that topic of channel inventory, I mean, it sounded like you still saw destocking, certainly as you just mentioned, and in the outdoors business, and I think in water as well. So where are we in that cycle of channel inventory rebalancing? You know, where does it feel like there still needs to be a little bit more to come versus, you know, where are we closer to the end of that destocking? Thank you.

Yeah, I think, Matt, this is David, and I think we're pretty close to the end. So outdoors, we look at the quarter. You know, outdoors, as I mentioned, has the biggest impact, you know, low double digits. You know, within water, It was really only a low single-digit impact from channel inventory, and then security was pretty well balanced. And so as the teams continue to look at our data and do channel checks, we feel like here entering the second quarter, we're relatively balanced to this rate of demand in this macro environment, and we really have finished comping the prior year service level recoveries that are also creating some noise in the year-over-year reported results.

So the team's

feel like we're in a pretty good place and that sell-in and sell-out will be more approximate to each other going forward.

Got it. All right. Thanks, Dave. Thanks, Nick. Good luck, guys. Sure. Thanks.

Thank you. Our next question is from Stephen Kim with Evercore ISI. Please proceed with your question.

Yeah. Thanks very much, guys. Just touching on the downtime, I think you'd said last quarter, I think you'd talked about maybe 50 to 55 million or something for the year with about 80% of that in the front half of the year. Just want to make sure that that, you know, is still what your expectation is. And I believe the reason why, you know, you would describe, you know, downtime effects, you know, sort of lasting throughout the entire year was because that was just basically going to be how it flows out of inventory. But are the actions that have, you know, sort of generated that headwind, are those actions at this point pretty much complete?

Yes, Steve, this is Dave. Back on your numbers question, yeah, that's right. We said full year P&L impact, 50 to 55 million. You know, first quarter, roughly 30 million. As I said earlier, we're actually a bit ahead of our inventory takedown expectations, and so there was a low single-digit million incremental impact to the P&L in the first quarter, still probably within that 50 to 55 million range for the full year. I'd say the actions to drive the results, mostly taken at this point. I mean, if you consider, you know, in water insecurity, where we have long lead time supply chains, and we started pulling levers in the third quarter of last year to kind of get those supply chains normalized. And then, you know, where we're more vertically integrated in outdoors, you know, those levers are a bit more real time, and we're pulling those in the first quarter, beginning of the second quarter. And you're correct, you know, the spread of that cost through the year is just the impact of of those stranded costs flowing from the balance sheet into the P&L.

Great. Yeah. Okay. Thanks for that. The second question relates to mix. And I was curious if you could just sort of across your businesses talk about where, if anywhere, we might be experiencing or you might be experiencing or anticipating a change in the mix profile that would be worth calling out. And then just a quick housekeeping item. I think there was a $6 million number or something in other I was just wondering what that was related to.

Michael Heaney- Okay. Well, I'll kick off with some thoughts on MIX, and then, Kenneth, if you can, 6 million plus any other thoughts you have on the MIX. And just I'd say as a reminder, you know, my comments earlier about, you know, we really try to gear the portfolio to be at the heart of the market and then capture consumers up and down the spectrum. You know, we've done so through a lot of our initiatives in a way in which we've also kind of maintained, I would say, very similar percent margin profiles, no matter where the mix lies, really leveraging volume at the lower price points and kind of more, you know, bespoke stuff at the higher price points. You know, it was interesting in this past quarter, you know, to see some of the higher-end products kind of hang in there, as they did. You know, I think Hustler Roll is a good example example of that, that, you know, we saw POS that was actually up just on an organic basis in the U.S. market, and I think that speaks to the resiliency of that consumer for a price point. And then from a channel perspective, I would say as a general rule, you saw retail mix be pretty strong, as Dave pointed out, kind of up until about March, and then when you hit the lap of that really goes kind of March, April, and And a bit into May, we saw the consumer come off, so that was as we expected. And the wholesale mix was a little bit more favorable than we expected, and I think that is going to probably continue a little bit here with some of the results that we've seen.

And, Steve, on the other item, so a portion of that is interest income, which is something we haven't had in a while, but it's nice to be able to generate some interest income with our cash. And the other portion is some pension income as the team's going to finalize pension for the year post-cabinet separation. Okay, great.

Thanks very much, guys. Sure.

Thank you. Our next question is from Tim Wise with Baird. Please proceed with your question.

Hey, guys. Good afternoon. Good afternoon. Maybe just on the wholesale side, I mean, you know, Nick, maybe just if you can step back and maybe kind of give us some color on where the channel inventories are now within wholesale. And have you started to see like a meaningful restock in that channel or is it just that the destocking is kind of subsiding?

Yeah, I would say, as Dave pointed out, the inventories are much healthier than they were. And just as a, As a reminder, a lot of the inventory that we saw accumulate and then come out in 2022 was not where we would normally look for inventory. It was kind of at our customers' customers, particularly in the water business where we serve a lot of production builders who are in turn served by, you know, large plumbers. And so, you know, that's where a lot of that inventory was built. And our sense is, and Dave can show the numbers again, you know, most of that's out. We saw a bit of regional inventory in the doors business, you know, a bit in the water business. As Dave said, security pretty balanced at this point. And so, we think it's in a pretty healthy spot. That said, we've not seen much restocking. If anything, I think we may be expected to see a bit more in the quarter, you know, if you take something like decking. And, you know, dealers are continuing, I think, to keep things pretty lean, understandably, with the economic uncertainty out of there. You know, so, you know, we'll just watch that as that goes.

Yeah, I think, Tim, just some color I'd add. So, As Nick mentioned, wholesalers really started to rebalance inventory last year as single-family new construction slowed down. So they kind of saw that coming and got out ahead of it. You know, in the quarter, low single-digit impacts on the water business from inventories predominantly in retail and a bit in e-commerce, which were expected heading into the year.

Okay. Okay, good. And then just maybe a bigger picture on China. Could you just give us a little bit of help or just a little bit of background on just where the business is in terms of transitioning that towards more of an R&R-type business? I don't know if it's a percentage of the sales that's R&R today versus where it might end up, but just a little bit of color on what the progress of that might look like over time.

Yeah, so I'll just start with kind of the big macro, right, which is, as you obviously know, China's been a big new construction-powered market for a very long time. And while we had a lot of exposure to that, we worked very hard to stay away from the very speculative building, right, the Tier 3 and 4 cities, like the empty buildings that you read about. We really kind of focused on Tier 1 and Tier 2 cities. So while we peg even our share at, say, like around a, you know, 10% ish mark or Shanghai shares probably closer to a 25. And so that's, you know, that's just how we constructed the business, but still even a market like Shanghai over the years, a lot of new construction, you know, those buildings are, are aging now and, you know, space is more scarce. And so what you're starting to see is a pivot. Now, a while ago, people would just buy, you know, empty concrete boxes and then go and decorate them. That's evolving to what's called either a finished unit or a decorated channel where you work with the designer to go in and finish the new construction unit. And now, as you'd imagine, that's becoming a bigger and bigger part of R&R. And so it's not a huge market yet, but it's a growing market, and we think it's one that's going to become you know, very important in the future as these consumers need to start, you know, refreshing these units. And so, you know, focusing on those bigger markets that are more established where we have stronger share, you know, and focusing on that channel is a big part of that strategy. Now, you know, we want to see sort of the bottoming out of new construction because it's just been a circular part of the business. We think we're seeing that now and we're being cautious about how long it may take for that, you know, positive inflection in starts to then translate into decorated units down the road. But the teams managing the business incredibly well, kept it, you know, quite profitable and focused on building out these new growth channels as well as being an innovation engine for the entire company so they continue to, serve up products that, you know, we're launching into other markets. And increasingly, you know, with our new Fortune Range Innovations structural organization and all the work that we've done to sort of simplify the business breakdown silos, you know, it can have an even bigger role working across all of our businesses to help drive business both in China as well as innovation into markets like North America.

Okay, great.

Thanks for the call, guys, and good luck on the year. Sure. Thanks.

Thank you. Our next question is from Truman Patterson with Wolf Research. Please proceed with your question.

Hey, good afternoon, everyone. Thanks for taking my questions. Last quarter, you all suggested that freight and material deflation would be about 1%, but that would be offset by other inflation in the business. Could you just talk about what you're expecting kind of by segment, give an update there, as well as maybe the cadence through the year is kind of 1Q peak inflation, and then it levels off kind of sequentially, or how are you all thinking about it?

Yeah, Truman, this is Dave. I'll tackle that one. So, yeah, you're correct. We kind of said, hey, 1%, you know, freight, materials, deflation offset by labor, some other items. I'd say that's pretty consistent with what we're seeing today with a few puts and takes. I mean, labor remains pretty sticky. There's actually some upward pressure on brass in the quarter driven by copper, although that was offset by some incremental freight deflation primarily ocean trade for the year. And so, I think, you know, pretty sticky. And across the segments, really pretty consistent across the segments in terms of input cost and inflation deflation. So, as we kind of look at the margin goals for the year, I don't think there's a big deflationary tailwind in any of the margin goals in any of our segments. And that's really true long-term as well, true when you're looking at our investor day targets that Nick mentioned. We see most of the path there through self-help, really 75% or 80% of that path is self-help. And so not banking on big deflation in our view of the world today is pretty consistent to what it was about a quarter ago.

Okay, perfect. And then, you know, you all have mentioned, you know, the consumer being a little softer moving throughout the quarter. But, you know, I think that was primarily in plumbing. There are a lot of offsets with, you know, destocking, et cetera. I'm really just hoping you can help us understand just, you know, overall for the company, R&R demand trends, just the cadence kind of through the quarter. And if there's any way you can help us understand, you know, exit rate March kind of POS or early April, you know, indications.

Yeah, I'll be happy to try to put some context around it. And so, yeah, You know, if you think about the shape of the year, and interestingly, you know, you look at 21 and 22, and they had very similar shapes, which is, you know, you start out the year, and then you built, you know, a big head of steam starting in March and into the early summer. You know, that first head of steam of 21, I think very stimulus-driven. And if you recall, we said we were, you know, quite surprised that the consumer really tracked almost dollar for dollar a little bit less in 2022 as they move through that same period. You know, we planned for and expected that this year the consumer would be beneath that. What we saw, you know, for the first part of the quarter before you got to that, you know, that big lap was actually the consumer sort of held in there pretty flattish for most of the quarter. And then as that As that big lapse started, that's where we saw a relative slowness in the consumer compared to that 2021-2022 hill that I would say kind of comes off as you get more towards the middle of the summer, in line with our expectations. And so, you know, if I go back to sort of my business, you know, most impact, you know, outdoors kind of down, mid-single digits, but plumbing down low single digits, really low single digits, and security up low single digits. So still, you know, kind of hovering in, you know, better than we might have anticipated at the beginning of the year. Do you want to add anything?

No, that's out here.

Perfect. Thank you all for the time.

Sure. Thank you.

Thank you. Our next question is from Adam Baumgarten with Zellman and Associates. Please proceed with your question.

Hey. Good afternoon, everyone. Just talking about the higher end kind of holding up better, at least relative to the other parts of the business, I guess, did that part of the portfolio also decelerate throughout the quarter and into April alongside some of the broader business, but just still was relatively better from a growth perspective?

Yeah, you know, that's more of a, so that deceleration I was referring to was what we were really seeing through retail. And, you know, this being a much more wholesale and design-assurance-focused business, no, we didn't see any particular deceleration there.

Okay, got it. And then just, you know, thinking about pricing, are you seeing any channels or products where Pricing is perhaps softening or promotional activities picking up, or are you largely holding on to the price that's been put through the system over the last year plus?

Well, you know, as a reminder, I mean, big, big focus for the portfolio, right, is brand and innovation and then, you know, bringing the insights to the channel that allows both us and our channel partners to do very well from a price and margin perspective. And with that in mind, I mean, we've certainly seen, you know, other categories that were commoditized with some pricing pressure. We've probably seen a bit more real estate for private label. By the way, that, you know, seems to sway between 10 and 15 percent market share at any given time over a long period of time. But there are lines that consumers and pros will draw around brand recognition, but also service and backing that certain people feel they need to have in the products. And so I wouldn't say at this point we're seeing undue pressure in any of the lines. We certainly keep an eye open, but, you know, we will continue to focus, I would say almost maniacally, on driving the brain and driving innovation and getting paid for it. And, you know, I sort of referred to my prepared remarks, like, you know, in the case of Mona, we've taken a lot of price over the last few years and raised the brand perception, both in terms of premiumness, but also quality price ratio. The consumer feels they're getting a better deal, notwithstanding the price that we've taken, than they were a few years ago. And that is really the engine that we want over all of the brands. And so, you know, if I go back to, you know, all of the org design changes that we made towards the end of last year, it's really to unleash all of those Fortune Brands Advantage capabilities, brand building. category management innovation across the entire portfolio because, you know, especially with our restructured portfolio now, if we're going to be in the business, we're going to be in the business with brands that drive value where we can come on good price and get paid for it.

And, Adam, you know, just as a reminder, last quarter we said that our guidance, sales guidance incorporated low single-digit positive impact from price with 50% of that carryover and 50% new. And that's still the appropriate guidance for the year. We don't see any change to that. And we will, as we always do, monitor competitiveness on the shelf and POS rates and elasticities and, you know, promote and reposition as needed both up and down, depending on what we see with our elasticities. But no real broad change to our expectations around price and price realization.

Okay. Great to hear. Good luck. Thank you. Thank you.

Thank you. And our final question is from Susan McClary with Goldman Sachs. Please proceed with your question.

Thank you. Good afternoon, everyone. My first question is, can you talk a bit about how you're thinking of capital allocation? Obviously, with the asset deal out there, that will have some implications for it. But in general, how are you thinking about the ability to generate cash this year as things normalize, and then some of the opportunities for it.

Okay. I'll just start broadly, and Dave can take you through some of the detail. But I would say at the highest level, our capital allocation strategy remains unchanged. You know, we continue to invest in ourselves. Those are our surest and highest return investments. And the teams continue to bring, you know, some great ideas forward for, you know, great returns. And so, you know, capital first and foremost. You know, second to corporate development, there where we can generate value. And, you know, we're very, as you know, from our long history, we're very disciplined about that part. And then we will return to shareholders, you know, what doesn't go into the first two buckets. And that, you know, certainly has not changed. Now, you know, we do have a deal pending. We're, you know, we're very excited about that. We think we're a great home for those brands and can really, build them in a very exciting way. And so we're being mindful of that as we move forward. But, you know, while maintaining a conservative leverage, particularly in this environment, you know, you saw like in this quarter, an opportunity as the teams did a really nice job generating cash to be opportunistic about share repurchase that, you know, wonderful values. So we stepped in and we did that. And I think that's very consistent with, you know, how we've approached it at the past and we'll continue to approach it in the future.

Yeah. And so just to put some points around cash flow, this has been a focus for us, as we mentioned, you know, on our call prior, we were cash free cash flow positive in the first quarter, which is unusual for us. It's usually a cash bleed quarter, you know, as we're ramping up inventories for the building season. So it really demonstrates that our initiatives, to right size working capital and inventory are working. And in fact, our free cash flow was $270 million better quarter over quarter this year versus last year. So as long as we can continue to generate cash in this environment, and as we've talked about in the past, this business in a downturn does generate a lot of cash as we shrink the balance sheet, we'll have opportunity to deploy that capital effectively.

Okay, that's very helpful. And then, you know, turning to water innovations, when you think about the trajectory for the margins in that segment, how should we think about the relative cadence as we go through this year? You know, you talked about China being weak, but obviously seeing new construction there pretty strong and maybe R&R sort of in between those two. How do you think about the dynamics and especially maybe as well as you think about the strength and how it's a role relative to Moen?

Yeah. So this is Dave, I'll handle that. So just a reminder, you know, our full year target for water is 23% to 24%. You know, as we look at their margin cadence through the year, you know, improving sequentially, I'd say first quarter to second quarter and then second quarter to the third quarter before probably a seasonal step back a bit in the fourth quarter. That's back to kind of a seasonal pattern for this business, you know, quarter to quarter. And then within the portfolio, you know, As we've talked about on call, our China business is profitable, remains profitable, and, in fact, was going to add the Fortune Brands Innovation Average for the first quarter on much lower volumes. So the team there is doing a great job. And then House of Roll, as it grows, becomes an accretive piece to the portfolio overall as well. So we feel like the business is performing as we would expect it to, and we'll see some of the sequential seasonal margin builds that we've had in years past.

Okay, that's very helpful.

Thank you. Good luck.

Thank you.

Thank you. That concludes our question and answer session. Thank you for joining today's conference call. You may now disconnect.

Thank you. Thank you. Thank you. Thank you. you Bye. music music

Good morning. My name is Camilla and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands first quarter 2023 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 Avsek, Vice President of Investor Relations and Corporate Affairs. Lee, you may now begin our conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations first 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 SBIN.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 reference 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 our 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?

Thank you, Lee, and thank you to everyone for joining us today. On this call, I will walk through the highlights of our first quarter performance, give some color on the drivers of this performance, and offer some thoughts on the macro environment. I'll then turn the call over today for discussion of our financial results and how we're thinking about the remainder of 2023, including the increase to our full year 2023 EPS guidance.

As a reminder,

This is our first quarter as the new, fully separated Fortune Brands Innovations. Our results in the tough market are testament to our compelling new investment thesis. We are a resilient and growth-focused company, powered by secular tailwinds, underpinned by leading brains, innovation, and channel management, and fueled by our Fortune Brands Advantage capabilities. All of this is enabled by our new organizational structure, which was thoughtfully designed to accelerate growth. Our company is driven by a highly focused, aligned, and motivated team who are keen to build even further on our long history of market outperformance. Collectively, over the last year, our teams have led through a period of immense change to emerge as an even leaner and more ambitious growth engine, and I thank them for their dedication. Turning to our first quarter performance, our teams delivered solid results amid a challenging external environment. As we anticipated, reduced demand and a return to typical seasonality impacted our industry. Thanks to the proactive steps we took in preparation for the downturn and the inherent strength of our newly refined portfolio, our brands performed well. As a result, sales and margins outperformed our initial expectations for the quarter. Net sales of $1 billion were down 9% versus the prior year, and our operating margin was 13.1%. Our sales and margin performance generated earnings per share of 69 cents in the first quarter. Our first quarter results look even stronger in the context of lapping the exceptional performance from the first quarter of 2022. Putting our results in a broader context, our first quarter organic sales results were 24% higher than in the first quarter of 2019. These results highlight the long-term strength of our portfolio, which is now more focused on smaller-ticket branded products. Our results also reflect the team's focus on outgrowing the market, preserving margins, and generating cash while prioritizing key investments, including in brand building, meaningful innovations, and our digital transformation. Looking at the overall market and consistent with what we anticipated on a fourth quarter call, we encountered macro challenges driven by lower rates of new construction starts, reduced consumer spending, and channel partner and order patent inventory normalization in parts of the business. We continue to expect headwinds through the remainder of 2023, and the teams are prepared to act proactively and with agility as part of our commitment to our stakeholders to outperform in all environments. Specifically, as part of the reorganization work that we initiated last year, we also took concrete actions to right-size the cost structure of the business and improve our overall efficiency. including by reducing inventory, driving efficiency in our operations, and reducing duplication throughout the company. This new structure enables acceleration of our focus on branding and innovation, and we will continue to provide our customers with the high levels of service and partnership for which we are known. Most importantly, our new structure is a catalyst for accelerated growth. It allows us to deploy the Fortune Brands Advantage capabilities across the whole organization while fueling growth by removing duplication and non-value-added activities. The opportunities unlocked by our new structure will become even more evident as the market returns to growth. In the interim, we will closely monitor the trends and data across our business and will respond to market conditions with additional actions as necessary. I have full confidence in Fortune Brands Innovation's ability to deliver long-term growth and sustain value creation through the cycle, and we remain committed to achieving our long-term goal of a net sales growth CAGR of 6% to 9%, operating margins of 20% to 22%, and EBITDA margins of 23% to 25%. Fueling this confidence is our strong belief in the medium to long-term market opportunity underpinned by attractive demographics and a significant shortage of U.S. housing, which has only been exacerbated by the current interest rate environment. The recent acceleration of mortgage underwriting following rate drops demonstrates how much pent-up demand exists for housing. Our business is optimally positioned for acceleration once the housing market returns to growth. Turning now to some additional thoughts on the current housing market and the market for our products. As anticipated, The first quarter was marked by decreased demand driven by lower new construction starts, lower consumer spending, and continued inventory reductions as more typical seasonal demand patterns return. Compared to the prior year, new construction remains challenged. However, certain metrics are showing signs of improvement when viewed on a sequential basis. Single-family new construction permits, starts, and completions were all up sequentially in March. although down significantly year over year. Over the last few months, mortgage applications increased significantly in response to a relatively small decrease in mortgage rates. This speaks to our previously communicated and well-accepted thesis. The market remains under bolt, and pent-up demand is only being exacerbated by the slowdown in construction. Once the market is confident that the Federal Reserve has stopped raising rates, we expect consumers and builders will react positively. Ultimately, the only solution for the supply and demand imbalance in housing is to build more homes. And with our balanced exposure to new construction, we are well positioned to capture the opportunities that will result when the market returns to growth. All that said, we are cognizant and prepared for future volatility as long as challenging macroeconomic conditions persist. Turning to R&R, we saw the R&R market decelerate over the first quarter and into April. in response to inflation and general economic uncertainty. Although the overall R&R market is expected to be down for 2023, there are some important nuances. For example, recent credit card data indicated that while spending decreased across the home product space, the declines were most pronounced in big ticket and more commoditized products. Further, while down on a year-on-year basis, both spend and keyword search data are significantly higher than pre-COVID levels. We believe our products are relatively more insulated because of their smaller ticket price, are less disruptive to install, and therefore less tied to housing turnover, and offer a higher return on investment potential for the cost. Supporting this was a recent study conducted by ThermaTru, showing that replacing an outdated door with a ThermaTru door offers one of the best returns on investments in the home and can even raise a home buyer's perceived value of a home by up to 7%. We expect the softness in R&R to continue throughout 2023 as macroeconomic uncertainty persists, however, the fundamentals of the market point to a favorable mid to long term future for the R&R market. The combination of high home equity levels, the low supply of homes and aging housing stock and the fact that many homeowners are living in homes they purchased with no mortgage or with record low interest rates is causing many people to rethink their existing space. and undertake R&R projects to turn what they have into what they need. Finally, in China, the market remains soft, but we believe it is starting to find a bottom. As has been widely reported, the Chinese economy is showing signs of a steady recovery, including strong new home sales growth in March. However, as a reminder, many Chinese homes are sold before they are completed, and our products are used later in the building cycle. As a result, we would expect to see positive impact 12 to 18 months from the point that home sales inflect positive. We have confidence in our team's ability to successfully navigate short-term disruptions and remain focused on creating long-term value in China, including in the emerging and high potential R&R space. In short, while these are certainly challenging times for our industry and for the overall global economy, Fortune Brands Innovations is well positioned. Our branding power meaningful and value-add innovation and channel strength are powerful moats in uncertain times. Our consumers continue to reward us with growing market share, and our customers continue to view us as valued partners with unique insight and category management expertise. Our products and brands are uniquely positioned to outperform the market in all environments, as our results demonstrated this past quarter. Starting this quarter, we began reporting on three segments, water innovations, outdoors, and security. All of our segments are unified by their strategic focus on brand, innovation, and channel, and their opportunities for supercharged growth. Our water innovation segment includes our leading Moen and House of Roll brands. As the world increasingly focuses on the power and importance of water, we've positioned ourselves to capture the powerful growth associated with this category, including water management, sustainability, and connected products tailwinds. Our core suite of faucets and showers employ sophisticated technology to maximize water savings while still delivering an enjoyable water experience. And our pioneering connected water products have phenomenal potential to change the way residential water is managed. Our outdoors segment includes our leading door brands, ThermaTru, Larson, and Solar Innovations, as well as our fiber on decking brand and our Fipe on Decorative Millwork brand. This segment is exposed to key growth drivers, including outdoor living, sustainability, and material conversion trends. We're excited about the opportunity ahead to continue converting consumers and pros away from commoditized lumber products as they increasingly understand the performance characteristics and advantage value proposition of our brands. Finally, Our security segment is comprised of our iconic Master Lock and Sentry Safe brands and is also driven by high-growth secular tailwinds, including connected products and commercial safety. Companies across the globe are increasingly focused on the importance of worker safety as something that is both the right thing to do and good for business. We believe we have a unique opportunity to grow in this space as we look to leverage our subject matter expertise, focus on innovation, and unparalleled brand recognition. Turning now to our individual business results. In the first quarter, water innovation sales declined 8 percent compared to the prior year, driven by volume declines across the segment, partially offset by price. These results were stronger than we initially projected and reflect higher than expected sales across the Mo and North America business, particularly in wholesale. Our margins for the segment were 21.6 percent, reflecting lower operating leverage from lower volumes and our inventory reduction efforts. In the quarter, Moe North American POS outperformed the market and was particularly strong in the wholesale and e-commerce channels. However, POS on both a unit and dollar basis trended down toward the back half of the quarter and through the first part of April, in line with the overall market softness and a significant lap from prior year. The pricing actions we took at the beginning of the year have remained in place as the value proposition of our products is increasingly well understood. As we highlighted during Investor Day, over the past few years, we've simultaneously increased price, elevated the perception of Moen as a high-end brand, while also significantly increasing the perception of delivering high value for price. This is an example of our brand building capabilities, which are now being deployed across the entire organization. We feel confident that our attractive, trusted, and innovative products will remain the choice of consumers and pros in any environment. Our House of Roll brands also delivered market-beating performance, with total sales up 20% for the quarter, including Aqualisa, and US POS was up low single digits. The higher-end consumer remains strong. and we continue to outperform in this attractive market as our story of crossmanship and unique designs continues to resonate. In China, as expected, we saw sales decline near 30%, excluding FX. Our China business is exceptionally well-run and is taking into account prevailing market trends and assessing new growth opportunities, including pivoting toward the emerging R&R market and pioneering new markets and service models. In addition, our China business continues to serve as an incubator for innovation introduced across the water portfolio. In outdoors, we saw sales declines of 16%, reflecting expected new construction market softness and the lapping of prior year as the market returns to more typical seasonality. The lower volumes were partially offset by price. Operating margin was 5.2%, reflecting stranded production costs from lower volumes and our inventory reduction efforts. In decking, we saw an expected sales decline as inventory levels rebalanced and seasonal buying patterns returned. While the first quarter had a lower-than-expected inventory build as distributors maintained leaner levels of inventory, POS was still strong in the quarter. Retail POS was up high single digits and wholesale POS was down low single digits. We are responding to the current environment by maximizing our operational efficiency and optimizing our Fiberon brand for future growth By making strategic and discipline capacity investments and leveraging our newly aligned organizational structure to accelerate our branding and innovation strategy. All these investments impact margins in the short term, especially as we compare them against prior periods marked by an unusual lack of seasonality. Mid to longer term these thoughtful and stage investments will help us capitalize on a long term growing market. We remain laser focused on taking profitable share by converting a commoditized lumber market into a brand and innovation-led market and we remain disciplined in our pricing actions. Indoors, we saw sales decline in the mid-teens as the overall market softened. The wholesale channel saw some regional destocking in the quarter, which we now believe is complete. We're confident in the strength of our product offerings and our long-standing advantage relationships with our key customers and channel partners. disciplined and thoughtful as we look to maintain and grow market share in the most attractive parts of the market. We continue to leverage our recent acquisitions to drive innovation across the portfolio. We recently unveiled the exciting new Veris collection, a contemporary entryway product line that incorporates the technology we acquired as part of the solar innovations acquisition. With Larson and Thermature, we are continuing to expand our offerings under our impression store systems, which are the first of their kind. a fully integrated storm and entry door system. Lastly, in security, sales increased 2%. These results were driven by price, together with new business wins, inventory replenishment at customers, and strong demand in the commercial safety and security space. Operating margin increased 70 basis points to 14%, reflecting the implementation of the strategic improvement initiatives that have been in place for the past few years. Our security business is powered by our iconic Master Lock and Sentry Safe brands, and we believe it has significant growth opportunities as we begin to leverage these world-class brands in new ways, including in the connected and rapidly growing commercial safety space. We expect our security business will see outsized benefits from our new organizational structure as we focus on driving the brand, augmenting our connected product capability and offerings, and increasing operational efficiencies in the business. Lastly, we are very excited about the potential of commercial safety and security, which has seen impressive growth over the past several years and now accounts for around one-third of our overall sales for the segment. Finally, we remain optimistic and very excited about the potential acquisition of two world-class businesses from Assa Abloy, the Amtek premium and luxury door and hardware business, and the U.S. and Canadian Yale and August residential SmartLux business. These businesses will be strong accelerants to our connected product and luxury portfolio strategies. We continue to expect this highly disciplined and strategic acquisition will successfully close mid-year, and we will update you as we know more on that front, including on the potential synergies associated with the transaction. Before I turn the call to Dave, let me share a few final thoughts. As we highlighted last quarter, we expected and planned for a challenging 2023. Beginning in mid-2022, we took steps to prepare by streamlining our cost structure, reducing our inventory and prioritizing cash generation, while continuing to invest in the key strategic priorities that will fuel our future outsized opportunities when the market returns to growth. These proactive steps generated around $50 million in annualized fixed cost and SG&A savings and reduced inventory ahead of plan. including over $150 million of inventory reduction since the third quarter of 2022. Importantly, we saw no negative impact on our best-in-class service levels, and our lead times have returned to normal levels. In our 2023 outlook, which Dave will discuss in a moment, we have developed a plan to deliver market-beating sales performance, preserve margins, and generate cash regardless of the headwinds we may face. We are prepared to confront any challenging end markets in the short term, while we position ourselves for accelerating long-term outperformance in a market supported by fundamental growth characteristics. With that, I'll turn it over to Dave.

Thanks, Nick. As a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year, unless otherwise noted. Let me start with our first quarter results. As Nick highlighted, our teams executed well against a challenging and dynamic environment. Sales and operating margin came in higher than what we initially anticipated during our call last quarter. Sales were $1 billion, down 9%, and consolidated operating income was $137 million, down 22%. Total company operating margin was 13.1%, and earnings per share were 69 cents. Our first quarter performance was driven by higher than expected sales in our water and security segments and resulting margin flow through. However, we are still anticipating a volatile remainder of the year and will remain agile and proactive in response to any changing market conditions. For the quarter, the 9% sales decline included a 3% unfavorable impact from our China business on our consolidated results. Excluding China, sales were down 6%, with POS down low single digits and a mid single digit unfavorable impact from current year channel inventory reductions and prior year service recovery, predominantly in our outdoors segment. As we discussed last quarter, We expected first quarter operating margin to be most acutely impacted by production inefficiencies and stranded fixed costs related to our inventory reduction efforts. As Nick mentioned, we have made very good progress against our near-term inventory reduction target of $175 million. We remain focused on driving outperformance, including above-market growth, preserving and enhancing margins, and generating cash. Our teams continue to focus on appropriately managing our P&L and balance sheet while maintaining key strategic growth investments. Now, let me provide more color on our segment results. Beginning with water innovations. Sales were $594 million, down $49 million, or 8%, and also down 8%, excluding the impact of the Aqualisa acquisition and FX. Net sales results reflect the impact of lower volumes partially offset by price. Importantly, our Moen USPOS was down low single digits in the quarter, reflecting a better than expected start to the year. China sales declined around 35%, or 30% excluding FX, driven by the prior year's decline in housing activity. While new home sales are improving, The Chinese consumer remains cautious in the housing space, and as Nick indicated, based on the timing of when our products are installed during the construction cycle, we don't expect to see the benefit of these improving indicators for another 12 to 18 months. Water Innovation's operating income of $128.6 million was down 14%. Operating margin was 21.6%, reflecting the impact of production inefficiencies and lower volumes. Turning to outdoors, sales were 290 million, down 54 million, or 16%, driven by lower volumes and channel inventory destocking, partially offset by price. Door sales were down mid-teens. As expected, sales were impacted by lower volumes and channel inventory reductions at ThermaTru, as production builders worked through their completion backlog and new starts softened. Decking sales declined mid-teens, driven by channel inventory rebalancing and expected lower volume. Outdoor segment operating income was $15.2 million, down 57%. Segment operating margin was 5.2%. Segment operating income declines were driven by unfavorable volume leverage in our businesses due to production inefficiencies and stranded fixed costs in support of our inventory reduction efforts. We expect outdoors margin will improve to mid-teens or higher in the second quarter, as expected seasonal volume increases drive scale through the P&L. Importantly, outdoors remains on track to deliver their 13.5% to 14.5% operating margin guidance for the year. In security, momentum in the segment continued with low single-digit sales growth driven by price and new business wins in locks and commercial safety and security. Segment operating income was $21.8 million, up 7%. Segment operating margin was 14.0%, an increase of 70 basis points versus the prior year, and was driven by price and continuous improvement initiatives. Turning to our balance sheet. Our balance sheet remains strong with cash of $539 million, net debt of $2.1 billion, and net debt to EBITDA leverage at 2.3 times. We finished the quarter with full availability under our $1.25 billion revolver. As mentioned, This past quarter, we continued our efforts to drive improved cash flow, including reducing our inventory levels. In line with our disciplined capital allocation strategy, this enhanced cash generation enabled us to opportunistically repurchase $100 million of shares in the quarter. Further capital deployment will depend on the timing around the closure of the potential ASSA ABOI transaction, our leverage ratio in the context of the external macro environment, and business performance and the attractiveness of other value-creating opportunities. We continue to be committed to maintaining a strong financial profile, enabling pursuit of above-market growth while prioritizing the best returning opportunities for value creation. To summarize the quarter, we delivered sales and margin results above our initial expectations in a very challenging environment. While our Q1 results were certainly encouraging and speak to the strength of our business, we are anticipating and preparing for continued headwinds and volatility. As a reminder, our initial financial guidance included prudent market and demand forecasts, the ability to maintain price while achieving reasonable continuous improvement actions, and the impact of production inefficiencies and stranded costs from our inventory reduction actions. With that in mind, I'll provide an update to our 2023 guidance. As today's press release indicated, we are increasing the midpoint of our EPS guidance by 5 cents to the range of $3.65 to $3.85, reflecting our higher than anticipated operational performance in the first quarter, as well as the impact of first quarter share repurchases. We are mindful of the ongoing uncertainties inherent in the external macro environment, and we continue to expect full-year net sales to be down in the range of 5% to 7%, operating margins to be between 16% and 17%, and EBITDA margins to be between 19% and 20%. We continue to expect to generate free cash flow of approximately $475 million during the year, with a cash conversion rate of around 100% of net income. During the quarter, we generated positive free cash flow driven by our working capital and inventory reduction efforts. Our teams are off to a great start against our full-year targets and will remain agile in the execution of our key priorities. I will now pass the call back to Lee to open the call for questions. Lee?

Thanks, Dave. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I will 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 to the operator to begin the question and answer session. Operator, can you open the line for questions?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we pull for questions. And our first question is from John Lovallo with UBS. Please proceed with your question.

Thank you for taking my questions. Maybe just starting from a high level strategic one first. Nick, I mean in your opening comments you talked about construction starts and consumer spending, you know, how they've moderated, but there's been some positive green shoots in different housing metrics, whether it's, you know, mortgage apps or new home sales, and even in some, you know, renovation initiatives. Curious, you know, how Fortune sees demand for both R&R and new construction evolving over the coming quarters, given the, you know, its presence in both markets, R&R and new construction, and, you know, how you view Fortune as being positioned to capitalize on this?

John, happy to talk about that, and I'll give you some perspectives. Dave may want to add a few other perspectives here. But, you know, look, without a doubt, 2023 is a challenging environment, and we've prepared the business to navigate a challenging environment, and I think it's going to remain so as long as you have economic uncertainty, as well as this return to seasonality on shoulder quarters that we're experiencing. You've got lower consumer spending. You've got lower starts. But if you step back for a second, I think, and put it in the context of the macro demand levels, I mean, as we see it from a number of, you know, the fundamental demand that we all talk about is still there. You know, for starters, as I think Dave said in his remarks, you know, organically, this quarter is still 24 percent up on the same quarter in 2019, pre-COVID, right? And so, notwithstanding all the noise and all the economic uncertainty and everything that you hear in the marketplace, it's still a 24 percent increase. And it tells you that, you know, it takes a consumer to be there. It takes pros to be there in order to drive that. And then, you know, where you see any sort of positive, a little bit of positive inflection, certainly around traffic orders and even new home sales, you know, you see the consumers have shown up even with a little bit of easing. And so, you know, we take that, and I mean, we just remain pretty sanguine about the whole marketplace, stepping back and looking at the fundamentals, the demographics, the fact that the market's free under both, the fact that, A lot of existing home product is very old out there, and that you have an environment that I think is primed for consumers to spend against. And I think there's enough evidence, even in a quarter like Q1, which we don't like because we're down, of that happening. Now, how we play the portfolio against that, I'd just start by saying we really, really aim to gear the portfolio where the consumer is, right? And I think you've seen us move up and down the price and premium spectrum as we built up the portfolio. We saw, you know, the large amount of millennial homebuyers coming through. We made sure we kind of had that heart of the market set, very innovative product that served us really, really well as they've started to mature into some second homes or even third homes, you know, we've kind of positioned a portfolio like House of Roll or some of the premium parts of our other portfolio to be able to capture them. And you see in the House of Roll results how resilient those consumers have been. So, you know, from a product perspective and a brand perspective, we really, really aim to leverage the innovation insights machine to meet the consumer where they are. From a market-back perspective, you know, we are approximately two-thirds R&R, and fundamentally that's going to be a market that, you know, grows nicely over the long run. And then we like the torque that we get from new construction because, as I said in the prepared remarks, the only way to rectify the imbalance in supply and demand is to build more homes. And so, we want to give investors the benefit of that exposure to new construction. And we view it as the responsibility of this management team to manage, you know, any downdrafts and to manage the cost structure appropriately. And I think that you're seeing us do that, and you'll see us do that through the rest of the year. And so, we really aim to have a portfolio of both our product, brand, and then channel perspective, you know, really exposed at, you know, where the market is and where we think the long-term growth will be. And then a final comment that I'll make is, you know, we're putting more and more emphasis on, you know, finding these secular growth pockets, these supercharged kind of subcategories in our categories. where you're going to have growth no matter what because you just have underlying trends pushing them along. And I think that was evident in some of the security results where you've got, you know, really nice tailwind in the commercial safety space. You've got a really nice tailwind in the connected space. And that's, you know, now pushing on, you know, a third of that business. And you see it kind of power through a tough macro environment notwithstanding. And we aim to turn that dial more and more in the whole portfolio.

And, hey, John, this is Dave. Let me add a bit about just our market view for the rest of the year. And if you recall, our market guidance that we gave last quarter was for the global and U.S. markets to be down between 6.5 and 8.5 percent, with U.S. R&R down 4 to 6 and U.S. single-family new construction down 18 to 22 percent. So, as we look at the first quarter and some trends into the rest of the year, I think there's probably a bit more momentum in single-family new construction. that maybe leans us more towards the better end of that range. And while R&R was better in the quarter, especially in the first half of the quarter, I think it's too early to call any full-year improvement on our R&R market right now, even though the first quarter was a bit better than expected. And I remind you, as we talked about last quarter, I mean, there's a pretty significant lap in our POS that we see in our data from, you know, March through June. And so we want to get through that period of time and understand how the business is performing because we're comping, you know, 2021 stimulus effects that were then, you know, lapped in full by 2022 price and demand. So I think too soon to kind of give any new color around R&R, but single family seems to be a little bit better.

Okay. Thank you for that, guys. And then the second question is, you know, the first quarter decremental margins were around 40%. And I think you articulated last quarter that The first half would be under more pressure, particularly in the first quarter, given production curtailments and stranded costs. With that said, though, it looks like inventory only came in by about 9% sequentially. And just curious if you guys reduced the production as much as you anticipated and how we should sort of think about the progression of decremental margins as we move through the year.

Yeah, John, this is Dave. So as we said on the last call, when we gave a bit more color around the first quarter than usual, You know, we expected margins, operating margins, to be between 12.5 and 13 percent. You know, we came in at 13.1 percent, so a bit higher than the range, really driven by better sales. On the inventory side, we're actually a bit ahead of our plan in what we were able to take out in the quarter. Now, some of that was because of our internal efforts, and some of that was because of the sales being a bit better. So, we're ahead of inventory coming down. And, you know, as we look forward, I think we set up the year on the last quarter, first half, second half, talking about, you know, first half sales declined between 7% and 9% with operating margins between 15% and 15.5%, and we still see that as the right expectation for the first half. And then similar with the second half, with sales down 3% to 5% in operating margin, 17% to 18% still feel like that's the right expectation for the second half. In terms of your question on decrementals, we're targeting 25% to 30% OI decremental margin for the year and still see that as the right range for the business. And I think we'd look to achieve that even if the market were a bit softer than what we're projecting. So that's how the company and the portfolio is geared towards that 25% to 30% decremental. Thanks, Dave. Yep.

Thank you. Our next question is from Matthew Bully with Barclays. Please proceed with your question.

Hey, good evening, everyone. Thanks for taking the questions. Maybe a question on outdoors. You had the 5% margin result there in the quarter, and I think I heard you say at the top that you still expect that to improve to mid-teens by Q2, and correct me if I misheard you, but... You know, any sort of detail on what kind of underlies that, you know, confidence in the sequential margin improvement in that business? And then, you know, how you think about the margin progression in outdoors through the balance of the year? Thank you.

Yeah, Matt, I'll just kick it off with a little perspective on outdoors and then hand it to Dave. He can walk you through the margin story. I would say, you know, outdoors, POS was down around single digits. And that business is probably of all the businesses sort of most impacted by kind of a return to seasonality. And the fact that with respect to the doors business, and to a degree, the decking business, you know, you're lapping a period where things were not just going full board, but were on allocation. And people were taking everything that they could. And so, that's a little bit of the effect we saw last year, also in the business kind of now rolling through here, because it's the last thing to come off of allocation. But as it does, you know, it's good to see sort of POS kind of hanging in there. But I would just add to that as a reminder, you know, this is a materials conversion business, right? Whether it's on the door side, on the decking side, or even on the mall work side, like it's all about, you know, that material science, investing in the material science and having the capacity. And so... you know, as we've worked through this, we've continued to, I think, be very strategic about how we feather in capacity increases. But with the long-term view that this is a growing category and we need to be able to capture the growth. And so, in a period where you're going to have the inventory coming off or some lower volume, you're going to see the impact through the bottom line. But over the long run, we're very confident in the margin progression that we expect this business to make, so. Dave, want to give a bit more detail?

I think that's it, Matt. It's really a quarter with some volume deleverage. If we look at the sales results for outdoors, you know, down 16%. As Nick said, POS was down mid-single digits. Volume was actually down mid-teens from a POS perspective. And then there was a low double-digit impact from channel inventory. So as we signaled a quarter ago, we expected outdoor margins in the first quarter to be high single digits. You know, they were mid-single digits, I think a bit more channel inventory came out than expected. We were anticipating some of that indoors, and that occurred. So looking forward, this would be the lowest volume quarter of the year, and as volume returns to that business, we'll gain operating leverage pretty quickly and get that margin back up into the mid-teens.

Gotcha. Okay, that's helpful. Thanks for that, guys.

And then I guess on that topic of channel inventory, I mean, it sounded like you still saw destocking, certainly as you just mentioned, and in the outdoors business, and I think in water as well. So where are we in that cycle of channel inventory rebalancing? You know, where does it feel like there still needs to be a little bit more to come versus, you know, where are we closer to the end of that destocking? Thank you.

Yeah, I think, Matt, this is David, and I think we're pretty close to the end. So outdoors, we look at the quarter. You know, outdoors, as I mentioned, has the biggest impact, you know, low double digits. You know, within water, It was really only a low single-digit impact from channel inventory, and then security was pretty well balanced. And so as the teams continue to look at our data and do channel checks, we feel like here entering the second quarter, we're relatively balanced to this rate of demand in this macro environment, and we really have finished comping the prior year service level recoveries that are also creating some noise in the year-over-year reported results.

So the team's

feel like we're in a pretty good place and that sell-in and sell-out will be more approximate to each other going forward.

Got it. All right. Thanks, Dave. Thanks, Dr. Lucas. Sure. Thanks.

Thank you. Our next question is from Stephen Kim with Evercore ISI. Please proceed with your question.

Yeah. Thanks very much, guys. Just touching on the downtime, I think you'd said last quarter, I think you'd talked about maybe 50 to 55 million or something for the year with about 80% of that in the front half of the year. Just want to make sure that that, you know, is still what your expectation is. And I believe the reason why, you know, you would describe, you know, the downtime effects, you know, sort of lasting throughout the entire year was because that was just basically going to be how it flows out of inventory. But are the actions that have, you know, sort of generated that headwind, are those actions at this point pretty much complete?

Yes, Steve, this is Dave. Back on your numbers question, yeah, that's right. We said full year P&L impact 50 to 55 million. You know, first quarter, roughly 30 million. As I said earlier, we're actually a bit ahead of our inventory takedown expectations, and so there was a low single-digit million incremental impact to the P&L in the first quarter, still probably within that 50 to 55 million range for the full year. I'd say the actions to drive the results, mostly taken at this point. I mean, if you consider in water insecurity where we have long lead time supply chains and we started pulling levers in the third quarter of last year to kind of get those supply chains normalized. And then, you know, where we're more vertically integrated in outdoors, you know, those levers are a bit more real time and we're pulling those in the first quarter, beginning of the second quarter. And you're correct, the spread of that cost through the year is just the impact of of those stranded costs flowing from the balance sheet into the P&L.

Great. Yeah. Okay. Thanks for that. The second question relates to mix. And I was curious if you could just sort of across your businesses talk about where, if anywhere, we might be experiencing or you might be experiencing or anticipating a change in the mix profile that would be worth calling out. And then just a quick housekeeping item. I think there was a $6 million number or something in other I was just wondering what that was related to.

Michael Heaney- Okay. I'll kick off with some thoughts on MIX and then say if you can, 6 million plus any other thoughts you have on the MIX. And just I'd say as a reminder, you know, my comments earlier about, you know, we really try to gear the portfolio to be at the heart of the market and then capture consumers up and down the spectrum. You know, we've done so through a lot of our initiatives in a way in which we've also kind of maintained, I would say, very similar percent margin profiles, no matter where the mix lies, really leveraging volume at the lower price points and kind of more, you know, bespoke stuff at the higher price points. You know, it was interesting in this past quarter, you know, to see some of the higher-end products kind of hang in there, as they did. You know, I think Hustlerol is a good, example of that, that, you know, we saw POS that was actually up just on an organic basis in the U.S. market. And I think that speaks to the resiliency of that consumer for a price point. And then from a channel perspective, I would say as a general rule, you saw retail mix be pretty strong, as Dave pointed out, kind of up until about March. And then when you hit the lap of that really goes kind of March, April, And a bit into May, we saw the consumer come off, so that was as we expected. And the wholesale mix was a little bit more favorable than we expected, and I think that is going to probably continue a little bit here with some of the results that we've seen.

And, Steve, on the other item, so a portion of that is interest income, which is something we haven't had in a while, but it's nice to be able to generate some interest income with our cash. And the other portion is some pension income as the team's going to finalize pension for the year post-cabinet separation. Okay, great.

Thanks very much, guys. Sure.

Thank you. Our next question is from Tim Wise with Baird. Please proceed with your question.

Hey, guys. Good afternoon. Good afternoon. Maybe just on the wholesale side, I mean, you know, Nick, maybe just if you can step back and maybe kind of give us some color on where the channel inventories are now within wholesale. And have you started to see like a meaningful restock in that channel or is it just that the destocking is kind of subsiding?

Yeah, I would say, as Dave pointed out, the inventories are much healthier than they were. And just as a, As a reminder, a lot of the inventory that we saw accumulate and then come out in 2022 was not where we would normally look for inventory. It was kind of at our customers' customers, particularly in the water business where we serve a lot of production builders who are in turn served by, you know, large plumbers. And so, you know, that's where a lot of that inventory was built. And our sense is, and Dave can show the numbers again, you know, most of that's out. We saw a bit of regional inventory in the doors business, you know, a bit in the water business. As Dave said, security pretty balanced at this point. And so, we think it's in a pretty healthy spot. That said, we've not seen much restocking. If anything, I think we may be expected to see a bit more in the quarter, you know, if you take something like decking. And, you know, dealers are continuing, I think, to keep things pretty lean, understandably, with the economic uncertainty out of there. You know, so, you know, we'll just watch that as that goes.

Yeah, I think, Tim, just some color I'd add. So, As Nick mentioned, wholesalers really started to rebalance inventory last year as single-family new construction slowed down. So they kind of saw that coming and got out ahead of it. In the quarter, low single-digit impact on the water business from inventory is predominantly in retail and a bit in e-commerce, which were expected heading into the year.

Okay. Okay, good. And then just maybe a bigger picture on China. Could you just give us a little bit of help or just a little bit of background and just where the business is in terms of transitioning that towards more of a R&R type business? I don't know if it's a percentage of the sales that's R&R today versus, you know, where it might end up, but just a little bit of color on what the progress of that might look like over time.

Yeah, so I'll just start with kind of the big macro, right, which is, as you obviously know, like China has been a big new construction powered market for a very, very long time. And while we had a lot of exposure to that, we worked very hard to stay away from the very speculative building, right, the Tier 3 and 4 cities, like the empty buildings that you read about. And we really kind of focused on Tier 1 and Tier 2 cities. So while we peg even our share at, say, like around a, you know, 10%-ish mark, our Shanghai share is probably closer to 25. And so that's, you know, that's just how we constructed the business, but still, even a market like Shanghai over the years, a lot of new construction. You know, those buildings are aging now, and, you know, space is more scarce. And so what you're starting to see is a pivot. Now, a while ago, people would just buy, you know, empty concrete boxes and then go and decorate them, that's evolving to what's called either a finished unit or a decorated channel where you work with the designer to go in and finish the new construction unit. And now, as you'd imagine, that's becoming a bigger and bigger part of R&R. And so it's not a huge market yet, but it's a growing market, and we think it's one that's going to become you know, very important in the future as these consumers need to start, you know, refreshing these units. And so, you know, focusing on those bigger markets that are more established where we have stronger share, you know, and focusing on that channel is a big part of that strategy. Now, you know, we want to see sort of the bottoming out of new construction because it's just been a circular part of the business. We think we're seeing that now and we're being cautious about how long it may take for that positive inflection in starts to then translate into decorated units down the road. But the team's managing the business incredibly well, kept it quite profitable and focused on building out these new growth channels as well as being an innovation engine for the entire company so they continue to serve up products that, you know, we're launching into other markets. And increasingly, you know, with our new Fortune Range Innovations structural organization and all the work that we've done to sort of simplify the business breakdown silos, you know, it can have an even bigger role working across all of our businesses to help drive business both in China as well as innovation into markets like North America.

Okay, great.

Thanks for the call, guys, and good luck on the year. Sure. Thanks.

Thank you. Our next question is from Truman Patterson with Wolf Research. Please proceed with your question.

Hey, good afternoon, everyone. Thanks for taking my questions. Last quarter, you all suggested that freight and material deflation would be about 1%, but that would be offset by other inflation in the business. Could you just talk about what you're expecting kind of by segment, give an update there, as well as maybe the cadence through the year is kind of one Q peak inflation, and then it levels off kind of sequentially, or how are you all thinking about it?

Yeah, Truman, this is Dave. I'll tackle that one. So, yeah, you're correct. We kind of said, hey, 1%, you know, freight material deflation offset by labor, some other items. I'd say that's pretty consistent with what we're seeing today with a few puts and takes. I mean, labor remains pretty sticky. There's actually some upward pressure on brass in the quarter driven by copper, although that was offset by some incremental freight deflation primarily ocean trade for the year. And so, I think, you know, pretty sticky. And across the segments, really pretty consistent across the segments in terms of input cost and inflation deflation. So, as we kind of look at the margin goals for the year, I don't think there's a big deflationary tailwind in any of the margin goals in any of our segments. And that's really true long-term as well, looking at our investor day targets that Nick mentioned. We see most of the path there through self-help, 75% or 80% of that path is self-help. And so not banking on big deflation in our view of the world today is pretty consistent to what it was about a quarter ago.

Okay, perfect. And then, you know, you all mentioned, you know, the consumer being a little softer moving throughout the quarter. But, you know, I think that was primarily in plumbing. There are a lot of offsets with, you know, destocking, et cetera. I'm really just hoping you can help us understand just, you know, overall for the company, R&R demand trends, just the cadence kind of through the quarter. And if there's any way you can help us understand, you know, exit rate March kind of POS or early April, you know, indications.

Yeah, I'll be happy to try to put some context around it. And so, yeah, You know, if you think about the shape of the year, and interestingly, you know, you look at 21 and 22, and they had very similar shapes, which is, you know, you start out the year, and then you built, you know, a big head of steam starting in March and into the early summer. You know, that first head of steam of 21, I think very stimulus-driven, and if you recall, we said we were, you know, quite surprised that the consumer really tracked almost dollar for dollar a little bit less in 2022 as they moved through that same period. You know, we planned for and expected that this year the consumer would be beneath that. What we saw, you know, for the first part of the quarter before you got to that, you know, that big lap was actually the consumer sort of held in there pretty flattish for most of the quarter. And then as that As that big lapse started, that's where we saw a relative slowness in the consumer compared to that 2021-2022 hill that I would say kind of comes off as you get more towards the middle of the summer, in line with our expectations. And so, you know, if I go back to sort of my business, you know, most impact, you know, outdoors kind of down, mid-single digits, but plumbing down low single digits, really low single digits, and security up low single digits. So still, you know, kind of hovering in, you know, better than we might have anticipated at the beginning of the year. Should I add anything?

No, that's accurate.

Perfect. Thank you all for the time.

Sure. Thank you.

Thank you. Our next question is from Adam Baumgarten with Zellman and Associates. Please proceed with your question.

Hey. Good afternoon, everyone. Just talking about the higher end kind of holding up better, at least relative to the other parts of the business, I guess, did that part of the portfolio also decelerate throughout the quarter and into April alongside some of the broader business, but just still was relatively better from a growth perspective?

Yeah, you know, that's more of a, so that deceleration I was referring to was what we were really seeing through retail. And, you know, this being a much more wholesale and designer-focused business, no, we didn't see any particular deceleration there.

Okay, got it. And then just, you know, thinking about pricing, are you seeing any channels or products where Pricing is perhaps softening or promotional activities picking up, or are you largely holding on to the price that's been put through the system over the last year plus?

Well, you know, as a reminder, I mean, big, big focus for the portfolio, right, is brand and innovation. And then, you know, bringing the insights to the channel that allows both us and our channel partners to do very well from a price and margin perspective. And with that in mind, I mean, we've certainly seen, you know, other categories that were commoditized with some pricing pressure. We're probably seeing a bit more real estate for private label. By the way, that, you know, seems to sway between 10 and 15 percent market share at any given time over a long period of time. But there are lines that consumers and pros will draw around brand recognition, But also service and backing that certain people feel they need to have in the products. And so I wouldn't say at this point we're seeing undue pressure in any of the lines. We certainly keep an eye open, but we will continue to focus. um i would say almost maniacally on driving the brain and driving innovation and getting paid for it and you know i sort of referred to my prepared remarks like you know in the case of mona we've taken a lot of price over the last few years and raised the brand perception both in terms of uh premiumness but also quality price ratio. The consumer feels they're getting a better deal, notwithstanding the price that we've taken, than they were a few years ago. And that is really the engine that we want over all of the brands. And so, you know, if I go back to, you know, all of the org design changes that we made towards the end of last year, it's really to unleash all of those Fortune Brands Advantage capabilities, brand building. category management innovation across the entire portfolio because, you know, with specifically with our restructured portfolio now, if we're going to be in the business, we're going to be in the business with brands that drive value where we can come on good price and get paid for it.

And Adam, you know, just as a reminder, last quarter we said that our guidance, sales guidance incorporated low single-digit positive impact from price with 50% of that carryover and 50% new. And that's still the appropriate guidance for the year. We don't see any change to that. And we will, as we always do, monitor competitiveness on the shelf and POS rates and elasticities and, you know, promote and reposition as needed both up and down, depending on what we see with our elasticities. But no real broad change to our expectations around price and price realization.

Okay. Great to hear. Good luck. Thank you. Thank you.

Thank you. And our final question is from Susan McLaury with Goldman Sachs. Please proceed with your question.

Thank you. Good afternoon, everyone. My first question is, can you talk a bit about how you're thinking of capital allocation? Obviously, with the asset deal out there, that will have some implications for it. But in general, how are you thinking about the ability to generate cash this year as things normalize, and then some of the opportunities for it.

Okay. I'll just start broadly, and Dave can take you through some of the detail. But I would say at the highest level, our capital allocation strategy remains unchanged. You know, we continue to invest in ourselves. Those are our surest and highest return investments. And the teams continue to bring, you know, some great ideas forward for, you know, great returns. And so, you know, as we'll recap, first and foremost, you know, second to corporate development there where we can generate value. And, you know, we're very, as you know, from our long history, we're very disciplined about that part. And then we will return to shareholders, you know, what doesn't go into the first two buckets. And that, you know, certainly has not changed now. You know, we do have a deal pending where, you know, we're very excited about that. We think we're a great home for those brands and can really, build them in a very exciting way. And so we're being mindful of that as we move forward. But, you know, while maintaining a conservative leverage, particularly in this environment, you know, you saw like in this quarter an opportunity as the teams did a really nice job generating cash to be opportunistic about share repurchase at, you know, wonderful values. So we stepped in and we did that. And I think that's very consistent with, you know, how we've approached it in the past and we'll continue to approach it in the future.

Yeah. And so just to put some points around cash flow, this has been a focus for us, as we mentioned, you know, on our call prior, we were cash free cash flow positive in the first quarter, which is unusual for us. It's usually a cash bleed quarter, you know, as we're ramping up inventories for the building season. So it really demonstrates that our initiatives, to right size working capital and inventory are working. And in fact, our free cash flow was $270 million better quarter over quarter this year versus last year. So as long as we can continue to generate cash in this environment, and as we've talked about in the past, this business in a downturn does generate a lot of cash as we shrink the balance sheet, we'll have opportunity to deploy that capital effectively.

Okay, that's very helpful. And then, you know, turning to water innovations, when you think about the trajectory for the margins in that segment, how should we think about the relative cadence as we go through this year? You know, you talked about China being weak, but obviously seeing new construction there pretty strong and maybe R&R sort of in between those two. How do you think about the dynamics and especially maybe as well as you think about the strength and how it's a role relative to Moen?

Yeah. So this is Dave, I'll handle that. So just a reminder, you know, our full year target for water is 23% to 24%. You know, as we look at their margin cadence through the year, you know, improving sequentially, I'd say first quarter to second quarter, and then second quarter to the third quarter before probably a seasonal step back a bit in the fourth quarter. That's back to kind of a seasonal pattern for this business, you know, quarter to quarter. And then within the portfolio, As we've talked about on call, our China business is profitable, remains profitable, and, in fact, was going to add the Fortune Brands Innovation Average for the first quarter on much lower volumes. So the team there is doing a great job. And then House of Roll, as it grows, becomes an accretive piece to the portfolio overall as well. So we feel like the business is performing as we would expect it to, and we'll see some of the sequential seasonal margin builds that we've had in years past.

Okay, that's very helpful. Thank you.

Good luck.

Thank you.

Thank you. That concludes our question and answer session. Thank you for joining today's conference call. You may now disconnect.