Fortune Brands Innovations, Inc.

Hello, my name is Shamali, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands second 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 Abseck, Vice President of Investor Relations and Corporate Affairs. You may begin the conference call.

Good afternoon, everyone. and welcome to the Fortune Brands Innovations second quarter earnings call. Hopefully, everyone has had a chance to review the earnings release and our web posting for additional information on our most recent acquisition, as well as our supplemental financials. The earnings release and our audio replay of this call can be found in the investor section of our fbin.com website. I want to remind everyone that our 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 may be required by law. Any references to operating profit or margin, earnings per share, or free cash flow in 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 a lot of time to address some questions. I will now turn the call over to Nick. Nick?

Thank you, Leigh, and thank you to everyone for joining us today. On this call, I will walk through the highlights of our second quarter performance and offer some thoughts on the macro environment. I will also discuss our recent acquisition and how we expect these leading brands to accelerate key strategic initiatives and contribute meaningfully to our performance. I'll then turn the call over to Dave for discussion of our financial results and how we are thinking about the remainder of 2023, including the upward revisions to our market forecasts and increase to our full year 2023 sales and EPS guidance. Turning to our second quarter performance, our results and the actions we took this quarter demonstrate the resilience and strength of Fortune Brands innovations. Our teams delivered solid sales and strong margin results amidst an external environment that remains dynamic. Our leading brands, our focus on meaningful innovation, and our advantage channel relationships positioned us well in the current environment and drove our results. I want to thank all of our associates for your dedication and pursuit of excellence, and again welcome our newest associates to Fortune Brands Innovations. Together, we are going to continue to build an exceptional company. Net sales of $1.2 billion in the quarter were down 7% versus the prior year, and our operating margin was 17%. Our top-line results were 50 basis points above our estimates for our market. These results demonstrate our ability to grow above the market, protect margins, and invest in key strategic growth initiatives, even in a challenging environment. Our sales and margin performance generated earnings per share of $1.07. As we discussed in our last earnings call, heading into the second quarter, we knew that we were coming up against uniquely challenging year-over-year comparisons. As we expected, we saw sequential point-of-sale dollar growth versus the first quarter of 2023. It was not at the same exceptional levels of ramp-up that we experienced in 2022. As a reminder, the slowdown in the market for our products and major inventory destocking began in the second half of 2022. In fact, our second quarter 2023 organic sales results were 19% higher than in the second quarter of 2019, demonstrating that consumers continue to be interested in investing in their homes. Our results this quarter reflect our unwavering focus on outgrowing the market, preserving margins, and generating cash, all while continuing to prioritize key investments, including brand building, thoughtful capacity additions, meaningful innovation, and our digital transformation. I believe that we are very well positioned as we head into the second half of 2023. Turning now to some thoughts on the current U.S. housing market and the market for our products. As we have consistently stated, demand outstrips supply in the U.S. for housing, which creates a market opportunity for our products in both new construction and repair and remodel. There is significant pent-up housing demand driven by several factors that I'll touch on shortly. This demand, together with our strong and optimally positioned brands, will result in medium to long-term tailwinds for our business in both new construction and repair and remodel. Starting with new construction, as has been widely reported, the new home construction market has fared better than anticipated, despite higher interest rates. Existing home inventories remain near historic lows as U.S. housing remains severely underbuilt. Builders, particularly the large production builders with whom Fortune Brands enjoys strong relationships, have been responding to affordability challenges in a dynamic marketplace by building spec inventory and providing sales incentives, including rate buy-downs. Sales of new homes have been increasing throughout the year and starts are again outpacing completions. The backlog of new homes is also increasing, albeit at a much more manageable rate. With that as a backdrop, we have revised our single-family new construction outlook upward for the remainder of the year while continuing to monitor for economic volatility and the potential for a full recession. Turning to R&R, within the broader repair in the model space, we remain confident that our products are uniquely and optimally positioned to outperform. Several factors are converging to result in a unique opportunity for growth. First, the current lack of existing inventory combined with the fact that over 80% of mortgages are under 5% means that people are more inclined to stay in place and make the home they have into the home they want. Next, consumers continue to have high confidence in their homes as an asset given the extremely high levels of home equity and personal real estate investments which have offered financial stability and strong rates of return. Finally, the average home is over 40 years old, and homes built during the early 2000s boom are coming into prime R&R age. Additionally, the baby boomer generation continues to prefer aging in place and investing in their homes, while millennials and other first-time homebuyers are purchasing homes in need of upgrades due to limited available inventory and affordability concerns. These demographic trends are all supportive of repair and remodel. Our data shows that our products are less tied to existing home sales and instead are more dependent on factors like consumer confidence, age of the house, and home equity and employment levels. We believe our products are relatively more insulated than other R&R items because they are smaller ticket items, are less disruptive to install, and because they offer immediate aesthetic improvement or meaningful innovation and functionality to a home. In short, people buy our products because they want to enjoy them. That said, we are aware of the uncertainty inherent in the broader macro environment, and we are watching market conditions closely, and we will respond quickly if warranted. Turning now to our most recent acquisitions, I'm extremely excited about the recent acquisition of two world-class businesses from Assa Abloy, the Emtek and Schaub premium and luxury door and hardware business, and the U.S. and Canadian Yale and August residential smart lock business. Dave will provide more color into the numbers, but at a high level, we expect second half 2023 sales for these businesses to be approximately $190 to $210 million, and for this deal to be accretive to our P&L in 2023, with $0.04 to $0.06 of EPS, even after factoring in $0.08 of purchase price amortization. This acquisition is a great example of a disciplined approach to M&A. Emtek and Schaub are the market-leading brands in the luxury hardware space and will be a fantastic complement to our House of Roll business. The margins for these brands are exceptional, and we look forward to leveraging the team's demonstrated skill at driving phenomenal customer service and highly designed products, while also maintaining high margins across the entire Fortune Brands portfolio. Clearing on Tech & Sharp, our luxury platform will now be over half a billion dollars in annual sales, and the potential synergies are meaningful. This acquisition will allow us to expand our presence in luxury showrooms, further penetrate the luxury hospitality market, and become an authentic global luxury design house, offering cohesive product offerings and finishes throughout the home. Our consumer remains strong and is increasingly interested in products with storied brands and distinctive quality, and we believe our growing luxury portfolio speaks to the secular demand trend. The Yale and August residential smart security businesses consist of innovative brands with a strong IP portfolio and exceptional digital talent. As part of the acquisition, we have added roughly 100 new engineers supporting in-house software and hardware platforms, who we will leverage across our portfolio of brands over time. In addition, this acquisition will allow us to expand our retail and omnichannel and wholesale door lock business, broaden our residential connected security ecosystem, and accelerate innovation across our brands, including the potentially transformative development of a fully integrated smart entry door system. Here again, the potential for synergies is significant. This acquisition will be a key accelerant to our growth strategy. It allows us to expand in existing channels and categories, as well as in new, high-growth spaces with secular tailwinds. Importantly, through the addition of Yale in August, This acquisition is a key step in our transformation into a digital, innovative disruptor. Further, with the addition of EmTech and Schaub, we will materially accelerate our strategy to build the House of Roll into a global luxury powerhouse for the entire home. Combined with our existing Fortune Brands business, we now have the knowledge base, the growth platforms, and the brands to bring new and disruptive products and services to the market that will be the first of their kind. Overall, Fortune Brands Innovations is well positioned for both the near term and the long term. Our branding power, meaningful and value-add innovation, and strength in the multi-step distribution channel are powerful moats in uncertain times and accelerants in times of broader economic growth. Our recent acquisition of the leading Emtek, Schaub, August, and Yale brands will provide growth opportunities and nicely complement our strategic focus on branding, innovation, and channel. Our brands are uniquely positioned to outperform the market in all environments, and our newly aligned structure, together with our Fortune Brands Advantage capabilities, will enable this outperformance, as our results demonstrated this past quarter. As we announced in the release this afternoon, we are raising our full-year sales and free cash flow guidance and again raising our full-year EPS guidance. Dave will give more details, but this increase reflects our confidence in the Fortune Brands business. Before I turn to the individual businesses' performance, I would like to remind everyone that our second quarter 2023 results reflect both the impact of challenging prior year comparisons plus the impact of the single-family new construction market which slowed abruptly in the second half of 2022. That slowdown is now being digested through our business. In the second quarter, water innovation sales declined 5% compared to the prior year quarter due to market-driven volume declines across the segment, partially offset by price. Our margins for the segment were 23.2%. The Moen U.S. business has strong long-standing relationships with the top U.S. production builders, and our strategic decision to invest in our relationships with these key customers yielded tangible results. In retail, we saw more general market softness as the DIY consumer market slowed. Our House of Roll brand's total sales were up low teens for the quarter, including Aqualisa, and down high single digits organically, reflecting the impact of high second quarter 2022 comps and a softer market. For the full year, we expect our organic sales to be flat, as our story of craftsmanship and unique designs continues to resonate with the luxury consumer who is increasingly seeking differentiated goods and values, timeless quality. We recently announced the building of a new facility in the UK, which will help meet global capacity needs of the business as we continue to expect our brands to perform well. In China, sales were up over 30% year over year. This reflects the impact of lapping the second quarter of 2022, which was marked by the Shanghai COVID shutdown. We also saw higher-than-expected project completions, although the overall market remained soft and the Chinese consumer remains cautious. However, we continue to capitalize on our leadership positions and are well positioned within the Chinese housing market, where we are increasingly focused on the emerging Chinese R&R market. For the full year, we now expect China sales to be down high single digits. In outdoors, sales declined 14%, reflecting expected market softness, which was partially offset by price. We saw sales improvements sequentially throughout the quarter and are encouraged by July results so far. We are pleased with our operating margin of 16.4%, which is 80 basis points higher than our second quarter 2022 results and is a proof point of the success of our newly aligned operating model. We are well positioned across our outdoors brands to respond to any changes in demand patterns and are making investments to continue to best serve all of our customers and channel partners. while also focusing on the innovations which we believe will further differentiate our products. In decking, POS trends indicate continued strong consumer interest in this category and the recent re-acceleration of sales as the value proposition is increasingly understood by consumers and pros alike. Wholesale sellout improved throughout the quarter and we exited June up high single digits. In the quarter, Sales were down high teens versus the same quarter of 2022. However, when comparing to Q1 of 2023, we saw sequential sales increased by more than 50%. Our channel partners were conservative with inventory buys in the beginning of the quarter, but in June and into July have been accelerating their inventory purchases, and our POS data shows that we are growing above the market. Indoors, sales declined low teens as the slowdown from the 2022 single-family new construction market impacted ThermaTru. We are confident in the long-term opportunity as well as the strength of our product offerings and our long-standing advantage relationships with our key customers and channel partners as we look to maintain and grow market share in the most attractive parts of the market, including in the single-family new construction market. Lastly, in security, sales increased 2% over the prior year quarter. These results were driven by price and continued growth in commercial and international markets. As we have previously mentioned, our security and water businesses share many key similarities, including the importance of their iconic brands with consumers and trade partners, a strategic focus on connected products, and the structure of their operations and supply chains. The security business continues to implement the Fortune Brands Advantage Playbook that we first used to transform our water business eight years ago, and the results are becoming apparent. Going forward, the team will work to continue to evolve this business into a higher growth, higher margin business focused on driving the power of our brains and developing meaningful innovation. Before I turn the call to Dave, let me share a few final thoughts. We took meaningful steps this past quarter to prepare Fortune brands for continued growth. Our reorganization into a more efficient, centralized company focusing on brands, innovation, and channel has progressed more quickly than we anticipated thanks to the strong engagement from our teams and the impact was apparent in our results. We made important changes to our supply chain to align with our growth areas and margin progression targets. We continue to invest in our key strategic priorities, including our iconic brands, digital transformation, and meaningful innovation. And finally, we closed on an exciting, potentially transformative acquisition that we expect to drive growth and accelerate our larger strategy. As we highlighted last year, the actions we took in 2022 were designed to transform Fortune brands into a growth-focused, highly innovative company. Six months following our separation, I am encouraged by all that we've accomplished and excited about what we will achieve next. As reflected in our revised full-year guidance, we see some positive indicators of a healthy consumer while also being mindful of potential short-term disruptions. We're constantly monitoring and are well-prepared to respond to uncertain end markets in the short term while we position ourselves for accelerating longer-term outperformance in a market supported by fundamental growth characteristics. As we head into the second half of 2023, we are focused on execution and delivering on our commitment to above-market sales growth and margins. With that, I'll turn the call over to Dave.