Fortune Brands Innovations, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Replatforming and Portfolio Focus: The company focused on the highest growth and most profitable opportunities, simplified the organization, announced a new modern campus to fuel innovation and attract talent, and simplified the leadership structure for quicker decision-making.
• Digital Business: Digital sales were $214 million in 2024. The digital water business had 12 partnerships with insurance companies, aimed for $100 million annualized sales in 2025, and planned to launch new subscription-based pricing models. The digital security business signed 14 partnerships and acquired a connected lockout tagout platform.
• Operational Steps: The company streamlined its portfolio, optimized operations, aligned its footprint, and increased supply chain flexibility to reduce tariff exposure from China, aiming to reduce exposure to less than 10% of total costs by the end of 2025.

Segment Performance

• Water Innovations: Fourth-quarter sales were $645 million, down 3%; organic sales increased 2% excluding the impact of China and hurricanes. Full-year sales were flat, with organic sales down 2% excluding China and the one-time hurricane impact. Operating margin was 23.7% in the fourth quarter and 23.5% for the full year. China sales declined 30% in the fourth quarter and 31% for the full year, but the business has been replatformed and future declines should have less impact on the P&L.
• Outdoors: Fourth-quarter sales were $303 million, down 2%; full-year sales were $1.4 billion, up 1%. Operating margin was 18.2% in the fourth quarter (an increase of 430 basis points) and 16.1% for the full year (a 310 basis point increase). Doors were flat in the fourth quarter and up low single digits for the full year, while decking sales were down mid-teens in the fourth quarter and low teens for the full year due to a softer demand environment and destocking.
• Security: Fourth-quarter sales were $157 million, down 17% (down 10% excluding a third-party software outage at distribution centers); operating margin was 9.3%. Full-year sales decreased 4% to $694 million, with organic sales down ~10% excluding the software outage impact. Operating margin was up 10 basis points for the full year. The segment's performance in 2024 did not meet standards, but actions are being taken to improve it.

Guidance

• Sales: 2025 sales are expected to have a seasonal cadence, with the first quarter likely being the lowest quarter, and the second half expected to be stronger. The guide is conservative given the macro environment, but there is momentum in core businesses and digital growth.
• Margin: First quarter operating margin is expected to be lower due to operational costs, but second half margin is expected to improve as operational costs reverse and digital growth accelerates.
• Digital Impact: Digital is expected to contribute 150 basis points of growth to net sales in 2025, with the first half contributing around 100 basis points and the second half more, driven by sales activation and conversion efforts.

Risks

• Supply Chain Disruptions: Potential impact from tariffs or other geopolitical situations, although efforts have been made to increase supply chain flexibility and reduce tariff exposure.
• Software Outages: The third-party software outage in the security segment's distribution centers in the fourth quarter impacted sales and margin.
• Market Volatility: The dynamic macro environment, including factors like housing affordability and interest rates, could impact sales and margins.

Question and Answer

• Q: Thoughts on 2025 efforts and market outperformance? **A: Nicholas and David discussed that the company has momentum in core businesses like water and outdoors, digital growth, lapped low margin business, and a normal seasonal sales cadence, giving confidence in outperforming the market in 2025.
• Q: Connected products growth and cadence? **A: David mentioned that connected products are expected to contribute 150 basis points to full-year net sales growth in 2025, with the first half contributing around 100 basis points and the second half higher, and strong point-of-sale trends continuing in water and security.
• Q: Tariffs and international sourcing? **A: Nicholas and David discussed supply chain agility, reducing tariff exposure through redundant networks and a strong North American and US manufacturing footprint, with efforts ongoing to further reduce exposure in Mexico, Canada, and other regions.