Fortune Brands Innovations, Inc.

Good afternoon, everyone. My name is Morgan, and I will be your conference operator today. Welcome to the Fortune Brands First Quarter 2025 Earnings Conference Call. All lines are muted to prevent background noise. Following the speaker's remarks, we will open the call for a Q&A session. At this time, I'll turn the call over to Leigh Avsek, Executive Vice President, External Affairs, and Chief of Staff. Leigh, please go ahead.

Good afternoon, everyone. and welcome to the Fortune Brands Innovation's first quarter earnings call. Hopefully, everyone has had the chance to review the earnings release. The earnings release and the audio replay of this call can be found on the investor section of our fbin.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in our associated question and answer session, are based on current expectations and market outlook. and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements except as required by law. Any references to operating profit or margin, earnings per share, or free cash flow on today's call will focus on our results on a before charges and gains basis, unless otherwise specified. Please visit our website for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. With me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry, our former Chief Financial Officer and current President of Security and Connected Products. We will also be joined by John Bocht, our new Chief Financial Officer, and Kurt Worthington, our new Vice President of Investor Relations and Finance during the Q&A session. Kurt is a seasoned IR professional and joins us from Pact of Evergreen, where he worked alongside John. I will continue to be involved in investor relations as part of my role as head of external affairs and chief of staff, just in a different capacity. I am looking forward to working with Kurt to ensure a seamless transition. Following our prepared remarks, we will have allowed time to address some questions. I will now turn the call to Nick. Nick?

Thanks, Leigh, and thank you to those joining our call. On this call, I'll discuss the impact of tariffs on our company, summarize our first quarter performance, give an update on a few of our key strategic priorities, and discuss the external macro environment. In addition to giving an overview of our expectations around the impact of tariffs, I will provide some color into the areas where we believe we have opportunities to outperform and grow share. Then, Dave will review our financial results and assumptions and give more information on tariffs, our mitigation efforts, and our balance sheet. I would like to take a moment to thank Dave and extend my heartfelt gratitude for his partnership as our CFO. Now, as he fully transitions to his new role of President, Security and Connected Products, I'm excited for how he will accelerate our success with that portfolio. I'm also pleased to have Fortune Brand's new CFO, John Bosch, join us for Q&A today. John's level of experience as a successful public company CFO is outstanding, and he's quickly learning our business and already providing valuable insights. He and Dave are working closely together to ensure a smooth transition. John is one of several recent highly talented key hires that we have made as we prepare to consolidate most of our U.S. office associates into one state-of-the-art campus in Deerfield, Illinois. We've been delighted by the quality of talent that we are attracting, and now have a world-class leadership team fully in place. Additionally, we're pleased to have many of our existing out-of-state associates willing and able to continue their career journeys with us in Deerfield, with the numbers of associates who have chosen to relocate and remain with the company exceeding benchmarks. Overall, I am extremely pleased with our progress as we consolidate our offices into one headquarters campus. By establishing an inspiring hub where our associates can effectively collaborate and ideate, we will elevate our execution and expedite our growth potential. We anticipate that our first wave of associates will come together at the new campus towards the end of the summer. These are very dynamic times. Fortune Brands Innovations has demonstrated the capabilities to respond promptly, adapt swiftly, and identify opportunities, even in the face of challenging circumstances. such as the initial tariff increases from 2017 to 2019, the COVID-19 pandemic, and the subsequent supply chain disruptions. Through each of these challenges, our team's execution exceeded our customers' expectations as well as our own, enabling us to capture additional share. This proven track record gives me great confidence that we will continue to thrive and deliver exceptional results for our stakeholders. Our associates are demonstrating the same urgency and strategic thinking with the current tariff situation from both a supply chain and commercial perspective. I am very grateful to our teams for rising to the challenge presented by the current uncertainty and focusing on the very real opportunities we have right now in delivering for our customers and consumers. In response to the uncertainty of the external environment, we have established a focused set of priorities designed to ensure that we can continue to execute our strategy and deliver for customers and consumers. This includes mitigating the expected impacts of tariffs by leveraging our strong U.S. footprint, investing behind our successful brands and impactful innovation, expanding our digital business, and driving free cash flow to support our Fortress balance sheet. By dedicating our resources to these crucial priorities and sustaining strategic investments, I have confidence that we will succeed. We remain agile in a very rapidly changing environment and have already taken significant actions to mitigate our exposure to the anticipated impacts of tariffs and to optimize our competitive positions in light of our robust U.S. and North American supply chain and operations footprint and leading brand positions. Our initial guidance of February 6 included the impact of the then-announced tariffs, and our EPS range assumed that some additional tariffs could be imposed. However, because of the uncertainty around how consumer demand will trend throughout the year, we will not be providing detailed full-year financial guidance this quarter. Instead, we will be providing a framework that outlines how various volume scenarios may impact our full-year EPS. I will provide a high-level view on how we're thinking about the impact of tariffs and the related mitigation actions in 2025. we expect to fully offset the anticipated $200 million of 2025 tariff impact through a combination of supply chain opportunities, cost-out activities, and strategic pricing actions across all of our channels and brands. Assuming current tariff levels, we expect the full annualized impact of tariffs in 2026 to be around $525 million, which we expect to fully mitigate through supply chain actions, and other mitigation strategies. In addition to our three main mitigation strategies, we have been actively engaged with senior level officials in the Trump administration, key agencies, and members of both the House and the Senate to educate them on our story and to find ways to further bolster U.S. manufacturing. While we are not planning on any tariff exclusions or exemptions, we believe ourselves to be well positioned if there are government actions to support U.S. manufacturers. Notwithstanding some of the shorter-term cost challenges, we believe the tariffs and current geopolitical situation are creating some very relevant short- and long-term growth opportunities, and we are working to maximize these opportunities, including leveraging our significant U.S. and North American manufacturing presence. We are predominantly a North American-based manufacturer, with around 60% of our COGS from the U.S., and 70% from North America. We have 15 North American manufacturing and distribution sites, including 12 US sites employing thousands of Americans. Since 2017, we've reduced our spend from China by over 60%. And by the end of the year, we expect our China COGS to be around 10%. We've already made significant progress on other large supply chain moves, which will further reduce our exposure to China. Many of our competitors, particularly in our outdoors and security segments, sourced almost exclusively from China, putting us at a clear and immediate advantage. In other parts of our supply chain, we are noting potential transshipping of Chinese products, and we are confident these actions will be exposed and stopped, leading to further opportunity. In the coming months, we expect our advantage supply chain will offer us opportunities to take share in many of our categories. Beyond our supply chain, we have several other competitive advantages. We are price leaders, and the majority of our sales are through complex channels, which allow us to more effectively pass along price increases where and as needed. We have sophisticated data capabilities, allowing us to take strategic and more surgical pricing actions. We have leading brands in spaces where brands, innovation, and quality matter, giving us a competitive advantage during periods where consumers are looking for more value. Our products are generally smaller ticket items that can enhance the space at a relatively low cost. Finally, we make digital products that help solve some of the most pressing challenges facing the world today and can help consumers and commercial customers reduce costs and therefore have idiosyncratic demand curves with non-traditional drivers. Importantly, we have a fortress balance sheet with strong annual cash flow. This robust foundation allows us additional flexibility to navigate challenging external conditions without compromising our long-term strategy of opportunistically deploying capital and paying a reasonable dividend. We believe that we are well prepared for any future economic downturns with the ability to generate cash and maintain a strong balance sheet while continuing to invest for the future. We have demonstrated that we can deliver attractive decremental margins in the face of material market declines and take various cost-out actions if necessary. Importantly, while our recently announced headquarters consolidation was driven by highly strategic reasons, it also has the expected impact of reducing our SG&A. Additionally, we are now hiring for those roles made available by associates who chose not to relocate. and have full control over the pace of hiring with the ability to scale back discretionary rehiring if external conditions warrant. We are many months ahead of other companies that may potentially look to make tough decisions about their workforce in the coming months. Turning now to some thoughts on the current housing market and the market for our products. We continue to see the effects of uncertainty around the economy weighing on the consumer and ultimately on our demand. The spring selling season has been slower due to cautious consumer behavior. In the repair and remodel sector, consumers are similarly hesitant, delaying major purchases because of the uncertain environment. Larger, more discretionary projects are expected to be more impacted than smaller R&R tasks. Despite this, the housing market is still under bolt. with significant pent-up demand, and historically, the housing sector tends to recover first during economic downturns. We believe the medium and long-term fundamentals in this space remain strong. Turning to our first quarter performance. Our first quarter results reflected a softer market, including inventory reductions across our channels, primarily in water. Consumers and customers are showing caution due to external uncertainty. Amidst this uncertain backdrop, we delivered margins and EPS in line with our expectations. Sales were $1 billion, down 7% versus the first quarter of 2024, or down 5% organically, excluding the impact of China and FX. Our results reflected the impact of a soft demand environment, with point-of-sale excluding China down low single digits and reductions in wholesale inventories. Our teams remained focused on our key priorities amidst a volatile environment and delivered margin results in line with our expectations while continuing to invest in a narrow set of long-term strategic initiatives. Our operating income was $136 million, and our operating margin was 13.1%. Our earnings per share were 66 cents. This past quarter, we saw the implementation of several key initiatives. We believe the progress that we made on these strategic initiatives will result in long-term value. Our new MonsterLock and CenturySafe brand campaigns launched, and we have seen an immediate positive uptick of sales and website traffic. Our large and perfect aisle rollout accelerated this past quarter with extremely favorable responses and will bring new energy to this category. Our Moen brand is stronger than ever, and we were recently recognized as the most trusted for the 10th consecutive year. Moen introduced updated fashionable product suites that are in line with current trends, receiving very positive market feedback. These products are expected to perform well throughout the year and beyond. And as I will detail in a bit, our flow leak detection device continues to have incredible momentum. We've sold more flow devices year-to-date than in all of 2024. We are pleased with the performance of our digital products with over 200,000 device activations in the first quarter. Our digital business remains strong, and we believe that we are on track to deliver around $300 million in sales in 2025 in this portion of our business. Our flow business was especially strong with impressive momentum. We added three new major insurance partnerships in the first quarter, including our recently announced partnership with Liberty Mutual Insurance. one of the largest national insurance companies. Flow sales increased by 180% over the first quarter of 2024. We also unveiled our first bundled subscription model with very positive feedback on our pricing structure. Even before we started marketing this new pricing model, we saw consumer uptake. We're confident that our flow business will continue to accelerate even in the current uncertain environment, driven by its clear win-win value proposition for both homeowners and insurers. These new insurance partnerships, growing consumer awareness of the criticality of this product and its ability to protect homes and lower insurance premiums, is fueling its continued strong momentum. Our Yale lock business is accelerating with many recent developments and new partnerships. This past quarter, Yale expanded into some of the largest retailers with very encouraging initial sales, and we introduced new multifamily smart lock solutions. In partnership with Google, our new enhanced Yale smart lock with Matter will roll out later this quarter, replacing the prior Nest Yale lock. We recently announced that ADT and Yale have partnered together to introduce the first ever biometric Z-Wave Credential Command Cloth Lock, an industry-first innovation that which allows ADT users to unlock and disarm their security system from their door using just their fingerprint. And finally, we made important strides with our MonsterLock Connected Lockout Tagout this past quarter. This commercial safety solution has been adopted at several large-scale customers, including Ozinga Manufacturing and Cushman Wakefield. Connected Lockout Tagout is a significant and attractive opportunity for manufacturing companies because it leverages technological advancements to provide superior protection, efficiency, and safety for employees during maintenance and servicing of machinery while reducing workers' compensation claims. We continue to expect big things out of this digital business. Turning now to our individual business results. Starting with water innovations, this segment saw sales decrease by 10%, or 7% organically, excluding China and FX. Our results reflect the softer demand environment, with point of sale excluding China down low single digits, as well as inventory destocking and wholesale as our partners prepared for a softening environment. Our results also reflect a transition to enhanced pricing discipline in our e-commerce channels, resulting in lower point of sale and shipments in the quarter. Within the segment, we saw market outperformance in our House of Roll business as the luxury consumer remains resilient. Looking forward to the remainder of 2025, this segment will be impacted by tariffs, and we cannot accurately predict the demand landscape. We are focused on addressing our tariff exposure through sourcing moves, cost-out activities, and selective pricing actions. We believe that our domestic Moen operations will provide us with a competitive advantage particularly against finished goods which come directly from China or other tariffed countries. In addition, the current geopolitical environment is providing us with opportunities to distinguish our safe and reliable non-products versus inferior and dangerous imposter brands. We will focus on achieving above-market sales by targeting areas of the market with significant growth potential. Our strategy includes making careful and selective investments in our key priorities such as branding, marketing, and digital initiatives. I am confident in the ability of our new leadership in our water business to launch another era of market outperformance for this storied business. Turning to outdoors, sales decreased 3% on softer retail point of sale and wholesale inventory reductions in doors, partially offset by double-digit sales growth in decking. We remain laser-focused on leveraging our expertise and investing behind our core categories and in those products which we expect will offer the most attractive growth opportunities. Our outdoors business has a significant North American manufacturing base with strong domestic manufacturing presence. We expect this advantaged operational footprint will give us a strong competitive advantage, particularly in the case of ThermaTru, where many of our competitors are sourced directly from China. The high tariffs should result in narrowed price differentials, and our North American supply chains should provide more stability of products. In addition, we are in the first phase of our anti-dumping lawsuit, where we are seeking to address unfair trade practices of a number of China-sourced fiberglass door products. The combination of tariffs and the anti-dumping lawsuit is an opportunity to even further accelerate our expected market outperformance. Finally, our security segment sales decreased 4% in the quarter, primarily due to soft point of sale as consumer confidence decreased and channel partners took out inventory. However, we see opportunity in this business to take share because many of our competitors' products come from China, and we are accelerating our branding efforts around helping consumers understand the true value of our products, which has already been proven very successfully in our safes business. We expect to see some benefits in the second half of the year related to some new product rollouts in both traditional security and our digital locks business. Our Yale lock business is showing positive momentum as we look to the back half of the year and comp against disruptions in 2024. To recap, as we look across the balance of the year, we are acutely aware of the pressures of the external environment and will be executing on a narrow set of clear priorities. These priorities include mitigating the expected impact of tariffs, controlling costs, continuing to drive our strong brands and digital portfolio, and maintaining our fortress balance sheet. We have full confidence in our team's ability to mitigate the expected impact of tariffs through strategic sourcing moves, cost-out activities, and pricing actions. While we have less clarity around volume and demand trends, the current situation creates several opportunities to drive market outperformance, across our portfolio. Our digital business remains strong with opportunities for growth, even in the current environment. Our brands are trusted and known for their dependability, safety, and design. We have advantaged supply chains across our portfolio with reduced reliance on China, which we can leverage to our advantage. And finally, we have a world-class leadership team in place and engaged, high-performing associates who are energized, by external challenges. As we have done in the past, we will seek and execute upon opportunities to excel in the current environment. I will now turn the call over to Dave.