Fortune Brands Innovations, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Tariff Mitigation: Expect to fully offset the anticipated $200 million of 2025 tariff impact through supply chain opportunities, cost-out activities, and strategic pricing actions. For 2026, expect full annualized tariff impact of around $525 million to be fully mitigated through supply chain actions and other mitigation strategies. Actively engaged with senior-level officials to educate on the company's story and bolster U.S. manufacturing.
• Headquarters Consolidation: Progressing with consolidating U.S. office associates into one state-of-the-art campus in Deerfield, Illinois. More than expected associates willing to relocate, with hiring underway and control over rehiring pace. Anticipate first wave of associates to come together at new campus towards end of summer.
• Business Initiatives:
  • Water Innovations: House of Rohl continues to outperform. Transitioning to enhanced pricing discipline in e-commerce channels. Focused on addressing tariff exposure through sourcing moves, cost-out activities, and selective pricing actions.
  • Outdoors: Leveraging U.S. manufacturing base, particularly in Therma-Tru, and anti-dumping lawsuit against China-sourced fiberglass store products.
  • Security: Yale lock business accelerating with new partnerships and product rollouts. Master Lock and SentrySafe brand campaigns launched with positive sales and website traffic uptick. Master Lock Connected Lockout Tagout adopted at large scale customers.

Segment Performance

• Water Innovations: Sales were $565 million, down 10%, and down 7% organically excluding the impact of FX and China. Operating income was $113.2 million, a decrease of 20%. Operating margin was 20%. Revenue contribution within the company is a significant portion, impacted by softer demand, inventory destocking, and transition to enhanced pricing discipline in e-commerce channels.
• Outdoors: Sales were $305 million, down 3%, driven by low single-digit POS declines. Outdoor segment operating income was $31.7 million, down 16% from the prior year quarter. Segment operating margin was in line with expectations at 10.4%. Benefits from anticipated tariff impacts on doors, particularly in Therma-Tru, and the Larson aisle reset.
• Security: First quarter sales were $163 million and declined 4%, reflecting low single-digit POS declines and Yale destocking. Segment operating income was $23.2 million, down 13%, and segment operating margin was 14.2%, reflecting lower volumes and investment in innovation and brand building. Many competitors in this space are sourced from China, creating opportunity for Fortune Brands in the near term.

Guidance

• Will not provide detailed full-year financial guidance this quarter but will provide a framework outlining how various volume scenarios may impact full-year EPS.
• Expect to fully offset the anticipated $200 million of 2025 tariff impact through a combination of supply chain opportunities, cost-out activities, and strategic pricing actions across all channels and brands.
• Assuming current tariff levels, expect the full annualized impact of tariffs in 2026 to be around $525 million, which is expected to be fully mitigated through supply chain actions and other mitigation strategies.
• Provided a framework and range for 2025 EPS of $3.70 to $4.20 underpinned by two different volume scenarios: low single-digit volume declines could lead to EPS of around $4.20 with low single-digit revenue growth and operating margins around 17%; high single-digit volume declines could lead to EPS of around $3.70 with low single-digit revenue declines and operating margin around 16%.

Risks

• External Environment Uncertainty: Uncertainty around the economy weighing on consumer demand, affecting the housing market and the company's product demand. Spring selling season slower due to cautious consumer behavior, and repair and remodel sector also hesitant.
• Tariff Uncertainty: Uncertainty around how consumer demand will trend throughout the year, and the impact of potential changes in tariff levels on the company's cost structure and competitive position.
• Consumer Demand Trends: Uncertainty regarding consumer behavior and its impact on product volume and sales, which is a key factor in determining financial performance.

Question and Answer

Q: Phil Ng with Jefferies asked about the progress of the transformation effort and how it allows navigating the dynamic backdrop.

A: Nicholas Fink responded that the transformation is in the third phase of co-location to drive innovation and performance acceleration. More than expected associates willing to relocate, with good talent interest in joining. Can control the pace of rehiring in the dynamic economic backdrop.

Q: Phil Ng asked about tariff divvying up by segments and mitigation actions.

A: David Barry responded that 525 million annualized tariff impact is about 80% China-related, balance rest of world. Segments: water about 60%, security 25%, outdoors 15%. P&L impact from tariffs starting to be seen late in the quarter, ramping into third and fourth quarters.

Q: John Lovallo with UBS asked about confidence in achieving digital initiative sales and balancing core business efforts.

A: Nicholas Fink and David Barry responded that the digital business is performing well with 200,000 device activations in the quarter, new insurance partners, and subscription-based pricing test. The core business is also receiving focus with innovation around products like Moen's new offerings, Washington Perfect aisle refresh, and security brand campaigns.

Q: Trevor Allinson with Wolfe Research asked about supply chain movement if tariff rates on China come down and business in China.

A: Nicholas Fink responded that supply chain lanes are set for regionalization, and the business in China is a closed-loop system serving the local market and providing innovation exposure. David Barry added that China business comps are improving and the business is less impactful on overall results.

Q: Susan McClary with Goldman Sachs asked about leveraging the environment to gain share and security margin.

A: Nicholas Fink responded that there are opportunities in outdoors, security, and water by leveraging U.S. manufacturing and addressing unfair competition. David Barry added that security margin is impacted by investment cycles, but core Master Lock margins are strong and brand campaigns are resonating.

Q: Michael Rehaut with JP Morgan asked about guidance framework and upcoming quarter.

A: David Barry responded on pricing and volume scenarios, with sales expected to be down in low to mid single digits in the second quarter, and tax rate to approach 30% due to China cash repatriation.