Good afternoon, everyone. My name is Paul, and I will be your conference operator today. Welcome to the Fortune Brands Second Quarter 2025 Earnings Conference Call. [Operator Instructions] At this time, I'll turn the call over to Curt Worthington, Vice President of Finance and Investor Relations. Curt, please go ahead.

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. 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 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 our 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 Jon Baksht, 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?

Thanks, Curt, and good afternoon to everyone. Thank you for joining our call. On today's call, I will start with the strategic actions that we are taking to generate growth, while flexing our cost structure in response to market conditions. I will also provide an update on the tariff landscape and our mitigation strategy, which is on track to fully offset the anticipated impact of tariffs this year and on an annualized basis. In addition to covering our execution and the drivers of our above-market performance within the quarter, I will also share my thoughts around the remarkable progress that we have made in our multiyear transformation. I'll close by discussing the macroeconomic environment and summarize our performance in the quarter. Jon will then review our financial results in more detail and provide color on our updated guidance for the remainder of 2025. In the second quarter, Fortune Brands delivered solid execution and outperformed our end market with impressive share gains across many of our businesses, including in our core water and outdoors businesses. In a market environment that continues to be dynamic, we have demonstrated our ability to respond quickly and decisively. At the same time, we have maintained a relentless focus on our key strategic priorities and have continued to invest in our brands, accelerate innovation and drive operational excellence. We have made significant progress on our multiyear transformation into a highly aligned and efficient growth company, which I will detail shortly and are driving our strategy to grow the core and accelerate digital. By harnessing best-in-class consumer and customer insights, we can anticipate market trends and meet evolving needs with precision. Through focused investment in our leading brands and targeted innovation, we are driving product leadership and differentiation across key categories. At the same time, our ongoing…

Thank you, Nick. Before I begin my discussion of our financial results, I'd like to take a moment to thank Nick and the broader Fortune Brands team for such a warm welcome to the company over the past 3 months. I've been extremely impressed by the extraordinary talent throughout the organization and the shared sense of purpose felt by all our associates. All the positive attributes that I observed from the outside have only been reinforced. I'm excited to join this organization at such an impactful inflection point for the company. I was initially drawn to Fortune Brands by the foundational strengths of the company, the enduring brands, high margin profile and strong free cash flow generation, among many others, overlaying the innovation story and upside growth potential with the connected business made the opportunity even more compelling. Nick described the 3 pillars in the ongoing transformation that is entering the third phase, and my initial interactions with various stakeholders, I believe 1 aspect that's underestimated is the value that will be created by moving from a holding company structure to an operating company structure, of which the 1 HQ initiative is a part of. In the quarter-to-quarter world of public companies, that value will always be visible immediately, and the returns won't be realized in a straight line, but I'm confident those along for the journey will be rewarded over the long term. We're taking this opportunity to build out a best-in-class platform across the portfolio, starting with a simplified and standardized data layer, feeding modern systems, leveraging AI with streamlined and standardized processes run by a passionate team with the shared vision for innovation and excellence. This next stage in our transformation will drive improved insights into the business with improved analytics, which will ultimately drive enhanced financial…

Thanks, Jon. 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 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 is from Matthew Bouley with Barclays.

I wanted to start out actually on the Connected Products business. I take a lot of promising progress that you spoke to, including that subscription model coming. So I would love to hear more detail on that. I think on the numbers, I think I heard you say the updated sales guide for this year is $250 million, but you still expect to get to that $300 million run rate. So just any more details on kind of the pluses and minuses that are impacting 2025 as you get all these initiatives coming through and you get to that run rate, kind of any early thoughts on how the business is shaping up perhaps for 2026.

Sure, Matt. Happy to jump in there and describe a little bit of what's going on. So firstly, super pleased with the connected results. We've invested heavily in the space in the last few years, and it's just great to see this momentum and scale continue to build, not just frankly, on the sales line, but just also the team that we've built, the digital fluency, the entire organization that's kind of come along for the journey with them. And then now the leverage of that knowledge like into the legacy business in terms of driving AI tools and processes into the business. With respect to the connected business itself, I would say the performance this year, you're right, $250 million is our expectation for the year, but the run rate we think we'll close out the year closer to $300 million. And as we look at the pipeline, I would say it's both broader and a little bit slower than we expected. So broader in that we're touching on even more space and opportunity than we had anticipated, more insurance partners coming into the mix, sort of more adjacencies in terms of areas that we can impact with the connected portfolio, including the recent launch of our connected lockout tagout portfolio and finding some huge white space there that we can go after. And then learning that as we build this giant pipeline of opportunity and contracts that we've built, converting those into sales and driving that process. And so the teams are very, very focused on that bottom end of the funnel and that conversion piece. And then as you touched on, we're also very excited to be launching the subscription test this quarter. We think it's a win-win. Obviously, a win for us to get people onto subscription recurring revenue, right, now at 5 million users plus. So that is a big part of the future. But our consumer research tells us it's a win for the consumer, too. They much prefer from the research, the lower entry point of a subscription to a onetime purchase. And so we think if this -- we want to test it and see if it works. But if it works, not only will help us accelerate sales and penetration, it's going to put the company on a really solid recurring revenue footing. So we're very, very excited about it. And then beyond the -- that piece also just the new partnership with Google. So sunsetting that older first-generation Google product, which a lot of which was sunsetted last year, which is a part of the headwind that we went through as that sunset before the new products came online. But with that hitting the market now, we think it's a really great product that's going to do some exciting things.

Okay. Great. No, that's really helpful. And then secondly, jumping over to the water business, and I wanted to ask around market share. It sounded like POS outperformed the market. I heard you say you won maybe some new business with large builders and there might be some offerings coming down the pike here, that would be targeted for retail I think, e-commerce as well. So maybe, if you can just sort of level set us on what's happening with market share in the water business across your channels? And sort of what the impact of some of these wins may have as we think about the second half of the year?

Sure. Happy to do that. So why don't start with Moen. So as you mentioned, builder business. We saw some really nice performance out of the team, both getting increased commitment for share from existing as well as converting new and as you know, a very large business for us to see that continued conversion. And I think it really speaks to the strength of the ecosystem. It's the product, the support, the service, the warranty, the professional support and belief in the product. And so that came through very strongly I'm happy with that. Retail performance, also very strong in the quarter. So very pleased, and we think that's just the beginning. We've done a lot to reinvigorate the work that we're doing with our retail partners. And I think we can elevate that even further. So a lot of focus from the team coming. I think that will play out well through this year, but really get some acceleration in '26. And then some opportunity, I think, still around e-commerce. I talked on the last call about how we had really started to enforce much stronger pricing discipline in e-commerce. And that takes time and it takes -- it takes discipline, frankly, is the word to stick to it and to enforce it. And so that, over time, as that discipline starts to stick and we're able to then go in and really win on the basis of products and our ability to optimize search and do problems in the right way, we expect it will be a tailwind in the future, but I think some more work for the team to do there. If I flip over to the House of Rohl, really strong resilience with that luxury consumer. I mean, we saw excellent results out of the House of Rohl, really delighted with the performance that the team has driven to continue to bring that to life in the portfolio and see that performance really compounding and growing into the back half of the year. So resilient with that end luxury consumer. And I think the portfolio is really just answering the consumer needs and the designer needs. So really good performance there.

Our next question is from Susan Maklari with Goldman Sachs.

My first question is on the -- my first question is on the Security segment. It sounds like you've had some really nice initiatives there as you're gaining in that e-commerce channel. Can you talk a bit about some of those retail wins as well in the second half? And how we should be thinking about this new launch and focus on the brand coming together in the next couple of quarters?

Yes. So just great question. And as a reminder, you have been on a journey with security. I mean we really set out, I think even way back over to the last Investor Day talking about how we were going to take this segment on a journey to really through some supply chain initiatives, rebuild the margin of the business to create fuel for growth to then start to reinvest in brand. As you see the margin profile now coming through, that gives us much more room to make those investments. And then through our kind of 1 Fortune Brands initiatives to bring this company together, we're not able to leverage our marketing expertise to really bring the first major refresh and brand campaign to security in several decades. And so we're excited about what's coming with Master-It campaign. As I mentioned on the call, we've seen a 60% uptick in -- in website visits. I think I mentioned on the last call, in the SentrySafe we're early experimenting around doing some work there. We saw double-digit uptick in website visits there translating into a double- digit point-of-sale growth in that quarter. So this stuff works. What you should expect from us is this campaign to now roll out not just above line, but all the way through the funnel with a very consistent, much clearer shelf set and product set and messaging to the consumer that allows them to navigate this category, which we do captain as the leader in a very simple way, where they can understand the value of the different price points of our product. And we think that's going to be a really great opportunity. And so new leadership in there. A lot has been done to really reorient that business, drive accountability with the GMs inside of that business. And as we get through the headwinds of some of the execution issues last year, we think we get into the back half of this year, we're going to see some really solid performance, but that performance is really just building momentum into '26 and beyond.

Okay. That's very helpful color on it. And then maybe turning to the margins, the consolidated margin. Can you talk a bit about the cost saving efforts that you are pursuing, where we are in that process, how we should think about those benefits coming through? And then any color on the path for profitability in the back half of this year?

Yes. So why don't I start with some high-level thoughts, I'm going to hand it over to John to take us through some of the detail. But a couple of things. One thing is this management team feels that it's very much a duty to manage the P&L with discipline in a category that at times can have headwinds. And certainly, in the last couple of years, there's been more headwinds than we've expected, and I think we're proud of the way in which we've managed the P&L tightly, not just to deliver for shareholders from a margin perspective, but also to create the field to reinvest in the business. And we've continued to make those investments in brand and innovation and digital. And so that's very much the philosophy of the team, including our presidents and general managers that's sort of part of the DNA. I think as we got into this year, this 1 headquarters move, which we're more than halfway through now actually ended up giving us flexibility as we were moving people and at the same time, rehiring people to control the pace of that and really think deeply about exactly what capabilities we needed and when. And that's given us flexibility as we built the cost base for this year and hopefully will allow us to leverage that as we get into next. So I don't know, if you want to add some color to that?

Yes, sure. And just looking at the cost structure going into the back part of the year, we touched on in the opening remarks that moving into the new headquarters here in the fall. We've got move-in dates starting out in September. And as we do that, we're -- there's going to be some efficiencies that we're going to gain from just consolidating some of the operations there from a corporate basis. And then if you look at some of the business units in the segments, for example, both outdoors and securities are going to see higher margins as we go into the back part of the year, different factors driving each of them. Within outdoors, 1 of the dynamics that impacted the first half this year was frankly just some higher costs that were in the back part of last year that for inventory. We under absorbed last year in the back part of the year, which led to higher cost of goods for this particularly in the decking segment there. We're going to see that roll off going into the second half of the year, which should lead to some better market performance there. On Security, we talked about some of the investments we've been making in the marketing and the branding there. Those are investments that we made largely in Q2. We're going to continue to invest to drive that growth. But if you look at some of the margin that we're expecting to get back and going into the back part of the year, we're expecting to get some of the benefits of that incremental spend this quarter, seeing that into really translate next half.

And our next question is from John Lovallo with UBS.

The first 1 is just on the Water segment, the 25.6% margin. I think is among the highest probably that you guys have achieved. And I know you talked about productivity, manufacturing efficiencies, SG&A things of that nature. Just curious if there was anything kind of onetime in nature in that number, anything related to the prebuy or things like that? And also what level of pricing have you guys realized here ahead of the tariffs?

Yes, I can start, Jon. No, it's a great question. We're really proud of the 25.5% -- 25.6% that we achieved this quarter. There weren't any onetimers that were flowing through there. It was all those things that you mentioned and that we prepared -- that we mentioned in the prepared remarks, all of those are a factor. I would say the -- from a kind of breakdown within there. The House of Rohl segment was a nice example of an area that we've touched on in the luxury segment where the consumer really has been more resilient, and we've been able to see some price increases, volume increases there within that segment, which has really helped to drive some of that increase. The other piece that I would point to, just broadly speaking, we're going to be taking some promote. We're going to be factoring in some other promotional events and other things to drive further sales going into the back part of the year, which we've guided to 23% to 24% on a full year basis. So not a large decremental margin, but that is going to normalize as we get into the back part of the year with that and some of the new business that we've won.

And I'd just add on your question on pricing, I mean, we really try to be disciplined across the businesses and take pricing in a regular way and in an incremental way, where we don't have to do large catch-up prices, et cetera. And you saw us do that during the supply chain shocks post COVID here, we've really done our best to sort of keep it in the mid-single-digit range on average. As Jon mentioned, our target margin for the year 23%, 24%. So we're not going to try to overshoot the market. We're going to trying to stay really competitive for our customers and our consumers. And to the extent there is a court like this that allows us to continue to do so also while we invest to continue to drive the brand and innovation across this portfolio.

Okay. That's helpful. And then on the updated tariff numbers, the $80 million in 2025 and the $260 million in 2026 unmitigated. Maybe just help us understand the plan to offset maybe the mix between pricing cost savings, supply chain initiatives in each year would be helpful.

Yes, I'll start and Jon add some color about what I'd say is, obviously, for competitive reasons, we don't break that down. But we are working the supply chain piece the hardest, right? Our goal is to get supply chain savings, where we can reorient the supply chain where we can do all the work, I mean, the work that the team has done, there's really been second to none and the speed at which they've gone off to this. And you can see it, right, in the offsets. Really, again, leveraging the digital investments that we've made in our own systems, the ability to draw that data, analyze that data and act on that data has been second to none. And so we've been able to make a lot of progress there. And then we can't cover, we look to price to cover. But we will keep going back to the cost and supply chain opportunities and keep working them over. And to the extent that then starts to overdeliver that's going to give us more flex on the price piece, either to put that price back to work in promo or reinvest it for branded growth.

Sure. And just to add maybe a little bit of color in terms of where those tariffs are coming from. We mentioned in the prepared remarks that our exposure to China as part of our COGS is roughly 10%. Now to put that into perspective of the $260 million annualized number, about half of that impact is China. And so to the effect that we are able to manage that supply chain to mitigate that risk and looking through optimization there, that's a big part of those mitigation efforts.

Our next question is from McClaren Hayes with Zelman & Associates.

I was just wondering first on the tariffs, has that lower annualized number impacted the way that you guys are thinking about going after some of those cost-out actions and balancing that with the investments you're making?

Yes. I mean, not every day, not every day, we're rerunning the model. It seems like -- so absolutely. Look, it changes the mix of what you're doing. But what it doesn't change is the principle of what we're doing. What we're doing is aiming to build a regionalized supply chain with redundancy that doesn't make us dependent on any 1 geography or any 1 single point of failure. And so that philosophy stays the same, and we are going to continue to invest to make that happen. Fortunately, we're starting from a phenomenal place, which is 1 of the strongest, if not the strongest U.S. North American manufacturing base any of our competitors. And so what we've seen is a lot of customers come to us and say, how can we leverage what you guys have in the U.S. How can we leverage what you guys have inside a USMCA to really drive it further. And so a lot of the work we're doing is about what product sets we bring inside of that regional fence, if you will, and how over time we can use that to drive the business further. And so I think there's what we've done today, which I'd say is fairly tactical. We've done it very quickly. But the future -- we won't -- even if we cover off on all the tariffs, we want to stop here. The future is the strategic element, which is how we keep driving CI out of the supply chain and build the most resilient and lowest cost supply chain that we possibly can and then use those funds to reinvest to make our products competitive and to build our brands and drive our innovation.

Awesome. And just on China within Water, I guess, any update on what you guys are seeing on the ground there and kind of how the outlook is shaping up for the back half?

Yes. Looking at China, I mean, if we look at all of last year, it was interesting, right, because the comps were up and down '24 versus '23, but the net sales line was very, very steady. I mean every quarter, almost exactly the same, and we saw it very steady. We definitely saw it take a step down in Q1 of this year, and I think directly attributable to a lot of the uncertainty driven by these tariff wars. And that is impacting the consumer over there who's been much more cautious. So we're working that with the China team. And that really is around the developer business. If we look at things like our showroom channel and what we call a designer channel, those are showing growth. And so what we're going to do is really work with the team over there to understand how much of that development business we expect -- where do we expect it to land? And how do we expect it to then grow from there? And what's the point at which this becomes a growth vehicle for our organization. I'll just add, at this point, the team there has done such a great job managing the cost basis as the top line has declined that we do not have much exposure from an EPS perspective. So it's not like there's a lot of EPS risk for us in China, they've managed it really, really well. And it does give us exposure to a lot of interesting products and innovation, and we like that window that, that business gives us. So optionality for growth. and access to innovation. And so the objective there is really to keep building these other channels that are growing, while we start to find the bottom of the developer channel and then grow from there and really turn what's been a headwind into a tailwind for the business.

Our next question is from Stephen Kim with Evercore ISI.

This is [ Atish ] on for Steve. Just going back to the topic of tariffs, and thanks for all the detail there. On the last call, it was mentioned that the incremental tariff impact would be offset by the mitigation actions, including mid-single-digit pricing across the business on average. Is that pricing expectation changed given the updated tariff expectations?

Well, the tariffs have shifted around a lot. But I would say the pricing across the portfolio on an average, we've been able to maintain around that mid-single-digit mark. And then to the extent that we're able to further mitigate the tariff impact will certainly look to that and work hard to be as competitive as we can in the marketplace.

And the only thing I'd add is that is that's not a peanut butter spread across the portfolio across different channels, we're being very surgical around how we implement those tariffs, price actions and how we can best realize some recovery there.

It's Steve. Just to follow-up on that. Why is the -- is the pricing action is going to remain the same, but the tariff gross headwind is less why wouldn't you be able to -- why wouldn't you be effectively over mitigating under that circumstance? I'm just trying to make sure I'm understanding conceptually what the change is.

Yes. Well, again, we run this model on this daily, right? And so I would say it's very early stages to say, hey, it's set, and we know that we don't have enough -- we don't have too much we could start to move things around. But that is certainly the objective. But I said all of our pricing is in at this point. By and large, I'm sure there's probably a couple of accounts out there that are still being discussed. But I think, by and large, all the pricing is in and as we work those mitigations, if there's opportunity, we'll leverage that opportunity. And I think that's the way to think about it. And then as Jon just said it's not a peanut butter spread either. I mean there are places where we had to take more and we'll see where those mitigations come out. There are other places, I mean, look at the outdoors business, U.S. manufacturing fully vertically integrated. And we had a lot of competition in the last couple of years, frankly, some of it dumping in the market. And now that business will be hugely advantaged by the geopolitical and tariff opportunity. And so thinking through there, well, how do you manage that? And we have the largest facility, how we're going to handle the volume that might come our way and how do we balance that with pricing. And so there's a different way of thinking about a similar issue that's impacted by the tariff, I think in a very different way.

Yes. And Stephen, the only thing I'd add is when you're looking at the math just from last quarter to this quarter, the 1 thing to also keep in mind is when the tariff rates come down and a lot of them have come down since the last quarterly call, some have gone up, but several have come down and meaningfully down. The mitigation actions from the supply chain effects that we've put into place, that also comes down because we measure those last call off of the baseline higher tariff rates for certain countries than they are today. So to Nick's point, we're running these models every day. So it's -- they all -- there's a lot of factors that go into it.

Our next question is from Mike Dahl with RBC Capital Markets.

Just a follow up with a couple more on tariffs, sorry to beat the horse here. On the ex China piece, can you give us an update on some of these tariff rates have been moving around kind of what your what your largest country exposures are? And then I didn't hear you mention copper as being contemplated. There's obviously some moving pieces and puts and takes with copper, but if you've done any quick work to give us a sense of how that would impact I know probably not this year, but as you think about kind of an annual impact, maybe looking to next year?

I'll just start with the copper and then I'll hand it over to Jon. And I'd say at this point, what we understand to be contemplated by copper does not have a material impact. Now we'll see the HTS codes, when they come out. But that's not our understanding of where it's come out this far. And so we don't see that as a huge impact. Now that's let's give it a few more days or weaker whatever it is before we see that, but we didn't see anything particularly alarming in the copper piece.

Yes. And as it relates to the rest of the world piece, just to give you some more color there. I mean it's a longer tail. So China is the most meaningful and at about half. And then beyond that, it's really a lot of different countries. But if you were to take #2, it's probably Mexico, non-U.S. MCA Mexico. But again, it's not nearly as material. It is a long tail.

Okay. And would the largest be on Mexico, the other Southeast Asia countries. I guess that's just clarifying. And the second question again, given some of these moving pieces, if there's any help you can provide in terms of you often give some quarterly directional cadence around how to be thinking about margins and sales by business. I think that would help just given such a dynamic environment.

Well, I'll just say on other countries well, and Jon can answer the other piece. But I just recall -- and I say we come -- like a lot of people in our sector are importing finished goods from Southeast Asian countries, and we certainly have some Southeast Asian countries in the mix. But for the most part, we're a U.S. manufacturer and U.S. assembler. And so most of our tariff exposure is coming from that sort of remaining piece of the supply chain that today we've only made in China, that's sort of like getting down to the 10%, but we then bring over here and assemble in the U.S. And so that is the vast majority of the exposure. And what we'll do is work over time to create other sources for that component and then continue to leverage what is ultimately, U.S. manufacturing. That's our goal.

And if you're looking for some of the back half some guidance, so if you look at our earnings release, we did reintroduce the table there that does have segment breakdowns for the full year that can give you some information around what we're expecting for the back half of the year. So if you look at Water, for example, just starting there, for the full year, we're looking at negative 3% to negative 1% on net sales and operating margins for the year at 23% to 24%. Outdoors where net sales basis flat to 2% with an operating margin of 14% to 15%. And security net sales negative 1% to 2% and margins at 16.5% to 17.5%.

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