Good afternoon. My name is Marianne. I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands First Quarter 2024 Earnings Conference Call. [Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Leigh Avsec, Vice President of Investor Relations and Corporate Affairs. You may begin the 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 Investors section of our fbin.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as may be required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for reconciliations. With me on the call today are Nick Fink, our Chief Executive Officer; and Dave Barry, our Chief Financial Officer. Following our prepared remarks, we have 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 first quarter performance, give some color on the drivers of this performance, including progress on our strategic initiatives and offer some thoughts on the macro environment. I will then turn the call over to Dave for a discussion of our financial results, including how we are thinking about the remainder of 2024. Our teams delivered strong first quarter results by executing on our priorities, including delivering above-market growth and operating margin improvements. We saw powerful proof points of our compelling investment thesis this past quarter and are increasingly seeing the benefit of the transformative actions we took over the past few years. These actions all support our strategy as a growth-focused company, powered by secular tailwinds, underpinned by leading brands, innovation and channel management and fueled by our Fortune Brands Advantage capabilities in our newly aligned structure. Turning to our first quarter performance. Our teams delivered strong top and bottom line results, driving both sales and margins as they executed on our priorities. Through our strategy of growing the core and accelerating digital products, we were able to focus on those opportunities with the highest potential for returns, including in our leading brands, digital and connected capabilities and products and our meaningful innovation while also optimizing and aligning our operations. Looking forward to the remainder of the year, we continue to expect to achieve the full year guidance we initially outlined during our fourth quarter call. Net sales of $1.1 billion were up 7%, while organic sales were down 3% versus the prior year's first quarter. We estimate that our POS performance outperformed the larger market for our products by over 100 basis points, reflecting our commitment…

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 our priorities amid a dynamic macro environment. As I will detail in my section, our financial results have some very compelling examples of how the transformative actions we undertook over the past 1.5 years are generating tangible returns. In the first quarter, sales were $1.1 billion, up 7% and down 3% excluding acquisitions. Consolidated operating income was $167 million, up 22%. Total company operating margin improved 200 basis points to 15.1% and earnings per share were $0.83, a 20% increase versus last year. Our first quarter performance was driven by higher-than-expected sales in our Outdoor and Water segments and resulting margin flow-through. As Nick mentioned, we remain focused on driving outperformance including above-market growth, enhancing margins and generating cash. Our teams continue to focus on 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 $625 million, up $31 million or 5% and down 7%, excluding the impact of acquisitions. Our organic results reflect POS down mid-single digits and channel inventory reductions at select customers. China sales declined mid-single digits and were up low single digits, excluding the impact of FX. As Nick indicated, the Chinese consumer remains cautious in the housing space and our team continues to manage the dynamic environment well while finding pockets of growth in the emerging channels and in product category expansion. Water Innovations operating income was $141.5 million an increase of 10%. Operating margin was 22.6%, an…

Thanks, Dave. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there are a number of you who would like to ask a question, I will ask that you limit your initial questions to 2 and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator, can you open the line for questions? Thank you.

[Operator Instructions]. Our first question comes from John Lovallo with UBS.

Nick, maybe I'll start high level sort of where you started. And just looking for any update on the progress of the various kind of Fortune initiatives to align the company more as one company, whether it's connected products, integrated supply chain efforts, the transformation office. I mean where are the biggest opportunities for improvement this year?

John, it's a great question. I mean, we're a little more than a year into that now, right? So as September '22 when we announced the realignment of the company. And we shy away from it, it is a heavy lift to go and redesigning an operating model. And then really work through a full cycle, which was 2023 of operating in that new model. And now we seem to be hitting our groove. And what I really look to -- what are the proof points of things that we've been able to get done that we might not have been able to get done had we not come together in this way. And I think you can see it across a number of things and firstly, the portfolio is getting increasingly cohesive. A lot of people remarked, I think at the industry shows at KBIS and IBS, seeing Emtek and House of Rohl together on display is really not just a proof but an example of what's really rolling out the market and the speed with which we were able to do that. I think it was very surprising coming into outdoors area and not just seeing products on display together, but starting to see how those innovations will work together to bring those technologies across the various brands in areas like Outdoors with Emtek. So you're starting to see the portfolio with the aligned organization being able to expect greater value than where it was less aligned or more siloed. So that is a big area for us. I think another big area is our op leverage, right? You just have now a single team supporting the entire business and the caliber of the team that comes with that. And what they're getting done and the time that…

Got it. That's really helpful. And then maybe turning just to Outdoors. Revenue was up 9% in the first quarter versus your full year outlook of plus 1% to 3%. Was there some timing benefit here because the remainder of the year implies more modest growth on a year-over-year basis. And then along the same lines within decking, it sounds like retail may have been down meaningfully to offset that 20% increase in wholesale. So can you provide any color on what's going on there?

Yes, I'll give you some perspectives and Dave can round it out on the rest of the year. I mean, obviously, super excited about the Outdoor for the quarter. I think you may have really seen that business coming into its own, and getting much more aligned under its leadership. Great performance out of the doors business. They did some work to align it. And of course, you're seeing new construction finally start to come through as we sort of move towards the end of the year and starting into this year as that ticks back up. So some really good stuff there. On Fiberon, you're absolutely right. I mean, we made some strategic calls to really focus that on the most profitable part of the market, where we can hopefully generate the types of margins we'd like to see in order to be able to fuel future growth and future innovation. I mean, that's really how we think about the margin journey and the whole company is this, that's a real purpose. And so we're seeing really the growth continue to come through the wholesale channel and seeding some in the retail channel. And then very interestingly for us as we start to see some of the work that we've been at Larson for the last couple of years, hit the marketplace. And so Larson kind of go through a total refresh with some of the ideas that we had coming into that acquisition, but with the pandemic and some of the changes we had to make and some of the less profitable business that we walked away from, just took a while to align that organization and now starting to see some really positive POS coming there. So I'd say in whole, really good quarter coming in ahead of where we thought and gives us some good confidence for not just the rest of the year, but where we take this business from here.

And John, I'd add with the Outdoor segment, we saw POS up mid-single digits, which was mostly volume driven in the quarter. And then as a reminder, we had a low single-digit benefit from a prior year inventory reduction primarily in Therma-Tru that took place last quarter. So that drove the 9% sales. Going forward, we do think a better quarter than we expected. It gives us confidence in the full year guide. It helped us derisk some of the second half sales expectations. I think that's true across the business when you look at our first quarter results. And then with Outdoors specifically, as the volume returns, and we weren't drawing down inventory, you saw significant volume -- margin improvement driven by volume and by productivity, and we expect that to continue through the year, a really good start for that business out of the gate.

Our next question comes from Phil Ng with Jefferies.

After a slower start, it looks like your business certainly picked up. Any color on how [indiscernible] going to progress early read in April? -- little surprise here, some of your customers are still destocking, I think, in security and water. What channel? And have you seen that kind of calm down and maybe restock potentially?

Yes. I'd say we -- as we called out on the last call, not unusually, but the year started a little slow and then certainly picked up, I would say, it's been a bit -- it's a bit choppier towards the end of the quarter, particularly as some of the noise around interest rates picked up, but you are kind of still seeing resilience where we've called it out. So the wholesale channels, single-family new construction, some areas like Larson. I think going forward, we'll see as we come into the season just -- how it picks up. There's certainly -- we're seeing a lot of consumer interest, as mentioned in the prepared remarks, we're still seeing searches up relative to even last year. We're seeing -- responding some surveys, saying they're planning projects. And so I think we just need to manage it. As far as the destocking part of your question is concerned, it was interesting because we see that particularly in e-commerce more than elsewhere, but e-commerce and a little bit of wholesale across the business. So it wasn't really isolated to just one spot [indiscernible] more, but we're going to saw some customers. I think taking inventory ahead of what they might perceive as some general consumer weakness. And so those channels look pretty thin from inventory perspective to us at this point.

And then Phil, on your POS trend question. I'll provide some color sequentially. So first quarter POS finished dollar for dollar almost exactly in line with the fourth quarter. So typically, I think we'd see a first quarter that's a little bit softer than the fourth. But we were dollar for dollar almost equal, Q4 '23 to Q1 '24. And as we've moved through April, we've seen our retail and e-commerce POS ramp seasonally as we would expect, moving from the first quarter to the second quarter, though still negative though over year, that the channel serving single-family new construction continue to show growth, and we've seen nice input trends to start the quarter in those businesses, in those channels.

Super. That's helpful. And then on your Water Innovation business, helpful -- kind of give us a little more color on how to think about the margin profile perhaps in 2Q in the back half just given perhaps some of the start-up costs from the new facilities as you kind of ramp that up. And then some of the investments and growth opportunities you see in connected products, water filtration and Flo, how should we think about the margin profile of that business versus, let's say, your core Moen business?

Yes. On the connected side, really strong contribution margins, a little bit ahead of the core, it's still in an investment phase. So we're managing those investments coming through. But product margins are good. And then on the margin side, overall, for the segment, we still feel confident in tracking to that 24% to 24.5% full year margin target. And actually, we're a little bit ahead of our internal expectations in Q1. I think you'll see sequential improvement Q1 to Q2 and then continued sequential improvement as we move through the back half of the year. And we're ramping up new facilities and getting the savings there and as we have some continued price/cost favorability through the P&L.

Our next question comes from Adam Baumgarten with Zelman.

Could you give some more color on the upcoming smart water partnership in California? It sounds pretty interesting. Just anything else you could add?

Sure. I mean we've got a number of these, I would say, in [ Moen ] works right now. So you're going to be [indiscernible] to us being ahead on some internal milestones that we're really excited about. And then we're working on a number we referenced one, but a number of external partnerships that we believe could really amplify the business. A, as well sort of just bring kind of -- whether it's ease purchase of price point, placement, installation to life. B, awareness, right? Awareness is still a huge thing for a category that's very nascent. And we'll be complementing that with our ad campaign that is just rolling out now, which will all be awareness around the odds that you will have an event like this in your house. And so -- these are big initiatives. They're big partnerships. And I've long said it. I don't think this is an if, it's a when, this category really starts to take hold. And I think what we're seeing now is sort of a buildup of momentum and initiatives that we think is really going to sort of amplify our voice and this new category's voice out in front of the consumer. And I also mentioned 85% uptick in POS, in retail and e-commerce in the quarter, I would say, caught us by surprise -- caught us a little bit by surprise. We're actually going to accelerate the amount of inventory we're going to bring in to support our customers in this space. And I do think between our internal activities in both the product are activities speaking externally, whether it be through media marketing, online, you see much more activity. And then through these partnerships, whether it be with municipalities, insurers, I think you're really going to see an amplification of what we're doing in the marketplace. Very excited about it.

Great. And then, Dave, maybe for you, just on input costs for the year, how you think about that and maybe generally price costs as we move through the year?

Yes. So still, it's a line of sight to -- on the price side, being net price positive for the full year, no change there in our businesses. Most of our businesses took gross price in the first quarter, and we're successful with that implementation. On the cost side, we still expect net deflation of around 1% of COGS. Our base input costs really, here in the second quarter, have increased some of our base metals. But I'd remind everyone the way our supply chain is structured that we really won't see that impact in our P&L until either very, very late in or really -- more likely the first quarter of 2025 as any movement in base metals doesn't change the price for us until the following quarter, and then we'll have to work through with supply chain. So that gives our team some visibility to what's coming and allows them to work on price and cost actions to get ahead of it. So I feel good about our price cost estimates for the year that we laid out on the last call.

Our next question comes from Stephen Kim with Evercore ISI.

Yes. Great. You made a comment about how, I guess, there was a little bit of slowing at the end of the quarter. It sounds like into April, you've seen some -- you saw some -- maybe some improving signs, I guess, in e-commerce and retail POS. I just -- I don't want to put words in your mouth, but I guess would you say that, that was better than what you saw at the end of the quarter or not? And would it be fair to say that the beat in 1Q and then not raising the guide, for the year sort of reflect some cautiousness based on what you saw at the end of the quarter.

Yes. I would -- I think that's absolutely right. It's still choppy out there, and we want to see how it evolves. I don't want to get too excited about a couple more weeks and things are looking a little bit healthier. I just think the consumers' pretty choppy. And so we wanted to see how it evolves. We are overall happy with the quarter relative to expectations, but I'd say we want to get well beyond where we are today. Few more weeks into the spring and summer before we have a really good read on the year.

Yes. And Steve, on POS, I think of it as sequentially week-on-week improving numbers, which we would expect to see given where we are in the season. Building a ramp seasonally though year-over-year still negative for retail and e-commerce, but for us is really our best read into R&R. That said, as I mentioned on the flip side, single-family new construction input remains in the growth mode, and I think that will continue a strong level of starts. Single-family starts in the first quarter, though completions were still down 6%. So the -- as we -- as our products come in closer to a complete that negative completion rate really get a good line of sight to continued volume flow through the year as builders work through the uptick in start.

Got you. Okay. Right. But with respect to the POS, the ramp you're seeing is kind of just normal seasonality. So not something that we should get too excited about. Yes. Okay. Yes. Perfect. You made some comments with respect to the 2 facilities in water weighing a little bit. Can you quantify that for us in some way? And I think you made some comment also about Chinese consumers sort of transitioning away from new construction to R&R. I was just kind of curious, what does that entail? Maybe provide a little context around that?

On the facility piece, from a margin standpoint, I'd say 25 to 50 basis points in the quarter of margin headwind is for facilities ramp up and we have production inefficiencies relative to a normal rate. And then on the China question, that market, especially as we move away from speculative new construction, I think, which drove a lot of the sales to R&R, we're seeing in our business, Chinese consumers engaging in different categories. So there's a home decoration channel. That's new, probably has emerged over the past 3-ish years that the team is really taking some nice share and then focusing our efforts on e-commerce and in our showroom network to make sure we're capturing the R&R as the market transitions. It is -- we do see a transition. It has been -- the overhang of new construction has been greater than the transition to R&R at this point.

Yes. Interestingly, for a lot of last year, you actually saw growth in some of those R&R channels that Dave was mentioning. And so you could see consumers coming in. It's just the preponderance of the size of the new construction that needs to go on the plate before you really see that. But it's a natural transition for that market to now make. A lot of these are established. And then I just -- if you recall that our exposure is predominantly to Tier 1 and Tier 2 cities. So that's where we have the highest share and that's where and most of the R&R demand will start to form. And so we love the optionality of the market. The team has done the right job managing that P&L and keeping the profitability very, very healthy as we've navigated through this. And we like optionality that it gives us to get exposure to R&R as well as the innovation engine that it brings because in that market, that team is highly innovative and is also building up new adjacencies -- will result in growth.

Our next question comes from Matthew Bouley with Barclays.

I'll ask on security. It sounded like it was a little softer in Q1 there, maybe a little bit of destocking as well. It looks like you held the full year guide unchanged. So just any additional elaboration on sort of what happened in Q1 and then the confidence in some improvement to kind of achieve that full year guide?

Sure. as security, just talking more on the Master Lock and SentrySafe side of the portfolio, most of the -- really, really healthy last year. Then you can see the consumer kind of slowed towards the end of the year, and we saw that continue to play out into Q1. But interestingly, I'd say that decline in Q1 of about 50% of that is destocking, right? And so that brings actual PLS number much closer to kind of mid-single digits. And there's a lot of work underway in that business to drive into much, much more of a growth business by focusing both on some exciting areas like commercial where it's now 1/3 of the business, and we've been seeing really, really nice growth. Connected integrating it with the Yale and August side where we think we can drive a lot of growth. As well as just refreshing the offering in both safe and in padlock, now it's going to start to hit shelves as we go through the year. And so A lot of work has gone to reengineer that business over the last few years and just starting [indiscernible] the business to a much, much healthier margin profile and gives us confidence to invest and sort of stick behind where this business is heading and continue to be very excited about it.

Secondly, just looking at the balance sheet, it looks like inventory dollars stepped up a bit, presumably the acquisition played into that. But maybe just kind of refresh us on how you're thinking about inventory going forward? Does there need to be any sort of rightsizing of production from here? Or is that really just the acquisition? Any additional color there?

Matt, I'd say a few things. the acquisition is a piece of it, but also say we're back more to a normal seasonal first quarter where we're building inventory for a couple of reasons: one, to mitigate Chinese New Year supply chain impacts and two, in advance of spring and summer seasons. And so we still expect to deliver free cash flow conversion of around 100% for the year and have positive free cash flow quarters Q2 to Q4, which is consistent with this business. So I don't think there's anything unusual in the results. I think actually last year, first quarter was more unusual as we're pulling inventory down at such a rapid rate. We had positive free cash flow in the first quarter of '23. So I think it's back to normal results. And the team continues to work to optimize inventory, and we'll do so throughout the year more driven by systems enhancements and process enhancements and then the final driver is we brought in a bit of extra inventory to buffer our supply chain against the Suez Canal and Panama Canal disruptions that have taken place. We're probably holding on to that maybe a bit longer than we expected through the year, just given those continued disruptions.

And the other thing I'd add to that is, going back to the first question about the aligned organization. Which simply excited me and you saw a lot of this last year, and I think we'll continue to see this year is there's not kind of one budgeting operations team really owning not just inventory, but thinking about the total balance sheet from a shareholder perspective and working to pull every lever on it. And so they're having conversations with some of our suppliers. We're going to have to put extra inventory on the water to support all of our businesses, what are the impacts of total working capital, how do we think about that? And just having that shareholder lens inside the business, sort of working all the time is part of what's going to drive total working capital improvement beyond just inventory. And I think the big drivers last year, and I think you'll continue to see that improvement in this year.

Our next question comes from Susan Maklari with Goldman Sachs.

Thank you. Good afternoon, everyone. My first question is on the acquisition you did of the water filtration operations there, which is an interesting add your whole smart water network that you're building out there. Can you talk a bit about that opportunity, how it fits into this where it can go over time, the potential there? And maybe just how to think about the M&A pipeline more broadly and what you're seeing as well?

Sure. I'll start with SpringWell. So it's a space we've been looking at for quite some time. We've been fairly discerning about wanting to find a very high-quality entry point into that business. But I'll break it down. I mean, firstly, just the business itself. We're excited about that addressable market. It's $4 billion in the U.S. alone today, it's growing. Concern about water quality is growing. And there's going to be a tech enablement for that and the ability to know the quality water kind of coming in and out of your system. And so just in and of itself, a very exciting entry point. Secondly, a digital native business, right. Started up as digital native, the team -- not even sure they used that word because there's no other way to build the business when you started today. And just as we have with Yale August or with Emtek, team is really kind of holding it to the side and saying, "I want to learn everything about what you do and be careful to integrate only the best of the best if they do something better than we do. We're going to adopt that into our business." and we're being very, very deliberate about that. But their ability to interact with consumers in a digital setting, the speed at which they can get things done the way they work a sale is very, very interesting to us. And that is a capability that we will seek to adopt over the entire business. And so another flow that is pretty interesting. And then the third part is just -- there is a lot of industrial logic around our smart water network and filtration. They go in at the same point. Certainly flow -- I mean there's other elements to…

Okay. All right. That's encouraging. And then maybe turning a bit to the consumer. You talked a fair amount about new versus R&R activity in the quarter. But anything that you would highlight in terms of consumer behavior or any changes you're seeing in the business across the various price points, luxury versus some of the other offerings that you have? Just anything of note there? And I guess, anything that's changed in the last couple of weeks as well with that.

I don't know -- and Dave, feel free to add color. I don't know that a ton has changed. Just thinking back to some of the trends we talked about on the last call, and I did mention, I think, consumer has still been somewhat choppy. I think the luxury consumer has outperformed. If I look at the point of sale for the luxury business was probably up mid-single digits. And so more recently -- they're kind of still at the same rate, almost 2x what the underlying water business is doing. Consumer interest continues to be there. We do a lot of work around that to make sure that we're right because we're placing bets on where that consumer will be. We are continuing to see a shift online. And so being very cognizant about investing in and building our online capabilities. And that's not just the pricing piece is the whole online shelf and the ability to manage that. I think SpringWell is going to play very, very well to that capability. But beyond that, I don't think a whole lot new, Dave gave some color around kind of the sequential dollars that we're seeing through retail and e-commerce. And I think we just want to see how it plays out now. I do think as the noise around rate stabilizes, whether that impacts [indiscernible] that move or not and has not impacted our product that much, but just a level of confidence probably does. And you hopefully see more consumers come in and do some of these projects that they're talking with us.

Yes, I would agree with everything Nick said in relation to the consumer as they're engaged with us in housing. I think one area we did see a change is in security from our recent trends. And that probably speaks more towards the broader consumer. That's a piece of the portfolio that's more exposed generally to the consumer. And as we look at where the POS trends were soft, it was on the consumer products that were really a bit core and then some of the noncore things like TSA locks, bike locks and things that were maybe purchased in the prior quarters -- yes, that weren't going forward. And so I think that maybe a reading of how the broader consumer is thinking that it's a trend we'll keep an eye on, but I think everything Nick said around the consumer with respect to how they -- we haven't seen a lot of change in trends in that state.

Thank you for joining today's conference call. You may now disconnect.