Fortune Brands Innovations, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Digital Strategy: Made progress with Flo strategy, signed 7 insurance contracts, added ~20,000 Flo Smart Water Monitor and Shutoff users in Q3. POS for retail and e-commerce up 80% vs Q3 2023. Expect Flo business to grow in 2024 and accelerate in 2025. Yale and August businesses made progress with key customers.
• Market Environment: Choppy environment with U.S. repair and remodel declines and China market challenges. Fed rate cuts but mortgage rates remain elevated. Pent-up demand in R&R due to home equity growth but limited equity extraction.
• Margin Performance: Operating margin in Q3 was 18.7%, up 130 basis points vs Q3 2023. Driven by continuous improvement initiatives, cost reduction, and focus on more profitable categories.
• Transformation: Approaching two-year anniversary of business reorganization. Developed new purpose 'elevate every life by transforming spaces into havens' to unify associates and drive innovation.
• Segment-Specific: Moen North American organic sales down low-single digits; House of Rohl organic sales down low-single digits; Therma-Tru benefited from new construction starts; Security took action to reverse market softness with new ad campaigns and increased promotions.

Segment Performance

• Water Innovations: Sales were $635 million, down 8%. Excluding China, organic sales were down 2%. Operating income was $156 million, operating margin 24.6%. China sales declined over 40%.
• Outdoors: Sales were $343 million, down 6%. Segment operating income was $62 million, operating margin 18%, an improvement of 320 basis points. Door sales were flat, decking sales down over 30% due to inventory actions.
• Security: Sales declined 14% to $178 million, organic sales down 12%. Operating income was $34 million, operating margin 19.3%, an increase of 250 basis points. Impacted by market softness and non-compliant private label alternatives.

Guidance

• 2024: Revised EPS guidance to $4.17 to $4.23. Reflects choppy demand, hurricane impacts, and lower channel inventory, but maintains investment in strategic priorities. Fourth quarter sales expected to be down low-single digits with operating margin improvement and high single to low-double-digit EPS.
• 2025: Anticipates market inflection in the second half, with above-market growth from core and digital products. Focus on execution and delivering on sales growth and margin performance goals, but specific 2025 guidance assumptions not provided yet.

Risks

• Market Softness: U.S. repair and remodel market remains challenged with low single-digit POS declines.
• Non-Compliant Products: Trade down to inferior and non-compliant private label alternatives in security, impacting sales.
• China Market: Chinese market remains soft with cautious consumers, though government policies announced but impact timing and magnitude unclear.
• Hurricane Impact: Short-term negative impact on Q4 sales due to recent hurricanes, affecting Moen and Doors businesses.

Question and Answer

Q: John Lovallo from UBS asked about the decline in results and guidance revisions.

A: Nick Fink and Dave Barry discussed that sales were impacted by pivoting from low-margin categories, slower conversion of digital contracts to revenue, and trade down to non-compliant products, but saw positive signs in digital and margin improvement. Guidance revised with ~$135 million lower at midpoint, half due to hurricanes and half due to consumer POS softness.

Q: Phil Ng from Jefferies inquired about connected products growth, supply chain, and 2025 opportunities.

A: Nick Fink and Dave Barry mentioned strong POS and pipeline for connected products but slower conversion to sales. Focus on ramping up supply chain and capacity, with $160 million sales pipeline from insurance contracts and 60 million homeowners under discussion.

Q: Michael Dahl from RBC Capital Markets asked about Flo conversion rate and COGS exposure to China.

A: Nick Fink explained a 5% conservative conversion rate for signed insurance contracts, with higher conversion expected for mandated contracts. COGS exposure to China reduced from over 50% in 2018 to less than 25% today, with U.S. sourcing increasing.

Q: Trevor Allinson from Wolfe Research asked about non-compliant product impact and China market.

A: Nick Fink discussed non-compliant products affecting security and water, with positive momentum in POS after new ad campaigns. China market remains soft but managed tightly with low bottom line risk.

Q: Stephen Kim from Evercore ISI asked about security POS and digital product sales channels.

A: David Barry noted security POS down mid-single digits due to market softness, and digital products over-index in online sales.

Q: Adam Baumgarten from Zelman asked about digital growth contribution and trade down.

A: David Barry said digital POS strong but sales conversion rate slower, with focus on reducing time to revenue. Trade down seen in some mechanical products but not across all segments.

Q: Matt Bouley from Barclays asked about margin progress and decking trends.

A: David Barry discussed margin progress from productivity, SG&A efficiency, and mix, with investment in growth offsetting some gains. Decking destocking was onetime, with improving trends seen in the fourth quarter.