Fortune Brands Innovations, Inc. (FBIN) Earnings

Management highlights

### New CEO Strategic Priorities - New CEO Jesse Singh confirmed the company has strong core brands (Moen, ThermaTru, Master Lock) and growing connected adjacencies (Moen Flow, Yale Connected Locks) with significant untapped long-term growth and margin potential. - The company will refocus on customer-centricity, reversing past over-centralization and internal distractions to improve service, product quality, and organizational simplicity to drive better execution and efficiency. - Management is addressing underperformance across segments: resolving water segment service and supply chain issues, driving material conversion to higher-value resilient products in doors, expanding categories in security, and scaling secular growth in connected businesses. - A corporate cost structure streamlining initiative is underway, building on the previously announced $70 million annual cost savings program, with a full portfolio review to align resources with core high-return brands. Full business realignment is expected by the end of 2026, with clear strategic details to be released over the next 1-2 quarters and progress visible in 2027. ### Operational Updates - New product development momentum is building for 2027: recent successful launches include the Moen Swivel Control Faucet (with a retrofit wand for existing units) that received positive early market feedback, and the Master Lock Elite Padlock that is exceeding initial sales expectations. - Centralized brand, marketing, and advertising functions are being moved back into individual business units to reduce organizational distance from customers, remove unnecessary layers, cut redundant costs, and accelerate decision-making. - The company remains on track to deliver $70 million in annualized run-rate cost savings by Q1 2027, with $15 million of savings recognized in 2026. - A strategic review of the Fiberon business is actively underway to reallocate capital and management focus to core higher-return opportunities, with additional select portfolio reviews ongoing. - The $122 million gross Q2 2026 tariff refund (81 million in net operating income benefit) will be fully reinvested in the business to improve service, accelerate new product development, and boost consumer brand awareness; ongoing overall tariff exposure remains largely unchanged after recent tariff regulation updates. ### Market Context - The repair and remodel (R&R) end market is expected to decline low single digits for 2026, with resilience in luxury non-discretionary project categories. - Single-family new construction is expected to decline mid-single digits for 2026, with no recovery anticipated during the year, matching prior outlooks. - Input cost inflation is accelerating, particularly for oil derivatives and freight; 2026 guidance does not assume any commodity inflation relief before year-end.

Guidance

- Full-year 2026 net sales guidance is maintained as a low single-digit year-over-year decline, with results now expected to land slightly below the midpoint of the prior range due to ongoing execution challenges weighing on volumes. - Full-year 2026 EPS guidance is revised downward to a range of $3.22 to $3.52, which includes a 52 cent net benefit from anticipated tariff refunds. Excluding the benefit, core EPS guidance is $2.70 to $3.00, reflecting planned near-term investments to improve service, accelerate product development, and enhance execution, plus slightly lower expected sales. - Full-year 2026 free cash flow guidance incorporates $56 million in net tariff refund proceeds collected to date, offset by lower expected second half operating income. - H2 2026 net sales are expected to see a modest improvement versus H1 2026, but will still decline year-over-year, supported by more favorable retail comparisons in water and new product launches in security. - Year-over-year price costs are expected to be unfavorable in Q3 2026 and favorable in Q4 2026; at the guidance midpoint, H2 2026 operating margins are expected to be up ~100 bps sequentially versus H1 2026. - Q3 2026 guidance calls for a 1-2% year-over-year net sales decline, with EPS of $72 to $76 cents and an operating margin of 12.5% to 13%. - CapEx guidance is maintained at $110 to $125 million, lower than prior years as the company already has sufficient physical capacity for future incremental volume.

Segment performance

1. Water Segment: Q2 2026 sales were $605 million, a 6.5% year-over-year decline, contributing 50.4% of total company revenue. Excluding China, sales declined 5.4%, driven by service-level challenges, 2025 H1 share loss carryover, and soft new construction demand in wholesale channels, partially offset by e-commerce growth. Operating income was $179 million, up 7.9% YoY, with an operating margin of 29.5% (up 390 bps YoY), which included a $66 million net tariff refund benefit adding 1090 bps to margin. Excluding the tariff benefit, underlying margins declined due to unfavorable price costs, volume deleverage, and higher customer service costs. 2. Outdoors Segment: Q2 2026 sales were $365 million, a 3.8% YoY decline, contributing 30.4% of total company revenue. Excluding Fiberon, sales declined 1.5% due to soft new construction demand in wholesale, partially offset by retail growth and positive pricing; Larson outperformed as its NIL reset gained momentum. Operating income was $56 million, up 14.2% YoY, with an operating margin of 15.2% (up 240 bps YoY), including a $5 million net tariff refund benefit adding 130 bps to margin. Results were partially offset by lower volume and higher tariff, commodity, and freight costs, especially for Larson. 3. Security Segment: Q2 2026 sales were $184 million, up 3.8% YoY, contributing 15.3% of total company revenue. Growth was broad across commercial, retail, and e-commerce channels, with new product launches contributing 200 bps of sales growth. Operating income was $50 million, up 88.2% YoY, with an operating margin of 26.8% (up 1200 bps YoY), including a $19 million net tariff refund benefit adding 1030 bps to margin. Results were partially offset by higher tariff, commodity, and freight costs.

Risks & headwinds

- Persistent service-level and execution challenges, particularly in the large water segment, have negatively impacted near-term sales and margins, and will require incremental near-term investment to resolve. - Input cost inflation is accelerating for key commodities (brass, copper, aluminum) and freight, creating ongoing price-cost headwinds through at least Q3 2026. - Recent organizational, systems, and supply chain changes created unanticipated disruptions to inventory planning and customer service, requiring a reset to prior proven processes. - Softness in single-family new construction and overall consumer caution continue to pressure top-line results, with no recovery in new construction expected in 2026. - There is uncertainty around the timing and amount of any additional future tariff refunds beyond what has already been recognized. - New product growth and turnaround efforts have multi-quarter lead times, so meaningful benefits to results are not expected until the second half of 2027 at the earliest.

Analyst Q&A

• Q: After one month on the job, what are Fortune Brands' biggest opportunities and challenges, and when will the marketing/advertising devolution to business units be complete? /

  A: Singh says long-term opportunity is even larger than he expected: the company has strong diverse brands, talented teams, and clear expansion opportunities across all segments, including material conversion in ThermaTru, growing connected home demand, and core water segment market expansion. The top challenges are restoring strong customer service levels and reducing unnecessary organizational complexity. The devolution work is already underway, with meaningful progress expected by the end of 2026, when the business will be well-positioned for customer-focused execution. (358 characters)

• Q: How should investors think about the timing and magnitude of reinvestment versus cost savings, and when will operational improvements deliver results? /

  A: Management notes investments were necessary regardless of the tariff refund, but the refund allowed the company to accelerate these near-term investments to set up 2027 performance. It is too early to give a specific cadence, but the 2026 guidance already reflects the balance of upfront investment before cost realignment, with meaningful progress expected in 2027. Long-term, the company can increase customer-facing resourcing while driving SG&A efficiency gains. (361 characters)

• Q: Can you break down the underlying performance of the water segment, and what is the margin cadence expected in H2 2026? /

  A: Excluding China, Q2 water sales were down 5.4%: price up low single digits, volume down high single digits, with half the decline from 2025 share loss carryover and half from ongoing service constraints. Excluding tariff refunds, underlying operating margin fell 700 bps, half from price-cost headwinds, 200 bps from incremental service costs, and the rest from volume deleverage. Price-cost headwinds remain significant in Q3, ease in Q4, and the next two quarters are expected to be the trough for water margins, with improvement building through 2027 as service issues are resolved. (437 characters)

• Q: What is driving the downward EPS guidance revision, and what improvements will come in the near term versus long term? /

  A: The $0.30 midpoint EPS reduction is split: ~$0.20 from planned incremental investments in service and growth initiatives, and ~$0.10 from lower volume driven by current service constraints. Management is taking action on all priorities (service improvement, organizational streamlining, new product investment, cost reduction) immediately. The $70 million cost savings target will be completed by Q1 2027. New product growth will take longer, with meaningful impact expected in the second half of 2027 due to typical product launch and adoption lead times. (392 characters)

• Q: What is the timeline for the Fiberon strategic review, and could there be additional non-core assets divested? /

  A: The Fiberon review is progressing with external advisors, focused on maximizing shareholder value while setting the business up for success, but no formal timeline has been disclosed. For the overall portfolio, management is confident in the three core business pillars plus connected adjacencies, but will evaluate granular sub-segments and product lines to optimize the portfolio and focus resources on high-return opportunities where the company can win. Minor portfolio tweaks are possible, but no major overhauls of the core business segments are planned. (359 characters)