Q2 2023 Fortune Brands Innovations Inc Earnings Call
Yes.
Hello, My name is Chabal use and I will be your conference operator today at this time I would like to welcome everyone to the Fortune Brands' second quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I'd like to turn the call over to Lee assay, Vice President of Investor Relations and corporate Affairs, you may begin the conference call.
Good afternoon, everyone and welcome the Fortune brands innovations second quarter earnings call.
Hopefully everyone has had a chance to review the earnings release, and our web hosting for additional information on our most recent acquisition as well as our supplemental financials.
The earnings release, and our audio replay of this call can be found in the investors section of our F. B I N Dot com website.
I want to remind everyone that our 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 maybe required by law.
Any references to operating profit or margin earnings per share or free cash flow and today's call will focus on our results on a before charges and gains basis unless otherwise specified.
Please visit our website for a reconciliation.
With me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry Our Chief Financial Officer.
Following our prepared remarks, we have a lot of time to address some questions.
I will now turn the call over to Nick Nick.
Thank you Lee and thank you to everyone for joining us today.
On this call I will walk through the highlights of our second quarter performance and offer some thoughts on the macro environment I will also discuss our recent acquisition and how we expect these leading brands to accelerate key strategic initiatives and contribute meaningfully to our performance.
I'll, then turn the call over to Dave for a discussion of our financial results and how we're thinking about the remainder of 2023, including the upward revisions to our market port costs and increase to our full year 2023 sales and EPS guidance.
Turning to our second quarter performance.
Our results and the actions we took this quarter demonstrate the resilience and strength of fortune brands innovations.
Our teams delivered solid sales and strong margin results amidst the external environment that remains dynamic.
Our leading brands our focus on meaningful innovation and our advantage channel relationships positioned us well in the current environment and drove our results.
I want to thank all of our associates for your dedication and pursuit of excellence and again welcome our newest associates to fortune brands innovations.
Together, we're going to continue to build an exceptional company.
Net sales of $1 2 billion in the quarter were down 7% versus the prior year and our operating margin was 17%.
Our topline results were 50 basis points above our estimates for our market.
These results demonstrate our ability to grow above the market protect margins and invest in key strategic growth initiatives, even in a challenging environment.
Our sales and margin performance generated earnings per share of the dollar and <unk>.
As we discussed on our last earnings call heading into the second quarter, we knew that we were coming up against a uniquely challenging year over year comparisons.
As we expected we saw sequential point of sale dollar growth versus the first quarter of 2023.
It was not at the same exceptional levels of ramp up that we experienced in 2022.
As a reminder, the slowdown in the market for our products and major inventory Destocking began in the second half of 2022.
In fact, our second quarter 2023 organic sales results were 19% higher than in the second quarter of 2019, demonstrating that consumers continue to be interested in investing in their homes.
Our results this quarter reflect our unwavering focus on outgrowing the market.
Preserving margins and generating cash all while continuing to prioritize key investments, including brand building thoughtful capacity additions meaningful innovation and our digital transformation.
I believe that we are very well positioned as we head into the second half of 2023.
Turning now to some thoughts on the current U S housing market and the market for our products.
As we've consistently stated demand outstrip supply in the U S for housing, which creates a market opportunity for our products in both new construction and repair and remodel.
There is significant pent up housing demand driven by several factors that I'll touch on shortly.
This two months together with our strong and optimally positioned brands will result in medium to long term tailwind for our business in both new construction and repair and remodel.
Starting with new construction.
As has been widely reported the new home construction market has fared better than anticipated despite higher interest rates.
Existing home inventories remained near historic lows as U S housing remains severely under both.
Builders, particularly the large production builders with whom fortune brands enjoyed strong relationships.
Had been responding to affordability challenges in a dynamic marketplace by building spec inventory and providing sales incentives including rate buy downs.
Sales of new homes have been increasing throughout the year and starts are again outpacing completions.
The backlog of new homes is also increasing albeit at a much more manageable rate.
With that as a backdrop, we have revised our single family new construction outlook upward for the remainder of the year, while continuing to monitor for economic volatility and the potential for a full recession.
Turning to R&R.
Within the broader repair and remodel space, we remain confident that our products are uniquely and optimally positioned to outperform.
Several factors are converging to result in a unique opportunity for growth.
First.
The current lack of existing inventory combined with the fact that over 80% of mortgages are under 5% is that people are more inclined to stay in place and make the home they have into the home they want.
Next consumers continue to have high confidence in their homes as an asset given the extremely high levels of home equity and personal real estate investments, which are offered financial stability and strong rates of return.
Finally, the average home he has over 40 years old and homes. Both during the early two thousands boom coming into prime R&R H. Additionally.
Additionally, the baby Boomer generation continues to prefer aging in place and investing in their homes, while millennials and other first time homebuyers are purchasing homes in need of upgrades due to limited available inventory and affordability concerns.
The demographic trends are all supportive of repair and remodel.
Our data shows that our products are less tied to existing home sales and instead are more dependent on factors like consumer confidence age of the house and home equity unemployment levels.
We believe our products are relatively more insulated than other R&R items, because they are smaller ticket items.
Less disruptive to install and because they offer immediate aesthetic improvement on meaningful innovation and functionality to our home.
In short people buy our products because they want to enjoy them.
That said, we are aware of the uncertainty inherent in the broader macro environment and we are watching market conditions closely and we will respond quickly if warranted.
Turning now to our most recent acquisition.
I'm extremely excited about the recent acquisition of two world class businesses from my side.
Amtech, and sharp premium and luxury door and hardware business.
In the U S and Canadian Yale in August residential smart lock business.
Dave will provide more color into the numbers.
But at a high level, we expect second half 2023 sales for these businesses to be approximately $190 million to $210 million and for this deal to be accretive to our P&L in 2023 with four to six cents of EPS, even after factoring in eight of purchase price amortization.
This acquisition is a great example of our disciplined approach to M&A.
I'm, taking sharp are the market, leading brands and the luxury hardware space. It will be a fantastic complement to our house of ROHL business.
The margins for these brands are exceptional and we look forward to leveraging the teams demonstrated skill driving phenomenal customer service and highly designed products, while also maintaining high margins.
The entire fortune brands portfolio.
Cleaning on tech and sharp our luxury platform will now be over half a billion dollars in annual sales and the potential synergies are meaningful.
This acquisition will allow us to expand our presence in luxury showrooms.
Further penetrate the luxury hospitality market and become an authentic global luxury design house offering cohesive product offerings and finishes throughout the home.
Our consumer remains strong and is increasingly interested in products with storied brands and distinctive quality and we believe our growing luxury portfolio speaks to the secular demand trends.
The Illinois August residential smart security businesses consist of innovative brands with a strong IP portfolio and exceptional digital talent.
As part of the acquisition, we have added roughly 100, new engineers supporting in house software and hardware platforms.
We will leverage across our portfolio of brands over time.
In addition, this acquisition will allow us to expand our retail and Omnichannel and wholesale door lock business.
No residential connected security ecosystem and accelerate innovation across our brands, including the potentially transformative development of a fully integrated smart entry doors system.
Share gain potential for synergies is significant.
This acquisition will be a key accelerant to our growth strategy.
It allows us to expand in existing channels and categories as well as a new high growth spaces with secular tailwind.
Importantly through the addition of Yellen August this acquisition is a key step in our transformation into a digital innovative disruptor.
Further with the addition of Amtech and shop, we will materially accelerate our strategy to build the house of ROHL into a global luxury powerhouse for the entire home.
Combined with our existing fortune brands business, we now have the knowledge base the growth platforms and the brands to bring new and disruptive products and services to the market that will be the first of their kind.
Overall fortune brands innovations is well positioned for both the near term and the long term.
Our branding power meaningful and value add innovation and strength in the multi step distribution channel are powerful moats in uncertain times and accelerates in times of broader economic growth.
Our recent acquisition of the leading Amtech Sharp August and Yale brands will provide growth opportunities and nicely complement our strategic focus on branding innovation and channel.
Our brands are uniquely positioned to outperform the market in all environments.
Newly aligned structure together with our fortune brands advantaged capabilities will enable this outperformance as our results demonstrated this past quarter.
As we announced the release. This afternoon, we are raising our full year sales and free cash flow guidance and again, raising our full year EPS guidance.
David will give more detail, but this increase reflects our confidence in the fortune brands business.
Before I turn to the individual businesses performance I would like to remind everyone that our second quarter 2023 results reflect both the impact of challenging prior year comparisons.
Just the impact of the single family, New construction market, which slowed abruptly in the second half of 2022.
That slowdown is now being digested through our business.
In the second quarter water innovation sales declined 5% compared to the prior year quarter.
Due to market driven volume declines across the segment, partially offset by price.
Our margins for this segment with 23, 2%.
Among U S business has strong long standing relationships with the top U S production builders and our strategic decision to invest in our relationships with these key customers yielded tangible results.
In retail we saw more general market softness as the DIY consumer market slowed.
Our house of ROHL brands total sales were up low teens for the quarter, including a call Lisa and down high single digits organically, reflecting the impact of high second quarter, 2022 comps and a softer market.
For the full year, we expect organic sales to be flat as our story of craftsmanship and unique designs continues to resonate with the luxury consumer who are increasingly seeking differentiated goods and values timeless quality.
We recently announced the building of a new facility in the UK, which will help meet global capacity needs of the business as we continue to expect our brands to perform well.
In China sales were up over 30% year over year.
This reflects the impact of lapping the second quarter of 2022, which was marked by the Shanghai Covid shutdown.
We also saw higher than expected project completions.
Though the overall market remains soft and the Chinese consumer remains cautious.
However, we continue to capitalize on our leadership positions and are well positioned within the Chinese housing market, where we are increasingly focused on the emerging Chinese R&R market.
For the full year, we now expect China sales to be down high single digits.
And outdoors sales declined 14%, reflecting expected market softness, which was partially offset by price.
We saw sales improvement sequentially throughout the quarter and are encouraged by July results. So far.
We're pleased with our operating margin of 16, 4%, which is 80 basis points higher than our second quarter 2022 results and as a proof point of the success of our newly aligned operating model.
We are well positioned across our outdoor brands to respond to any changes in demand patterns and are making investments to continue to best serve all of our customers and channel partners. While also focusing on the innovations, which we believe will further differentiate our products.
In decking P. O S trends indicate continued to strong consumer interest in this category and the recent Reacceleration of sales is the value proposition is increasingly understood by consumers and pros alike.
Wholesale sellout improved throughout the quarter and we exited June up high single digits.
In the quarter sales were down high teens versus the same quarter of 2022.
Ever when comparing to Q1 of 2023, we saw sequential sales increased by more than 50%.
Our channel partners were conservative with inventory buys in the beginning of the quarter, but in June and into July had been accelerating their inventory purchases and our Pos data shows that we are growing above the market.
Indoors sales declined low teens as the slowdown from the 2022 single family New construction market impacted thermometer.
We are confident in the long term opportunity as well as the strength of our product offerings and our long standing advantages relationships with our key customers and channel partners as we look to maintain and grow market share in the most attractive parts of the market, including in the single family New construction market.
Lastly in security sales increased 2% over the prior year quarter.
These results were driven by price and continued growth in commercial and international markets.
As we have previously mentioned, our security and water businesses share many key similarities including the importance of their iconic brands with consumers and trade partners and.
Our strategic focus on connected products and the structure of their operations and supply chains.
The security business continues to implement the fortune brands advantaged playbook that we first used to transform our water business eight years ago and the results are becoming apparent.
Going forward the team will work to continue to evolve this business into a higher growth higher margin business focused on driving the power of our brands and developing meaningful innovation.
Before I turn the call to Dave Let me share a few final thoughts.
We took meaningful steps this past quarter to prepare fortune brands for continued growth.
Reorganization into a more efficient centralized company focusing on brands innovation and channel has progressed more quickly than we anticipated. Thanks to the strong engagement from our teams and the impact was apparent in our results.
We made important changes to our supply chain to align with our growth areas and margin progression targets.
We continue to invest in our key strategic priorities, including our iconic brands digital transformation.
And meaningful innovation.
And finally, we closed on an exciting potentially transformative acquisition that we expect to drive growth and accelerate our larger strategy.
As we highlighted last year. The actions. We took in 2022 were designed to transform fortune brands into a growth focused highly innovative company.
Six months following our separation I am encouraged by all that we've accomplished and excited about what we will achieve next.
As reflected in our revised full year guidance you see some positive indicators of a healthy consumer while also being mindful of potential short term disruptions.
We're constantly monitoring and are well prepared to respond to in certain end markets in the short term, while we position ourselves for accelerating longer term outperformance in the market supported by fundamental growth characteristics.
As we head into the second half of 2023, we are focused on execution and delivering on our commitment to above market sales growth and margins.
With that.
I'll turn the call over to Dave.
Thanks, Nick as a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance. Additionally.
Additionally, comparisons will be made against the same period last year unless otherwise noted.
Let me start with our second quarter results.
As Nick highlighted our teams executed well this quarter amid challenging comparable and the impact of last year's abrupt slowdown in single family New construction.
Our results reflected their dedication.
Sales were $1 2 billion down, 7% and consolidated operating income was $198 million down 11%.
Total company operating margin was 17% and earnings per share were $1 seven.
Our sales in the second quarter largely tracked our P O S.
Volume was down high single digits, which was partially offset by low single digit price.
<unk> and channel inventories did not impact consolidated results.
As we discussed previously we expected operating margin in the first half of 2023 to be heavily impacted by production inefficiencies and stranded fixed costs related to our inventory reduction efforts.
We continued to make excellent progress against our near term inventory reduction target and.
And our organic second quarter inventory finished at $845 million.
Down roughly $240 million from our third quarter 2022 peak.
Our second quarter operating margin of 17% included a roughly $20 million impact from these efforts.
Bringing the total P&L impact in the first half to more than $50 million.
Going forward healthier supply chain and are more aligned organizational structure should improve our ability to accurately forecast with continued focus on service levels and inventory mix.
While we are pleased with our second quarter results. Our teams remain focused on driving outperformance, including above market growth preserving and enhancing margins and generating cash.
Our continued focus on these performance metrics has enabled the team to drive both key strategic growth investments and strong cash flow.
As I will detail later, our balance sheet remains strong and we have the flexibility to manage through various economic outcomes, while deploying additional capital to drive shareholder value.
Now, let me provide more color on our segment results.
Beginning with water innovation sales were $617 million down, 5% and down 6%, excluding the impact of the Aqua Liza acquisition and FX.
The net sales results reflect the impact of lower volumes, partially offset by price.
Water innovations operating income was 143 million and operating margin was 23, 2%, reflecting lower volumes, partially offset by price and continuous improvement initiatives.
Our point of sale performance for mowing was down low double digits and in line with our expectations given the challenging comparable period and prior year slowdown in single family New construction.
How's the role total sales were up low teens, while organic sales, excluding our Aqua Lisa acquisition were down high single digits, primarily due to strong prior year comparable as end market softness, which was most pronounced outside the United States.
China sales grew more than 30%, primarily due to an easy comparable following the prior year's Covid shutdown that acutely impacted the Shanghai region.
The Chinese market remained soft and though the completion of delayed projects is accelerating.
New home sales and starts are moderating as the Chinese consumer remains cautious.
That said, we continue to see growth in the emerging R&R channels and are positioned for market outperformance due to the strength of our brand and expertise of our in country leadership.
Turning to outdoors sales were $376 million down 14%.
Segment operating income was $61 6 million down 10% importantly.
Importantly, our margins improved both versus the prior year and sequentially to 16, 4% driven by volume leverage price and plant productivity.
Door sales were down low teens.
As expected sales were impacted by lower volumes from the single family New construction slowdown in 2022, and the challenging Pos comparable however, our wholesale business is performing above market and the business should be positively impacted by the improved new construction outlook.
In decking as Nick mentioned, we saw Pos accelerate through the quarter and continue to expect full year sales to be roughly flat to prior year.
Finally in security sales increased 2%, reflecting increased distribution price and continued strength in commercial and international security.
Security segment operating income was $27 million up 6% versus 2022.
Segment operating margin was 15, 6% up 70 basis points.
Our team continues to work to transform our security business into a higher growth higher margin business focused on attractive categories, where our brands and innovations can drive consumer and customer share gains over time.
This strategy will be accelerated by the integration of the Yale in August asset.
Turning to the balance sheet and our cash flow performance.
Our balance sheet remains strong with cash of $682 million net debt of $2 6 billion and net debt to EBITDA leverage at two nine times.
This leverage ratio reflects the impact of our recent acquisition and we expect to reduce our net leverage ratio over time as the business continues to generate strong cash flow.
We generated free cash flow of $358 million in the quarter, bringing our first half free cash generation to $391 million.
Our working capital reduction efforts continue to shrink our balance sheet and generate cash.
To summarize the quarter, we delivered solid sales and strong margin results in a fluid environment, while overcoming the most challenging period of prior year comparable and the impact of the slowdown in single family New construction market in 2022.
With that in mind I'll now provide an update to our 2023 guidance inclusive of the acquisition of the Alpha I believe assets.
As indicated in our release and in our supplemental presentation for the second half of 2023.
The acquisition is expected to generate net sales of $190 million to $210 million and earnings per share of <unk> <unk> to <unk>.
This includes the unfavorable impact of approximately eight from purchase price amortization.
Based on our revised market assumptions, which include an improved outlook for U S single family New construction.
Plus the impact of the Asa acquisition, we now expect full year consolidated fortunate brand sales to be flat to down 2% or down 4% to 6% on an organic basis.
We now expect full year operating margins between 16% and 16, 5%.
Reflecting the impact of purchase price amortization from the acquisition.
On an organic basis, we continue to expect operating margin to be around 16, 5%.
As todays press release, and our supplemental web posting indicated we are increasing the midpoint of our EPS guidance by <unk> <unk> and narrowing the overall range to $3 75 to $3 90.
Reflecting the acquisition and our organic businesses performance in an improving market.
As a reminder, we previously raised our EPS guidance during our first quarter 2023 earnings call, reflecting our operational outperformance. So in total our updated EPS guidance reflects a 13% increase over the midpoint of our initial guidance.
In closing as we head into the second half of 2023, we remain ahead of or tracking to the guidance targets, we put forth at the beginning of this year.
We have delivered solid sales results managed our margins and made significant improvements in cash generation.
Our teams have done a fantastic job navigating the uncertainty of the past few years and as we come into the back half of 2023, we remain confident about the future of the business.
I will now pass the call back to Lee to open the call for questions Lee.
Thanks, Dave.
That concludes our prepared remarks, we will now begin taking a limited number of questions.
Since there may be a number of you would like to ask a question.
I'll ask that you limit your initial questions to two and then re enter 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.
Okay.
Thank you again, we will now be taken in a limited number of questions. Just Darren yes, maybe a number of you who would like to ask the question.
Got you limit your initial questions to two and then reenter the queue to ask additional questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from Nicky and for participants using speaker equipment. It may be necessary to pick up your handset.
Before especially in D stock East.
Again Thats Star one to register your question at this time.
Our first question comes from the line of Phil.
And <unk> with Jefferies. Please proceed with your question.
Hey, guys I appreciate the great Investor deck, it's got some good insights on the asset deal it looks like you're anticipating pretty strong growth with sales stepping up from 400 million to 525 million in 2026 Q can you provide some color on the growth drivers and Nick I think you don't typically baking much cross selling in <unk>.
Cash deals.
What's giving you the confidence.
On the cross selling synergies you are calling out I think it's about 665 to eight 5 million. How do you see that kind of wrapping up and what are some of the big opportunities.
Hey, Phil.
Thanks for the question happy to elaborate a little bit.
We obviously seen variety of deals <unk> done a variety of deals over the over time, but this one really sits at a at a wonderful crossroads of being fantastic.
<unk> backed by an excellent team.
A great price paid through some really disciplined approach to the asset itself.
But then thirdly the.
The third part of the intersection is really the opportunity to come and unlock growth by putting these things together.
In our portfolio and we tried to be really disciplined around value. But then also really disciplined on the other two items.
For great brands and teams, but asking where we can add value with a fortune brands portfolio and I'd say. This is this is one of the more exceptional deals that we've seen and so I'll give you a couple of key foundational pillars, and then happy to elaborate if that's helpful. But.
One just start actually with the <unk> business.
Tech and sharp leader in luxury.
Hardware category journey design led.
A lot of colors and choices for designers.
Credible supply chain and service you really cant serious approach in doing that.
Really really.
Fantastic margins not something that you see very often bring all of those things together and we looked at the house of ROHL platform, which you can see in the organic results here continues to take share and outperform the market and there is really really resonating with consumers and designers by putting those two things together over time.
Have a platform that's north of possibility.
Outgrowing the market and has global reach and the elements really worked together whether it be in the channel where we have overlap.
In types of distribution channels, but not necessarily overlap in all of our distribution.
But then even things like being able to unlock.
Sections for an entire room do color matching designed to work together and really provide a solution where a designer a consumer gets to put something together the way they want it but in a way that works with our backing us as a company and so that's an example, and then I think you go over to the.
Other side he held in August .
Really driving check first and connected product first and into the August platform itself as we're getting in there and learning more about it we think is a very very powerful platform.
That is something that we can bring in the business by the way it learn from what they've done and be really thoughtful about how we integrate it but we see it as a huge unlock and potentially transformational unlock in our connected products.
It is generally but the ability to bring that many engineers that skill set that kind of agile.
Fast way of working.
Into the investments, we've already made which we're really happy with but we think it could be exponentially greater when you bring those two things together and one of the things that we called out in the deck. For example is smart entry right, we're going to have one of the leading.
Entry.
Locke businesses and brands with some of the best if not the best technology and you marry that with the leading.
Fiberglass entry door brand already a leader in this space right and you think about all the innovation that went into that and you actually make that thing work not as a just a bolt on to an existing system, but a total system solution for consumers.
That's just an example of the kinds of things, we're thinking about it and so the team.
<unk> has been getting obviously this one really enthusiastic.
Number of deals.
I'm not sure I've ever seen a business team sort of jumped on.
Synergies.
This team has jumped on them and with the level of excitement and really kind of pushing it beyond our initial case, which we thought was pretty good to begin with and so you bring all those things together. We just think it's really excited to have this quality of brands. This team.
Coming to our entire portfolio with this potential transformational unlock and have been able to do it at this valuation.
That's super that's great color, Nick glad to senior really excited about this transaction.
You bumped your organic sales guide give us some color on any inter color inter quarter trends you saw early read into July you've expressed a more upbeat outlook on new construction, how do you see that inflection and the orders to builders have called out in your business, particularly plumbing and doors. Thank you.
Yeah sure I'll start and then I'll hand, it over to Dave anything a bit more detail about it but I'd say at the highest level. If you think about it there's actually been fairly consistent fanatically with what we saw in the second quarter and so what did you see you saw relative strength.
In.
Both Boulder, I think relative to expectations.
In there.
Order books of what was being reported now obviously in Q2 two.
<unk> thousand 300 were digesting the slowdown from last summer right and so the uptick is yet to come through the P&L and then on the R&R side, I'd say relative strength and everything that was more project or pro related.
And.
Relative weakness in things that were more kind of DIY or weekend warrior related.
As you've been looking to July I would say somatic leader continues to be true.
We're going to see.
More uptick around the large production builders we are seeing.
<unk> value chain supply chain starts to strengthen as people prepare for those orders.
Come through we've seen continued strength in our pro related channels, where it'd be projects continue to be strong and it's more around the very discretionary DIY products that you continue to see some weakness, but as Dave alluded to in his remarks, even there.
In the last few weeks there were some encouraging signs of certain product groups, where youre seeing.
At retail a little bit more life than we've seen in.
That DIY stuff, so data science here.
So just I'd add some color around just the second half sales cadence and so if our prior organic guidance was down 3% to 5% I'll.
To remind people that includes the extra <unk>.
Non repeating fiscal week from last year that for the second half is roughly two percentage points all in.
Fourth quarter or four percentage points overall, so that organic guidance than call it down.
Down two percentage points, excluding that comp or moving it.
The midpoint of our current guidance down to flat in the second half of the year and I think simply.
You think about it.
POS down low single digits offset by a favorable inventory comp up low single digits that gets you roughly to the flat and then the non repeating fiscal week two percentage point headwind that gets you to the midpoint of the guidance. So the next point.
Here at the end of July we look at our Pos data.
See it trending in the right direction to support this forecast and then you layer on top of that the single family New construction.
Improvement that will really start to benefit us in the fourth quarter that gives us confidence to believe in our second half outlook.
Okay really appreciate color guys.
Great. Thank you.
Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yes, thanks, very much guys I appreciate it.
Yes.
You ask about let's start with the acquisition I think you had indicated that there was going to be a little purchase accounting impact.
In the back half any reason why we should expect for that to continue into fiscal 'twenty four.
And as you look across the.
Yes, the sales synergies and cost synergies.
Do you think we could see some of the cost synergies.
By the end of the year start to trickle in and just give us a little color on I guess timing.
In <unk>, <unk>, and maybe I'll look into <unk>.
Yes, Steve this is Dave.
Talk to that.
On the synergy side I think maybe some of the sales synergies check line by the end of the year on the cost side because of their inventory positions. While the teams will be doing the work we won't see that in our P&L until next year, just given the balance sheet.
And then to your question on purchase price amortization. So remember these are trade.
Trade names that are amortized over a long period of time. So it is roughly 8% in the back half of this year it'll be 16.
And a full year next year impact.
And then going forward beyond that pretty consistent for the next 10 or so years until that trade name, it's fully amortizing off the balance sheet.
So hopefully that helps to answer to your question on <unk>.
Yes.
Absolutely.
Okay, Great that's very helpful.
Now I know that your guide you mentioned your guide.
<unk> sort of reflects to some degree and I think a large degree the.
Hence the view of single family.
Activity and I'm, assuming there is basically the lagged starts effect.
Are there any mix or margin implications from the rebound that we've been seeing and housing starts start to emerge as well.
If you could talk to that that would be helpful.
So the mix impact on us.
Yes.
And if it to you.
You talked about the top line, but I'm wondering if there might be margin implications that could come from that and if you could describe what those might be.
Yes.
Just give me some thoughts around the dramatically in Bev can give more color I would say bottom line is we are and we really work to keep the portfolio March agnostic.
Whether it be around products price point, I'm certain margin percentage, but Ron product price point or around channel and so.
So if you look if you think about it we might have if we see a lot more production builder business that may come in at a lower contribution margin for example, but it takes a lot less to serve that business because they're big customers you can call on them.
It's more standardized can say showroom business, which any big sales forces out in the market serving that maybe higher contribution margin the large SG&A supporting it and at the end of the day that sort of balances out and so.
It moves around the P&L is the P&L geography, but I would think about it as we're fairly agnostic no matter, the channel or where we sort of set price points.
Continuing from premium to ultra luxury in our portfolio.
And Steve I'd point, you to our full year guidance for operating margins for water, which prior was 23%, 24% and updated is around 23, 5%. So at that midpoint inclusive of the change in single family, New construction and the headwind from the purchase price amortization from the Asa deal Thats not rolling into that segment.
So pretty consistent from a margin standpoint within water.
Great. That's very helpful. Thanks, guys.
Our next.
Comes from the line of Michael Rehaut with J P. Morgan. Please proceed Mr. <unk>.
Thanks, Good afternoon, everyone.
First I just wanted to dial in a little bit on some of the puts and takes on the updated margin guidance for the year.
I guess.
On a segment level you had security.
Nick down at the high end of the prior guidance and just wanted to confirm that that's.
I assume largely just driven by the acquisition accounting.
And if there were any other puts and takes into the back half outlook.
Im thinking about to the extent that you have a little bit better topline outlook.
Organically at least.
Yeah.
Are there any you know.
Additional leverage that you were thinking of and it was that offset by anything else.
And then I just had a follow up.
Yes.
Mike This is Dave and the security question you are correct thats predominantly.
Just impacts.
Impacts from accounting from the acquisition.
Base business is performing well as evidenced by their margin results in the second quarter.
And then in the back half.
We had said.
On our initial call. This year that we expected back half operating margin to be between 17 and 18%.
We still think that's the right range for the back half between 17 and 18% now there are some puts and takes in there we are making some incremental investment invest.
Investing in digital investing in brand and R&D in the second half, we're controlling that tightly but we see some areas that we want to accelerate as we head into 2024.
And then interesting interestingly if you look at our first half margin performance of 15, 2% and normalize for the inventory reduction overhead of $50 million that we called out Youre right at about 17, 5%. So the business is demonstrating pretty consistent margin performance and trajectory well.
Shifting some of the implications of reducing our balance sheet and the market volatility, but we feel good about the outlook going forward.
Yes.
I'd just add Mike if you think back to our Investor day.
In December when we presented that longer term margin walk and all of the activities that we had planned to start to drive those.
Feeling very good that that is now coming through in both the security and the outdoor business and notwithstanding the fact that it's pretty choppy external environment out. There you can see the business is making a progression that we want them to make and we're doing that by taking this newly aligned structure and a fortune brands advantage.
Playbook and applying it.
And the teams are feeling very good about their ability to execute well against that over time.
Right.
I appreciate that and I guess secondly, maybe just go back to that.
The slide on the deck around the synergy opportunities on the top line, which you know.
Very detailed and and and and obviously very well thought out.
I think back to the acquisition of fiber on and I believe you you had correct me if I'm wrong I want to say, a 50% growth over three years.
And in a lot of that due to some really nice additions on the distribution side.
You were able to.
Secure new customers et cetera.
<unk> added distribution for the fiber one product.
We see a lot of of.
Expansion of our channel.
In both the Yale in August and Amtech and shop, and so I guess the question is maybe just to push obviously these are these are really good numbers.
The synergies on the sales side.
But I would have actually thought perhaps there would have been room for some for slightly higher numbers and maybe I'm, just being a little too aggressive, but or maybe you're perhaps being conservative just wanted your take on that particularly over a three year period. It does seem like there's a lot of <unk>.
Cross selling opportunities to the point on the slide and just curious.
If I'm thinking about things, maybe a little too aggressively in terms of even greater upside potential.
Yes, so firstly, thanks for calling out the fiber analogy because I think it's really good and I think.
Particularly interesting about that example that you called out is.
That is still ongoing like that.
Those gains at the higher margin part of that business.
Distribution gains are still unfolding, obviously, the market's a little bit tougher this year, but as we just check that conversion rate so that that bounces between 1% to 2%, we see it sort of moved back up Youll see those play through and during that whole time, though we're preparing that business to then build on private brand and in the.
And so very dramatically I think similar to what I would say specific to <unk>.
Yeah August 10 second shop for Citrix cloud.
We closed June 30, so we fully have the teams together.
For a short amount of time.
And they've identified a series of synergies that we put here, particularly around channel and what we'll do is we'll be very respectful of what these businesses do better than the legacy fortune reservations business and so they have channel strength in certain areas that is better and we will look to learn from that and build it into.
The legacy business and then Conversely, there are of course places where the legacy business has strength that these businesses don't where we can start to expand.
Through distribution.
And excess in our channel strengths in relationships and so.
Will there be more upside over time for that possibly but I think the real big unlock comes from really sort.
The one plus one equals five strategy, which is as you put these things together can we unlock new.
New innovation new approach, whether it be on the luxury side, where we really are going to have a lot more scale to go after the business on the global business on a global basis with that luxury consumer.
Who cares about brand and cares about.
Seasonal stories behind it or on the technology enabled side, where.
Our connected business is going to be that much bigger and the infrastructure backbone on which now all six is going to allow us to unlock innovation at a faster pace and I think that's where the real upside may exist, but that's going to take us a little time to work through those innovation opportunities in premium to market.
Our next question comes from the line of Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good afternoon, and thanks for taking the question.
Sure Jamie.
Can you talk a little bit about how you.
Your position from an inventory perspective across the different channels in the different segments. It sounds like you've got a nice lift in the quarter from the volumes that that did flow through there as you think about the back half what's the ability to capture any further upside to demand and perhaps see those volumes continue to move a bit.
Further.
Yes, Steve It's Dave I would say looking at water and security.
<unk> balanced from an inventory.
Perspective relative to the rate of sales.
We're still a little bit light in the outdoors in the channel primarily around wholesale decking at the end of the quarter and we do expect and we really have started to see some of those orders that we expected to come through in July for decades, and so we're seeing that inventory fill back up.
I think if the market were to accelerate beyond our expectations in the second half there would be.
Some some inventory upside opportunities as we would expect customers to put some inventory of those sales.
But where we sit right now, it's pretty well balanced and we've kind of gotten through a lot of the prior year challenges from inventory.
Builds and are pleased that really noisy on the sales line.
Okay. That's helpful. And then you said.
About security and some of the company specific efforts that are going on there to drive results.
Above and beyond the acquisitions that that closed this quarter can you just talk a bit more about some of those initiatives and how should we be thinking about that flowing through to the business and actually coming through in terms of the both the revenue and margins over time.
Yes.
A very simple way to think about it as it changes so rewind the clock a little bit on the water business and you just observe what sort of happened, let's say starting in 15 and 16 in the playbook that was applied there. It's the same playbook being applied to security and actually they are very similar.
So the brand residents' ability to put innovation behind it.
Connected product and even the supply chain has a lot of commonality and so you can really sort of I'll, just lift and shift a lot of that playbook. So.
Starting from the top line down far more emphasis on innovation and so what we're seeing come through.
Alluded to.
Strength in commercial.
We're really.
Develop your leadership position in some of the safety work that we do in facilities. It's very sticky work, we go in and do consultative selling we help make facilities safer because obviously a lot of emphasis on that right now.
It's a great strength of ours, we're able to put the brand and innovation behind it eventually that will be connected as well and will be a much more data driven thing.
That's just an example of a.
A vector that can drive top line and then you sort of play it through like the supply chain improvements that we've made in water, whether it be in sourcing or footprint over time.
Loud us to generate a lot of fuel that we then reinvested.
To drive the top line some of which came into margin and you saw the margin progress over the years, but a lot of which was invested in the topline and so it really is those sorts of capabilities and are we talking about the fortune brands advantaged capabilities, because it's taken that playbook applying it and I think over time, and then particularly as we bring these assets these new assets into play.
And are able to accelerate some of the connected overlap.
Not just see the topline to accelerate but we'll see the margins go along with that and our philosophy is very much a virtuous cycle because as you develop those margins you're able to invest in these businesses Foster as you invest in them obviously the top line grows even quicker.
And so you just put some numbers behind that because we are starting to see it come through the results and so if you look at securities performance versus the second quarter of 2019 sales are up 15%, but roughly a 4% CAGR and their operating margin is up 390 basis points and so you see the.
Output of what Nick described is really taking that playbook from water embedding in it security and getting that flywheel going around growth reinvestment and margin enhancement.
Yeah, Okay, great. Thank you for the color and good luck.
Well thank you.
Our next question comes from the line of Joe <unk> with Deutsche Bank. Please proceed with your question.
Yes, thanks, very much good evening everybody.
Hey, Joe just want to go into the Yale business, a little bit deeper if you could maybe quantify the amount of the business Thats currently going through e-commerce and any considerations there around key customer partnerships with the change of control anything to consider there.
Yes.
I'll give you some perspective as broadly and Dave can elaborate but we usually don't break it down to that level of granularity for some information in the deck here, but I would think that this business has this has historic strength.
Yes.
In the integrated channel, which we found very interesting so.
People connect products into homes.
There.
There's one at a time.
August is bolt ons, but theres also a multiple its worked for the system with an integrator and what's really interesting about the Yale.
Infrastructure.
Backbone is how flexible it is on a variety of different systems. So that's a real strength of there is something that we don't have elsewhere in the business and so we really want to build upon and we can expand our portfolio even in our existing master lock business and portable security business right I think there we are.
Able to secure things that are portable interconnected way and so if we can leverage that backbone, but and then of course, we have a lot of strength in retail and E Commerce switch.
Historically it has been I would say weaker for Yale and so we think that that's an opportunity where we can leverage our historic strength.
<unk>.
Their business up and Joe I'd say interestingly like our connected product business. This business has been chip constrained.
They actually prioritize these third party integrators over other channels over the past few years, so the amount of sales flowing through.
Commerce, or even brick and mortar retailer are lower than the demand would be for the type of products as we get.
<unk> integrated back in stock that will be another growth Avenue for us going forward.
Yes that was actually my second question was around those constraints you had mentioned earlier I guess late last year.
Maybe for my second question I'll just ask.
Final question on the wholesale decking did you say that sellout improved high single digits and was that versus.
Before a specific amount of time.
Yeah, we said by the end of at the end of July .
High single digits versus prior year.
Like a trailing four weeks or something like what's the period, yes, yes.
I would look at it.
Alright, great. Thanks, a lot guys.
Yes sure. Thank you.
And our next question comes from the line of John Lovallo with UBS. Please proceed.
Hey, guys. Thank you for taking my question.
I guess first question would be on water volume in the U S. I mean can you just help us with what that was down in the second quarter and maybe what the positive impact from pricing was and then more broadly where you're seeing potential opportunities for incremental pricing across your broader portfolio as we move into the back half of the year.
Yes, I'll start and then Nick can comment just to decompose water sales.
Hello reported sales down 5%.
Strong sales growth from China, given the prior year comp and the acceleration of some previously.
Started development. So if you pull that out organic excluding China would be down about 9% and we see Pos down low double digits and so within that and John it's volume down low double digits offset by price up low single.
Which is consistent with what we've been saying all along we took a low single digit price increase in water at the beginning of the year and that stuck and remains.
In market and then there's a small low single digit benefit on sales from product load in timing around Amazon Prime day, which is just different weeks last year versus this year and it fell into the second quarter, but the cleanest way to think about it as Pos.
Pos down low double digits volume down low double offset by low single price.
And then the second part of your question on pricing opportunity.
Say as part of these fortune brands. It's about just capability is just talk to you about.
One of the things that we've invested in is category management.
Skills and capabilities, particularly in water and security and now youre carrying them over to the outdoors business and what that does is really give us. It gives us the ability to understand what is happening with the consumer and what is happening with the pro at the shelf using data and analytics and then to work with.
Our customers and wholesale partners to optimize pricing and so we're constantly we try to avoid doing massive recycling.
Shatkin price increases obviously in between 2020 and today there was some of that in certain categories, but we really seek to do smaller more incremental regular.
Price that the market expects that our customers are used to that are easily digestible and even at the peak in water I think you never saw us move beyond.
Mid single digits, and if you do that consistently and you do it all the time, you're able to create value for the entire value chain for all of our partners and do it in a way that you bring the consumer along and I think thats reflected in the fact that we've been able to do it consistently.
<unk> gained share as we were doing it.
That's helpful. Thank you and Nick one of the comments that you made and it's not unique to your business, but would love to get your thoughts on it.
DIY being a little bit softer than pro and in an environment where.
There's a little bit more challenge.
From an economic standpoint, I mean, intuitively you would think it could be the opposite where the consumer is trying to save some money by perhaps doing things a little bit more themselves. I mean, why do you. What do you think is driving this dynamic where the pro is holding up better.
Yes, I'll give you my hypothesis.
For what it's worth rich.
I think if you go back to sort of the fundamentals right.
You have a very very under bolt housing market.
Going to see new construction, you're seeing that come through in the production builders have the systems and the processes.
Excellent doing what they're doing so you've seen them texture and then you have a very aged housing stock and so I think you're seeing consumers prioritize their homes.
And go after projects, where they really need to bring their homes into a more modern era and <unk> seen that hold up and I think where you've seen what I'd say is relative weakness is in the <unk>.
Huge.
Growth that we saw in kind of retail Pos in 2021, and 2022 that we've called out pretty consistently saying coming into the spring selling period, we really saw people go out and spend a lot in retail for kind of the spring into early summer months.
My belief is a lot of that was stimulus driven they had money and we're probably doing projects that they wouldn't have otherwise done.
And as we anticipated if you now look at the Pos data.
Sequentially, the numbers improved weaker and weaker weakness you sort of went through.
Late winter into the spring as we would expect them to with normal seasonality.
They did not Kirk.
The huge hill that was both the prior year.
People went out and did a lot and interestingly and consistent with that as we've now gotten into.
Kind of mid summer as you get past that.
You can see those Pos dollars come back into line and closer to flat I would say consistent with.
Flat versus last year.
Yes.
Consistent with what we would expect a normal season to look like and so I guess to sum it up I think new construction bigger projects modernizing homes or building new homes continues to be driven I think what we are digesting is stimulus driven.
That was pretty tough surprised actually that we pretty much lapped 'twenty, one and 'twenty two and then in 'twenty. Three I think you did see sequential growth, but it was just too big of a lap.
Without the support of the stimulus dollars.
Got it thank you.
And we have reached we have reached the end of the Q&A session and also this does conclude today's conference. We do thank you for joining today's conference call you may now disconnect.
Yeah.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
[music].
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
[music].
Okay.
Okay.
Okay.
Okay.
[music].
[music].
[music].