Q3 2023 Fortune Brands Innovations Inc Earnings Call
Good afternoon, My name is Camilla and I will be your conference operator today.
At this time I would like to welcome everyone to the Fortune brands third 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 upset.
<unk> President of Investor Relations and corporate Affairs.
You may begin the conference call.
Good afternoon, everyone and welcome to the Fortune brands innovations third quarter 2023 earnings call hopefully everyone has had a chance to review our earnings release and supplemental financials. The earnings release and the audio replay of this call can be found in the investor section of 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 margin earnings per share of free cash flow in today's call will focus on our results on a before charges and gains basis unless otherwise specified.
Please visit our website for reconciliations.
With me today on the call 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 third quarter performance and offer some thoughts on the macro environment. I will also give an update on our ongoing evolution into a tightly aligned company focused on brands innovation and channel.
I will then turn the call over to Dave for a discussion of our financial results updates to our guidance for the remainder of 2023 as well as some thoughts on our emerging expectations for 'twenty 'twenty four.
Turning to our third quarter performance.
Our teams executed well and delivered solid top and bottom line results and the macro environment that remains challenging.
Our net sales growth outperformed the market for our products and our margin results sequentially improved over the second quarter or 2023.
We delivered above market P O S results across most of our businesses.
Our recently acquired assets are performing better than we expected and our balance sheet remains very healthy as we continued to generate strong operating and free cash flow.
Our results this quarter demonstrate the potential empower of our aligned organizational structure and our fortune brands advantaged capabilities as well as 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 and a digital transformation.
The actions, we took over the past year to better leverage the strength of our organization and sharpen our focus on our leading brands meaningful innovation and our advantaged channel relationships helped to drive our results and give me confidence and a strong future.
Our fortune brands advantaged capabilities will continue to advance our growth and margin journey by reducing cost and forming a strategic pricing strategies and enabling a high growth focus areas like connected products.
Finally, I'm pleased to report that our integration of the Amtech shot and Yellen August assets is going extremely well and we are even more optimistic about the growth potential that these businesses have.
Both regarding their standalone performance as well as the potential they have to accelerate our transformation into a digital disruptive company in the luxury goods powerhouse.
Good afternoon.
Net sales were $1 3 billion in the quarter versus $1 2 billion the prior year up 5%.
Leigh Avsec: My name is Camilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brand's third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
Organic net sales were down 4% versus the prior year.
Operating margin was 17, 4% up 40 basis points versus the second quarter of 2023.
After the speakers are marked, there will be a question and answer session.
Our sales and margin performance together with exceptional cash generation resulted in earnings per share of a dollar in 19th.
Leigh Avsec: I would like to turn the call over to Leigh Avsec, Vice President of Investor Relations and Corporate Affairs. You may begin the conference call. Good afternoon, everyone, and welcome to the Fortune Brand's innovations third quarter 2023 earnings call. Hopefully, everyone has had a chance to review our earnings release and supplemental financials. The earnings release and the audio replay of this call can be found in the Investor section of our website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepare 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.
At 3% increase over the third quarter of 2022 and gives us confidence in delivering our revised EPS range of $3 80 to $3.90.
As we discussed in our last earnings call. We continue to expect some headwinds from lower point of sale performance as consumer softness continues and as we further digest the impact from the slowdown in the new construction market through the first half of 2023.
It has been widely reported while single family New construction permits and starts continued to improve off of cycle lows based on where our products are installed in the production of a home we do not expect to see the benefit until the end of 2023 and into 'twenty 'twenty four.
Leigh Avsec: 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 are free cash flow and today's call will focus on our results on a before, charges, and gain spaces unless otherwise specified. Please visit our website for reconciliation.
The repair and remodel market remained soft although the pro was relatively stronger than pure DIY categories, and our strength with the pros worked tired vantage.
We will remain proactive in our response to any short term external headwinds, while continuing to focus on outgrowing the market preserving margins generating cash and prioritizing strategic investments into key growth priorities that we expect to pay outsized dividends when the market rebounds.
Leigh Avsec: With me today on the call are Nick Sink, our chief executive officer, and Dave Berry, our chief financial officer. Following our prepared remarks, we have allowed time to address some questions.
Now turning to some thoughts on the current U S housing market and the market for our products.
The need for housing remains incredibly strong although it is being constrained by current affordability challenges.
Nick Sink: I will now turn the call over to Nick. Nick? Thank you, Lee, and thank you to everyone for joining us today.
In fact, we believe the recent slowdown has only added to the pent up need for housing.
Nick Sink: On this call, I will walk through the highlights of our third quarter performance in office and thoughts on the macro environment. I will also give an update on our ongoing evolution into a tightly aligned company focused on brains, innovation, and channel.
A recent third party survey indicated that over a third of respondents reported plans to purchase of residential property within the next 12 months.
This remains well above the pre pandemic average and the longer term average dating back to 2014 or 29% demonstrating significant supply demand imbalance in the larger housing space.
Nick Sink: I will then turn the call over to Dave for discussion of our financial results. Our updates to our guidance for the remainder of 2023 as well as some thoughts on our emerging expectations for 2024. Turning to our third quarter performance, our teams executed well and delivered solid top and bottom line results in the macro environment that remains challenging. Our net sales growth outperformed the market for our products and our margin results sequentially improved over the second quarter of 2023.
While we cannot predict when the federal signal the end of the current cycle of rate increases and quantitative tightening.
As it does so we would expect interest rates to return to more normal levels and the corresponding significant returned to growth in the housing market.
We continue to believe there's fundamental demand together with a strong and optimally positioned brands will result in medium to long term tailwind for our business in both new construction and repair and remodel.
Nick Sink: We delivered above market POS results across most of our businesses. Our recently acquired assets are performing better than we expected, and our balance sheet remains very healthy as we continue to generate strong operating and free cash flow.
Starting with new construction.
As has been widely reported.
Single family, New construction market continued to improve versus what was initially anticipated at the beginning of 2023, despite higher than expected interest rates.
Nick Sink: Our results this quarter demonstrate the potential and power of our aligned organizational structure and our fortune brand's advantage capabilities as well as our unwavering focus on outgrowing the market, preserving margins, and generating cash, all while continuing to prioritize keen investments, including brand building, thoughtful capacity additions, and our digital transfer The actions we took over the past year to better leverage the strength of our organization and sharpen our focus on our leading brands, meaningful innovation, and our advantage channel relationships, helps drive our results, and give me confidence in our strong future. Our Fortune Brand's advantages capabilities will continue to advance our growth and margin journey by reducing cost, informing our strategic pricing strategies, and enabling our high growth focus areas like connective products.
Builders, particularly the largest production homebuilders with whom fortune brands enjoys strong relationships continued to respond to affordability challenges in a dynamic marketplace.
As we have previously stated.
The positive impact on our business will not be immediately apparent due to the timing of when our products are installed into a newly constructed homes. This should be a growth tailwind in 2024.
Turning to R&R.
R&R market remains dynamic and there are many variables that are impacting the repair and remodel space, including consumer savings and confidence employment levels existing home turnover and home equity levels. We.
We believe that we're well prepared for any external headwinds and remain confident that our products are increasingly well positioned to outperform in any market.
Nick Sink: Finally, I'm pleased to report that our integration of the EmTech, SHOD, and Yale in August assets is going extremely well, and we are even more optimistic about the growth potential that these businesses have, both regarding their standalone performance, as well as the potential they have to accelerate our transformation into a digital disruptive company and a luxury goods powerhouse. Net sales were 1.3 billion in a quarter, versus 1.2 billion the prior year up 5 percent.
First as mortgage rates rise to the highest levels in many years homeowners are increasingly viewing their current homes as a longer term investment and are interested in improving them to match their tastes and needs.
We continue to believe our products are relatively more insulated than other R&R items, because they are smaller ticket are less disruptive to install and because they offer immediate aesthetic improvement or meaningful innovation and functionality to a home.
A recent study indicated that for building products performance trusted brand name anesthetics were by far the most important factors consumers considered during their purchase journey.
Nick Sink: Organic net sales were down 4 percent versus the prior year. Our operating margin was 17.4 percent of 40 basis points versus the second quarter of 2023. Our sales and margin performance, together with exceptional cash generation, resulted in earnings per share of a dollar and 19 cents, a 3 percent increase over the third quarter of 2022, and gives us confidence in delivering our revised EPS range of $3.80 to $3.90. As we discussed in our last earnings call, we continue to expect some headwinds from lower point of sell performance, as consumer software continues, and as we further digest the impact from the slowdown in the new construction market through the first half of 2023.
More southern price.
Our brands perfectly aligned with those criteria.
As we continue to evolve our portfolio and focus on supercharged categories, which are categories that we've identified with high growth potential due to the exposure to secular tailwind is separate from the housing market.
As we continue to build upon our already strong grades and introduce meaningful innovations.
We expect that our products will further distinguish themselves.
Consumers continue to have high confidence in their homes as an asset.
This has resulted in an environment, where the home space, it's still be positively and consumers are willing to invest in making their spaces reflect their lifestyles and needs.
Nick Sink: It has been widely reported, while single-family new construction permits and starts continue to improve off of cycle lows, based on where our products are installed in the production of a home, we do not expect to see the benefit until the end of 2023 and into 2024. The repair and remodel market remained soft, although the pro was relatively stronger than pure DIY categories, and our strength with the pros worked to our advantage.
That said, we're watching macroeconomic trends closely including consumer confidence levels consumer spending habits, and employment levels, all of which impact repair and remodel trends.
While we are confident in the mid to long term trends for our products. We are anticipating an environment that continues to be challenging and uncertain.
As we have in times before we will respond quickly and decisively in any environment.
Nick Sink: We will remain proactive in our response to any short-term external headwinds while continuing to focus on upgrading the market, preserving margins, generating cash, and prioritizing strategic investments in the key growth priorities that we expect to pay outsized dividends when the market revolves.
As Dave will detail more completely in his section we are actively scenario planning for a variety of outcomes in 2024.
Turning now to an update on our organizational transformation.
As we approach the one year anniversary of the cabinets spinoff and reorganization of our business I wanted to reflect on the many transformational activities, we undertook over the past year.
Nick Sink: Now turning to some thoughts on the current US housing market and the market for our products. The need for housing remains incredibly strong, although it is being constrained by current affordability challenges. In fact, we believe the recent slowdown has only added to the pent-up need for housing. A recent third-party survey indicated that over a third of respondents reported plans to purchase a residential property within the next 12 months. This remains well above the pre-pandemic average and the longer-term average dating back to 2014 of 29 percent, demonstrating significant supply and demand imbalance in the larger housing space.
Nick Sink: While we cannot predict when the federal signal the end of the current cycle of rate increases in quantitative tightening, once it does so, we would expect interest rates to return to more normal levels and the corresponding significant return to growth in the housing market. We continue to believe this fundamental demand together with our strong and optimally positioned brands will result in medium to long-term tailwinds for our business in both new construction and repair and remodel.
These activities are driving our future is an exceptional company focused on growing our core while also accelerating our emerging connected products business.
As we noted at the time the separation represented a chance for fortune brands to evolve into an entirely new company one marked by excellent brands innovation and channel.
And while we are proud of the amount of value creation. The separation has generated for our shareholders. We're even more excited about the growth potential that we unlocked.
We've now had nearly a year operating as a more fully align company with an organization that is designed around accelerating growth.
While it would take more time to realize the full impact of our new structure, we are already seeing tangible results.
A more efficient structure has allowed us to remove unnecessary duplication make strategic decisions faster and with more precision and deploy our fortune brands advantaged capabilities across the portfolio.
Nick Sink: This, particularly the large production of homebuilders with whom Fortune Brands enjoys strong relationships, continue to respond to fortability challenges in a dynamic marketplace. As we have previously stated, while the positive impact on our business will not be immediately apparent due to the timing of when our products are installed in a newly constructed home, this should be a growth tailwind in 2024. Turning to R&R, R&R market remains dynamic, and there are many variables that are impacting the repair and remodel space, including consumer savings and confidence in employment levels, existing home turnover and home equity levels.
By removing those activities that do not create value we create space for those that do.
This is a multiyear journey that has already begun to pay dividends.
Our new structure has allowed us to invest additional capital and talent and those projects with the greatest opportunity to drive growth, including our digital transformation and connected products, which we believe have the potential to transform our entire space.
We now also have a dedicated transformation and integration office reporting directly to me, which is responsible for driving progress on the key growth initiatives across the company and we are now able to deploy our best talent and a fortune brands advantaged capabilities across the entire enterprise in a much more rapid efficient.
And holistic fashion.
There has been an enormous amount of change across the organization, but our 12000 associates across the globe have leaned into the change and embraced our transformation in a way that is nothing short of exceptional.
Nick Sink: We believe that we are well prepared for any external headwinds and remain confident that our products are increasingly well positioned to outperform in any market. First, as mortgage rates rise to the highest levels in many years, home owners are increasingly viewing their current homes as a longer-term investment and are interested in improving them to match their tastes and needs. We continue to believe our products are relatively more insulated than other R&R items because they are smaller-ticket, less disruptive to install, and because they offer immediate aesthetic improvement or meaningful innovation and functionality to a home.
I am so proud of our team.
Fortune brands innovations is stronger more agile and more aligned than it has ever been.
What are the key areas that we have identified as a growth catalyst is connected products.
Today I went to help put this business in its proper context.
Leading brands advantage route to market and technology backbone makes us uniquely positioned to capture growth in the connected product space.
I recently aligned organization is helping us fully unlock our potential across the full company.
Nick Sink: Recent study indicated that for building products, performance, trusted brand name, and aesthetics were by far the most important factors consumers considered during their purchase journey, more Southern price. Our brains perfectly aligned with those criteria. As we continue to evolve our portfolio and focus on supercharged categories, which are categories that we have identified with high growth potential due to the exposure to the secular tailwinds, separate from the housing market, and as we continue to build upon our already strong brains and introduce meaningful innovations, we expect that our products will further distinguish themselves.
The addition of yellow August enhances our capabilities and product set giving us the scale and talent to lead in connected products.
Now I'll first trends combined with.
Further on the path to becoming a digital innovator disruptor.
From 'twenty to 'twenty to 2022 fortune brands connected product sales nearly tripled.
And this is Jerry a chip constrained environment that limited us from reaching our full sales potential.
Including our recent acquisitions, our annualized run rate of connector products sales approaches $250 million.
Today, we have $4 5 million activations about connected products and we expect those numbers to grow exponentially as we continued to transform and disrupt the market.
Nick Sink: Consumers continue to have high confidence in their homes as an asset. This has resulted in an environment where the home space is still be positively and consumers are willing to invest in making their spaces reflect their lifestyle and needs. That said, we are watching macroeconomic trends closely, including consumer confidence levels, consumer spending habits, and employment levels, all of which impact repair and removal trends. While we are confident in the mid to long-term trends for our products, we are anticipating an environment that continues to be challenging and uncertain. As we have in times before, we will respond quickly and decisively in any environment. As table detail more completely in this section, we are actively scenario planning for a variety of outcomes in 2024.
Our connected product portfolio offers real solutions to real needs.
We're making life easier and more secure for the individual.
Addressing some of the world's most pressing sustainability and safety issues.
Businesses are using a master like connected access solutions to help them work more efficiently.
Individuals' with you on the August smart residential Lux and peace of mind and had been freed from using cheese.
Homeowners with products from the Mone, Smartwater network, including our AI enabled flow Smartwater monitoring shutoff can better protect against damaging and costly leaks in their homes.
I cannot overstate the potential positive impact our smartwater products can have on homeowners.
Nick Sink: Turning now to an update on our organizational transformation. As we approach the one-year anniversary of the cabinet spinoff and reorganization of our business, I wanted to reflect on the many transformation activities we undertook over the past year. These activities are driving our future as an exceptional company, focused on growing our core, while also accelerating our emerging connected products business. As we noted at the time, the separation represented the chance for Fortune Brands to evolve into an entirely new company, one marked by excellence in brands, innovation, and channel.
<unk> companies.
On the environment as we look to save billions of dollars and preventable water damage claims and trillions of gallons of water.
While our collector productivity is well on its way we have much more runway ahead, including our ability to deliver first of its kind connected products and ecosystems.
We will continue to innovate to make our homes communities and the planet smarter safer and more sustainable.
Expect much more from us as we continue to evolve this growth engine for our business.
Nick Sink: And while we are proud of the amount of value creation the separation is generated for our shareholders, we are even more excited about the growth potential that we unlocked. We have now had nearly a year operating as a more fully aligned company with an organization that is designed around accelerating growth. While we take more time to realize the full impact of our new structure, we are already seeing tangible results. A more efficient structure has allowed us to remove unnecessary duplication, makes strategic decisions foster, and with more precision, and deploy our Fortune Brands abundance capabilities across the portfolio.
Before I turn to the individual businesses performance I would like to put our results in the proper context.
We were well prepared for the challenges that we're currently facing it took meaningful action in anticipation of the environment.
As a result of these actions we were able to deliver solid top and bottom line results.
As the external market remains soft due to affordability concerns and macro uncertainty we will continue to protect our business, while prioritizing investment in a typeset key strategic priorities.
Such as those just discussed.
Nick Sink: By removing those activities that do not create value, we create space for those that do. This is a multi-year journey that has already begun to pay dividends. Our new structure has allowed us to invest additional capital and talent in those projects with the greatest opportunity to drive growth, including our digital transformation and connected products, which we believe have the potential to transform our entire space. We now also have a dedicated transformation and integration office reporting directly to me, which is responsible for driving progress on the key growth initiatives across the company.
In order to win for the long term.
In the third quarter water innovation sales were $688 million, an increase of 8% compared to the prior year quarter.
Our margins for the segment were 24, 2%.
On an organic basis, and excluding FX sales decreased 3% due to market driven volume declines partially offset by price.
I'm on North American business was down low single digits versus last year's third quarter due to lower volumes as a result of market softness, particularly in retail.
Nick Sink: And we are now able to deploy our best talent and our Fortune Brands advantage capabilities across the entire enterprise in a much more rapid, efficient, and holistic fashion. There has been an enormous amount of change across the organization, but our 12,000 associates across the globe have leaned into the change and embraced our transformation in a way that is nothing short of exceptional. I am so proud of our team. Fortune Brands innovations is stronger, more agile, and more aligned than it has ever been.
Or a P. O S data showed that we gained share in the market driven by a strong outperformance in the key wholesale channel.
Retail promotional activity increased in the quarter, we've been highly strategic about our promotional activity to ensure our promos are targeted and tailored to drive the best results.
Organic house of ROHL sales were down low single digits in the quarter the.
The U S luxury consumer continues to remain relatively resilient and our high quality artisan crafted products resonate.
Nick Sink: One of the key areas that we have identified as a growth catalyst is connected products. Today, I want to help put this business in its proper context. Our leading brands advantage route to market and technology backbone makes us uniquely positioned to capture growth in a connected product space. Our recently aligned organization is helping us fully unlock our potential across the full company. The addition of Yale and August enhances our capabilities in product set, giving us the scale and talent to lean in connected products.
Our recently acquired <unk> business performed above our expectations in the quarter were extremely pleased by the progress of the integration of amtech.
The more I learn about this business and their commitment to the consumer and the customer the more impressed I am.
I look forward to a bright future as we bring all of the brands together under the house of ROHL platform, which is now a uniquely positioned global luxury powerhouse with exceptional growth potential.
In China sales were down low teens year over year were mid single digits, excluding FX.
We saw higher than expected project completions as the government is increasingly incentivizing developers to deliver finished projects.
Nick Sink: Now, if our strengths combined, we are further on the path to becoming a digital, innovative disruptor. From 2020 to 2022, Fortune Brands' connected product fails nearly tripled, and this is during a chip-concerned environment that limited us from reaching our full sales potential. Including our recent acquisitions, our annualized run rate of connected product sales approaches $250 million. Today, we are 4.5 million activations of our connected products, and we expect those numbers to grow exponentially as we continue to transform and disrupt the market.
The overall market remains soft and the Chinese consumer remains cautious.
However, our non developer channels that focus on the emerging R&R market, which includes showroom home decorator and ecommerce all saw growth in our business is well positioned to capture the market evolution away from new construction.
Turning to our outdoor segment sales declined 9% in the quarter, reflecting market softness, particularly in the doors business.
Our margins were 14, 8%.
<unk> third quarter sales were up mid single digits versus prior year as we gained share in the key wholesale channel.
Nick Sink: Margaret. Our connected product portfolio offers real solutions to real needs, for making life easier and more secure for the individual, to dress into the world's most pressing sustainability and safety issues. Businesses are using our monster luck connected access solutions to help them work more efficiently. Individuals with Yale and August smart residential locks have peace in mind and have been freed from using cheese. Home owners with products from the Moan smart water network, including our AI-enabled flow, smart water monitor and shut off, can better protect against damaging and costly leaks in their homes.
Looking forward, we are focused on driving meaningful innovation in this space and have the resources and talent to innovate for the future in this growth category.
Indoors sales declined low double digits, because the slowdown from the 2022 single family New construction market continues to impact their mature and general market softness remains in this space.
Looking forward as the impact of the recent improvement in the single family New construction market begins to flow through in late 2023 in early 2024, we expect to see improving results from my door brands.
Nick Sink: I cannot overstate the potential positive impact our smart water products can have on home owners, insurance companies, and on the environment as we look to say billions of dollars in preventable water damage claims and trillions of gallons of water. A lot of connected product journey is well on its way. We have much more runway ahead, including our ability to deliver first of its kind connected products and ecosystems. We will continue to innovate to make our homes, communities, and the planet smarter, safer, and more sustainable. Expect much more from us as we continue to evolve this growth engine for our business.
Lastly in security third quarter sales increased 32% year over year and grew 6% organically.
Operating margins for the segment were 16, 8%.
Organic results were driven by price and continued growth in commercial and international markets Importantly.
Importantly improvement in our operating margin is a true testament to the power of the new organizational structure and a fortune brands advantaged capabilities.
We expect we will continue to see even more impressive margin results in security as we continue to deploy these capabilities.
As we integrate Yale in August we continue to be extremely impressed by their innovative focus and startup until it.
Nick Sink: Before I turn to the individual businesses performance, I would like to put our results in their proper context. We will well prepare for the challenges that we are currently facing and took meaningful action in anticipation of the environment. As a result of these actions, we were able to deliver solid top and bottom line results. As the external market remains soft due to affordability concerns and macro uncertainty, we will continue to protect our business, our prioritizing investment in a tight set of key strategic priorities, such as those just discussed, in order to win for the long term.
He was clearly deep talent and passion and I look forward to seeing their knowledge and insights contribute to the entire fortune brands connected product portfolio.
Importantly, Yale in August exceeded our expectations as they recover from the impact of chip shortages and are working to develop new customers and channels.
As with Amtech, the more I learn about these incredible brands and the teams who support them the more enthusiastic I am.
Before I turn the call to Dave Let me share a few final thoughts.
Our reorganization into a more efficient centralized company focusing on brands innovation and channel has progressed faster than we anticipated.
Nick Sink: In the third quarter, water innovation sales were 688 million, an increase of 8% compared to the prior year quarter. Our margins for the segment were 24.2%. On the organic basis and excluding FX, sales decreased 3% due to market-driven volume declines, partially offset by price. Our modern North American business was down low single digits versus last year's third quarter due to lower volumes as a result of market softness, particularly in retail. However, our POS data showed that we gained share in the market, driven by our strong out performance in the highly strategic about our promotion activity to ensure a promo is targeted and tailored to drive the best results.
Thanks to the strong engagement and trust from our teams.
We continue to invest in our key strategic priorities, including our iconic brands digital transformation and meaningful innovation.
We are growing our connected products portfolio.
And finally, we made meaningful progress in the integration of a transformative acquisition.
We are transforming fortune brands into an even more growth focused highly innovative company in spite of continued external and macro headwinds.
I am encouraged by all that we've accomplished and excited about what we will achieve next.
We're constantly monitoring and are well prepared to respond to uncertain end markets in the short term, while we position ourselves for accelerating long term outperformance in the market supported by fundamental growth characteristics.
Nick Sink: Organic House of Raw sales were down low single digits in the quarter. The U.S, luxury consumer continues to remain relatively resilient and a high-quality, artisanal craft of products resonate. A recently acquired Anteq business performed above our expectations in the quarter. We are extremely pleased by the progress of the integration of Anteq. The more I learn about this business and their commitment to the consumer and the customer, the more impressed I am.
As we head into the last part of 2023 and as we set our sights on 2024, we're focused on execution and delivering on our commitment to above market sales growth and margin performance with that I'll turn it over to Dave.
Thanks, Nick as a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance.
Nick Sink: I look forward to a bright future as we bring all of the brains together under the House of Raw platform, which is now a uniquely positioned global luxury powerhouse with exceptional growth. Financial. In China, sales are down low teens year-over-year on mid-single digits excluding FX. All we saw higher than expected project completions as the government is increasingly incentivizing developers to deliver finished projects. The overall market remains soft and the Chinese consumer remains cautious.
Additionally, comparisons will be made against the same period last year unless otherwise noted.
Let me start with our third quarter results.
As Nick highlighted our teams executed well and delivered solid sales margin and free cash flow performance.
Sales were $1 3 billion up 5% and consolidated operating income was $220 million up 2%.
Total company operating margin improved sequentially to 17, 4% and earnings per share were $1 19 up 3%.
Nick Sink: However, a non-developer channel that focus on the emerging R&I market, which includes showroom, home decorator, indie commerce, all saw growth, and our business is well-positioned to capture the market evolution away from the construction. Turning to our outdoor segment, sales declined 9% in the quarter, reflecting market softness, particularly in the doors business. Our margins were 14.8%. In decking, third quarter sales were up mid-single digits versus prior year as we gained share in the key wholesale channel.
Free cash flow in the quarter was $269 million, which brings our year to date free cash flow generation to $660 million.
Nick Sink: Looking forward, we are focused on driving meaningful innovation in this space and have the resources and talent to innovate for the future in this growth category. In doors, sales declined low double digits as the slowdown from the 2022 single-family new construction market continues to impact their mature and general market softness remains in the space. Looking forward, as the impact of the recent improvement in the single-family new construction market begins to flow through in late 2023 and early 2024, we expect to see improving results from outdoor brains.
Turning to sales on an organic basis net sales were down 4% driven by volume declines.
Overall volume was down mid single digits, driven by high single digit Pos volume declines, partially offset by low single digit favorable channel inventory comparable.
Price contributed low single digit benefit in the quarter.
Through the quarter, our Pos volume softened sequentially in line with normal seasonal trends and DIY channels continued to remain softer than pro channels.
Our operating margin of 17, 4% reflects our team's continued ability to drive continuous improvement savings and fun key strategic priorities, while remaining agile in the face of challenging end market.
Our teams remain focused on driving above market growth preserving and enhancing margins and generating cash.
Nick Sink: Lastly, in security, third quarter sales increased 32% year over year and grew 6% organically. Operating margins for the segment were 16.8%. Our organic results were driven by price and continued growth in commercial and international markets. Importantly, improvement in our operating margin is a true testament to the power of the new organizational structure and our Fortune brands' advantage capabilities. We expect we will continue to see even more impressive margin results in security as we continue to deploy these capabilities.
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 innovations sales were $688 million up 8%.
Organic sales were down 4% or down 3%, excluding the impact of FX.
The organic net sales results reflect the impact of lower volumes, partially offset by price.
Nick Sink: As we integrate Yale and August, we continue to be extremely impressed by their innovative focus and startup mentality. It is clearly deep talent and passion, and I look forward to seeing their knowledge and insights contribute to the entire Fortune brands' connected product portfolio. Importantly, Yale and August exceeded our expectations as they recover from the impact of chip shortages and are working to develop new customers and channels. As with MTEC, the more I learn about these incredible brands and the teams who support them, the more enthusiastic I am.
Water innovations operating income was 166 million and operating margin remained strong at 24, 2%, reflecting lower volumes, partially offset by continuous improvement initiatives.
U S MAU and point of sale was down mid single digits, while U S House overall point of sale was down low single digits.
The luxury consumer continues to outperform the broader market.
China sales declined low teens are down mid single digits, when adjusting for the impact of FX.
Nick Sink: Before I turn the call to Dave, let me share a few final thoughts. Our reorganization into a more efficient, centralized company focusing on brands, innovation, and channel has progressed faster than we anticipated thanks to the strong engagement and trust from our teams. We continue to invest in our key strategic priorities, including our iconic brands, digital transformation, and meaningful innovation. We are growing our connected product portfolio and finally, we made meaningful progress in the integration of our transformative acquisition. We are transforming Fortune brands into an even more growth-focused, highly innovative company, in spite of continued external and macro-head.
The Chinese market remained soft and though the completion of delayed projects accelerated as a result of government programs.
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, including at brick and mortar locations and online.
As we have stated our performance in the face of challenging external conditions has been nothing short of remarkable.
And we are confident we will lead as that market continues to evolve.
Turning to outdoors sales were $366 million down 9%.
POS for the segment was down low double digits, which was partially offset by mid single digit favorable channel inventory benefit from the prior year comparable.
Nick Sink: Woods. I'm encouraged by all that we have accomplished and excited about what we will achieve next. We're constantly monitoring and are well prepared to respond to uncertain end markets in the short term, while we position ourselves for accelerating long-term outperformance in a market supported by fundamental growth characteristics. As we head into the last part of 2023, and as we set our sights on 2024, we are focused on execution and delivering another commitment to above-market sales growth and margin performance.
Segment operating income was $54 3 million down 18%.
Operating margins for the third quarter were 14, 8% driven by reduced volumes.
Door sales were down low double digits as expected sales were impacted by lower volumes from single family New construction end market softness. However, these brands should be positively impacted by the recently improved new construction environment as we look towards 2024.
Nick Sink: With that, I'll turn it over to Dave.
In decking, we saw sales increased mid single digits in the quarter driven by mid single digit Pos growth in the wholesale channel.
Dave Barry: Thanks, Nick. As a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year unless otherwise noted.
Finally in security sales increased 32% to $207 million or 6% on an organic basis, reflecting the impact of the acquisition increased distribution price and continued strength in master locks commercial and international channels.
Dave Barry: Let me start with our third quarter results. As Nick highlighted, our teams executed well and delivered solid sales, margin, and free cash low performance. Sales were 1.3 billion up 5 percent, and consolidated operating income was 220 million up 2 percent. Total company operating margin improved sequentially to 17.4 percent, and earnings per share were $1.19 up 3 percent. Free cash low in the quarter was 269 million, which brings our year-to-date free cash low generation to 660 million.
Total security segment operating income was $35 million up 46% and operating margin was 16, 8% an increase of 170 basis points.
Utilizing the playbook first deployed in our water innovations business. 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 continued integration of Yale in August.
Dave Barry: Turning to sales on an organic basis, net sales were down 4 percent, driven by volume declines. Overall, volume was down mid single digits, driven by high single digit POS volume declines partially offset by low single digit favorable channel inventory comparables. Price contributed a low single digit benefit in the quarter. Through the quarter, our POS volume softened sequentially in line with normal seasonal trends, and DIY channels continue to remain softer than pro channels.
Turning to the balance sheet and our cash flow performance.
Our balance sheet remains strong with cash of $453 million.
Net debt of $2 4 billion and net debt to EBITDA leverage at two six times.
Our working capital reduction efforts continue to shrink our balance sheet and generate cash.
We continue to make excellent progress against our near term inventory reduction targets and our.
Ganic third quarter inventory finished at $829 million down roughly $260 million from our peak in 2022.
Dave Barry: Our operating margin of 17.4 percent reflects our team's continued ability to drive continuous improvement savings and fund key strategic priorities while remaining agile in the face of challenging end market. Our teams remain focused on driving above market growth, preserving and enhancing margins, and generating cash. 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.
Our impressive free cash flow of $269 million in the quarter allowed us to make significant progress in deleveraging following our recent acquisition.
In addition, our cash generation enabled us to Opportunistically repurchase.
$30 million of shares in the quarter.
And as of today, our total 2023 share repurchases are $150 million.
To summarize the quarter, we delivered solid sales and margin results in a soft environment, while further reducing inventory levels and generating significant cash flow.
Dave Barry: Now let me provide more color on our segment results. Beginning with water innovation, sales were 688 million up 8 percent. Organic sales were down 4 percent, or down 3 percent, excluding the impact of FX. The organic net sales results reflect the impact of lower volumes partially offset by price. Water innovation's operating income was 166 million, and operating margin remained strong at 24.2 percent, reflecting lower volumes partially offset by continuous improvement initiatives.
With that in mind I'll now provide an update to our 2023 guidance.
As todays press release indicates we are updating our full year 2023 guidance to reflect our current expectations and market condition.
Due to our continued strong execution and agility in this dynamic environment.
We are increasing the midpoint of our EPS guidance by <unk>, <unk> and narrowing the overall range to $3 82.
The $3 90.
Dave Barry: U.S. Mohen point of sale was down mid single digits, while U.S. House of Roll point of sale was down low single digits. The luxury consumer continues to outperform the broader market. China fails to climb low teens or down mid-single digits when adjusting for the impact of FX. The Chinese market remains soft, and though the completion of delayed projects accelerated as a result of government programs, new home sales and starts are moderating as the Chinese consumer remains cautious.
In total our updated EPS guidance reflects a 15% increase over the midpoint of our initial guidance earlier this year.
As a reminder, our fourth quarter EPS will be unfavorably impacted by <unk> as a result of a nonrecurring extra fiscal week in the fourth quarter of last year.
We are also updating our sales and margin guidance to reflect current market conditions, including a softer than anticipated second half R&R market, which is predominantly impacting sales in our outdoor segment.
Dave Barry: That said, we continue to see growth in the emerging R&R channels, including at brick and mortar locations and online. As we have stated, our performance in the face of challenging external conditions has been nothing short of remarkable, and we are confident we will lead as that market continues to evolve.
The full details of our updated guidance can be found in our press release.
As we head into 2024, and we are actively planning for a variety of scenarios.
While it would not be prudent for us to provide a full set of guidance assumptions for 2024 at this point.
Dave Barry: Turning outdoors, sales were 366 million down 9%. POS for the segment was down low double digits, which was partially offset by mid-single digit favorable channel inventory benefit from the prior year comparable. Segment operating income was 54.3 million down 18%. Operating margins for the third quarter were 14.8% driven by reduced volumes. Door sales were down low double digits. As expected, sales were impacted by lower volumes from single-family new construction and market softness.
We are able to share some initial thoughts.
Our base planning assumption currently include a low single digit market declines.
With U S. R&R also down low single digits.
Our U S single family, New construction market is up low single digits.
On the impact of second half 2023 starts growth.
On a 2024, our starts and completion forecast of up 3% to 5% and roughly flat respectively.
We expect China, and Canada markets to be more challenged than the U S. Both down high single digits.
Dave Barry: However, these brands should be positively impacted by the recently improved new construction environment as we look toward 2024. In decking, we saw sales increase mid-single digits in the quarter driven by mid-single digit POS growth in the wholesale channel. Finally in security, sales increased 32% to 207 million, or 6% on an organic basis, reflecting the impact of the acquisition, increased distribution, price, and continued strength in Masterlox commercial and international channels. Total security segment operating income was 35 million up 46%, and operating margin was 16.8% and increase of 170 basis points.
We would expect our organic sales to beat this market estimate and given the work we continue to do to re platform in the business and drive efficiencies, we see a path to operating margin improvement and earnings growth. If the market is down low single digits or better.
Our teams have done a fantastic job navigating the uncertainty of the past few years.
And as we approach the end of 2023, we remain confident about the future of the business and our teams ability to create value regardless of the macro environment.
I will now pass the call back to Lee for question and answer 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 who'd 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 to the operator to begin the question and answer session operator.
Dave Barry: Utilizing the playbook first deployed in our water innovations business, 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 continued integration of Yale and August.
Thank you.
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Dave Barry: Turning to the balance sheet and our cash flow performance. Our balance sheet remains strong with cash of 453 million, net debt of 2.4 billion, and net debt to evitile leverage at 2.6 times. Our working capital reduction efforts continue to shrink our balance sheet and generate cash. We continue to make excellent progress against our near-term inventory reduction targets, and our organic third quarter inventory finished at 829 million, down roughly 260 million from our peak in 2022.
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One moment, please while we poll for questions.
Thank you.
Question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good evening, everyone. Thanks for taking the questions.
Maybe just start off on the guide.
And kind of how youre looking at the fourth quarter here clearly a lot of cross currents in the market.
Dave Barry: Our impressive free cash flow of 269 million in the quarter allowed us to make significant progress in de-leveraging following our recent acquisition. In addition our cash generation enabled us to opportunistically repurchase $30 million of shares in the quarter. And as of today, our total 2023 share repurchases are $150 million.
You just mentioned some deceleration on the DIY side sort of looking at the guide it looks like you're implying some sequential.
Deceleration in the top line. So just I know, we can kind of back into what you gave given with the full year guide, but just sort of any puts and takes.
Upside downside to how you're thinking about the fourth quarter. Thank you.
Yes, Matt why don't I give you.
Dave Barry: Sanders. To summarize the quarter, we delivered solid sales and margin results in a soft environment while further reducing inventory levels and generating significant cash flow.
Some kind of high level thoughts on that and then David will take you through some of the puts and takes.
But a couple of things I mean, certainly just as.
As we said.
Dave Barry: With that in mind, I'll now provide an update to our 2023 guidance. As today's press release indicates, we are updating our full year 2023 guidance to reflect our current expectations and market execution and agility in this dynamic environment. We are increasing the midpoint of our EPS guidance by two cents and narrowing the overall range to $3.80 to $3.90. In total, our updated EPS guidance reflects a 15-cent increase over the midpoint of our initial guidance earlier this year.
Paired remarks.
Market.
<unk> has been more or less as we've expected I think with some of the point of sale DIY mix in the retail stopping of a softer single family, new construction being a bit stronger and as we see how it plays through the year.
Topline performance of every quarter.
Has been improving and so as we look to the fourth quarter.
Organic basis net of that 50, <unk> week, we would expect that to be flat, which is a sequential improvement.
So.
Good to see the business kind of coming back to.
Dave Barry: As a reminder, our fourth quarter EPS will be unfavorably impacted by five cents as a result of a non-recurring extra fiscal week in the fourth quarter of last year. We are also updating our sales and margin guidance to reflect current market conditions, including a softer than anticipated second half are in our market, which is predominantly impacting sales in our outdoor segment. The full details of our updated guidance can be found in our press release.
Flat in particular with the market outperformance.
And then as I look at some of the you know the actual dollar.
A sale that we get which is more <unk>.
Tell base, that's actually held remarkably steady for the last.
Call It 10 to 12 weeks.
Basis, obviously comparables move around in terms of percentages versus last year, but just what are consumers doing when they go into stores would have a $1. So that's been very steady so while we'd like it to be higher.
Dave Barry: As we head into 2024, we are actively planning for a variety of scenarios, while it would not be prudent for us to provide a full set of guidance assumptions for 2024 at this point. We are able to share some initial thoughts. Our base planning assumptions currently include a low single-digit market decline, with US R&R also down low single digits. Our US single-family new construction market is up low single digits based on the impact a second half 2023 starts growth and a 2024 starts in completion forecast of up 3-5 percent and roughly flat respectively.
The predictability of seeing that kind of steady line sort of feeds into October.
Our degree of confidence around the fourth quarter.
And I'm happy to provide a bit more color I think starting with sales.
You look at our organic performance throughout the year, each quarter and as Nick mentioned, we've gotten.
Better versus prior year. So it started down 10 in the first quarter, then down eight now down five and we'd expect a fourth quarter to be flat, excluding the extra fiscal week comp or likely down 3% to 4% reported organically when you factor in that comp.
Dave Barry: We expect China and Canada markets to be more challenged than the US, both down high single digits. We would expect our organic sales to beat this market estimate, and given the work we continue to do to re-platform the business and drive efficiencies, we see a path to operating margin improvement and earnings growth if the market is down low single digits or better. Our teams have done a fantastic job navigating the uncertainty of the past few years, and as we approach the end of 2023, we remain confident about the future of the business and our team's ability to create value regardless of the macro environment.
<unk> improvement versus the prior year on the sales line and then on margin, we still see the second half operating margin around 16, 5% or better.
Which would imply a fourth quarter of 15, 5% or better.
I think as expected in the fourth quarter to see a bit of a sequential pullback from the third quarter, just given volumes are down but still well ahead of where we were in the first quarter, which is our other low volume quarter. So feel good about how the business is managing I think both the top line and the margin opportunity.
If you think about ETS.
To remind people that our prior year had two favorable impact that won't repeat one being the flow through from that extra fiscal week and the other being some favorable tax outcomes as we spun cabinets that we're <unk>.
Leigh Avsec: I will now pass the call back to Lee for question and answer. 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 who would like to ask a question, I will ask that you limit your initial questions to two and then re-enter the queue to ask additional questions.
One time in nature, so as we look at EPS in the quarter, and we see something normalized down low single digits or better versus the prior year. So I know our teams are still working hard to capitalize on opportunities in the quarter, but we still feel like we're managing the business well given the environment.
I will now turn the call back to the operator to begin the question and answer session.
Operator? Thank you.
If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tell will indicate that your line is in the question queue. You may press star two if you would like to remove your questions, from the Q. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Got it okay. Thank you for that thanks for putting that up for us.
Second one a little higher level.
Now that you've had the asset assets on your team for another quarter and been able to dig in and get the integration underway.
I'm curious you had some comments at the top are alluding to this but sort of what have you learned incrementally.
Thank you.
As you've been able to dig into the assets.
And specifically the comments you made around the.
Matthew Bouley: Our first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Hey, good evening everyone. Thanks for taking the questions. Maybe just start off on the guide and kind of how you're looking at the fourth quarter here. Clearly a lot of cross-currents in the market. I think you just mentioned some deceleration on the DIY side, sort of looking at the guide. It looks like you're implying some sequential deceleration in the top line.
To help with.
How are you all in August could benefit your connected products portfolio curious number one is do your synergy targets include benefits to the connected products portfolio and then just number two more broadly.
Matthew Bouley: I know we can kind of back into what you gave given with the full year guide. But just sort of any puts and takes, you know, upside down side to how you're thinking about the fourth quarter. Thank you. Yeah, man.
You've looked into this further you know what what areas of upside could you see in those synergy targets. Thank you.
Yes.
I'd be happy to take that question.
As you.
Kurt.
Remarks.
Just delighted with the acquisition.
Even putting aside.
Nick Sink: Why don't I give you some kind of high level thoughts on that and then in a day to take you through some of the puts and takes. But, you know, a couple things. We certainly just, from sort of, as we said in the prepared remarks, you know, the market has been more or less as we've expected. I think with some of the point of sale, DIY, maybe some of the retail stuff being a bit softer, single family construction being a bit stronger.
Fantastic value.
Across that just.
Quality of the assets themselves are really phenomenal the quality of the teams that support those assets that's fantastic.
And the performance since we've owned them.
<unk> exceeded our expectations on the top line.
And on the bottom you'll see that we've actually been able to accelerate some of our investments and the integration just because of the integration has gone really well and so that's kind of the <unk>.
Nick Sink: And as we see how it plays through the year, the top line performance of every quarter has been improving. And so as we look to the fourth quarter, you know, on an organic basis, none of that to be third week. We'd expect that to be flat, which is a sequential improvement. And so, you know, good to see the business coming back to flat in particular with the market health performance. And then as I look at some of the, you know, the actual dollar point of sale that we get, which is more retail basis actually held remarkably steady to the last call it 10 to 12 weeks on a dollar basis.
Picture message.
It's a great question.
What are we learned.
Take them each of them separately.
But certainly serve amtech business.
They're just really remarkable continue to gain share.
Really really outperformed the market.
We were just recently on a market visit.
One of our customers pointed to.
Displays in a relatively small footprint of the store, but this is 50% of the sales in the category.
Little area and I think it just speaks to how powerful the brand is what we've really learned is what is the formula that supports that and the business model and how does that work as profitably as it does and so a lot of learnings coming from that that are starting to be integrated into the whole house of ROHL strategy and sort of just lost.
Nick Sink: So obviously, comparable to move around in terms of percentages versus last year, but just, you know, what are consumers doing when they go into stores, what are the dollars they're spending? That's been very steady. So, you know, while we'd like it to be higher, the predictability of seeing that kind of steady line sort of feeds into our degree of confidence around the fourth quarter. I'm happy to provide a bit more color.
We were going over annual operating plans and as those teams are coming together not just thinking about how do we offer these as an entire suite of product, which was part of our initial thesis, but really thinking how do we elevate the best of the best in the business models to be.
Nick Sink: I think you know, starting with sale, if you look at our organic performance throughout the year each quarter, as Nick mentioned, we've gotten better versus prior year. So it started down 10 in the first quarter, then down eight, now down five, and we'd expect the fourth quarter to be flat, excluding that extra fiscal week comp or likely down three to four percent reported organically when you factor in that comp. So nice sequential improvement versus the prior year on the sales line, and then on margin, you know, we still see the second half operating margin around 16 and a half percent or better, which would imply in the fourth quarter of 15 and a half percent or better, which is expected in the fourth quarter to see a bit of as the sequential pullback from the third quarter just given volumes are down, but still well out of where we were in the first quarter, which is our other low volume quarter.
Even.
An even better solution for customers and designers and so we think theres a lot of potential and a lot to learn there.
And then on the.
Yellen August side look like.
We're very proud of the collective products.
Progress we've made in the digital initiatives that we've made up to this point, but.
Getting to know those teams I mean, they really are.
Mid cycle, they operate like a mid cycle startup in a lot of that team is the original August team, which.
Spent some time in.
Speaking to people.
In that part of the world.
The most highly respected connect of engineers.
Around and so we're really looking to them to help lead us as.
Nick Sink: So feel good about, you know, how this business is managing and they both the top line and the margin opportunity. And then if you think about just EPS, you know, I remind people that our prior year had two favorable impacts that won't repeat, one being the flow through from that extra fiscal week and the other being some favorable tax outcomes as we spun cabinets that were one time in nature. So as we look at EPS in the quarter, we see something normalized that's down low single digits or better versus the prior year. So, you know, I know our teams are still working hard to capitalize on opportunities in the quarter, but still feel like we're managing the business well given the environment.
As we think about how to bring these teams together and how do we take what we've already created which are really product investments, we're already making which is not insignificant and then combine it with what we just acquired and.
And we really think that could be a huge unlock and so.
Asked about synergies I think we went in with a.
Pretty good synergy case.
I have some I'll call them easy because they take a lot of work with some lower hanging fruit likelihood distribution overlaps.
Those sorts of things, what we're coming away.
As were some transformational ideas around both the house of ROHL and the connector business.
Teams are leading into it it's not recent.
Matthew Bouley: Thank you for that, thanks for buttoning that up for us.
You got to deliver more I mean nature took the case. So we think we can do far more than this because we really think that this unlocks.
Nick Sink: Second one, a little higher level. Now that you've had the the asset assets on your team for another quarter, I'm going to be able to dig in and get the integration underway, I'm curious, you have some comments at the top alluding to this, but sort of what have you learned incrementally as you've been able to dig into the assets. And specifically the comments you made around the help with how Yale and August could benefit your connected products portfolio.
Pretty significant growth for both portfolios and so.
Those are being refined now, but we're really really excited and as you know.
And the.
Comments.
Connected business now.
Approximating and approaching 250 million on an annualized basis, but over 4 million activations and compounding at a really really fast growth rate now feels like a scale connected business and connected platform and having one technological backbone to.
Nick Sink: Here is number one, do your synergy targets include benefits to the connected products portfolio and then just number two more broadly, as you've looked into this further, what areas of upside could you see in those synergy targets. Thank you. Yeah, I'd be happy to take that question. We were, as you've heard in the further marks, we're just delighted with the acquisition, even putting aside the fantastic value that came across that, just the quality of assets themselves are really phenomenal, the quality of the teams that support those assets, the fantastic and the performance.
To which we can continue to refine the products, we have but also add more to the ecosystem overtime is really really exciting. So I could go on for a while I'll start with some sort of other questions, but you can tell we're pretty excited about it.
Great well, thanks, Nick Thanks, Dave and good luck guys.
Thanks, Matt.
Okay.
Thank you. Our next question comes from the line of John Lovallo with UBS. Please proceed with your question.
Good evening, guys and thanks for taking my questions. Nick I actually did want to follow up on what Matt just asked to some extent on the connected product portfolio very.
Very interesting opportunity goes beyond smart locks, obviously with Smartwater.
Nick Sink: You know, since we bond them, you can see their expectations on the top line and on the bottom, you'll see that we've actually been able to accelerate some of our investments in the integration, just because the integration's going really well. And so that's kind of the big picture message. Now, you know, yes, great question sort of, you know, what have we learned? I take them each of it separately. But certainly, you know, serve the end tech business.
You guys I think you mentioned you've tripled the sales over the past few years. So the question is I mean, where do you go from here, what's sort of the expected growth trajectory and what are the potential product expansion opportunities yes.
Yes, John Thanks for thanks for that question.
We've really taken a big step forward.
Forward I think to the strap plan cycle and really asked ourselves that question that you just laid out so I'm just thinking about it incrementally.
Nick Sink: I mean, you know, they're just really remarkable. Continue to gain share really, really outperform the market. You know, we were just recently on a market visit and you know, it's been one of our customers pointed to displays and a relatively small footprint of the store and said, you know, this is 50% of the sales category, just from, you know, this little area. And I think it just speaks to how powerful the brand is what we've really learned is what is the formula that supports that and the business model and how does that work as possibly as it does.
We really like what is the addressable market here and what do we expect that we could gain in terms of of ownership of that market and you know you touched on smart water I mean, when you look at the.
Smartwater opportunity.
A number of different lenses at is pretty staggering right.
To start with just the pure how much preventable water damage.
Today, we think that's $15 billion.
Of claims a year, it's greater than.
Feinberg, who he combined rates of $15 billion of preventable water damage.
Nick Sink: And so a lot of learning is coming from that that are starting to be integrated into the whole house role strategy. And so just last week we were going over annual operating plans and as those teams are coming together, not just thinking about, you know, how do we offer these as an entire suite of product, which was part of our initial thesis. But really thinking, how do we elevate the best of the best in the business models to be even an even better solution for customers and designers.
I actually believe we're going to grow that addressable market, because we are going to come up with more products that can address more types of preventable water damage. We can take that pretty much two zero I mean, we did a study with lexisnexis. Some 10000 homes, we reduced 96% of the claims to zero and the other 44% of claims I believe we reduce.
By over 70%, so pretty much going to zero.
Nick Sink: And so we think there's a lot of potential and a lot we can learn there. And then on the yellow and August side, look, you know, we're very proud of the connected products progress that we've made and the digital issues that we've made, you know, up to this point but getting to know those teams. I mean, you know, they really are, you know, in mid cycle, they offer it like a mid cycle start up.
Yes, she likes to it in addition to saving potentially trillions of gallons of water is a huge energy component to processing of cleaning the water and so you take mission mode, which is really based on what we have in the market today.
<unk> seven trillion gallons by 2030.
That according to the the massive album EPA website, so equivalent of US taking 1 million cars off the road for a year right and so you can start to see now some municipalities right. It has a huge dollar value impact and so the opportunity is huge.
Nick Sink: And a lot of that team is the original August team, which, you know, spend some time and speaking to people in that part of the world, you know, some of the most highly respected connected engineers around. And so we're really looking to them to help lead us as we think about how to bring these teams together. And how do we take what we've already created, which you're really proud of, the investment that we're already making, which is not insignificant, and then combine it with what we just acquired.
I'm really not thinking of it as a multibillion dollar opportunity where building teams around really addressing not just our core product to make it better and better all the time. They are building an ecosystem around it so when it connects to your Mo in irrigation smart irrigation system, where you Ramon smart pasta or Mone smart.
Some pump monitor and I could go on and on and really gets better and better and smarter at starter kit was able to speak to all of these nodes in the home understand what's going on and really do things like protect you from freezes because it can pulse water out of your kitchen faucet or health protect you if you're on vacation from bacterial buildup and things like that and so we're really now lean.
Nick Sink: And we really think that could be a huge quote on lock. And so, you know, you asked about synergies. I think we went in with a He's a pretty good synergy case of some, I won't call him easy, because we take a lot of work with him lower, hanging fruit, like distribution overlaps, and those sorts of things, what we're coming away is with some transformational ideas around both the house of role and the connected business that the teams are leading into.
And to this I think in a much more serious way and as I just said in response to Matt's question.
If you then add on the scale of having the August team come onboard and think about but it is to be able to think about.
Nick Sink: It's not me saying you got to deliver more, I mean they took the case and they said we think we can do far more than this because we really think that this unlocks pretty significant growth for both portfolios. Those are being refined now, but we're really, really excited. You heard in the comments, I mean the connected business now approximating and approaching 250 million on an annualized basis, but not over 4 million activations and compounding at a really, really fast growth rate, now feels like a scale connected business and connected platform and having one technological backbone to which we can continue to refine the products we have, but also add more to the ecosystem over time is really, really exciting.
Cloud as a single team or Wi Fi as a single team or AI right. The Smartwater network is AI powered so our AI team becomes sort of a single team with dedicated people to different projects and products, but still functioning as a as a scale team.
Nick Sink: So I could go on for a while, I'll stop for some further questions, because you can tell we're pretty excited about it.
We think the opportunity.
Is really really significant.
Look forward to speaking about it more in the future.
That's helpful color. Thank you and then the next question is on water specifically the sales outlook was raised from flat to down 2% to now flat to down 1% U S. New construction, a little better China, a little worse. So I guess, how are you thinking about house of ROHL and mowing in this equation, which I think were both down.
Organically in the quarter and then also what's driving the decrease in margin outlook from I think 23, 5% to 23 on an improved sales outlook. Thank you Jonathan.
Matthew Bouley: Great, well thanks Nick, thanks Dave, good luck guys. Thank you.
This is Dave.
I'll handle the margin one first I think it's more around some of the accelerated investments that we're making as Nick mentioned some with.
John Lovallo: Our next question comes from the line of John Lovalo with UBS. Please proceed with your question. Good evening guys and thanks for taking my questions. Nick, I actually did want to follow up on what Matt just asked, to some extent, on the connected product portfolio. Very interesting opportunity goes beyond smart locks obviously, with smart water. You guys, I think you mentioned you've tripled the sales over the past few years, so the question is, I mean where do you go from here, what sort of the expected growth trajectory, and what are the potential product expansion opportunities?
With the <unk> acquisition and then some in the base and so as we've talked about in the past our margin quarter to quarter stays in that kind of low to mid Twenty's. Then you may see some fluctuation that was 2004 two in the third quarter and step back a little bit in the fourth but more around investment timing than anything else and.
And then on the sales line.
Really continued to perform well and drive outperformance until house of ROHL as we've mentioned.
Low single digit organically in the third quarter, probably at similar levels in the fourth quarter, and then for Melon Americans and a similar performance, we see that down low single digits in the fourth quarter, which really implies that our run.
John Lovallo: Yeah, well John, thanks for that question. I mean we've really taken a big step forward, I think, through this draft lands cycle, and really asked us all that question that you just laid out. So instead of just thinking about it incrementally, we're really like, what is the addressable market here, and what do we expect that we can gain in terms of ownership of that market? And you know, you touched on smart water, I mean when you look at the smart water opportunity from a number of different lenses, it is pretty staggering, right?
Run rate is that mid single digits or better and then we have some favorable inventory tail wins from last year that we've discussed so I think it's more as we have line of sight to the end of the year just tightening that range around the performance that we're seeing out of the business.
Thank you guys.
Yes.
Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
John Lovallo: They just, you know, start with just the pure, how much preventable water damage is there today? We think that's $15 billion of claims a year, it's greater than fire and mercury combined, right, so $15 billion of preventable water damage. I actually believe we're going to grow that addressable market because we're going to come up with more products that can address more types of preventable water damage. We can take that pretty much to zero.
Yes, Thanks, guys I appreciate all the color.
I wanted to.
Ask a little bit on the U S residential side.
You are I think increase the U S single family New construction component of your guide.
But multifamily has been looking weaker.
John Lovallo: I mean we did a study with Lexus Nexus in 10,000 homes, we reduced 96% of the claims to zero, and the other 44% of claims are believed to be reduced by over 70%. So pretty much going to zero. There's an ESG lens to it, right? In addition to saving, you take potentially trillions of gallons of water, there's a huge energy component to processing and cleaning water. And so you take Mission Moment, which is really based on what we have in the market today, our commitment to save a trillion gallons by 2030, that according to the math available on the EPA website, the equivalent of us taking a million cars off the road for a year, right?
What was the increase in rates and so forth I think the concerns exist about how things might look over the next few months. So I know that you have a fairly constructive view of that given the under supplied state of the industry, obviously I share that view as well, but I was curious if you could talk specifically about the multifamily side.
To the degree to which that may be weighing and on the overall outlook because I didn't hear you call that out.
And then.
Similar to this in your outdoors Division your doors business has a lot of starts exposure I guess.
Your sales guide you said it was kind of as expected.
John Lovallo: And so you can start to see, you know, now from municipalities, right? It has a huge dollar value impact. And so the opportunity is huge. We're really not thinking of it as a multi-billion dollar opportunity. We're building teams around really addressing not just the core product, making it better, better all the time. We're building an ecosystem around it. So when it connects to your moan irrigation, smart irrigation system, where you're a moan, smart faucet or your moan, and I can go on and on.
<unk> effect, but the sales guide came down a bunch and so I'm just curious if you could just sort of maybe tie that in there as well.
Sure why don't I I'll start and just give you some.
Perspectives, and Dave will add some more color around it I'll just start more on the your question about sort of the starts in multifamily in.
John Lovallo: It really gets better and better and smarter because it's able to speak to all these notes in the home, understand what's going on, and really do things like protecting from freezes because it can pulse water out of your kitchen faucet or health protect you if you're on vacation from bacterial bulb up and things like that. And so we're really now leaning into this, I think in a much more serious way. And as I just said in response to Matt's question, if you then add on the scale of having the other team come on board and think about what it is to be able to think about, you know, cloud as a single team or Wi-Fi as a single team or AI, right, the smart water network is AI powered. So our AI team becomes sort of a single team with dedicated people to different projects and products that still function as a scale team.
Multifamily is actually a pretty small part of our business.
And so I don't disagree with you I do think it's it's challenged I think it's going to be challenge, but it's a pretty smart small part of our business and then within that the part of multifamily that we serve tends to be the higher end of multifamily and so I think where a lot of it is coming is probably in places where.
No we don't have a ton of exposure because we're more if you think about multi.
Multifamily for sale.
Large concept buildings those are the types of things that we tend to be calling on versus you know I think we're seeing a lot of pressure.
In the rental market, which tends to skew more towards the price competitive so I might pause there Dave may have some color on and then we can talk about the outdoor space.
Steve So multifamily in total is about 67% of the portfolio, so pretty small and recall our product go in towards the end so our multifamily.
John Lovallo: So we think the opportunity is really really significant and we look forward to speaking about it more in the future. That's helpful, Colour. Thank you.
We estimate for this year is actually up high single digits and so we're not feeling much headwind in the macro this year based on what our products are consumed on multifamily I'd say, what's a little bit softer as probably the overall U S. R&R right if were still down 4% at the midpoint of that maybe a bit below the midpoint and that's offsetting.
John Lovallo: And then the next question is on water specifically. The sales outlook was raised from I think flat to down 2% now, flat to down 1%. U.S. New Construction a little better, China a little worse. So I guess you know, how are you thinking about House of Role and Moan in this equation, which I think we're both down organically in the quarter. Then also what's driving the decrease in margin outlook from I think 23, 5 to 23 on an improved sales outlook.
Those single family New construction.
And the overall macro.
Yes, okay.
We're outdoors question.
Youre right more single family New construction exposure there you know what's been interesting.
John Lovallo: Thank you. Hey John, this is Dave. I'll handle the margin one first. I think it's more around some of the accelerated investments that we're making as Nick mentioned, some with the mtech acquisition and then some in the base. And so as we've talked about in the past, our margin quarter to quarter stays in that in a load of mid 20s. And you may see some fluctuations. It was, you know, 24 to in the third quarter and we'll step back a little bit in the fourth, but more around investment timing than anything else.
Is we kind of haven't yet seen the benefit of the starts acceleration pull through our products. So we think that's probably just got to do with when our products are installed and that varies I mean, not the point of this space. It doesn't vary but the lag between starts and completes tends to vary and so.
It's kind of an inexact science and so we have not seen that pull through.
John Lovallo: And then on the sales line, you know, the team really continues to perform well and drive out performance. And so House of Role, as we've mentioned, you know, down low single digit organically in the third quarter, you know, probably a similar levels in the fourth quarter. And then for Moan America in a similar performance, we see that down low single digits in the fourth quarter, which really implies that our POS run rate stays that mid single digits were better and we have some favorable inventory talents from last year that we've discussed. So I think it's more, you know, as we have line of sight to the end of the year, just tightening that range around the performance that we're seeing the other business. Thank you, guys. Thank you.
Strongly in doors or valves, which for us is a great indicator given our exposure to large production builders, we get a great sense given the valve install is fairly early on.
When that's pulling through it. So we think that's probably most likely to be a end of 'twenty three.
And into 2004 tailwind and Steve just some color on that through our mowing.
Pos in the third quarter. So the component of the product that goes behind the wall and new construction was still down mid single digits.
And then our doors wholesale PLO, Pos which predominantly serves new construction was down low double digits. So we're not seeing that new construction pull through yet at this point.
They'll probably late fourth quarter early 2024.
Stephen Kim: Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question. Yeah, thanks, guys. Appreciate all the color. I wanted to ask a little bit on the US residential side. You, I think, increased the US, the single family new construction component of your guide. But multi families, you know, been looking weaker and the, you know, what would the increase in rates and so forth. I think, you know, the concerns exist about, you know, how things might look over the next few months. And so I know that you have a fairly constructive view of that given the undersupplied state of the industry. Obviously I share that view as well.
Suddenly outdoors guy driving it down a little bit of channel inventories are still lean across that segment and we expected a bit more.
Our inventory to come in in the quarter than we saw as we exited the quarter or still pretty lean both on the dumping endorsed side.
Okay.
Okay. That's helpful. I appreciate that that didn't following that 1000 is interesting because we have seen that pull through some kind of happened in some other segments. So another product so.
That's interesting.
It should come soon.
Given that we're pretty much locked into.
First we're locked into that portion of the book is very high it's a pretty yes.
Stephen Kim: But I was curious if you could talk specifically about the multi family side to the degree to which that may be weighing and on the overall outlook, because I didn't hear you call that out. And then similar to this, you know, in your outdoors division, your doors business has a lot of starts exposure, I guess. Your sales guy, you said it was kind of as expected, you know, the starts effect, but the sales guy came down a bunch. And so I'm curious if you could sort of maybe tie that in there as well.
Yeah clearly okay second question relates to just kind of generally if you could talk about the dynamic between price cost. If there was anything to call out there that we should be.
I'd be thinking about across your various segments.
Yes, nothing material to update really from where we've been in the past few quarters. So still.
See price as a low single digit contributor to sales.
Starting to see some deflation metals deflation in the P&L in the third quarter as we expected, but I'd say overall deflation still less than 1% of Cogs given offsets to labor.
Stephen Kim: Sure, why don't I start and just give you some perspectives and enable add some more color around it. I'll just start more on the your question about the starts and multi-family and multi-family is actually a pretty small part of our business and so I don't disagree with you I do think it's it's challenge I mean it's gonna be challenge but it's a pretty smart small part of our business and then within that the part of multi-family that we serve tends to be the higher end of multi-family and so I think where a lot of this calling is probably in places where you know we don't have a ton of exposure because you know we're more if you think about a multi-family per sale you know large concept buildings those are the type of things that we tend to be calling on versus you know I think we're seeing a lot of pressure in the rental market which tends to cure more towards the the price competitive stuff so I'm not positive they may have some color and then we can talk about that at the worst piece.
Some of the freight lanes have increased and then around indirect spending until tracking.
Tracking to where we thought we'd be at the beginning of the year.
No material update or change.
And I'll just add some color talked about this previously but you know one of our key fortune brands advantaged capabilities as category management and so what are what are the projects. These are the things that we decided to invest in to get really really good at so things like next generation sourcing capabilities global supply chain and category management.
Complexity reduction and digital and we're finding that that having that capability, which is really data and analytics driven and understanding of the shelf the consumer and shopper behaviors. The elasticities were having that tool now.
There has been very powerful because it has allowed us to have very constructive conversations with our trade partners and.
Allows us to be very precise and targeted in how we manage price and therefore continues to be a contributor while keeping us competitive in the marketplace.
Stephen Kim: Yes Steve so multi-family in total is about 67% of the portfolio so pretty small and recall our products go in towards the end so our multi-family estimate for this year is actually up high single digits and so we're not feeling much headwind in the macro this year based on when our products are consumed on multi-family I'd say you know what's a little bit softer is probably the overall US R and R right if we're still down four to six that they were at the midpoint of that maybe a bit below the midpoint and that's offsetting the single-family new construction benefit in the overall macro. You're at Doors question you're at more single-family new construction exposure there you know what's been interesting is we kind of haven't yet seen the benefit of the starts its valuation pull through our products so we think that's probably just got to do with when our products are installed and you know that varies I mean not the point of installation doesn't vary but the lag between starts and completes tends to vary and so you know it's it's common in exact science and so we've not seen it pull through very strongly in doors or valves which for us is a great indicator given our exposure to large production so there's we get a great sense given valve install is fairly early on when that's pulling through and so we think that's probably most likely to be a end of 23 and into 24 tailwind yeah I can see just some color in that there are mowing valve POS in the third quarter so the component of the product that goes behind the wall and new construction was filled down mid single digit and then our doors wholesale POS which predominantly through new construction was down low double digits so we're not seeing that new construction pull through yet it's in this point no probably late fourth quarter early 2024 so the other piece on the outdoors guide you know driving a down a little bit channel inventory is they're still lean across that segment and we expected really a bit more inventory to come in in the quarter than we saw and as we acted as a quarter still pretty lean both on a decking and door side Okay.
Okay, great. Thanks, very much guys.
Okay.
Thank you. Our next question comes from the line of Michael Rehaut with J P. Morgan. Please proceed with your question.
Great. Thanks, very much good afternoon, everyone.
Just wanted to my for my first question and make sure I'm getting some of the nuances of the change in guidance here and you know.
Stephen Kim: Okay, that's helpful. Yeah, appreciate that. That info in the bowels is interesting because we have seen that pull through come happened into mother segments. So another product. So that's interesting that it should come soon. Yeah, clearly. Okay.
I guess just on a basic level it seems like the slight reduction in in <unk>.
Operating margin is predominantly driven by the slight change in sales.
So just wanted to make sure I'm thinking about that right. It just appears like its.
More just a function of the sales leverage.
And when you think about from a top down perspective.
You have a couple of the segments a slight tick down in the in the.
Sales guidance.
What's really driving that from an end market perspective, and it also appears if I'm looking at it right that you were a little better than our outlook on <unk>.
And a little worse than what we were seeing about <unk>. So if theres any type of shift.
Shift between.
The timing here or if things are a little better things are a little worse in the last three months of the year just wanted to appreciate any of those differences as well.
Hey, Mike, It's Dave I would say.
Your first question.
Accurate.
<unk>.
Slight reduction in our sales guidance flowing through to operating margin is based on the volume leverage.
So thats really coming in outdoors I mean, if you look at the segment.
As water.
Segment guidance overall up slightly so from minus two to flat to minus 1% to flat and then security Fame.
Slightly 13 to 15 up to 14 to 15. It. So it is really outdoors as we mentioned earlier on the call.
Slightly lower R&R.
And then the channel inventories are leaner, so I think thats the simple way to think about the change in guidance.
Third quarter fourth quarter, there are always.
Some timing benefits across the quarter and challenges across the quarter as I mentioned.
Earlier teams are working hard to get the best result out of the fourth quarter and that we can given the market environment.
Right No no I appreciate that I guess I was focusing attach more on the organic.
Dave Barry: Second question relates to just kind of generally if you could talk about the dynamic between price cost. If there was anything sort of a call out there that we should be thinking about, you know, across the various segments. Yes, there's nothing material to update really from where we've been in the past few quarters. So still see price, you know, as a low single digit contributor to sales. Started to see some deflation metal deflation in the PNL in the third quarter as we expected.
<unk> I mean, it brings me related the second question, which is that you had mentioned both acquisitions are doing better than you expected.
Dave Barry: But I say, you know, overall deflation still less than 1% of cogs given off sex to labor. Some of the freight lanes have increased and then around indirect spending. And so, you know, tracking to where we thought we'd be at the beginning of the year and no material update or change. And I just have some color.
And so.
I was hoping to get a sense number one of I know, it's just one quarter, perhaps that's under your belt here, but any kind of updated thoughts about how to think about an annualized revenue run rate for these two businesses I think.
A quarter ago, you were talking about.
I believe $240 million.
For.
For for and Tech job and $1 74 year law against.
If there is any changes to how we should think about those numbers.
On an annualized run rate and you know from the again from an end market perspective, if you think about those two different businesses, where is that upside coming from if it's again, a certain channel or end market or if there is even any initial benefits from some of the sales synergies. We tried to expect would be more in 'twenty four but.
Nick Sink: Talk about this previously, but you know, one of our key fortune brands advantage capability is category management. And so what are, you know, what are the. These are the things that we decided to invest in to get really, really good at the things like, you know, next generation sourcing capabilities, global supply chain category management, complexity reduction in digital. And we're finding that that having that capability, which is really data and analytics driven and understanding of the shelf, the consumer and shopper behaviors that elasticity.
Just any thoughts in terms of the drivers there.
Nick Sink: You know, having that tool now has been very powerful because it's allowed us to have very constructive conversations with our trade partners and allows us to be very precise and targeted in how we manage price. And therefore, you know, continues to be a contributor while keeping us competitive in the marketplace.
I'll start with the drivers and then I'll give it to David can you can talk to you through the.
The rest of it but I'd say the drivers are.
On the and again you have two different <unk>.
Amtech on shots I think.
We now have just built a fantastic business model and a mouse trap that really really works for the high end designer consumer and that continues to take share and so you know it is outperforming the market.
And a very healthy way.
Michael Rehaut: Okay. Great. Thanks very much, guys. Thank you.
But I think the real opportunity will be to take what's really working in that model and leverage across the rest of the luxury portfolio.
Michael Rehaut: Our next question comes from the line of Michael Rayhot with JP Morgan. Please proceed with your question. Great. Thanks very much. Good afternoon, everyone. Just wanted to my first question, make sure I'm getting some of the nuances of the change and guidance here. And you know, I guess just on a basic level, it seems like the flight reduction in operating margin is predominantly driven by the flight change and sales. So just want to make sure I'm thinking about that right.
And then on the.
Yeah August side, you know just a really fantastic product set than it had been growing really nicely would've been chip constrained for a while and is that starting to flow now and I think also you know we're giving the team there for the privilege of focus I'm really working on a number of things that they had on their place that they wanted to do but they were also.
Michael Rehaut: It just appears like it's more just a function of the sales leverage. And when you think about, you know, from a top down perspective, you have a couple of segments of flight tick down in the in the failed guidance. You know, what's really driving that from an end market perspective, and it also appears, if I'm looking at it right, that you were a little better than our outlook on three Q. And a little worse than what we were thinking about for Q.
Working on other priorities.
For their predecessor organization.
Just give us the privilege of focus for a while and let us get some things done next quarter or two and we're seeing some of that come to fruition I think it's early days to say does that change our view on the run rate I mean sort of owned it since June.
What it's allowing us to do is lean into this.
The synergies with a lot of confidence and also invest ahead of plan on bringing some of those synergies to life.
I think Nick said it well.
We'll provide a more.
A more detailed view of 2024 on our next call for those businesses.
It is going well it is early days and the team is capitalizing a lot of opportunity.
Michael Rehaut: So if there's any type of shift between timing here or if you know, things are a little better, things are a little worse in the last three months of the year. I just wanted to appreciate any of those differences as well. I might say your first question, that's accurate, it should be sales, slight reduction in our sales guidance flowing through to operating margins is based on the volume leverage. But that's really coming in outdoor.
Great. Thank you.
Thank you. Our next question comes from the line of Adam Baumgarten with Zelman. Please proceed with your question.
Hey, guys. Good evening, just curious on the some of the benefits you could see from the leadership reorganization and kind of how that's playing out and I know there's been some some savings you've called out you know in the past here in the first year or so, but just kind of how to think about it going forward and then I'll stop there.
Michael Rehaut: If you look at the segment changes, water, segment guidance overall, pop slightly, so from minus 2 to 15, up to 14 to 15, so it's really outdoors, as we mentioned earlier on the call, slightly lower R&R, POS, and then channel inventory with our leaners. So I think that's the simple way to think about this change in guidance. Third quarter, fourth quarter, there are always some timing benefits across the quarter or challenges across the quarter. As I mentioned earlier, teams are working hard to get the best results out of the fourth quarter that we can given the market environment.
That.
Work and it was a lot of work and it is still a lot of work because we are really in the first cycle of the new operating structure right. So we just saw the first integrated annual plans or we could go next months will see the first integrated brand finished product plays innovation plans.
But in short it is actually.
Ahead of schedule and better than we expected and I say that with a lot of credit to our teams because I think it's really there as a trusted enthusiasm of leaning into it that's delivering.
But.
Was designed to.
To unlock growth and productivity and Dave can talk a bit to the numbers, but I.
Michael Rehaut: Right, no, I appreciate that. I guess I was focusing a touch more on the organic change. It brings me really the second question, which is that you've mentioned both acquisitions are doing better than you expected. And so, you know, I was hoping to get a sense number one of, I know it's just one quarter, perhaps, that's under your belt here. But any kind of updated thoughts about how to think about an annualized revenue run rate for these two businesses.
Economic immediate cost out benefit is a really nice byproduct.
Not wasting energy on things that we're creating value and allowing the organization to spend their time on things that well and so we're seeing a lot more of that we are seeing us be able to move through initiatives a lot quicker.
A simple example, gaming that I talked about sort of fortune brands advantage you have these capabilities and we were.
Getting much better at deploying them across the organization.
Michael Rehaut: I think, you know, a quarter ago, you're talking about, I believe 240 million for, for, for mtech shop. And 170 for, yeah, log is, you know, if there's any changes to how we should think about those numbers on an annualized run rate. And, you know, from, again, from an end market perspective, if you think about those two different businesses, where's that upside coming from? If it's, you know, again, a certain channel or end market or, you know, if there's even any initial benefits from some of the sales energies, which I'd expect would be more in 24.
But now it's not a question of is it a good idea or not a good idea is debating those leaders.
Sure five for reading, leading a commercial organization around most of the leading our supply chain organization is if they want to go execute on something across the entire portfolio.
I agree with their teams and they go execute and so we're seeing a much faster execution of our key initiatives and I think that will be the real unlock overtime.
We expect to show up more than anywhere else as growth now you are sort of where.
Are we in that I think we've we've taken out kind of like the.
A bite out of the easy third gainer caution myself using the word easy because I think our team would say nothing easy about it but it's the obvious.
Michael Rehaut: But just any thoughts in terms of the drivers there. Well, I'll start with the drivers. And then I go today we can talk to you through the rest of it. But I'd say the drivers are a on the, and again, you know, two different business mtech on short. So I think they, they, they, we, I guess now have just built a fantastic business model and mouse trap that really, really works with a high end designer consumer.
Lower hanging fruit opportunities when next to two thirds will really come from things like simplifying our systems being able to work more easily across the business taking up more duplication as we have more efficient systems in place.
Michael Rehaut: And that continues to take share. And so, you know, it, it is outperforming some market in a very healthy way. And, but I think the real opportunity will be to take what's really working in that model and leverage it across the rest of the luxury portfolio. And then, you know, on the yellow on the side, you know, just a really fantastic products that have been growing really nicely, but have been chip constrained for a while.
We see that as a multiyear.
Growth and productivity journey for the company.
And Adam just put the financials behind that so as we've mentioned.
That first third or so was $55 million of gross SG&A out and we have invested some back into the business to drive some key priorities.
Teams have been busy working this year on the next phase of that organization of the future and as we look to design. It is going to come with process improvement system simplification to really get more more lean.
Michael Rehaut: And is that starting to flow now? And I think also, you know, we're giving the team their, sort of the privilege of focus. I'm really working on a number of things that they had on their place that they wanted to do, but they were also working on other priorities for their predecessor organization. They told us to give us privilege of focus for a while. Let us get some things done next, you know, quarter or two.
More lean operating environment relative to where we've been.
Okay, great, Yeah, and I guess the other switching gears question I would have is just on the decking business. It seems like that's a pretty meaningful.
A positive standout you guys your peers and competitors in terms of versus the broader backdrop I guess, maybe if you have any color on what's driving that how sustainable it is.
Michael Rehaut: And we're seeing some of that come to fruition. I think it's early days to say, does that, you know, change our view on the run rate. I mean, we've sort of owned it since late June. But what it's allowing us to do is lean into the synergies with a lot of confidence and also invest a habit plan on bringing some of those synergies to life.
Anything you're seeing there just because of the because the broader I'd.
Stay home improvement market is kind of soft at this point.
Yeah, I will start in a couple of things I mean, firstly again as you know as you know really well just.
The underlying.
The value prop.
Composite.
MTBC materials continues to to really be healthy and you know, particularly when you add in all the other costs of installing a deck and so that will take share against wood and we'll continue to do so for a very very long time, and then our own capacity modeling, we will play with that conversion ratio, we think its somewhere between that.
Nick Sink: I think Nick said it well, Mike, and we'll provide a more detailed view of 2024 on our next call for those businesses, but it is going well. It is early days and the team is capitalizing a lot of opportunities.
Michael Rehaut: Great. Thank you.
I wanted to 2% of which seven are really hot air it might be a two and a slow year like this year.
Adam Baumgarten: Our next question comes from the line of Adam Baumgarten with Selman. Please proceed with your question. Hey guys, good evening.
Figure it might be closer to one, but it's still happening and so I think that it does continue to drive that top line that the next piece I think it's really important that you mentioned with sustainability and we've tried to be very thoughtful and very judicious about how we go to market to do it in a sustainable way for us and all.
Adam Baumgarten: I'm just curious on some of the benefits you've been seeing from the leadership reorganization and kind of how that's playing out. I know there's been some savings you've called out in the past year and the first year or so, but just kind of had to think about it going forward and then I'll stop there. Yeah. You know that that work and it was a lot of work and it's still a lot of work because we're really in the first cycle of the new operating structure.
Our route to market partners and so it would be thoughtful about pricing.
Pricing be thoughtful about our product offerings, and therefore be thoughtful about there where we got pressed the portfolio.
And I think what you're seeing in these latest results as you know we've been willing to.
Adam Baumgarten: So we just saw the first integrated annual plans a week ago next month, we'll see the first integrated brand plans, product plans, innovation plans. But in short, it is actually going ahead of schedule and better than we expected. And I said I live a lot of credit to our teams because I think it's really there, there's sort of trust and enthusiasm of leaning into it that's delivering. But you know, it was designed to unlock growth and productivity and you know, they can talk a bit to the numbers that the economic benefit, the immediate cost out benefit is a really nice byproduct of not wasting energy on things that were creating value and allowing the organization to spend their time on things that will.
Give up a little bit of that.
The lower margin business, where we think it's not going to be healthier sustainable to go focus on.
Areas that are and more up the price spectrum and then that's where we ended up taking share and I think that's right.
Through these results will continue to pursue that strategy because we think that's the most sustainable way to focus business. After the long term.
Great. Thanks best of luck.
Yes.
Thank you our.
Our next question comes from the line of Phil Ang with Jefferies. Please proceed with your question.
Hey, guys. Thanks for squeezing me on the call and Dave really appreciate you're giving US any early look on 2024 in terms of the market.
Adam Baumgarten: And so we're seeing a lot more of that. We're seeing us be able to move through initiatives a lot quicker. And you know, it's a simple example again. You know, I talked about sort of fortune brands advantage. You know, you have these capabilities and we were getting much better at deploying them across the organization. But now it's not a question of, you know, is a good idea, not a good idea is the better.
Calling for low single digit decline in 2024, but you're expecting margin expansion and earnings growth.
Can you help us unpack what are the key drivers.
Growing earnings and any color on ranges because the street certainly modeling a pretty robust.
Our robust earnings growth next year, or so maybe well off the level set a little bit but.
Adam Baumgarten: You know, those leaders, sure you fight for leading our commercial organization, you know, I'm also leading our supply to an organization. If you know, if they want to go execute on something or cross the entire portfolio, they agree with their teams and they go execute. And so we're seeing much faster execution of our key initiatives. And I think that will be the real unlock over time. And we're expecting to show up more than anywhere else is growth.
Really appreciate you, giving us an early look on 2024.
Yes happy to I think.
Confidence in margin expansion and earnings growth really stems from the work that we've talked about on this call. So re platforming the business getting after some synergy opportunity.
We've mentioned some changes in the security business that we've made.
So theres a lot of I'd say internal activities.
We see coming through the P&L next year.
Adam Baumgarten: Now you asked, where are we in that? I think, you know, we've taken out kind of like, you know, the bite out of the easy third. Now again, I caution myself using or easy because I think I think I think nothing was easy about it, but it's the obvious, you know, lower hanging fruit opportunities. The next two thirds will really come from things like simplifying our systems, being able to work more easily across the business, taking out more duplication as we have more efficient systems in place.
Have we.
We will be comping that inventory reduction headwind in the first quarter.
Given where production is likely going to be plan I wouldn't expect to get all of that back, but it will still be producing at a lever level lower than we were in 'twenty, one and 'twenty two.
And then when can we still see price cost benefit and our teams are still working through their strategic recommendations.
Adam Baumgarten: And we see that as a multi year growth and productivity journey for the company. And Adam just to post some financial sign that so as we've mentioned, you know, that that first third or so was 55 million of growths SGNA out and we have invested some back in the business to drive some key priorities. And the teams have been busy working this year on the next phase of bad organization of the future. And as we move to design it, it's going to come with process improvement system simplification to really get more, more lean, more lean operating environment relative to where we are.
Our customers around pricing looking to have price contribute again positively to net sales growth next year.
Nick Sink: Good. Okay, great.
We really think about taking price using our category management capabilities and based on the strength of our brands and innovation in a way that maximizes our share, but also profit for us and our customers and we've demonstrated our ability to do that over the past couple of years. So I think it's really those three levers the internal actions we've taken some fade.
Verbal comps on our cost bar and then some price cost favorability.
Is there any way to size up those buckets for us, though we have a better handle and should we assume flat.
Nick Sink: Yeah, I guess the other switching gears question I would have is just on the decking business, it seems like that's a, you know, positive, pretty meaningful positive standout, you guys, your peers, competitors in terms of, you know, versus the broader backdrop. I guess maybe if you have any color on what's driving that, how sustainable it is, you know, anything you're seeing there just because of the, because the broader, you know, I think home improvement market is kind of soft at this point.
Flattish market, if you're outpacing the market and Youre taking.
Price again, so maybe flat sales or you could actually get some top line growth, yes, I think so.
Our teams are still working through all the details we've seen enough to be able to give us confidence that we will provide more in January.
And then yes, I think depending on where the market settles and you would expect us to beat the market and typically organically, we're targeting 150 to 200 basis points above the market and so.
Nick Sink: Yeah, I would start, you know, a couple things. I mean, firstly, again, you know, as you know, really well, just the underlying value prop of composite and PVC materials continues to really be healthy and, you know, particularly in the end and all the other costs of installing a deck. And so, you know, that will take share against wood and we'll continue to do so for a very, very long time. And in our own capacity modeling, you know, we will play with that conversion ratio.
Nick Sink: We think it's somewhere between one and two percent of wood, so in a really, you know, here it might be a two in a slow year, like this year, we think it might be closer to one, but it's still happening. And so, I think that it does continue to drive the top line.
That would imply organic growth in that flat to down low single digits, depending on how the market settles out.
Okay I appreciate the color.
Yeah.
Thank you.
<unk> reached the end of our question and answer session and with that Thank you for joining today's conference call. You may now disconnect.
Okay.
Yeah.
Yeah.
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Nick Sink: The next piece I think is really important that you mentioned sustainability, right? And we've tried to be very thoughtful and very judicious about how we go to market to do it in a sustainable way for us and all of our root-to-market partners. And so, it would be thoughtful about pricing, be thoughtful about our product offerings, and therefore, be thoughtful about where we oppress the portfolio. And I think what you see in these latest results is, you know, we've been willing to give up a little bit of a lower margin business where we think it's not going to be healthier, sustainable, to go focus on areas that are and more off the price spectrum.
Nick Sink: And then that's where we ended up taking share. And I think that's what Red through these results will continue to pursue that strategy because we think that's the most sustainable way to both this business out for the long term.
Hmm.
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Yes.
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Nick Sink: Great. Thanks. That's luck. Thank you.
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Jeffries: Our next question comes from the line of fill-in with Jeff Reads. Please proceed with your question. Hey, guys. Thanks for squeezing me on the call. And day, really appreciate you giving us an early look on 2024 in terms of the market. You're calling for a low single-digit decline in 2020 for what you're expecting a margin expansion and earnings growth. So, can you help us unpack what are the key drivers in terms of growing earnings?
Yeah.
Uh huh.
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Okay.
Okay.
[music].
Jeffries: And any color on ranges because the street is certainly modeling pretty robust earnings growth next year. So, maybe we'll off the lower set a little bit, but I really appreciate you giving us an early look on 2024. Yeah, I'm so happy to, you know, I think it's our confidence in margin expansion and earnings growth really stems from the work that we talked about on this call. So, you know, replatforming the business, getting after some synergy opportunities, you know, we've mentioned some changes in the security business that we've made.
Jeffries: So, there's a lot of, I say, internal activities that we see coming through the P&L next year. You know, we have, we'll be copying that inventory reduction headwind in the first quarter. Given where production is likely going to be planned, I wouldn't expect to get all of that back because we'll still be producing in a level lower than we were, you know, in 21 and 22. And then we still see price cost as a benefit.
Jeffries: And, you know, our teams are still working through their strategic recommendations to our customers around pricing, but looking to have price contributes, again, positively to net sales growth next year, as we really think about taking price using our category management capabilities and based on the strength of our brands and innovation in a way that both maximizes our share, but also profit for us and our customers, and we've demonstrated our ability to do that over the past couple of years. I think it's really those three levels, the internal actions we've taken, you know, some favorable comps on our cost bar and then some price cost favorability.
Jeffries: You know, our teams are still working through all the details. We've seen enough to be able to give this confidence now, we'll provide more in January. And then, yes, depending on where the market settles, you would expect us to beat the market and typically organically we're targeting 150 to 200 basis points above the market. And so, you know, that would imply, you know, organic growth in that flat to download people they're just depending on how the market settles down. Okay, appreciate the color. Thank you.
Operator: We have reached the end of our question and answer session. And with that, thank you for joining today's conference call. You may now disconnect. Thank you.
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[music].
Good afternoon, My name is Camilla and I will be your conference operator today.
At this time I would like to welcome everyone to the Fortune brands third 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 would like to turn the call over to Lee <unk>, Vice President of Investor Relations and corporate Affairs.
You may begin the conference call.
Good afternoon, everyone and welcome to the Fortune brands innovations third quarter 2023 earnings call.
Everyone has had a chance to review our earnings release and supplemental financials. The earnings release and the audio replay of this call can be found in the investors section of 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 margin earnings per share of 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 a reconciliation.
With me today on the call 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 third quarter performance and offer some thoughts on the macro environment. I will also give an update on our ongoing evolution into a tightly aligned company focused on brands innovation and channel.
I will then turn the call over to Dave for a discussion of our financial results our updates to our guidance for the remainder of 2023 as well as some thoughts on our emerging expectations for 2024.
Turning to our third quarter performance.
Our teams executed well and delivered solid top and bottom line results and the macro environment that remains challenging.
Our net sales growth outperformed the market for our products and our margin results sequentially improved over the second quarter of 2023.
We delivered above market results across most of our businesses.
Our recently acquired assets are performing better than we expected and our balance sheet remains very healthy as we continued to generate strong operating and free cash flow.
Our results this quarter demonstrate the potential and power of our aligned organizational structure and our fortune brands advantaged capabilities as well as 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 and our digital transformation.
The actions, we took over the past year to better leverage the strength of our organization and sharpen our focus on our leading brands meaningful innovation and our advantage channel relationships helped to drive our results and give me confidence and a strong future.
Our fortune brands advantaged capabilities will continue to advance our growth and margin journey by reducing cost and forming a strategic pricing strategies and enabling a high growth focus areas like connected products.
Finally, I'm pleased to report that our integration of the Amtech sharp and Yellen August assets is going extremely well and we are even more optimistic about the growth potential that these businesses have both.
Both regarding their standalone performance as well as the potential they have to accelerate our transformation into a digital disruptive company and a luxury goods powerhouse.
Net sales were $1 3 billion in the quarter versus $1 2 billion the prior year up 5%.
Organic net sales were down 4% versus the prior year.
Our operating margin was 17, 4% up 40 basis points versus the second quarter of 2023.
Our sales and margin performance together with exceptional cash generation resulted in earnings per share of $1 19.
3% increase over the third quarter of 2022 and gives us confidence in delivering our revised EPS range.
Operator: [inaudible] Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry Barry[inaudible] Barry Barry Barry Barry Barry[inaudible][inaudible] John Lovallo, John Lovallo, John Lovallo, John Lovallo,[inaudible] Lovallo, John Lovallo, John[inaudible] John Lovallo, John Lovallo, John[inaudible] All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question and answer session.
$3 80 to.
To $3 90.
Leigh Avsec: I would like to turn the call over to Leigh Avsec, Vice President of Investor Relations and Corporate Affairs. He may begin the conference call. Good afternoon everyone and welcome to the Fortune Brand's innovations 3rd quarter, 2023 earnings call. Hopefully everyone has had a chance to review our earnings release and supplemental financials. The earnings release and the audio replay of this call can be found in the Investor section of our website.
As we discussed in our last earnings call.
We continue to expect some headwinds from lower point of sale performance as consumer softness continues and as we further digest the impact from the slowdown in the new construction market through the first half of 2023.
Leigh Avsec: 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 their 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.
It has been widely reported while single family New construction permits and starts continued to improve off of cycle lows.
Based on where our products are installed in the production of a home we do not expect to see the benefit until the end of 2023 and into 2024.
The repair and remodel market remained soft although the pro was relatively stronger than pure DIY categories, and our strength with the pros worked tired vantage.
We will remain proactive in our response to any short term external headwinds, while continuing to focus on outgrowing the market preserving margins generating cash and prioritizing strategic investments in the key growth priorities that we expect to pay outsized dividend when the market rebounds.
Leigh Avsec: Any references to operating profit or margin earnings per share are 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 reconciliations.
Leigh Avsec: With me today on the call, our Nick Sink, our Chief Executive Officer, and Dave Berry, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions.
Now turning to some thoughts on the current U S housing market and the market for our products.
The need for housing remains incredibly strong although it is being constrained by current affordability challenges.
Nick Sink: I will now turn the call over to Nick. Nick? Thank you, Lee, and thank you to everyone for joining us today.
Fact, we believe the recent slowdown has only added to the pent up need for housing.
Nick Sink: On this call, I will walk through the highlights of our third quarter performance in office and thoughts on the macro environment. I will also give an update on our ongoing evolution into a tightly aligned company focused on brains, innovation and channel.
A recent third party survey indicated that over a third of respondents reported plans to purchase of residential property within the next 12 months.
This remains well above the pre pandemic average and the longer term average dating back to 2014 or 29% demonstrating significant supply and demand imbalance in the larger housing space.
Nick Sink: I will then turn the call over to Dave for discussion of our financial results. Our updates to our guidance for the remainder of 2023, as well as some thoughts on our emerging expectations for 2024.
While we cannot predict when the federal signal the end of the current cycle of rate increases and quantitative tightening, whereas it does so we would expect interest rates to return to more normal levels and the corresponding significant return to growth in the housing market.
Nick Sink: Turning to our third quarter performance, our teams executed well and delivered solid top and bottom line results in the macro environment that remains challenging. Our net sales growth outperformed the market for our products and our margin results sequentially improved over the second quarter of 2023. We delivered above market POS results across most businesses. Our recently acquired assets are performing better than we expected, and our balance sheet remains very healthy as we continue to generate strong operating and free cash flow.
We continue to believe this fundamental demand together with a 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.
Single family, New construction market continued to improve versus what was initially anticipated at the beginning of 2023 <unk>.
Nick Sink: Our results this quarter demonstrate the potential and power of our aligned organizational structure and our Fortune brands' advantage capabilities, as well as 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 and our digital transformation. The actions we took over the POS year to better leverage the strength of our organization and sharpen our focus on our leading brands, meaningful innovation and our advantage channel relationships, help to drive our results and give me confidence in our strong Future. Our Fortune Brand's advantages capabilities will continue to advance our growth and margin journey by reducing cost, informing on strategic pricing strategies, and enabling our high growth focus areas like connective products.
Despite higher than expected interest rates.
Builders, particularly the large production homebuilders with whom fortune brands enjoys strong relationships continued to respond to affordability challenges in a dynamic marketplace.
As we have previously stated while the positive impact on our business will not be immediately apparent due to the timing of when our products are installed in a newly constructed homes. This should be a growth tailwind in 2024.
Turning to R&R.
R&R market remains dynamic.
There are many variables that are impacting the repair and remodel space.
<unk> consumer savings and confidence employment levels existing home turnover and home equity levels.
We believe that we are well prepared for any external headwinds and remain confident that our products are increasingly well positioned to outperform in any market.
Nick Sink: Finally, I'm pleased to report that our integration of the MPEC, SHOD, and Yale in August assets is going extremely well, and we are even more optimistic about the growth potential that these businesses have, both regarding their standalone performance, as well as the potential they have to accelerate our transformation into a digital disruptive company and a luxury goods powerhouse. Net sales were 1.3 billion in a quarter versus 1.2 billion the prior year up 5%.
First as mortgage rates rise to the highest levels in many years homeowners are increasingly viewing their current homes as a longer term investment and are interested in improving them to match their tastes and needs.
We continue to believe our products are relatively more insulated than other R&R items, because they are smaller ticket or less disruptive to install and because they offer immediate aesthetic improvement or meaningful innovation and functionality to a home.
A recent study indicated that Bobby products performance trusted brand name and aesthetics for by far the most important factors consumers considered during their purchase journey.
Nick Sink: Organic net sales were down 4% versus the prior year. Our operating margin was 17.4% of 40 basis points versus the second quarter of 2023. Our sales and margin performance, together with exceptional cash generation, resulted in earnings per share of a dollar and 19 cents, a 3% increase over the third quarter of 2022, and gives us confidence in delivering our revised EPS range of $3.80 to $3.90. As we discussed in our last earnings call, we continue to expect some headwinds from lower point of sell performance, as consumer softness continues, and as we further digest the impact from the slowdown in the new construction market through the first hoth of 2023.
More southern price.
Our brands perfectly aligned with those criteria.
As we continue to evolve our portfolio and focus on supercharged categories, which are categories that we have identified with high growth potential due to the exposure to secular tailwind separate from the housing market.
And as we continue to build upon our already strong grades and introduce meaningful innovations.
We expect that our products will further distinguish themselves.
Consumers continue to have high confidence in their homes as an asset.
This has resulted in an environment, where the home space is still be positively and consumers are willing to invest in making their spaces reflect their lifestyles and needs.
Nick Sink: It has been widely reported, while single-family new construction permits and starts continue to improve off of cycle lows, based on where our products are installed in the production of a home, we do not expect to see the benefit until the end of 2023 and into 2024. The repair and remodel market remained soft, although the pro was relatively stronger than pure DIY categories, and our strength with the pros worked to our advantage.
That said, we are watching macroeconomic trends closely including consumer confidence levels consumer spending habits, and employment levels, all of which impact repair and remodel trends.
While we are confident in the mid to long term trends for our products. We are anticipating an environment that continues to be challenging and uncertain.
As we have in times before we will respond quickly and decisively in any environment.
Nick Sink: We will remain proactive in our response to any short-term external headwinds while continuing to focus on outgroating the market, preserving margins, generating cash, and prioritizing strategic investments in the key growth priorities that we expect to pay authorized dividends when the market revolves.
As Dave will detail more completely in his section we are actively scenario planning for a variety of outcomes in 2024.
Turning now to an update on our organizational transformation.
As we approach the one year anniversary of the cabinets spinoff and reorganization of our business I wanted to reflect on the many transformational activities, we undertook over the past year.
Nick Sink: Now turning to some thoughts on the current U.S, housing market and the market for our products. The need for housing remains incredibly strong, although it is being constrained by current affordability challenges. In fact, we believe the recent slowdown has only added to the pent-up need for housing. A recent third-party survey indicated that over a third of respondents reported plans to purchase the residential property within the next 12 months. This remains well above the pre-pandemic average and the longer-term average dating back to 2014 of 29 percent, demonstrating significant supply and demand imbalance in the larger housing space.
These activities are driving our future is an exceptional company focused on growing our core while also accelerating our emerging connected products business.
As we noted at the time the separation represented a chance for fortune brands to evolve into an entirely new company.
One marked by excellent and brands innovation and channel.
And while we are proud of the amount of value creation. The separation has generated for our shareholders. We're even more excited about the growth potential that we unlocked.
We've now had nearly a year operating as a more fully aligned company with an organization that is designed around accelerating growth.
Nick Sink: While we cannot predict when the federal signal, the end of the current cycle of rate increases in quantitative tightening, once it does so, we would expect interest rates to return to more normal levels and the corresponding significant return to growth in the housing market. We continue to believe this fundamental demand, together with our strong and optimally positioned brands, will result in medium-to-long-term tailwinds for our business in both new construction and repair and remodeling, and Paul.
While it will take more time to realize the full impact of our new structure, we are already seeing tangible results.
More efficient structure has allowed us to remove unnecessary duplication.
Strategic decisions faster and with more precision and deploy our fortune brands advantaged capabilities across the portfolio.
By removing those activities that do not create value we create space for those that do.
Nick Sink: Starting with new construction, as has been widely reported, single-family new construction market continued to improve, versus what was initially anticipated at the beginning of 2023, despite higher than expected interest rates. Builders, particularly the large production of home builders, with whom Fortune Brands enjoys strong relationships, continue to respond to affordability challenges in a dynamic marketplace. As we have previously stated, while the positive impact in our business will not be immediately apparent due to the timing of when our products are installed in a newly constructed home, this should be a growth tailwind in 2024.
This is a multiyear journey that has already begun to pay dividends.
Our new structure has allowed us to invest additional capital and talent and those projects with the greatest opportunity to drive growth, including our digital transformation and connected products, which we believe have the potential to transform our entire space.
We now also have a dedicated transformation and integration office reporting directly to me, which is responsible for driving progress on the key growth initiatives across the company and we are now able to deploy our best talent and a fortune brands advantaged capabilities across the entire enterprise in a much more rapid efficient.
Nick Sink: Turning to R&R, R&R market remains dynamic, and there are many variables that are impacting the repair and removal space, including consumer savings and confidence, employment levels, existing home turnover and home equity levels. We believe that we are well prepared for any external headwinds and remain confident that our products are increasingly well-positioned to outperform in any market. First, as mortgage rates rise to the highest levels in many years, home owners are increasingly viewing their current homes as a longer-term investment and are interested in improving them to match their tastes and needs.
And holistic fashion.
There has been an enormous amount of change across the organization.
But our 12000 associates across the globe have leaned into the change and embraced our transformation in a way that is nothing short of exceptional.
I'm, so proud of our team.
Fortune brands innovations is stronger more agile and more aligned than it has ever been.
One of the key areas that we have identified as a growth catalyst is connected products.
Today I want to help put this business in its proper context.
Nick Sink: We continue to believe our products are relatively more insulated than other R&R items because they are a smaller ticket, a less disruptive to install, and because they offer immediate aesthetic improvement or meaningful innovation and functionality to a home. Recent study indicated that for building products, performance, trusted brand name, and aesthetics were by far the most important factors consumers considered during their purchase journey, more Southern price. Our brands perfectly aligned with those criteria.
Our leading brands advantage route to market and technology backbone makes us uniquely positioned to capture growth in the connected product space.
Ah recently aligned organization is helping us fully unlock our potential across the full company.
The addition of yellow August enhances our capabilities and product set giving us the scale and talent to lead in connected products.
Now I'll pass trends combined.
We're further on the path to becoming a digital innovator disruptor.
Nick Sink: As we continue to evolve our portfolio and focus on supercharged categories, which are categories that we have identified with high growth potential due to the exposure to secular tailwinds separate from the housing market. And as we continue to build upon our ready strong-grains and introduce meaningful innovations, we expect that our products will further distinguish themselves. Consumers continue to have high confidence in their homes as an asset. This has resulted in an environment where the home space is still be positively and consumers are willing to invest in making their spaces reflect their lifestyle and needs.
From 2020 to 2022 fortune brands connected product sales nearly tripled.
And this is Jerry a chip constrained environment that limited us from reaching our full sales potential.
Including our recent acquisitions, our annualized run rate of connector products sales approaches $250 million.
Today, we have $4 5 million activations of our connected products and we expect those numbers to grow exponentially as we continued to transform and disrupt the market.
Our connected product portfolio offers real solutions to real needs.
Nick Sink: That said, we are watching macroeconomic trends closely, including consumer confidence levels, consumer spending habits, and employment levels, all of which impact repair and removal trends. While we are confident in the mid-to-long-term transfer of products, we are anticipating an environment that continues to be challenging and uncertain.
We're making life easier and more secure for the individual.
To addressing some of the world's most pressing sustainability and safety issues.
Businesses are using a more select connected access solutions to help them work more efficiently.
Individuals' with yellow August smart residential Lux and peace of mind and had been freed from using cheese.
Nick Sink: As we have in times before, we will respond quickly and decisively in any environment. As table detail more completely in this section, we are actively scenario planning for a variety of outcomes in 2024.
Homeowners with products from the Mone, Smartwater network, including our AI enabled flow Smartwater monitoring shutoff can better protect against damaging and costly leaks in their homes.
I cannot overstate the potential positive impact our smartwater products can have on homeowners.
Nick Sink: Turning now to an update on our organizational transformation. As we approach the one-year anniversary of the cabinet spinoff in reorganization of our business, I wanted to reflect on the many transformation activities we undertook over the past year. These activities are driving our future as an exceptional company, focused on growing our core, while also accelerating our emerging connected products business. As we noted at the time, the separation represented the chance for Fortune Brands to evolve into an entirely new company, one marked by excellence in brands, innovation and channel.
<unk> companies and on the environment as we look to save billions of dollars and preventable water damage claims and trillions of gallons of water.
While our collector productivity is well on its way we have much more run way ahead, including our ability to deliver a first of its kind connected products and ecosystems.
We will continue to innovate to make our homes communities and the planet smarter safer and more sustainable.
Expect much more from us as we continue to evolve this growth engine for our business.
Nick Sink: And while we are proud of the amount of value creation the separation is generated for our shareholders, we're even more excited about the growth potential that we unlocked. We've now had nearly a year operating as a more fully aligned company with an organization that is designed around accelerating growth. While it would take more time to realize the full impact of our new structure, we are already seeing tangible results. A more efficient structure has allowed us to remove unnecessary duplication, make strategic decisions foster and with more precision, and deploy our Fortune Brands advantage capabilities across the portfolio.
Before I turn to the individual businesses performance I would like to put our results in their proper context.
We were well prepared for the challenges that we're currently facing it took meaningful action in anticipation of the environment.
As a result of these actions we were able to deliver solid top and bottom line results.
As the external market remains soft due to affordability concerns and macro uncertainty we will continue to protect our business, while prioritizing investment in a typeset key strategic priorities.
Such as those just discussed.
Nick Sink: By removing those activities that do not create value, we create space for those that do. This is a multi-year journey that has already begun to pay dividends. Our new structure has allowed us to invest additional capital and talent in those projects with the greatest opportunity to drive growth, including our digital transformation in connected products, which we believe have the potential to transform our entire space. We now also have a dedicated transformation and integration office reporting directly to me, which is responsible for driving progress and the key growth initiatives across the company.
In order to win for the long term.
In the third quarter water innovation sales were $688 million, an increase of 8% compared to the prior year quarter.
Our margins for the segment were 24, 2%.
On an organic basis, and excluding FX sales decreased 3% due to market driven volume declines partially offset by price.
I'm on North America business was down low single digits versus last year's third quarter due to lower volumes as a result of market softness, particularly in retail.
Nick Sink: And we are now able to deploy our best talent and our Fortune Brands advantage capabilities across the entire enterprise in a much more rapid, efficient and holistic fashion. There has been an enormous amount of change across the organization, but our 12,000 associates across the globe have leaned into the change and embraced our transformation in a way that is nothing short of exceptional. I am so proud of our team. Fortune Brands innovations is stronger, more agile, and more aligned than it has ever been.
Over our POS data showed that we gained share in the market driven by a strong outperformance in the key wholesale channel.
Retail promotional activity increased in the quarter, we've been highly strategic about our promotional activity to ensure our promos are targeted and tailored to drive the best results.
Organic house Rolls sales were down low single digits in the quarter the.
The U S luxury consumer continues to remain relatively resilient and our high quality artisan crafted products resonate.
Nick Sink: One of the key areas that we have identified as a growth catalyst is connected products. Today, I want to help put this business in its proper context. Our leading brands, and bunches root to market, and technology backbone makes us uniquely positioned to capture growth in the connected product space. Our recently aligned organization is helping us fully unlock our potential across the full company. The addition of Yale and August enhances our capabilities in product set, giving us the scale and talent to lead in connected products.
Our recently acquired <unk> business performed above our expectations in the quarter were extremely pleased by the progress of the integration of amtech.
The more I learn about this business and their commitment to the consumer and the customer the more impressed I am.
I look forward to a bright future as we bring all of the brands together under the house of ROHL platform, which is now a uniquely positioned global luxury powerhouse with exceptional growth potential.
In China sales were down low teens year over year were mid single digits, excluding FX.
We saw higher than expected project completions as the government is increasingly incentivising developers to deliver finished projects.
Nick Sink: Now, how does trends combined? We are further on the path to becoming a digital, innovative, disruptor. From 2020 to 2022, Fortune Brands' connected product sales nearly tripled, and this is during a chip constrained environment that limited us from reaching our full sales potential. Including our recent acquisitions, our annualized run rate of connected product sales approaches $250 million. Today, we have 4.5 million activations of our connected products, and we expect those numbers to grow exponentially, as we continue to transform and disrupt the market.
The overall market remains soft and the Chinese consumer remains cautious.
However, our non developer channels that focus on the emerging R&R market, which includes showroom home decorator and E. Commerce all saw growth in our business is well positioned to capture the market evolution away from new construction.
Turning to our outdoor segment sales declined 9% in the quarter, reflecting market softness, particularly in the doors business.
Our margins were 14, 8%.
And decking third quarter sales were up mid single digits versus prior year as we gained share in the key wholesale channel.
Nick Sink: Our connected product portfolio offers real solutions to real needs, for making life easier and more secure for the individual to address some of the world's most pressing sustainability and safety issues. I cannot overstate the potential positive impact our smart water products can have on homeowners, insurance companies, and on the environment as we look to save billions of dollars in preventable water damage claims and trillions of gallons of water. While our connected product journey is well on its way, we have much more runway ahead, including our ability to deliver first of its kind connected products and ecosystems. We will continue to innovate to make our homes, communities, and the planet smarter, safer, and more sustainable. Expect much more from us as we continue to evolve this growth engine for our business.
Looking forward, we are focused on driving meaningful innovation in this space and have the resources and talent to innovate for the future in this growth category.
In doors sales declined low double digits, because the slowdown from the 2022 single family New construction market continues to impact <unk> and general market softness debates in this space.
Looking forward as the impact of the recent improvement in the single family New construction market begins to flow through in late 2023 in early 2024, we expect to see improving results from outdoor brands.
Lastly in security third quarter sales increased 32% year over year and grew 6% organically.
Operating margins for the segment were 16, 8%.
Organic results were driven by price and continued growth in commercial and international markets.
Accordingly improvement in our operating margin is a true testament to the power of the new organizational structure and unfortunate brands advantaged capabilities.
We expect we will continue to see even more impressive margin results in security as we continue to deploy these capabilities.
As we integrate Yale in August we continue to be extremely impressed by their innovative focus and startup <unk>.
Nick Sink: Before I turn to the individual business's performance, I would like to put our results in their proper context. We will well prepare for the challenges that we are currently facing and took meaningful action in anticipation of the environment. As a result of these actions, we were able to deliver solid, top, and bottom line results. As the external market remains soft due to affordability concerns and macro uncertainty, we will continue to protect our business, our prioritizing investment in a tight set of key strategic priorities, such as those just discussed, in order to win for the long term.
He is clearly deep talent and passion.
I look forward to seeing their knowledge and insights contribute to the entire fortune brands connected product portfolio.
Importantly, Yale in August exceeded our expectations as they recover from the impact of chip shortages, and we're working to develop new customers and channels.
As with Amtech, the more I learn about these incredible brands and the teams who support them the more enthusiastic I am.
Before I turn the call to Dave Let me share a few final thoughts.
Our reorganization into a more efficient centralized company focusing on brands innovation and channel has progressed faster than we anticipated.
Nick Sink: In the third quarter, water innovation sales were 688 million, an increase of 8% compared to the prior year quarter. Our margins for the segment were 24.2%, on an organic basis and excluding FX, sales decreased 3%, due to market-driven volume declines, partially offset by price. Our modern North America business was down low single digits versus last year's third quarter due to lower volumes as a result of market softness, particularly in retail. However, our PRS data showed that we gained share in the market, driven by our strong-out performance in the key wholesale channel.
Thanks to the strong engagement and trust from our teams.
We continue to invest in our key strategic priorities, including our iconic brands digital transformation and meaningful innovation.
We are growing our connected products portfolio.
And finally, we made meaningful progress in the integration of our transformative acquisition.
We are transforming fortune brands into an even more growth focused highly innovative company in spite of continued external and macro headwinds.
I am encouraged by all that we've accomplished and excited about what we will achieve next.
Nick Sink: Retail promotional activity increased in the quarter, and we have been highly strategic about our promotional activity to ensure our promos are targeted and tailored to drive the best results. Organic House of Raw sales were down low single digits in the quarter. The U.S, luxury consumer continues to remain relatively resilient and a high-quality, artisanal crop to products resonate. A recently acquired Anteck business performed above our expectations in the quarter. We are extremely pleased by the progress of the integration of Anteck. The more I learn about this business and their commitment to the consumer and the customer, the more impressed I am.
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 long term outperformance to the market supported by fundamental growth characteristics.
As we head into the last part of 2023 and as we set our sights on 2024, we're focused on execution and delivering on our commitment to above market sales growth and margin performance with that I'll turn it over to Dave.
Thanks, Nick as a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance.
Nick Sink: I look forward to a bright future as we bring all of the brands together under the House of Raw platform, which is now a uniquely positioned global luxury powerhouse with exceptional growth potential. Financial. In China, sales are down low teens year-over-year on mid-single digits excluding FX. All we saw higher than expected project completions as the government is increasingly incentivizing developers to deliver finished projects. The overall market remains soft and the Chinese consumer remains cautious. However, a non-developer channel that focused on the emerging R&R market, which includes showroom, home decorator, and e-commerce, all saw growth, and their business is well-positioned to capture the market evolution away from the construction.
Additionally, comparisons will be made against the same period last year unless otherwise noted.
Let me start with our third quarter results.
As Nick highlighted our teams executed well and delivered solid sales margin and free cash flow performance.
Sales were $1 3 billion up 5% and consolidated operating income was $220 million up 2%.
Total company operating margin improved sequentially to 17, 4% and earnings per share were $1 19 up 3%.
Free cash flow in the quarter was $269 million, which brings our year to date free cash flow generation to $660 million.
Nick Sink: Turning to our outdoor segment, sales declined 9% in the quarter, reflecting market softness, particularly in the doors business. Our margins were 14.8%. In decking, third quarter sales were up in the single digits versus prior year, as we gained share in the key wholesale channel. Looking forward, we are focused on driving meaningful innovation in this space and have the resources and talent to innovate for the future in this growth category. In doors, sales declined low double digits as the slowdown from the 2022 single-family new construction market continues to impact their mature and general market softness remains in the space.
Turning to sales on an organic basis net sales were down 4% driven by volume declines.
Overall volume was down mid single digits, driven by high single digit Pos volume declines, partially offset by low single digit favorable channel inventory comparable.
Price contributed low single digit benefit in the quarter.
Through the quarter, our Pos volume softened sequentially in line with normal seasonal trends and DIY channels continued to remain softer than pro channels.
Our operating margin of 17, 4% reflects our team's continued ability to drive continuous improvement savings and fun key strategic priorities, while remaining agile in the face of challenging end market.
Nick Sink: Looking forward, as the impact of the recent improvement in the single-family new construction market begins to flow through in late 2023 and early 2024, we expect to see improving results from our door brains. Lastly, in security, third quarter sales increased 32% year over year and grew 6% organically. Operating margins for the segment were 16.8%. Our organic results were driven by price and continued growth in commercial and international markets. Importantly, improvement in our operating margin is a true testament to the power of the new organizational structure and our fortune-brands' advantage capabilities.
Our teams remain focused on driving above market growth preserving and enhancing margins and generating cash.
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 $688 million up 8%.
Nick Sink: We expect we will continue to see even more impressive margin results in security as we continue to deploy these capabilities. As we integrate Yale and August, we continue to be extremely impressed by their innovative focus and startup mentality. There's clearly deep talent and passion, and I look forward to seeing their knowledge and insights contribute to the entire fortune-brands' connected product portfolio. Importantly, Yale and August exceeded our expectations as they recover from the impact of chip shortages and are working to develop new customers and channels. As with MTEC, the more I learn about these incredible brands and the teams who support them, the more enthusiastic I am.
Organic sales were down 4% or down 3%, excluding the impact of FX.
The organic net sales results reflect the impact of lower volumes, partially offset by price.
Water innovations operating income was $166 million and operating margin remained strong at 24, 2%, reflecting lower volumes, partially offset by continuous improvement initiatives.
U S MAU and point of sale was down mid single digits, while U S House overall point of sale was down low single digits.
The luxury consumer continues to outperform the broader market.
China sales declined low teens are down mid single digits, when adjusting for the impact of FX.
Nick Sink: Before I turn the call to Dave, let me share a few final thoughts. Our reorganization into a more efficient centralized company focusing on brands, innovation, and channel has progressed faster than we anticipated thanks to the strong engagement and trust from our teams. We continue to invest in our key strategic priorities, including our iconic brands, digital transformation, and meaningful innovation. We are growing our connected product portfolio, and finally, we made meaningful progress in the integration of our transformative acquisition. We are transforming fortune-brands into an even more growth-focused, highly innovative company, in spite of continued external and macro heads.
The Chinese market remained soft and though the completion of delayed projects accelerated as a result of government programs.
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, including at brick and mortar locations and online.
As we have stated our performance in the face of challenging external conditions has been nothing short of remarkable and we are confident we will lead as that market continues to evolve.
Turning to outdoors sales were $366 million down 9%.
POS for the segment was down low double digits, which was partially offset by mid single digit favorable channel inventory benefit from the prior year comparable.
Nick Sink: Woods. I'm encouraged by all that we have accomplished and excited about what we will achieve next. We are constantly monitoring and are well prepared to respond to uncertain end markets in the short term, while we position ourselves for accelerating long-term outperformance in the market supported by fundamental growth characteristics. As we head into the last part of 2023, and as we set our sights on 2024, we are focused on execution and delivering on our commitment to above-market sales growth and margin performance.
Segment operating income was $54 3 million down 18%.
Operating margins for the third quarter were 14, 8% driven by reduced volumes.
Door sales were down low double digits as expected sales were impacted by lower volumes from single family New construction end market softness. However, these brands should be positively impacted by the recently improved new construction environment as we look towards 2024.
Dave Barry: With that, I'll turn it over to Dave.
In decking, we saw sales increased mid single digits in the quarter driven by mid single digit Pos growth in the wholesale channel.
Dave Barry: Thanks, Nick. As a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same cost.
Finally in security sales increased 32% to $207 million.
Or 6% on an organic basis, reflecting the impact of the acquisition increased distribution.
Dave Barry: As Nick highlighted, our teams executed well and delivered solid sales, margin, and free cash flow performance. Sales were 1.3 billion up 5 percent, and consolidated operating income with 220 million up 2 percent. Total company operating margin improves sequentially to 17.4 percent, and earnings per share were $1.19 up 3 percent. Free cash flow in the quarter was $269 million, which brings our year-to-date free cash flow generation to $660 million. Turning to sales on an organic basis, net sales were down 4 percent, driven by volume declines.
Price and continued strength in master locks commercial and international channels.
Total security segment operating income was $35 million up 46% and operating margin was 16, 8% an increase of 170 basis points.
Utilizing the playbook first deployed in our water innovations business.
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 continued integration of Yale in August.
Turning to the balance sheet and our cash flow performance.
Dave Barry: Overall, volume was down mid-single digits, driven by high-single digit POS volume declines partially offset by low-single digit favorable channel inventory comparables. Price contributed a low-single digit benefit in the quarter. Through the quarter, our POS volume softened sequentially in line with normal seasonal trends and DIY channels continue to remain softer than pro channels. Our operating margin of 17.4 percent reflects our team's continued ability to drive continuous improvement savings and fund key strategic priorities while remaining agile in the face of challenging end-market.
Our balance sheet remains strong with cash of $453 million.
Net debt of $2 4 billion and net debt to EBITDA leverage at two six times.
Our working capital reduction efforts continue to shrink our balance sheet and generate cash.
We continue to make excellent progress against our near term inventory reduction targets.
Organic third quarter inventory finished at $829 million down roughly $260 million from our peak in 2022.
Our impressive free cash flow of $269 million in the quarter allowed us to make significant progress in deleveraging following our recent acquisition.
Dave Barry: Our teams remain focused on driving above market growth, preserving and enhancing margins, and generating cash. 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.
In addition, our cash generation enabled us to Opportunistically repurchase.
$30 million of shares in the quarter.
And as of today, our total 2023 share repurchases are $150 million.
To summarize the quarter.
Dave Barry: Now let me provide more color on our segment results. Beginning with water innovation, sales were 688 million, up 8 percent. Organic sales were down 4 percent, or down 3 percent, excluding the impact of FX. The organic net sales results reflect the impact of lower volumes, partially offset by price. Water innovations operating income was 166 million, and operating margin remained strong at 24.2 percent, reflecting lower volumes, partially offset by continuous improvement initiatives.
We delivered solid sales and margin results in a soft environment, while further reducing inventory levels and generating significant cash flow.
With that in mind I'll now provide an update to our 2023 guidance.
As todays press release indicates we are updating our full year 2023 guidance to reflect our current expectations and market condition.
Due to our continued strong execution and agility in this dynamic environment.
We are increasing the midpoint of our EPS guidance by <unk>, <unk> and narrowing the overall range to $3 82.
The $3 90.
Dave Barry: U.S. Mohen point of sale was down mid-single digits while U.S. House of Roll point of sale was down low-single digits. The luxury consumer continues to outperform the broader market. China sales declined low teens or down mid-single digits when adjusting for the impact of FX. The Chinese market remains soft, and though the completion of delayed projects accelerated as a result of government programs, new home sales and starts are moderating as the Chinese consumer remains cautious.
In total our updated EPS guidance reflects a 15% increase over the midpoint of our initial guidance earlier this year.
As a reminder, our fourth quarter EPS will be unfavorably impacted by <unk> as a result of a nonrecurring extra fiscal week in the fourth quarter of last year.
We are also updating our sales and margin guidance to reflect current market conditions, including a softer than anticipated second half R&R market, which is predominantly impacting sales in our outdoor segment.
Dave Barry: That said, we continue to see growth in the emerging R&R channels, including at brick-and-mortar locations and online. As we have stated, our performance in the face of challenging external conditions has been nothing short of remarkable, and we are confident we will lead as that market continues to evolve.
The full details of our updated guidance can be found in our press release.
As we head into 2024, and we are actively planning for a variety of scenarios.
While it would not be prudent for us to provide a full set of guidance assumptions for 2024 at this point.
Dave Barry: Turning down to ours, sales were 366 million down 9%. POS through the segment was down low double digits, which was partially offset by mid-single digit favorable channel inventory benefit from the prior year comparable. Segment operating income was 54.3 million down 18%. Operating margins for the third quarter were 14.8% driven by reduced volumes. Door sales were down low double digits. As expected, sales were impacted by lower volumes from single-family new construction and market softness.
We are able to share some initial thoughts.
Our base planning assumption currently include a low single digit market declines.
With U S. R&R also down low single digits.
Our U S single family, New construction market is up low single digits.
On the impact of second half 2023 starts growth.
On a 2024, our starts and completion forecast of up 3% to 5% and roughly flat respectively.
We expect China, and Canada markets to be more challenged than the U S. Both down high single digits.
Dave Barry: However, these brands should be positively impacted by the recently improved new construction environment as we look toward 2024. In decking, we saw sales increase mid-single digits in the quarter driven by mid-single digit POS growth in the wholesale channel. Finally, in security, sales increased 32% to 207 million, or 6% on an organic basis, reflecting the impact of the acquisition, increased distribution, price, and continued strength in Masterlox commercial and international channels. Total security segment operating income was 35 million up 46%, and operating margin was 16.8%, an increase of 170 basis points.
We would expect our organic sales to beat this market estimate and given the work we continue to do to re platform the business and drive efficiencies, we see a path to operating margin improvement and earnings growth. If the market is down low single digits or better.
Our teams have done a fantastic job navigating the uncertainty of the past few years.
And as we approach the end of 2023, we remain confident about the future of the business and our teams ability to create value regardless of the macro environment.
I will now pass the call back to Lee for question and answer 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 who'd 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 to the operator to begin the question and answer session operator.
Dave Barry: Utilizing the playbook first deployed in our water innovations business, 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 continued integration of Yale and August.
Thank you.
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Dave Barry: Turning to the balance sheet and our cash flow performance. Our balance sheet remains strong with cash of 453 million, net debt of 2.4 billion, and net debt to evitileverage at 2.6 times. Our working capital reduction efforts continue to shrink our balance sheet and generate cash. We continue to make excellent progress against our near term inventory reduction targets, and our organic third quarter inventory finished at 829 million, down roughly 260 million from our peak in 2022.
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One moment, please while we poll for questions.
Thank you.
Last question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good evening, everyone. Thanks for taking the questions.
Maybe just start off on the guide.
Kind of how youre looking at.
At the fourth quarter here clearly a lot of cross currents in the market.
Dave Barry: Our impressive free cash flow of 269 million in the quarter allowed us to make significant progress in de-leveraging following our recent acquisition. In addition, our cash generation enabled us to opportunistically repurchase $30 million of shares in the quarter.
I think you just mentioned some deceleration on the DIY side sort of looking at the guide it looks like Youre, implying some sequential.
Deceleration in the top line. So just I know, we can kind of back into what you gave given with the full year guide, but just sort of any puts and takes.
Dave Barry: And as of today, our total 2023 share repurchases are $150 million, to summarize the quarter, we delivered solid sales and margin results in a soft environment while further reducing inventory levels and generating significant cash flow.
Upside downside to how youre thinking about the fourth quarter. Thank you.
Yeah, Matt why don't I give you.
Some kind of high level thoughts on that and then Dave can take you through some of the puts and takes.
But a couple of things I mean, certainly just.
As we said in the press.
Dave Barry: With that in mind, I'll now provide an update to our 2023 guidance. As today's press release indicates, we are updating our full year 2023 guidance to reflect our current expectations and market conditions. Due to our continued strong execution and agility in this dynamic environment, we are increasing the midpoint of our EPS guidance by two cents and narrowing the overall range to $3.80 to $3.90. In total, our updated EPS guidance reflects a 15-cent increase over the midpoint of our initial guidance earlier this year.
Paired remarks.
Market.
Has been more or less as we expected I think with some of the point of sale DIY mix on the retail side being a bit softer single family, new construction being a bit stronger and as we see how it plays through the year.
Topline performance of every quarter.
Has been improving and so as we look to the fourth quarter.
Our organic basis net of that 50, <unk> week, we would expect that to be flat, which is a sequential improvement.
So.
Good to see the business kind of coming back to.
Dave Barry: As a reminder, our fourth quarter EPS will be unfavorably impacted by five cents as a result of a non-recurring extra fiscal week in the fourth quarter of last year. We are also updating our sales and margin guidance to reflect current market conditions, including a softer than anticipated second half R&R market, which is predominantly impacting sales in our outdoor segment. The full details of our updated guidance can be found in our press release.
To flat in particular with the market outperformance.
And then as I look at some of the the actual dollar.
A sale that we get which is more.
Our retail base, that's actually held remarkably steady for the last.
Call. It 10 to 12 weeks on a dollar basis, obviously comparables move around in terms of percentages versus last year, but just what are consumers doing when they go into stores would have a $1. They're spending that's been very steady so while we'd like it to be higher.
Dave Barry: As we head into 2024, we are actively planning for a variety of scenarios, while it would not be prudent for us to provide a full set of guidance assumptions for 2024 at this point. We are able to share some initial thoughts. Our base planning assumptions currently include a low single-digit market decline, with US R&R also down low single digits. Our US single-family new construction market is up low single digits, based on the impact of a second half 2023 starts growth, and a 2024 starts in completion forecast of up three to five percent and roughly flat respectively.
The predictability of seeing that kind of steady line sort of feeds into our degree of confidence around the fourth quarter.
And I'm happy to provide a bit more color I think starting with sales.
If you look at our organic performance throughout the year each quarter and as Nick mentioned, we have gotten better versus prior year. So it started downturn in the first quarter, then down eight now down five and we'd expect a fourth quarter to be flat, excluding that extra fiscal week comp or likely down.
3% to 4% reported organically when you factor in that comp.
Dave Barry: We expect China and Canada markets to be more challenged than the US, both down high single digits. We would expect our organic sales to beat this market estimate, and given the work we continue to do to re-platform the business and drive efficiencies, we see a path to operating margin improvement and earnings growth if the market is down low single digits or better. Our teams have done a fantastic job navigating the uncertainty of the past few years, and as we approach the end of 2023, we remain confident about the future of the business, and our team's ability to create value regardless of the macro environment.
The sequential improvement versus the prior year on the sales line and then on margin, we still see the second half operating margin around 16, 5% or better.
It would imply a fourth quarter of 15, 5% or better.
As expected in the fourth quarter to see a bit of a sequential pullback from the third quarter, just given volumes are down but still well ahead of where we were in the first quarter, which is our other low volume quarter. So feel good about how that business is managing I think both the top line and the margin opportunity.
And then if you think about just Etfs.
And people that our prior year had two favorable impact that won't repeat one being the flow through from that extra fiscal week and the other being some favorable tax outcome that we spun cabinet that were onetime in nature. So as we look at EPS in the quarter, and we see something normalized that down low single digits or better.
Leigh Avsec: I will now pass the call back to Lee for question and answer. 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 who would like to ask a question, I will ask that you limit your initial questions to two and then re-enter the queue to ask additional questions.
Versus the prior year. So I know our teams are still working hard to capitalize on opportunities in the quarter, but still feel like we're managing the business well given the environment.
Operator: I will now turn the call back to the operator to begin the question and answer session.
Operator? Thank you. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tell will indicate that your line is in the question queue. You may press star two if you would like to remove your questions, from theCUBE. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you.
Got it okay. Thank you for that thanks for putting that up for us.
Second one a little higher level.
Now that you've had the asset assets on your team for another quarter and been able to dig in and get the integration underway.
I'm curious you had some comments at the top are alluding to this but sort of what have you learned incrementally.
Matthew Bouley: Our first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Hey, good evening everyone. Thanks for taking the questions. Maybe just start off on the guide and kind of how you're looking at the fourth quarter here. Clearly a lot of cross-currents in the market. I think you just mentioned some deceleration on the DIY side, sort of looking at the guide. It looks like you're employing some sequential deceleration in the top line.
As you've been able to dig into the assets.
And specifically the comments you made around the help with.
<unk> in August could benefit your connected products portfolio curious number one is do your synergy targets include benefits to the connected products portfolio and then just number two more broadly.
Matthew Bouley: So just, you know, I know we can kind of back into what you gave, given with the full year guide. But just sort of any puts and takes, you know, upside down side to how you're thinking about the fourth quarter. Thank you.
<unk> looked into this further you know what what areas of upside could you see in those synergy targets. Thank you.
Yes.
Be happy to take that question.
As you heard in my prepared remarks.
Delighted with the acquisition.
Even putting aside the fantastic value.
Nick Sink: Yeah, Matt, why didn't I give you some kind of high-level thoughts on that? And then, you know, Dave can take you through some of the puts and takes. But, you know, a couple of things. I mean, certainly just some secret, as we said in the prepared remarks, you know, the market has been more or less as we've expected. I think with some of the point of style, DIY, maybe some of the retail stuff being a bit softer, single family construction being a bit stronger.
That it came across that just the quality of the assets themselves are really phenomenal the quality of the teams that support those assets that's fantastic.
The performance since we've owned them.
<unk> exceeded our expectations on the top line.
On the bottom you'll see that we've actually been able to accelerate some of our investments and the integration just because of the integration has gone really well and so that's kind of the the.
Nick Sink: And as we see how it plays through the year, the top line performance of every quarter has been improving. And so as we look to the fourth quarter, you know, on an organic basis, note that to be third week, we'd expect that to be flat, which is a sequential improvement. And so, you know, good to see the business coming back to flat. In particular with the market health performance. And then as I look at some of the, you know, the actual dollar point of sale that we get, which is more retail basis actually held remarkably steady to the last.
The big picture message.
Yes, it's a great question.
What have we learned.
Nick Sink: Call it 10 to 12 weeks on a dollar basis. So, obviously, comparable to move around in terms of percentages versus last year. But just, you know, what are consumers doing when they go into stores, what are the dollars they're spending? That's been very steady. So, you know, while we'd like it to be higher, the predictability of seeing that kind of steady line sort of feeds into our degree of confidence around the fourth quarter.
The nature of it separately.
But certainly serve amtech business.
Just really remarkable continue to gain share really really outperformed the market.
We were just.
Currently on the <unk>.
Visit.
Speaking of one of our customers pointed to.
Displays in a relatively small footprint of the storm.
This is 50% of the sales in the category.
The civil area and I think it just speaks to how powerful.
Brand is what we've really learned is what is the formula that supports that and the <unk>.
This model and how does that work as profitably as it does a lot of learnings coming from that that are starting to be integrated into the whole house of ROHL strategy and sort of just last week, we were going over annual operating plans and that those teams are coming together not just thinking about how do we offer these as an entire suite of product, which was part of our.
Nick Sink: I'm happy to provide a bit more color. I think, you know, starting with sale, if you look at our organic performance throughout the year each quarter, as Nick mentioned, we've gotten better versus prior year. So, started down 10 in the first quarter, then down eight, now down five. And we'd expect the fourth quarter to be flat, excluding that extra fiscal week comp or likely down three to four percent reported organically when you factor in that comp.
Nick Sink: So, nice sequential improvement versus the prior year on the sales line. And then on margin, you know, we still see the second half operating margin around 16 and a half percent or better, which would imply the fourth quarter of 15 and a half percent or better, which is expected in the fourth quarter to see a bit of a sequential pullback from the third quarter, just given volumes are down, but still well out of where we were in the first quarter, which is our other low volume quarter.
Initial thesis, but really thinking how do we elevate the best of the best in the business models to be.
Even.
Even better solution for customers and designers and so we think theres a lot of potential and a lot we can learn there.
And then on the.
Yellen August side look like.
We're very proud of the collective products.
Progress that we've made in the digital initiatives that we've made.
Up to this point, but.
Getting to know those teams.
Really are.
In mid cycle, they operate like a mid cycle startup, but a lot of that team is the original August team, which.
Spent some time in.
Speaking to people in.
In that part of the World. There is some of the most highly respected connective engineers.
Around and so we're really looking to them to help lead us.
Nick Sink: So, feel good about, you know, how this business is managing and they both the top line and the margin opportunity. And then if you think about just EPS, you know, I remind people that our prior year had two favorable impacts that won't repeat one being the flow through from that extra fiscal week and the other being some favorable tax outcomes as we spun cabinets that were one time in nature. So, as we look at EPS in the quarter, we see something normalize the down low single digits or better versus the prior year.
As we think about how to bring these teams together and how do we take what we've already created which we're really proud of the investment that we're already making which is not significant and then combine it with what we just acquired.
And we really think that could be a huge growth unlock and so you asked about synergies I think we went in with a.
Pretty good synergy case.
Some I'll call them easy because they take a lot of work with some lower hanging fruit likelihood distribution overlaps and those sorts of things what we're coming away.
Nick Sink: So, you know, I know our teams are still working hard to capitalize on opportunities in the quarter, but still feel like we're managing the business well given the environment. Robert. Got it. Okay, thank you for that. Thanks for buttoning that up for us.
As were some transformational ideas around both the house of ROHL.
And the connected business.
Teams are leading into it it's not me, saying.
You got to deliver more I mean nature took the case. So if we think we can do far more than this because we really think that this unlocks.
Nick Sink: Second one, a little higher level. Now that you've had the the asset assets on your team for another quarter, been able to dig in and get the integration underway, you know, I'm curious, you know, you have some comments with the top alluding to this, but sort of what have you learned incrementally, you know, as you've been able to dig into the assets, and specifically, you know, the comments you made around the help with, you know, how Yale and August could benefit your connected products portfolio.
Pretty significant growth for both portfolios and so.
Those are being refined now, but we're really really excited.
And the.
Comments.
Connected business now.
Approximating and approaching 250 million and then Andy.
Realized basis, but over 4 million Activations and compounding at a really really fast growth rate now feels like a scale connected business and connected platform and having one technological backbone to.
Nick Sink: Here is number one is, do your synergy targets include benefits to the connected products portfolio, and then just number two more broadly, you know, as you've looked into this further, you know, what, what areas of upside could you see in those synergy targets? Thank you.
To which we can continue to refine the products, we have but also add more to the ecosystem over time is really really exciting. So I could go on for a while I'll start with some sort of other questions, but you can tell we're pretty excited about it.
Nick Sink: Yeah, I'd be happy to take that question. You know, we were, as you've heard in the further marks, it would just delight it with the acquisition, even putting aside, you know, the fantastic value that came across that just, you know, the quality of the assets themselves are really phenomenal, the quality of the teams that support those assets, the fantastic. And the performance, you know, since we've owned them is even exceeded our expectations on the top line, and on the bottom, you'll see that we've actually been able to accelerate some of our investments in the integration just because the integration's going really well.
Great well, thanks, Nick Thanks, Dave Good luck guys.
Thanks, Matt.
Yeah.
Thank you. Our next question comes from the line of John Lovallo with UBS. Please proceed with your question.
Good evening, guys and thanks for taking my questions. Nick I actually did want to follow up on what Matt just asked to some extent on the connected product portfolio.
Very interesting opportunity goes beyond smart locks, obviously with Smartwater.
I think you mentioned you've tripled the sales over the past few years. So the question is I mean, where do you go from here, what's sort of the expected growth trajectory and what are the potential product expansion opportunities yes.
Nick Sink: And so, you know, that's kind of the big picture message. Now, you know, you know, it's a great question sort of, you know, what have we learned? I take them each of it separately. But certainly, you know, serve the end tech business. I mean, you know, they're just really remarkable continue to gain share really, really outperform the market. You know, we were just recently on a market visit and you know, it's been one of our customers pointed to displays and, you know, a relatively small footprint of the store and said, you know, this is 50% of the sales and category just from, you know, this little area.
Yes, John Thanks for thanks for that question.
We've really taken a big step forward.
I think through the strap plan cycle and really ask ourselves that question that you just laid out so just thinking about it incrementally.
We really like what is the addressable market here and what do we expect that weak again.
In terms of ownership of that market and.
Touched on smart water I mean, when you look at.
The smartwater opportunity.
From a number of different lenses it is pretty staggering right.
To start with just the pure how much preventable water damage.
Nick Sink: And I think it just speaks to how powerful the brand is what we've really learned is what is the formula that supports that. And the business model and how does that work as possibly as it does. And so a lot of learning is coming from that that are starting to be integrated into the whole house role strategy. And so just last week, we were going over annual operating plans and those teams are coming together not just thinking about, you know, how do we offer these as an entire suite of product, which was part of our initial thesis.
Starting today, we think that's $15 billion.
Of claims a year, it's greater than <unk>.
Feinberg, who recombined rates of $15 billion of preventable water damage.
I actually believe we're going to grow that addressable market, because we are going to come up with more products that can address more types of preventable water damage, we can take that pretty much to zero I mean, we did.
A study with Lexisnexis and 10000 homes, we reduced 96% of the claims to zero and the other 44% of claims I believe we reduced.
Nick Sink: But really thinking, how do we elevate the best of the best in the business models to be even an even better solution for customers and designers. And so we think there's a lot of potential and a lot we can learn there. And then on the yellow and August side, look, you know, we're very proud of the connective products progress that we've made and the digital issues that we've made, you know, up to this point, but getting to know those teams.
By over 70%, so pretty much going to zero.
There's a few months in addition to saving potentially trillions of gallons of water is a huge energy component to processing, a cleaning water and so you take mission mode, which is really based on what we have in the market today.
Nick Sink: I mean, you know, they really are, you know, in mid cycle, they operate like a mid cycle startup. And a lot of that team is the original August team, which, you know, spend some time and speaking to people in that part of the world. And some of the most highly respected connective engineers around. And so we're really looking to them to help lead us. As we think about how to bring these teams together.
Our commitment to serve a Chilean gallons by 2030.
That according to the mass available on EPA website, so equivalent of US taking 1 million cars off the road for a year right and so you can start to see now from municipalities right. It has a huge dollar value impact and so the opportunity is huge.
Sure.
Really not thinking of it as a multibillion dollar opportunity.
Building teams around really addressing not just the core product, but get better and better all the time, but building an ecosystem around it. So when it connects to your Mo in irrigation smart irrigation system, where youre alone smart faster or mone.
Nick Sink: And how do we take what we've already created, which you're really proud of? The investment that we're already making, which is not insignificant, and then combine it with what we just acquired. And we really think that could be a huge, close unlock. And so, you know, you asked about synergies. I think we went in with a... He's a pretty good synergy case of some, I won't call him easy because we take a lot of work but some lower hanging fruit like distribution overlaps and those sorts of things.
Smart some pump monitor and I could go on and on and.
Really gets better and better and smarter sartor, who was able to speak to all of these nodes in the home understand what's going on and really do things like protected from freezes because it can be a pulse water out of your kitchen faucet or health protect you if you're on vacation from bacterial buildup and things like that and so we're really now leaning into this I think in a much more serious.
Nick Sink: What we're coming away is with some transformational ideas around both the House of Role and the connected business that the teams are leading into. It's not me saying you got to deliver more. I mean they took the case and they said we think we can do far more than this because we really think that this unlocks pretty significant growth for both portfolios and so those are being refined now but we're really really excited and as you know you heard in the comments I mean the connected business now approximating and approaching 250 million on an annualized basis but not over 4 million activations and compounding at a really, really fast growth rate.
And as I, just said in response to Matt's question.
Then add on the scale of having the August team come on board and think about but it is to be able to think about.
Cloud as a single team or Wi Fi as a single team or AI right. The Smartwater network is AI powered so our AI team becomes sort of a single team with dedicated people to different projects some products, but still functioning as a as a scale team.
We think the opportunity.
Is really really significant.
Look forward to speaking about it more in the future.
That's helpful color. Thank you and then the next question is on water specifically the sales outlook was raised from flat to down 2% to now flat to down 1% U S. Do construction, a little better China, a little worse. So I guess, how are you thinking about house of ROHL and mowing in this equation, which I think we're both.
Nick Sink: Now feels like a scale connected business and connected platform and having one technological backbone to which we can continue to refine the products we have but also add more to the ecosystem over time is really, really exciting. So I could go on for a while. I'll stop some sort of other questions because you can tell we're pretty excited about it.
Down organically in the quarter and then also what's driving the decrease in margin outlook from I think 23, 5% to 23 on an improved sales outlook.
Matthew Bouley: Great. Well, thanks Nick. Thanks Dave. Good luck guys. Thank you.
Hey, John this is Dave.
I'll handle the margin one first I think it's more around some of the accelerated investments that we're making as Nick mentioned some with.
John Lovallo: Our next question comes from the line of John Lovallo with UBS. Please proceed with your question. Good evening guys and thanks for taking my questions. Nick I actually did want to follow up on what Matt just asked to some extent on the connected product portfolio. Very interesting opportunity goes beyond smart locks obviously with smart water. You guys, I think you mentioned you've tripled the sales over the past few years so the question is I mean where do you go from here?
With the <unk> acquisition and then some in the base and so as we've talked about in the past our margin quarter to quarter stays in that kind of low to mid Twenty's. Then you may see some fluctuation that was 2004 two in the third quarter and step back a little bit in the fourth but more around investment timing than anything else.
And then on the sales line.
Really continues to perform well and drive outperformance so house of ROHL as we've mentioned.
John Lovallo: What sort of the expected growth trajectory and what are the potential product expansion opportunities? Yeah, well John thanks for thanks for that question. I mean we've we've really taken a big step forward I think to this draft land cycle and really also solves that question that you just laid out. So instead of just thinking about it incrementally we're really like what is the addressable market here and what do we expect that we can gain in in terms of ownership of that market and you know you touched on smart water.
Low single digit organically in the third quarter, probably at similar levels in the fourth quarter.
For Melon Americans and a similar performance, we see that down low single digits in the fourth quarter, which really implies that our past run rate, Dave that mid single digits or better and then we have some favorable inventory tailwind through last year that we've discussed so I think it's more.
John Lovallo: I mean when you look at the smart water opportunity from a number of different lenses it is pretty staggering right just you know to start with just the pure how much preventable water damage is there today we think that's $15 billion of claims a year it's greater than $15 billion is a preventable water damage I actually believe we're going to grow that addressable market because we're going to come up with more products that can address more types of preventable water damage. We can take that pretty much to zero I mean we did a study with Lexus next from 10,000 homes we reduced 96% of the claims to zero and the other 44% of claims I believe we reduced by over 70%.
Line of sight to the end of the year, just tightening that range around the performance that we're seeing out of the business.
Thank you guys.
Okay.
Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yeah. Thanks, guys I appreciate all the color.
Wanted to.
Ask a little bit on the U S residential side.
You are I think increase the <unk>.
The single family New construction component of your guide.
But multifamily has been looking weaker than what.
The increase in rates and so forth I think concerns exist about how things might look over the next few months. So I know that you have a fairly constructive view of that given the under supplied state of the industry, obviously I share that view as well, but I was curious if you could talk specifically about the multifamily side.
John Lovallo: So pretty much going to zero there's an ESG lens to it right in addition to saving you take potentially trillions of gallons of water is a huge energy component to processing and cleaning water. And so you take mission moment which is really based on what we have in the market today our commitment to save a trillion gallons by 2030. That according to the math available in the EPA website to equivalent of us taking a million cars off the road for a year right and so you can start to see you know now from municipalities right it has a huge dollar value impact and so the opportunity is huge we're really not thinking of it as a multi billion dollar opportunity we're building teams around really addressing not just the core product making it better better all the time.
The degree to which that may be weighing.
And on the overall outlook because I didn't hear you call that out.
And then similar to this in your outdoors Division your doors business has a lot of starts exposure I guess.
Your sales Scott you said it was kind of as expected the starts effect, but the sales guide came down a bunch and so just curious if you could just sort of maybe tie that in there as well sure.
Sure why don't I I'll start and just give you some.
Perspectives, and Dave will add some more color around it I'll just start more on your question about sort of the starts in multifamily in.
John Lovallo: They're building an ecosystem around it so when it connects to your moan irrigation sweat irrigation system where you're moan smart faucet or your moan, and I can go on and on. It really gets better and better and smarter and smarter because they will speak to all these notes in the home, understand what's going on and really do things like protect you from freezes because it can pull water out of your kitchen faucet or health protect you if you're on vacation from bacterial bulb up and things like that.
Multifamily is actually a pretty small part of our business.
And so I don't disagree with you I do think it's challenged I think it's going to be challenge, but it's a pretty small part of our business and then within that the part of multifamily that we serve tends to be the higher end of multifamily and so I think where a lot of it is coming is probably in places where.
John Lovallo: And so we're really now leaning into this, I think, in a much more serious way and as I said in response to Matt's question, you know, if you then add on the scale of having the other team come on board and think about what it is to be able to think about, you know, cloud as a single team or Wi-Fi as a single team or AI, right, the smart water network is AI powered. So AI team becomes sort of a single team with dedicated people to different projects and but still functioning as a scale team, we think the opportunity is really really significant.
No. We don't have a ton of exposure because we are more if you think about multi.
Multifamily for sale.
Large concept buildings those are the types of things that we tend to be calling on versus.
I think we're seeing a lot of pressure.
And the rental market, which tends to skew more towards.
The price competitiveness, so I'll pause there Dave may have some color and then we can talk about the outdoor space.
Steve So multifamily in total is about 67% of the portfolio, so a pretty small and recall our products go in towards the end. So our multifamily estimate for this year is actually up high single digits and so we're not feeling much headwind in the macro this year based on what our products are consumed on multifamily.
John Lovallo: You know, look forward to speaking about it more in the future. That's helpful, Collar. Thank you.
John Lovallo: And then the next question is on water specifically. The sales outlook was raised from, I think, flat to down 2% now, flat to down 1%, US new construction a little better, China a little worse. So I guess you know, how are you thinking about House of Roll and Moan in this equation, which I think we're both down organically in the quarter, then also what's driving the decrease in margin outlook from, I think, 23, 5 to 23 on an improved sales outlook?
What's a little bit softer as probably the overall U S. R&R right. If we're it is still down $4 six that they were at the mid point of that maybe a bit below the midpoint and that's offsetting the single family new construction.
Benefit and the overall macro.
Yes, okay.
<unk> question.
You write more single family new construction exposure there.
John Lovallo: Thank you. Hey, John, this is a, um, I'll handle a margin one first. I think it's more around some of the accelerated investments that we're making as Nick mentioned, some with the M-Tech acquisition and then some in the base. And so as we've talked about in the past, our margin quarter to quarter stays in that, you know, low to mid 20s and you may see some fluctuations. It was, you know, 24-2 in the third quarter and we'll step back a little bit in the fourth, but more around investment timing than anything else.
Interesting.
Is we kind of haven't yet seen the benefit of the starts acceleration pull through our products. So we think thats, probably just got to do with when our products are installed and that varies I mean, not the point of this space. It doesn't vary but the lag between starts and completes tends to vary and so.
It's kind of an inexact science and so we've not seen a pull through.
John Lovallo: And then on the sales line, you know, this team really continues to perform well and drive out performance. And so House of Roll, as we've mentioned, you know, down low single digit organically in the third quarter, you know, probably at similar levels in the fourth quarter and then for Moe in America, it's going to similar performance we see that down low single digits in the fourth quarter, which really implies that our POS run rate stays that mid single digits were better and we have some favorable inventory talents from last year that we've discussed.
Very strongly in doors or valves, which for us is a great indicator given our exposure to large production builders, we've got a great sense given the valve install is fairly early on.
When that's pulling through it so we think thats, probably most likely there'll be a end of 'twenty three and into 2004 tailwind and Steve just some color on that so our mowing.
Our Pos in the third quarter. So the component of the product that goes behind the wall into construction was still down mid single digits.
John Lovallo: And so I think it's more, you know, as we have line of sight to the end of the year, just tightening that range around the performance that we're seeing out of the business. Thank you, guys. Thank you.
And then our doors wholesale PLO, Pos which predominantly serves new construction was down low double digits. So we're not seeing that new construction culture, Nick's point, probably late fourth quarter early 2024.
Stephen Kim: Our next question comes from the line of Steven Kim with Evercore ISI. Please proceed with your question. Yeah, thanks, guys. Appreciate all the color. One of two, ask a little bit on the US residential side. You, I think, increase the US, the single family new construction component of your guide. But multi-families, you know, have been looking weaker and the, you know, what were the increase in rates and so forth. I think, you know, the concerns exist about, you know, how things might look over the next few months.
Other piece on the outdoors guy driving it down a little bit channel inventories are still lean across that segment and we expected a bit more.
Our inventory to come in in the quarter than we saw in as we exited the quarter or still pretty lean both on the dumping endorsed side.
Okay.
Okay. That's helpful. I appreciate that that didn't following that 1000 is interesting because we have seen that pull through to come kind of happened in some other segments. So another product so.
That's interesting.
That it should come soon.
Given that we're pretty much locked into finished.
We're locked into that portion of the book is very high it's a pretty good yes.
Stephen Kim: So I know that you have a fairly constructive view of that given the undersupplied state of the industry. Obviously, I share that view as well, but I was curious if you could talk specifically about the multi-family side, the degree to which that may be weighing and on the overall outlook, because I didn't hear you call that out. And then, similar to this, you know, in your outdoors division, your doors business has a lot of start exposure, I guess.
Yeah clearly.
Second question relates to just kind of generally if you could talk about the dynamic between price cost. If there was anything to call out there that we should be.
<unk> be thinking about across your various segments.
Nothing material to update really from where we've been in the past few quarters. So still.
See price as a low single digit contributor to sales.
Stephen Kim: Your sales guy, you said it was kind of as expected, you know, the starts effect, but the sales guy came down a bunch and so I'm curious if you could sort of maybe tie that in there as well.
Starting to see some deflation metals deflation in the P&L in the third quarter as we expected, but I'd say overall deflation still less than 1% of Cogs given offsets to labor.
Nick Sink: Sure, why don't I start and just give you some perspectives and enable add some more color around it? I'll just start more on the your question about the the starts and multi-family and multi-family is actually a pretty small part of our business and so I don't disagree with you I do think it's it's challenged I mean it's going to be challenged but it's a pretty smart small part of our business and then within that the part of multi-family that we serve tends to be the higher end of multi-family and so I think where a lot of this calling is probably in places where you know we don't have a ton of exposure because you know we're more if you think about a multi-family per sale you know large concept buildings those are the type of things that we tend to be calling on versus you know I think we're seeing a lot of pressure in the rental market which tends to cure more towards the price competitive stuff so I'm not positive they may have some calling that we can talk about that door's piece yes and Steve so multi-family in total is about six seven percent of the portfolio so pretty small and recall our products go in towards the end so our multi-family estimates for this year is actually up high single digits and so we're not feeling much headwind in the macro this year based on when our products are consumed on multi-family I'd say you know what's a little bit softer is probably the overall USR and R right if we're still down four to six that they were at the midpoint of that maybe a bit below the midpoint and that's offsetting the single-family new construction benefit in the overall macro you're at door's question you're like more single-family new construction exposure there you know what's been interesting is we kind of haven't yet seen the benefit of the search acceleration pull through our products and we think that's probably just got to do with when our products are installed and you know that varies I mean not the point of inspiration doesn't vary but the lag between starts and completes tends to vary and so you know it's it's kind of in exact science and so we've not seen it pull through very strongly in doors or valves which for us is a great indicator given our exposure to large production builders we get a great sense given the valve install is fairly early on when that's pulling through and so we think that's probably most likely to be a end of 23 and into 24 tailwind yeah I can see just some color on that so our mowing valve POS in the third quarter so the component of the product that goes behind the wall and new construction was filled down mid single digit and then our doors wholesale POS which predominantly through new construction was down low double digits so we're not seeing that new construction pull through yet it's in this point no probably late fourth quarter early 2024 so the other piece on the outdoors guide you know driving it down a channel inventory they're still lean across that segment and we expected really a bit more inventory to come in in the quarter and then we saw and we acted as a quarter still pretty lean both on a deputy and door side Okay.
Some of the freight lanes have.
Nick Sink: Okay, that's helpful. Yeah, I appreciate that. That info on those valves is interesting because we have seen that pull through come happened into mother segments. So another product. So that's interesting that it should come soon. Yeah, clearly. Okay.
We have increased and then around indirect spending until <unk>.
Tracking to where we thought we'd be at the beginning of the year.
No material update or change.
And I'll just add some color you talked about this previously but one of our key fortune brands advantage capabilities as category management and so what are these.
These are the things that we decided to invest in to get really really good at so things like next generation sourcing capabilities global supply chain category management complexity reduction and digital.
And we're finding that that having that capability, which is really data and analytics, driven and understanding of the shelf consumer and shopper behaviors. The elasticities, we were having that tool now.
Been very powerful because it has allowed us to have very constructive conversations with our trade partners and.
<unk> allows us to be very precise and targeted in how we manage price and therefore continues to be a contributor while keeping us competitive in the marketplace.
Okay, great. Thanks, very much guys.
Okay.
Thank you. Our next question comes from the line of Michael Rehaut with Jpmorgan. Please proceed with your question.
Great. Thanks, very much good afternoon, everyone.
Just wanted to first question make sure I'm getting some of the nuances of the change in guidance here.
No.
I guess just on a basic level it seems like the slight reduction in <unk>.
Operating margin is predominantly driven by the slight change in sales.
So just want to make sure I'm thinking about that right. It just appears like its more just a function of the sales leverage.
And when you think about from a top down perspective.
You have a couple of the segments a slight tick down in the in the.
Sales guidance.
What's really driving that from an end market perspective, and it also appears if I'm looking at it right that you were a little better than our outlook on <unk>.
And a little worse than what we were seeing about <unk>. So if there is any type of shift between.
Timing here or if things are a little better things are a little worse in the last three months of the year just wanted to appreciate any of those differences as well.
Hey, Mike, It's Dave I would say on your first question.
It's accurate.
<unk>.
Slight reduction in our sales guidance flowing through to operating margin is based on the volume leverage.
Really coming in outdoors I mean, if you look at the segment.
Water segment guidance overall up slightly so from minus two to flat to minus 1% to flat and then security theme.
Slightly 13 to 15 up to 14 to 15. It. So it's really outdoors as we mentioned earlier on the call.
Slightly lower R&R.
And then channel inventories are leaner, so I think thats the simple way to think about the change in guidance.
Third quarter fourth quarter, there are always.
Some timing benefits across the quarter challenges across the quarter as I mentioned earlier.
Earlier teams are working hard to get the best result out of the fourth quarter that we can given the market environment.
Right.
I appreciate that I guess I was focusing attach more on the organic.
Dave Barry: Second question relates to just kind of generally if you could talk about the dynamic between price cost. If there was anything sort of a call out there that we should be thinking about, you know, across the various segments. Yes, he's nothing material to update really from where we've been in the past few quarters. So still see price, you know, as a low single digit contributor to sales. Started to see some deflation metal deflation in the PNL in the third quarter as we expected.
Change brings me related the second question, which is that you had mentioned both acquisitions are doing better than you expected.
And so.
I was hoping to get a sense number one I know, it's just one quarter, perhaps that's under your belt here, but.
Any kind of updated thoughts about how to think about an annualized revenue run rate for these two businesses I think.
Dave Barry: But I'd say, you know, overall deflation still less than 1% of cogs given off sex to labor. Some of the freight lanes have increased and then around indirect spending. And so, you know, tracking to where we thought we'd be at the beginning of the year and no material update or change. And I just have some color.
A quarter ago, you were talking about I believe $240 million.
Four.
For for Amtech, Shaab and 174 Yale August.
If there is any changes to how we should think about those numbers.
On an annualized run rate and from a again from an end market perspective, if you think about those two different businesses, where is that upside coming from if it's again, a certain channel or end market or if there is even any initial benefits from some of the sales synergies. We tried to expect would be more in 'twenty four but.
Nick Sink: Talk about this previously, but you know, one of our key fortune brands advantage capability is category management. And so what are, you know, what are the, these are the things that we decided to invest in to get really, really good at the things like, you know, next generation sourcing capabilities, global supply chain category management, complexity reduction in digital. And we're finding that that having that capability, which is really data and analytics driven and understanding of the shelf, the consumer and shopper behaviors that elasticity, you know, having that tool now has been very powerful because it's allowed us to have very constructive conversations with our trade partners and allows us to be very precise and targeted in how we manage price. And therefore, you know, continues to be a contributor while keeping us competitive in the marketplace. Okay. Great. Thanks very much, guys. Thank you.
Just any thoughts in terms of the drivers there.
I'll start with the drivers and then I'll give it to David can you can talk to you through.
The rest of it but I'd say the drivers.
We are on the and again you have two different <unk>.
Amtech on shots I think.
We now have just built a.
Fantastic business model and a mouse trap that really really works for the high end designer consumer and that continues to take share and so it is outperforming the market.
And a very healthy way.
But I think the real opportunity will be to take what's really working in that model and leverage across the rest of the luxury portfolio.
Michael Rehaut: Our next question comes from the line of Michael Rayhot with JP Morgan. Please proceed with your question. Great. Thanks very much. Good afternoon, everyone.
And then on the.
Yeah August side.
Really fantastic product set that had been growing really nicely would've been chip constraint for a while and is that starting to flow now and I think also.
Michael Rehaut: Just wanted to my first question, make sure I'm getting some of the nuances of the change and guidance here. And, you know, I guess just on a basic level, it seems like the slight reduction in operating margin is predominantly driven by the slight change in sales. So just want to make sure I'm thinking about that right. It just appears like it's more just a function of the sales leverage. And when you think about, you know, from a top down perspective, you have a couple of segments of slight tick down in the in the failed guidance, you know, what's really driving that from an end market perspective.
Giving the team there for the privilege of focus I'm really working on a number of things that they had on their place that they wanted to do but they were also working on other priorities.
For their.
First our organization.
Told us just give us the privilege of focus for a while and let us get some things done next quarter or two and we're seeing some of that come to fruition I think it's early days to say does that change our view on the run rate I mean sort of owned it since June.
But what it's allowing us to do is lean into.
The synergies with a lot of confidence and also invest ahead of plan on bringing some of those synergies to life.
Michael Rehaut: And it also appears, if I'm looking at it right, that you were a little better than our outlook on three Q and a little worse than what we were thinking about for Q. So if there's any type of, you know, shift between timing here or if, you know, things are a little better, things are a little worse in the last three months of the year. I just wanted to appreciate any of those differences as well.
Yes, I think Nick said, it well Mike will provide a more detailed view of 2024 on our next call for those businesses.
It is going well it is early days.
<unk> is capitalizing a lot of opportunity.
Great. Thank you.
Thank you. Our next question comes from the line of Adam Baumgarten with Zelman. Please proceed with your question.
Michael Rehaut: Yeah, I might say your first question, that's accurate, it should be, you know, sales, slight reduction in our sales guidance going through to operating margins is based on the volume leverage. But that's really coming in outdoor. I mean, if you look at the segment changes, water, segment guidance, overall up, slightly, so from minus two to flat, to minus one to flat, and then security, same, you know, up slightly, 13 to 15, up to 14 to 15.
Hey, guys. Good evening, just curious on the some of the benefits you could see from the leadership reorganization and kind of how that's playing out and I know there's been some some savings you've called out in the past here in the first year or so, but just kind of how to think about it going forward and then I'll stop there.
Yes.
Yes.
<unk>.
And it was a lot of work and it is still a lot of work because we are really in the first cycle of the new operating structure right. So we just saw the first integrated annual plans a week ago next months will see the first integrated <unk> product lines innovation plans.
Michael Rehaut: And so it's really outdoor, as we mentioned earlier on the call, slightly lower R and R, you know, POS, and then, you know, the channel inventory is winter leaner. So I think that's the simple way to think about this change in guidance. You know, third quarter, fourth quarter, they're always, you know, some timing benefits across the quarter or challenges across the quarter. As I mentioned earlier, teams are working hard to get the best results out of the fourth quarter that we can given the market environment.
But in short.
Is actually growing.
Ahead of schedule and better than we expected and I say that with a lot of credit to our teams because I think it's really there as a trusted enthusiasm of leaning into it that's delivering.
But.
It was designed.
To unlock growth and productivity and Dave can talk a bit to the numbers.
Nick Sink: Right, no, I appreciate that. I guess I was focusing a touch more on the organic change. And it brings me really the second question, which is that you've mentioned both acquisitions are doing better than you expected. And so, you know, I was hoping to get a sense number one of, I know it's just one quarter perhaps that's under your belt here, but any kind of updated thoughts about how to think about an annualized revenue run rate for these two businesses, I think, you know, a quarter ago, you're talking about, I believe, 240 million for mTekShob and 174, yeah, a log is.
Economic immediate cost out benefit is a really nice byproduct.
Not wasting energy on things that we're creating value and allowing the organization to spend their time on things that will and so we're seeing a lot more of that we are seeing us be able to move through initiatives a lot quicker.
Nick Sink: You know, if there's any changes to how we should think about those numbers on an annualized run rate. And, you know, from, again, from an end market perspective, if you think about those two different businesses, where's that upside coming from? If it's, you know, again, a certain channel or end market, or, you know, if there's even any initial benefits from some of the sales energies, which I would expect would be more than 24, but just any thoughts in terms of the drivers there.
A simple example, again I talked about sort of fortune brands advantage you have these capabilities and we were.
Getting much better at deploying them across the organization.
Now it's not a question of is it a good idea or not a good idea is debated those leaders.
Sure.
Leading our commercial organization, Iran will still waiting our supply chain organization is if they want to go execute on something across the entire portfolio.
I agree with their teams and they go execute and so we're seeing a much faster execution of our key initiatives and I think that will be the real unlock overtime.
And where I expect to show up more than anywhere else as growth now you are sort of where are we in that I think we've we've taken out kind of like.
The bite out of the easy third gainer caution without using the word easy because I think our team would say nothing easy about it but it's the obvious lower hanging fruit opportunities. When next to two thirds will really come from things like simplifying our systems being able to work more easily across the business taking up more duplication as we have more.
Nick Sink: Well, now I'll start with the drivers. And then I go to David. He can talk to you through the rest of it. But I'd say the drivers are on the, and again, two different business mTekShob, I think they, they, we, I guess now, have just built a fantastic business model and a mass trap that really, really works with a high end designer consumer. And that continues to take share. And so, you know, it is outperforming some market in a very healthy way.
More efficient systems in place and we see that as a multiyear.
Growth and productivity journey for the company.
And Adam just put the financials behind that so as we've mentioned.
That first third or so was $55 million of gross SG&A out and we have invested some back into the business to drive some key priorities.
Nick Sink: And, but I think the real opportunity will be to take what's really working in that model and leverage it across the rest of the luxury portfolio. And then, you know, on the Yale and August side, you know, just a really fantastic product that had been growing really nicely, but have been chip constrained for a while. And is that starting to flow now? And I think also, you know, we're giving the team their sort of privilege of focus.
Teams have been busy working this year on the next phase of that organization of the future and as we look to design. It is going to come with process improvement system simplification to really get more more lean.
More lean operating environment relative to where we've been.
Okay, Great Yeah, I guess the other switching gears question I would have is just on the decking business. It seems like Thats a pretty meaningful.
Nick Sink: I'm really working on a number of things that they had on their place that they wanted to do, but they were also working on other priorities for their predecessor organization, which they, they told us, give us privilege of focus for a while. Let us get some things done next, you know, quarter or two. And we're seeing some of that come to fruition. I think it's early days to say, does that, you know, change our view on the run rate.
Positive standout you guys your peers.
Competitors in terms of versus the broader backdrop I guess, maybe if you have any color on what's driving that how sustainable it is.
Anything you're seeing there just because of the because the broader I'd.
Stay home improvement market is kind of soft at this point.
Nick Sink: I mean, sort of owned it since late June. But what it's allowing us to do is lean into the synergies with a lot of confidence and also invest a habit of plan on bringing some of those synergies to life.
Yeah, I will start in a couple of things I mean, firstly again as you know it really well just.
The underlying.
Value prop.
Composite.
And PVC materials continues to.
Dave Barry: I think Nick said it well, Mike, and we'll provide a more detailed view of 2024 on our next call for those businesses, but it is going well. It is early days and the team is capitalizing a lot of opportunities.
Really be healthy, particularly when you add in all the other costs of <unk>.
Stalling a deck and so.
We'll take share against wood and we'll continue to do so for a very very long time, and then our own capacity modeling.
We will play with that conversion ratio, we think its somewhere between 1% and 2% of which so really hot air it might be a two and a slow year like this year, we think it might be closer to one, but it's still happening and so I think that it does continue to drive the top line. The next piece I think it's really important that you mentioned with sustainability.
Michael Rehaut: Great, thank you. Thank you.
Adam Baumgarten: Our next question comes from the line of Adam Baumgarten with Selman. Please Hey guys, good evening. I'm just curious on some of the benefits you've been seeing from the leadership reorganization and kind of how that's playing out.
And we've tried to be very thoughtful and very judicious about how we go to market to do it in a sustainable way for us and all of our route to market partners and so it will be thoughtful about.
Nick Sink: I know there's been some savings you've called out in the past year and the first year or so, but just kind of had to think about it going forward and then I'll stop there. Yeah. You know, that work and it was a lot of work and it's still a lot of work because we're really in the first cycle of the new operating structure, right? So we just saw the first integrated annual plans a week ago.
Pricing and be thoughtful about our product offerings, and therefore be thoughtful about where we go across the portfolio.
What you're seeing in these latest results as we've been willing to.
Give up a little bit of.
Nick Sink: Next month, we'll see the first integrated brand plans, product plans, innovation plans. That in short, it is actually going ahead of schedule and better than we expected. And I said I live a lot of credit to our teams because I think it's really there. There's sort of trust and enthusiasm of leaning into it that's delivering. But you know, it was designed to unlock growth and productivity and you know, they can talk a bit to the numbers, but the economic benefit, the immediate cost out benefit is a really nice byproduct of not wasting energy on things that we're creating value and allowing the organization to spend their time on things that will.
Lower margin business, where we think it's not going to be healthier sustainable to go focus on.
Nick Sink: And so we're seeing a lot more of that. We're seeing us be able to move through initiatives a lot quicker. And you know, it's a simple example. Again, you know, I talked about some of the fortune brands at Montage. You know, you have these capabilities and we were getting much better at deploying them across the organization. But now it's not a question of, you know, is a good idea? Not a good idea.
Areas that are more up the price spectrum and then that's where we ended up taking share and I think thats what.
Through these results will continue to pursue that strategy, because we think thats the most sustainable way to broker business after the long term.
Great. Thanks best of luck.
Yes.
Thank you.
Our next question comes from the line of Phil <unk> with Jefferies. Please proceed with your question.
Hey, guys. Thanks for squeezing me on the call and Dave really appreciate you're giving US a early look on 2024 in terms of the market.
Calling for low single digit decline in 2024, but you're expecting margin expansion and earnings growth. So can you help us unpack what are the key drivers.
In terms of growing earnings and any color on ranges because the street certainly modeling a pretty.
Our robust earnings growth next year, so maybe well off the level set a little bit but.
Nick Sink: Is the better? You know, those leaders, sure, you fight for leading our commercial organization, you know, run most of the leading our supply chain organization. If, you know, if they want to go execute on something across the entire portfolio, figure out their teams and they go execute. And so we're seeing a much foster execution of our key initiatives. And I think that will be the real unlock over time. And where I expect to show up more than anywhere else is growth.
Really appreciate you, giving us an early look on 2024.
Yes happy to I think.
Confidence in margin expansion and earnings growth really stems from the work that we've talked about on this call. So re platforming the business getting after some synergy opportunity.
We've mentioned some changes in the security business that we've made.
So theres a lot of I'd say internal activities.
We see coming through the P&L next year, we have.
Nick Sink: Now, where are we in that? I think, you know, we've taken out kind of like, you know, the bite out of the EZ third. Now, again, I caution myself using more EZ because I think I team would say nothing was easy about it, but it's the obvious, you know, lower hanging fruit opportunities. The next to two thirds were really come from things like simplifying our systems, being able to work more easily across the business, taking out more duplication as we have more efficient systems in place. And, you know, we see that as a multi-year growth and productivity journey for the company.
We will be comping that inventory reduction headwind in the first quarter.
Given where production is likely going to be plan I wouldn't expect to get all of that back, but it will still be producing at a lever level lower than we were in 'twenty, one and 'twenty two.
And then when can we still see price cost benefit and our teams are still working through their strategic recommendations to our customers around pricing looking to have price contribute again positively to net sales growth next year.
Nick Sink: And Adam, just to put some financials behind it, as we've mentioned, you know, that first third or so was 55 million of growths SGNA out and we have invested some back in the business to drive some key priorities. And the teams have been busy working this year on the next phase of that organization of the future. And as we move to design it, it's going to come with process improvement system simplification to really get more lean, more lean-operating environment relative to where we are. Good. Okay, great. Yeah.
Really thinking about taking price using our category management capabilities and based on the strength of our brands and innovation in a way that maximizes our share, but also profit for us and our customers and we've demonstrated our ability to do that over the past couple of years. So I think it's really those three levers the internal actions we've taken some.
Comps on our costs are and then some price cost favorability.
Is there any way to size up those buckets for us.
We have a better handle and should we assume flat.
Nick Sink: And I guess the other switching gears question I would have is just on the the decking business, it seems like that's a, you know, positive, pretty meaningful positive standout. You guys, your peers, competitors in terms of, you know, versus the broader backdrop. I guess maybe if you have any color on the striving that how sustainable it is. You know, anything you're seeing there just because of the, because the broader, you know, I think home improvement market is kind of soft at this point.
Flattish market, if you're outpacing the market and Youre taking.
Price again, so maybe flat sales or you could actually get some topline growth, yes, I think so.
Our teams are still working through all the details we've seen enough to be able to give this confident now we will provide more in January.
And then yes, I think depending on where the market settles you would expect us to beat the market and typically organically, we're targeting 150 to 200 basis points above the market and so.
Nick Sink: Yeah. I would start a, you know, a couple things. I mean, firstly, again, you know, as you know, really well, just the underlying value prop of composite and PVC materials continues to really be healthy. And, you know, particularly in the end and all the other costs of installing a deck. And so, you know, that will take share against wood and will continue to do so for a very, very long time. And in our own capacity modeling, you know, we, we will play with that conversion ratio.
Nick Sink: We think it's somewhere between one and two percent of what so really, you know, here it might be a two in a slow year like this year, we think it might be closer to one, but it's still happening. And so I think that it does continue to drive the top line. The next piece. I think it's really important that you mentioned with sustainability, right. And we've tried to be very thoughtful and very judicious about how we go to market to do it in a sustainable way for us and all of our route to market partners.
That would imply organic growth in that flat to down low single digits, depending on how the market settles out.
Okay I appreciate the color.
Yeah.
Thank you.
<unk> reached the end of our question and answer session and with that Thank you for joining today's conference call. You may now disconnect.
Nick Sink: And so it would be thoughtful about pricing, be thoughtful about our product offerings, and therefore be thoughtful about there, where we all press the portfolio. And I think what you see in these latest results is, you know, we've been willing to give up a little bit of a lower margin business where we think it's not going to be healthier sustainable to go focus on areas that are and more off the price spectrum.
Nick Sink: And then that's where we ended up taking share. And I think that's what read. Through these results will continue to pursue that strategy because we think that's the most sustainable way to both this business after the long term. Great. Thanks. That's luck. Thank you.
Dave Barry: Our next question comes from the line of fill in with Jeffries. Please proceed with your question. Hey guys. Thanks for squeezing me on the call. And they really appreciate you giving us an early look on 2024 in terms of the market. You're calling for a low single digit decline in 2024, but you're expecting a margin expansion and earnings grow. So can you help us unpack what are the key drivers in terms of growing earnings and any color on ranges because the street certainly modeling pretty robust earnings growth next year.
Dave Barry: So maybe we'll offer a little bit, but really appreciate you giving us an early look on 2024. Yeah. Happy to, you know, I think our confidence in margin expansion and earnings growth really stems from the work that we talked about on this call. So, you know, replatforming the business, getting after some synergy opportunity. You know, we've mentioned some changes in the security business that we've made. There's a lot of internal activities that we see coming through the P&L next year.
Dave Barry: You know, we have what we'll be copying that inventory reduction headwind in the first quarter. Given where production is likely going to be planned, I wouldn't expect to get all of that back because we'll still be producing in a level lower than we were in 21 and 22. And then we still see price thought as a benefit. And, you know, our teams are still working through their strategic recommendations to our customers around pricing.
Dave Barry: But looking to have price contributes, again, positively to net sales growth next year. As we really think about taking price using our category management capabilities and based on the strength of our brands and innovations in a way that both maximizes our share but also profit for us and our customers, and we've demonstrated our ability to do that over the past couple of years. So I think it's really those three levels, the internal actions we've taken, some favorable comps on our cost bar, and then some price cost favorability.
Dave Barry: Is there any way to size up those buckets for us that we have a better handle, and should we assume flatish market, if you're outpacing the market and you're taking price again to maybe flat sales, or you could actually get some top line growth? Yeah, I think so, our teams are still working through all the details. We've seen enough to be able to give this confidence now, we'll provide more in January.
Dave Barry: And then yes, depending on where the market settles, you would expect us to beat the market, and typically organically we're targeting 150 to 200 spaces points above the market. And so that would imply organic growth in that flat to download single digits, depending on how the market settled down. Okay, appreciate the color. Thank you.
Operator: We have reached the end of our question and answer session, and with that, thank you for joining today's conference call. You may now...