Good afternoon, everyone. My name is Shamali, and I will be your conference operator today. Welcome to the Fortune Brands Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] At this time, I will 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 Fourth Quarter and Full Year 2025 Earnings Call. Hopefully, everyone has had a chance to review our earnings release. The earnings release and the audio replay of this call can be found on the Investors section of our fbin.com website. Beginning this quarter, we are also including an earnings presentation, which is also available on our 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 for these non-GAAP financial measures to the most directly comparable GAAP financial measures. With me on the call today are Susan Kilsby, our Board Chair; Nick Fink, our Chief Executive Officer; and Jon Baksht, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address questions. I will now turn the call over to Susan.

Good afternoon, everyone. Before Nick and Jon outlined our financial results and 2026 outlook, I want to briefly address the leadership transition announcement we made earlier today. Nick has been an outstanding leader of this company since he became CEO in 2020. Under Nick's leadership, the company has made numerous advancements that have truly benefited all of our stakeholders. In addition, Nick has led a team that has navigated an uncertain market environment with agility and poise. We wish Nick all the best in his new role. Succession planning is something we talk about at the Board on an ongoing basis. The Board approached this transition through a defined, deliberate and well-structured succession process, one that's centered around ensuring a smooth leadership transition that protects continuity, while also positioning Fortune Brands for optimal performance and long-term value creation. As part of this process, we are extremely fortunate and excited to appoint Amit Banati as our new Chief Executive Officer, which will be effective in May. Amit has been on the Board of Fortune Brands for nearly 6 years. most recently as Chair of the Audit Committee. He has worked closely with the management team and knows the company and this market extremely well, and I believe he is an exceptional choice to lead Fortune Brands in this next phase. Amit will remain on the board as we move forward. There will be a short period between Nick's departure and on its official start date in May. During this interim period, I will manage the responsibilities of the CEO's office. I will work closely with Nick, Amit and the leadership team to ensure a seamless transition as we continue to drive the business forward. I have been a member of the Fortune Brands Board of Directors since 2015 and serving as nonexecutive chair for the last 5 years. I am intimately familiar with our strategy and our team, have confidence in our ability to create long-term value and I believe that we have a deep bench of talented professionals who are aligned around our strategic priorities. With that, Nick, I'll turn it back to you to cover our earnings.

Thanks, Susan, and good afternoon to everyone. Thank you for joining our call. I want to start by providing additional context regarding our results and guidance and be fully transparent about the headwinds we faced in 2025 and are facing in 2026. Our industry saw significant volume deleverage, high single digits, which created intense pressure on profitability, particularly in the fourth quarter. In response, we have initiated a comprehensive profitability reset. In 2025, we reduced our headquarters workforce by around 10% and captured $60 million in continuous improvement savings. We've already identified initiatives to optimize our operating footprint and cost structure in 2026 and which will lead to an estimated annualized run rate operating income savings of $35 million by year-end. This $35 million is not included in the 2026 guide. And the team is working on a broader cost reduction program for 2027 and 2028, which will be communicated over the next couple of quarters. But let me be very clear. We are not satisfied with our profitability today. The entire team is doing the work to identify further opportunities to structurally improve our company's performance and return the business to the level of profitability that we expect. That includes a comprehensive review of our cost structure to identify efficiencies to drive shareholder value over time. At the same time, while we remain in early stages, we are seeing progress on our growth strategies based on the deliberate actions we took in 2025, including strengthening our commercial execution and aligning our structure. Based on our point-of-sale data, we estimate that, excluding China, we outperformed the market for our products by approximately 130 basis points for the full year and approximately 300 basis points in the fourth quarter. That demonstrates an improvement in performance over the course of 2025 and…

Thank you, Nick. As a reminder, my comments will focus on results before charges and gains unless otherwise noted, and comparisons will be made against the prior year. I'll start with our full year results. For the full year, total company sales were $4.5 billion, down 3%, excluding the impact of China, sales were down 1%. The decline in sales was primarily due to lower volumes across our segments, reflecting the challenging market environment throughout 2025, as the macro uncertainty negatively impacted consumer sentiment as well as the market demand for our products. This is partially offset by higher price realizations, including strategic adjustments to mitigate tariff-related costs. As we have highlighted previously, we employed a disciplined approach to pricing and implemented the majority of our price actions in early 2025. Excluding China, our point of sale was roughly flat compared to the market for our products, which we estimate declined by low single digits for the year. Importantly, our exposure to the Chinese market has continued to decrease. In 2025, China made up less than 5% of our total revenue compared to approximately 10% of total revenue in 2021. Consolidated operating income was $699 million, down 10% and operating margin was 15.7%, down 120 basis points, largely due to lower sales volume and the impact of higher manufacturing costs, including tariff costs. The tariff impact was mitigated by continued productivity gains across the segments as we leverage our global supply chain team to execute strategic sourcing actions and adjustments to our logistics and transportation networks. As a reminder, we covered tariff costs on a dollar-for-dollar basis with strategic pricing actions, but that did impact margins by roughly 20 basis points. Operating income also reflects roughly flat SG&A which benefited from $56 million in reductions to incentive compensation. Earnings per…

Before we wrap up this call, I want to express my gratitude to all of our stakeholders. Serving as CEO of Fortune Brands has truly been an honor, and I appreciate all of you with whom I've had the privilege of working both internally and externally over the past 6 years as CEO and 11 years with the company. I have absolute confidence in our strategy, the leadership team's capabilities and the incredible future that I believe lies ahead. Together, we've built a solid foundation achieved real progress and set a clear path forward. Thank you for your partnership and dedication to this great company. I am confident that the company is in great hands with Amit and in a position to deliver significant lasting value for its stakeholders. I am excited for the value that he will help create. Curt, back to you.

Thanks, Nick. 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. [Operator Instructions] 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?

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

Jon, I guess the first one would be the consolidated sales outlook is flat to up 2%. What's driving the expected 70 basis point year-over-year decline at the midpoint in margin? I mean -- I know you talked about tariffs, input cost inflation, but offset by some productivity. So could you help us just kind of unpack that a bit.

Yes, sure. If you look at some of the cost environment that we're facing, there is -- I mentioned on the prepared remarks, as we start rolling over some of the tariff impact and under absorption from our balance sheet into the P&L into the first half of the year, you are going to see some margin compression as it does take a quarter or 2 depending on the category that you're looking at on our P&L of where that flows through. And so as we roll those increased tariff costs and you're going to start seeing that. And as we talked about on the last call and just to reemphasize here, we saw in 2025, last time we talked about $80 million of tariff impacted the actuals came in closer to the low 60s. So we were able to mitigate some of those tariff impacts. But on a full year basis going into 2026, last call, we were talking about $200 million. From a mitigated basis, we were able to bring those tariff costs down. And so on a mitigated basis, we're looking at about $151 million of tariff impacts in 2026, so an increase of just over $100 million year-over-year. But now as you break into that a bit further, we are looking at different efficiencies. Nick touched about some of the continuous improvement that we have. So the broader balance is, we do have some manufacturing inflation, including commodity inflation, offsetting that with CI, with continuous improvement. So net-net, that's -- those are some of the impacts of that margin compression that you are seeing.

And John, this is Nick. I'd just add, as we said in the prepared remarks, we've also identified certain operational efficiency initiatives, and we are going to continue to identify more of those. We've referenced some that we're certain as to the ability to deliver les certain as to the time. So we didn't bake it into our guide, but that will be part of our initiatives to drive the margins back up to a level that we feel is acceptable.

And then my follow-up would be for Susan. Susan, Amit has been on the board for 5 years and clearly has a strong history of working with brand-focused companies, but he doesn't have any CEO experience or really building products experience outside of being on the board. So I'm just curious what makes him the best candidate in your eyes? And what was the timeline that you had to work with to make this decision.

Thank you, John, for the question. As you -- let me talk -- address timeline first. As you can imagine, we -- the Board goes through a succession evaluation process on an ongoing basis. And we have looked at a number of different candidates over a reasonable amount of time. And Amit was obviously a candidate as we were reviewing our succession opportunities. He has -- Amit has a very strong -- while he doesn't have building products expertise. He has a very strong background in consumer-branded products. He is a proven leader who has a deep commercial and financial experience, and he's worked with a lot of different branded consumer-branded companies developing and delivering profitable growth and executing enterprise-wide business transformation. And as you know, we have been going through quite a robust transformation with Nick in the lead, and we have -- we believe Amit is the right person to continue that transformation.

Our next question comes from the line of Phil Ng with Jefferies.

Well, Nick, thanks for the partnership, really enjoyed working with you and good luck with your future endeavor.

Thanks Phil, I really appreciate it.

Kind of kick things off, perhaps maybe a question for Jon. The macro is still certainly very murky at best, not easy to ask to forecast. How did you approach your market growth assumptions? And then you're still assuming outgrowth versus the broader market, how much line of sight do you have for that outgrowth as well?

I'll start philosophically with a couple of comments, and then Jon can work us through how we build this model. I'd just start by reiterating, I think, what we all know, which is we really do believe in the fundamentals of this marketplace. And for all the reasons why I won't repeat that you're very familiar with the demographics, the equity that is on the home, aging housing stock, et cetera. But as we both our model, and it's very helpful to have Jon's perspective coming into the company. We kept in mind that for the last couple of years, we've all been waiting for a recovery that hasn't materialized. And ultimately, we decided as we built the model that we wanted to model a year for 2026 that essentially looks like 2025 without an inflection and without an improvement. And we'll call an improvement when we see it. But if we weren't seeing the inflection and we wanted to build a model and a plan that reflected what the current trends were that we've seen all through and frankly, even before that. And both something that's realistic and achievable for the company. And as we said in the prepared remarks, we're not satisfied with where the profitability is. We're pleased with the market outperformance and the momentum that, that is gaining. But we're not satisfied with the profitability and we didn't want to depend on the market recovery to drive that. We're going to depend on initiatives. And so that was a little bit of the philosophy that went into approaching this year.

Yes. And Phil, to build on that, too. As you know, and you've known me from my prior roles as well, one of the things coming in early last year was trying to understand what our market drivers were. I think we have a unique set of market that's not one comp you can look to externally to say this is what drives all of our different segments, all of our different brands. And so there is a correlation model that we have here at the company that given the market uncertainty last year, probably need some refinement. And it's not -- as you've seen over the course of the last couple of quarters, we have -- the market outlook we've missed, and we want to get better at that. And our market outlook projections and the historical correlations yes, there's been some uncertainty and yes, there's been some tariffs impacts that were affecting things. But we're looking to tighten that up and really get the right data points that -- and the correlations refined so that we understand and can better project what that market outlook into the future will be as best as anybody can. And so looking at 2026 specifically, what we saw in Q4 since the last time we were on a quarterly call, Q4 did decelerate in terms of what we were expecting, and you can see that in our results. And as we looked at some of the pullback in the market activity, as Nick said, we wanted to be very measured in how we looked at 2026. And really look at the current market environment from Q4 going into Q1 and really taking that forward and not projecting a large inflection by the back part of the year. Could that prove to be conservative, perhaps. But from what -- the way that we're approaching it is we are trying to be measured in terms of looking at the current market environment and using the best data points we have available and external and internal data points of what the market will look like for our various segments.

My next question is on Outdoors. Margins obviously came down pretty hard. Perhaps some of that's destock. And you called out further margin compression when we look out to 2026. Help us understand what are some of the drivers there? And I think you're calling for a path for recovery, hopefully, back to 2024 levels. That's a big step up, right? What are some of the things that you need to happen for that to materialize. You called out some share loss in Fiberon as well. Is that core to what you've done because that business has been a little choppy. So just kind of help us think through the margin compression and the path to getting back to 2024 levels? .

Sure. So to start, what we saw in Q4, just very specifically, we were expecting -- and I think we talked about it on the call and even some follow-up meetings after the call. we were expecting some channel inventory building going into the back part of the year and wholesale specifically. We had seen a drawdown in the prior year, and we were thinking that we were going to see some more normalized levels. And frankly, we saw that at the beginning part of the quarter. But then by the end of the quarter, we really saw that drop off quite a bit. And so with that softness, that did bring down if you look at our broader scale just from an overall leveraging standpoint and broader scale, it did impact our margins. And there was also a very large mix element that contributed to that -- the margin piece. And so in terms of particularly between the channels and also between the products, there was a mix element that impacted the margins. And when we start looking at next year, 2026, I should say, and what the impacts and the opportunities are. We did have some losses at Fiberon with a key customer there that we need to build back up. And we're looking at different initiatives in terms of optimizing our footprint and cost structure there. We mentioned the $35 million of annualized OI cost-saving improvements that we think will benefit the Outdoor segment, primarily. But from that standpoint, it will take a bit of time to get that executed. And so I think we're optimistic that once we execute some of these actions, we're going to see some material margin improvement back to '24 levels. which implies 17% plus. So there's initiatives that we have underway to really get that going again.

Our next question comes from the line of Matthew Bouley with Barclays.

So maybe on the Water guide, both the top line and margins. So on the revenue side, I think you said 0% to 2% is the guide. So my question is on that if price is kind of running at this mid-single-digit rate right now for the whole company, I mean, is the assumption that volumes actually are down in Water? And is there anything on the share side that is driving that? And then with the margin side of it, what are you expecting on raw materials? So if copper stayed at current levels, how would that impact your margin expectation for the year?

Why don't I start at with just the topline and Jon can take us through the margin piece. But Water we are we seeing nice and improved market outperformance, which is giving us confidence and the momentum. As we said in the prepared remarks, we saw really nice share gains in brick-and-mortar, really nice share gains with our builder customers, improved performance in e-commerce we've called that out, but we think there's still some room to go there. So again, nice recovery, but a lot of opportunity as we continue to build momentum. And so against that, we also took pretty modest pricing for 2026 in the segment to get on the moment side of the business, House of ROHL is different and a whole lot less price sensitive. But on the Mon pretty modest price increases because as Jon described, we've gotten so much of the tariff mitigation work done and sorted in 2025. And so we think we're very well positioned to continue building the momentum. And then relative to the competitive set, leverage, it should be some pricing advantage to continue to drive that outperformance.

And then in terms of -- just to build on that in terms of some of the margin impact from commodities, we are -- for the company, we're looking at roughly $40 million of impact for commodity inflation from our cost of goods sold. I would say about just under half of that is in the Water segment. There's just impacts across different commodities, but probably brass probably or the most substantial one. So there is an impact from that.

Okay. Got it. Secondly, the cost program of the savings of $35 million. I think I heard you say it's not included in the guide. So but you'd be at run rate by the end of '26. So I mean, just is there a time line around these actions and when they might begin to impact the income statement even if you're not including this in guidance?

Yes, there's -- it's -- there's still some execution that needs to be done and that we've got a few moving pieces there. So no exact timeline we're trying to execute it as quickly as possible because clearly, we'd like to get those savings we feel absolutely confident it will occur by the end of the year, and it is an annualized run rate savings. And so it won't be the full $35 million. Going into 2026, you'll get -- sorry, going to 2017, it will be the full run rate savings. But we are trying to execute it as quickly as possible. It won't necessarily be right away, but we're working on it.

Nick, best of luck in your next role.

Our next question comes from the line of Stephen Kim with Evercore ISI.

My first question, I guess, relates to the change. I think Nick, you described the timing as being somewhat natural. It comes at a natural time, I think, for you and the company. I was curious if you could elaborate a little bit more on what you meant by that? And what -- specifically, I was curious if we should expect any kind of assessment of the product portfolio or other personnel changes in the business segments this year?

Yes. Well, why don't I start with the first part, Stephen. I'll give you some perspective. I don't want to speak too much for others, but I'll certainly share my perspective on that question. And just let me start with the timing. The company has been on quite a transformational journey really since 2022 when we announced the divestiture or the spin of our Cabinets business, it was 40% of revenues, if you recall at the time. And that was really Phase 1 of what's been 3 phases of transformation. So Phase 1 risk portfolio. Phase 2 was our operating model and Phase 3 was really the refining of that operating model and then getting our footprint to match our strategy, which we've now completed, and we're really starting to see the momentum of the connection of people coming together and some organic ideas that are happening in the business. And now we turn to a time that I'm actually quite excited about, but we're now building momentum behind execution. We called out some execution issues in 2024. We rectified those, you can see the momentum building. And so I actually feel very confident now about where the company is heading, what we've achieved and the direction that is set and the team that we have, by the way, I think some of the most talented people I've ever had the pleasure of working with. And so this is an opportunity that came away, I wasn't necessarily expecting it, but something that was quite intriguing to me and I have given a lot of thought. And that cross section of really that opportunity coming at a time where I think we've completed a lot of that heavy lift and the teams in place and executing well is what I meant by -- it felt quite natural. And then I don't want to speak for our board, but I do feel that there's a lot of continuity and a great candidate like Amit not only has great enterprise experience, has great commercial experience, having led business units for well over a decade inside of large multinationals and a real belief in this team, the talent and the strategy behind this company.

Maybe I'll just add a few words to that because we have had the opportunity to have Amit sitting in the boardroom for the last 5 years, and you've had the last couple of years as Chair of the Audit Committee, he's been intimately involved in with the leadership team, with the business and understands it well. And I think he's given his background and his experience and his deep knowledge on execution and enterprise-wide business transformation. We feel like at this time, he's the right person, and is truly an exceptional candidate to take us forward from here. Really, Nick has done an extraordinary job bringing us all to this point. But I think that Amit's presence. And as we move on from here is really a very -- an exceptional opportunity for the company and for Amit.

So shall I take from your comments that we should not expect any major personnel changes in the business segment, leadership or a reassessment of the product portfolio?

There is nothing planned at this time.

Our next question comes from the line of Michael Rehaut with JPMorgan.

Nick, best of luck to you in the future, and Amit, I look forward to working with you. I wanted to start off with first question on the digital portfolio and the aspirations there. I was wondering if you could kind of just review -- I'm sorry if I missed it, what sales, were you able to generate, as you closed out 2025? And how you're thinking about that portfolio growth over the next couple of years given the ongoing efforts that you're making with insurance companies and other facets of the digital portfolio in terms of lock in, lock out and the security side, et cetera?

Yes, I'll give you some thoughts, Jon, may have some perspectives, so with your question, Mike. We finished the year where we expected to finish the year for the digital portfolio. So we're very pleased with that performance, notwithstanding had been in the marketplace. It did what we believe that we do. And so happy there. And then within that, we saw Flo growth in excess of 50% for the year. So still very powerful momentum behind the Flo business. And we really just kicked off our subscription service, which is our leak protection service, which is now up and running. And we believe, based on our market research, that could be a real unlock for Flo because what we're finding is while the value prop is enormous, there is a buy-in cost when you're installing the device and having to pay for the installation that for some consumers, it's still a hurdle. But when we offer it as a subscription, the insurance savings are actually a net gain for that consumer right off the bat. And so it's just getting into market now, but we think not just direct-to-consumer but also working with our insurance partners to make it just -- we're offering this to you, and it's a net gain in your pocket. -- from the minute you install it is potentially a very big unlock for that business. And so that's good. And then we saw some really nice recovery on Yale, particularly towards the end of the year, and we've launched that Smart Lock with Meta, which also performed very strongly. And so we're feeling good about the portfolio and the momentum still on track with where we believe it should go. And the final piece you off was the connected lockout tagout where a lot of progress was made in getting the product set right and getting some, let's say, test bed customer setup for '26 and there's some really interesting stuff in the pipeline. So that portfolio still looks very exciting to us.

And Mike, one thing just to add in terms of our presentation of our financials. We talked about last quarter that we were looking at really providing more transparency and really tightening up our -- the way that we report. So it's more consistent and from quarter-to-quarter and transparent. And I think you'll -- hopefully, you've seen that a bit this quarter. We've got a new investor deck out there. We walked through the segment financials. Expect to see that on a consistent basis going forward. One note though, we don't have a page on connected because we do split connected between both Water and Security depending on the products. And we continue to look at how we disclose for that segment. And you might have noted, we didn't guide to it this year. It's not because it's not growing, and it's not because we're not happy with this performance, but it's still less than 10% of our portfolio. It's an exciting part of the portfolio. But as we look at our reporting for that, look for that in the Water segment for Flo and connected products there, look for it in the Security segment for the Yale connected lock, lockout tagout. And so we'll continue to provide updates. But since it is a smaller segment for us and still growing, it is a bit more volatile quarter-to-quarter. And so we are -- we'll continue to keep you abreast of it, but it's -- we'll probably look at it in a slightly different way and also open to feedback as we meet with yourself and investors following up this quarter.

I understand in terms of the approach there. I guess, secondly, and I apologize if some of this was touched on earlier in the call, but just wanted to understand, particularly for Outdoors and Water, the margin decline in '26 versus '25 despite roughly flat or flat to slightly up sales. And I wanted to understand how much of that is due to perhaps a timing of mitigation of tariffs, in particular, I'm thinking about maybe the first half of '26, you're still in the hole and maybe you're just getting to breakeven in the back half. And so that's kind of one of the bigger drivers there or if there's anything else I'm missing? And maybe more broadly, how that kind of parlays into how we should think about first half versus second half during the upcoming year.

Yes, sure. Happy to hit on all those points. So there are several factors flowing through here. And so you're right, there is some declines in both of those 2 segments. The Outdoors more so than Water. And I touched on that earlier in terms of -- we did have some loss at Fiberon there. And that's probably going to be -- have a more of an outsized impact on that segment in terms of how that impacted margins for our projections for 2026. But I would say across the portfolio, particularly Water and Outdoors, the dynamics I hit on earlier on the call in terms of our operating costs, what I said in the prepared remarks, the tariff impact is flowing into the P&L. Really, you're starting to see that in the next couple of quarters, and that will have an impact on margins and also with the lower volume. So we underabsorbed in Q4, and you'll see with the volume declines that we're looking at into both Water and Outdoors next year. that is also going to have an impact on some margin compression. The other piece, and you're right to think about the phasing in terms of the first half of the year. The only other point that I would make is I touched on also in the prepared remarks is around SG&A. We did have a benefit of $56 million of incentive compensation that was in the '25 comps due to our underperformance to plan. As we reset that plan, that was -- that did have an outsized impact in terms of our accrual in Q3 and then also Q4. And so that will -- so yes, you're right about the phasing for the first half in terms of the tariffs and kind of our manufacturing absorption impact in the first half, but then in the second half, those costs for that incentive compensation reset do hit the business units. And so that is also -- as that gets rebuilt, will impact the comps into the back part of the year.

And we have reached the end of the question-and-answer session. And therefore, I'll turn it back over to management for any closing remarks.

Thank you, everyone, for joining our call.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.