Q3 2024 Fortune Brands Innovations Inc Earnings Call
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Morgan: Good day, ladies and gentlemen, my name is Morgan and I will be your conference operator today I would like to welcome you to the Fortune brands third quarter 2024 earnings Conference call. All lines have been placed on mute to prevent any background noise. Following the Speakers' remarks, we will open the call for a question and answer.
Session at this time I'd like to turn the call over to Leigh <unk>, Vice President of Investor Relations and corporate Affairs.
Li Please go ahead.
Leigh: Good afternoon, everyone and welcome to the Fortune brands innovations third quarter 2024 earnings call hopefully everyone's had a chance to review the earnings release, and our 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.
Leigh: 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.
Leigh: Any obligation to update or revise any forward looking statements, except as required by law.
Leigh: Any references to operating profit or 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.
Visit our website for a reconciliation.
With me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry Our Chief Financial Officer.
Leigh: Following the prepared remarks, we've allowed time to address some questions I will now turn the call over to Nick Nick.
Nick: Thank you Lee and thanks to everyone for joining us today.
Nick: On this call I will walk through the highlights of our third quarter performance give some color on the drivers of this performance, including progress on our digital strategy and offer some thoughts on the macro environment.
Nick: I'll, then turn the call over to Dave for a more detailed discussion of our financial results our updates to our guidance for the remainder of 2024 as well as some thoughts on our emerging expectations for 2025.
Nick: Before turning to our third quarter performance I would like to provide some context around our market.
Nick: While we are increasingly excited about the long term opportunities in our space for our company.
Nick: We continue to operate in a choppy environment with continuous year over year U S repair and remodel declines and unprecedented market disruption in China.
Nick: Our seasoned team is managing our business tightly while continuing to prioritize investments in our strategic growth priorities, including our digital transformation.
Nick: We have purposely moved away from less profitable categories to focus our resources on our supercharged higher margin opportunities.
Nick: We continue to streamline our operating model, which has allowed us to operate more efficiently reduce SG&A and fuel growth.
Nick: While our short term results remain pressured in a demand challenged environment. We are already seeing tangible results from the strategic actions and investments undertaken to advance our longer term growth opportunities.
Nick: As in Q2, we saw areas of sales strength in our core North American Mowen confirmatory businesses.
Nick: Our digital products portfolio. Once again saw some very exciting wins this past quarter and the organization continues to ramp our sales pipeline.
Nick: Finally, as we approach the two year anniversary of our new operating model, we are working as a more aligned and efficient organization, including developing new marketing campaigns launching new products Foster and building a new company purpose.
Nick: This new purpose, which better captures the ambition of fortune brands innovations will help unify and motivate all 11000 associates across the globe behind our unique opportunity.
Nick: Net sales were $1 $2 billion in the quarter down 8%.
Nick: Excluding China, which was again impacted by lower sales as the Chinese consumer remained very cautious our organic sales were down 5% in the quarter.
Nick: Quarterly point of sale, excluding China was down low single digits.
Nick: We have now annualized sales of amtech Yale in August into our organic results.
Nick: One year. Following this transaction, we remain very pleased with their performance as well as how they have helped accelerate our transformation into a digital disruptive company in luxury goods powerhouse.
Nick: We were fortunate the exceptional talent that we acquired along with these brands.
Nick: In the third quarter, we continued our trend of delivering strong margin results. Our operating margin in the quarter was 18, 7% up 130 basis points versus the third quarter of 2023.
Nick: Our strong margin performance resulted from continuous improvement initiatives targeted cost reduction activities as well as our continued focus on growing more profitable categories.
Nick: These initiatives enabled us to continue to make key investments in the quarter.
Nick: Our third quarter earnings per share were $1 16.
Nick: And our operating income was $216 million.
Nick: Turning first to our digital portfolio, we have made excellent progress with our flow strategy.
Nick: We have now signed seven insurance contracts.
Nick: These agreements feed our opportunity pipeline, creating leads which we then convert into sales.
Nick: In the third quarter alone we added around 20000 users of our flow Smartwater monitor and shut off in retail and E. Commerce. Pos performance was up 80% versus the third quarter of 2023 exceeding our expectations as consumers increasingly gain awareness of the incredible value of our flow.
Nick: <unk> device.
Nick: We expect our flow business to grow nicely in the fourth quarter of 2024 and expect this growth to accelerate into 2025.
Nick: We currently have agreements in place covering approximately 8 million policyholders and are in active discussions with homeowner insurance companies representing around 60 million homeowners.
Nick: We are also having continued conversations with municipalities and water utility companies across the country, including our recently announced partnership with Miami Dade County.
Nick: To give a sense of the amount of sales we have coming down the pipeline at a conservative 5% sales conversion assumption of the insurance agreements that we currently have under contract the potential sales pipeline. We currently have for flow is over $160 million.
Nick: While the timing of this backlog is hard to predict we reasonably expect to see these sales soon.
Nick: The significant progress we've made in just a few short months to expand the reach of our smart leak detection is truly impressive.
Nick: This past quarter, we again had some key wins in our digital product space and saw over 225000, new device Activations in the third quarter between both water and security and now have approximately $4 5 million users across our digital platforms.
Nick: This continued acceleration gives us confidence in the strong future of fortune brands as a digital leader.
Nick: In addition to the several large insurance partnerships with flow or yellow August businesses made progress with some key customers, including integrations with ADT.
Nick: <unk> and Airbnb.
Nick: In addition, we are excited that our new monster like connected lockout Tagout solution is now in beta testing at several facilities.
Nick: More to come on this which we believe will be the next big breakout opportunity.
Nick: While our digital product journey is well on its way we have much more runway ahead.
Nick: As we are still learning the best and most efficient ways to get our products to our customers and partners.
Nick: I expect more from us as we continue to evolve this growth engine.
Nick: As we stated last quarter, we see a path for well over a $1 billion in digital sales by 2030.
Nick: Turning now some thoughts on the current U S housing market and the market for our products.
Nick: The external macro environment continues to be uneven and challenging.
Nick: While the fed lowered interest rates earlier this quarter mortgage rates remain elevated above 6%.
Nick: And many homebuyers in homeowners remained on the sidelines.
Nick: Repair and remodel data has generally stabilized relative to larger declines over the prior 12 months.
Nick: But at a lower than historical rate as consumers remain cautious.
Nick: Notwithstanding the recent market softness we continue to be very excited about our future including in 2025.
Nick: Housing fundamentals remain positive with the need for housing remaining strong home prices holding steady and equity levels exceeding 35 trillion.
Nick: As we continue to evolve our portfolio and focus on our supercharged categories and.
Nick: And as we continue to build upon our already strong brands and introduce meaningful innovations, we expect that our products will further distinguish themselves.
Nick: With regards to the single family New construction market large builders continue to remain resilient as they use their balance sheets to lower mortgage rates and to help get people into new homes.
Nick: We expect that large homebuilders will continue to gain share and we have the added torque of the exposure to their growth.
Nick: While starts were down this summer.
Nick: Homebuilder market is continuing to grow.
Nick: In September the single family and HB housing market index for sales expectations for the next six months, we're up 8% versus prior year, while builder sentiment was also improving.
Nick: Turning to repair and remodel.
Nick: R&R is driven by several factors, including consumer confidence employment levels home equity levels and access to credit.
Nick: Our R&R has been down over the last two years. We believe this has created unprecedented levels of pent up demand.
Nick: One recent estimate putting it at $30 billion.
Nick: As we previously mentioned Americans have more than 35 trillion dollars in home equity up 81% from the end of 2019. However.
Nick: However, the usage of equity extraction vehicles like home equity loans and cash out refinancing has fallen as rates remain high.
Nick: In fact, the percentage of extracted home equity followed by more than half since the fourth quarter of 2019.
Nick: It is now estimated that over 14% of homeowners have mortgages above 6%.
Nick: Finally, making refinancing a sensible option.
Nick: In addition, as the federal Prime rate comes down next year, he likes and credit card rates should be more attractive and we would expect more people to utilize them to finance their R&R projects.
Nick: As interest rates declined and as mortgage lock in effect subsides.
Nick: We believe people will increasingly tap into their home equity for renovation projects through a variety of vehicles, including refinancing helix key loans and home equity agreements.
Nick: Finally, we expect that there will be a short term negative impact from the recent hurricanes on our fourth quarter sales as we have seen this in our point of sale data.
Nick: Our thoughts are with those impacted and we've been providing products and assistance to those in need.
Nick: We expect that there will be opportunities as communities rebuild in 2025 and our teams are working actively to capture this.
Nick: Additionally, these tragedies have put additional pressures on insurance companies to find innovative solutions to offset the losses that they can control through devices like flow.
Nick: As Dave will detail more completely in his section we are actively scenario planning for a variety of outcomes in 2025.
Nick: We believe the demand environment in the U S will inflect positively.
Nick: With the recovery more weighted to the second half of the year. Additionally.
Nick: Additionally, as we complete our pivot from lower growth less profitable categories to supercharged categories, our mix will help accelerate growth regardless of the external conditions.
Nick: We will focus on growing our core and accelerating our digital products and we'll continue to invest behind our long term growth priorities.
Nick: As we head toward the end of 2024 and set our sights on 2025, we are focused on execution and delivering on our commitment to above market sales growth and margin performance.
Nick: Turning now to an update on a key part of our transformation.
Nick: As we approach the two year anniversary of the cabinets spinoff and the reorganization of our business from a decentralized mechanical only business into a digital innovator I wanted to highlight a key milestone.
Nick: Over the past nine months, we leveraged associate feedback and senior leader conversations to develop a new purpose statement.
Nick: Porting strategic drivers.
Nick: And behaviors.
Nick: This new purpose captures the unique opportunities fortune brands innovations has to positively impact lives and communities.
Nick: Our purpose is to elevate every life by transforming spaces into havens.
Nick: This represents a bold multi decade vision for the company were through our products, we can impact the lives of our customers our associates and our communities.
Nick: We will bring our purpose to life by executing upon a specific set of behaviors and strategic drivers.
Nick: Grounding our business then.
Nick: <unk> clearly articulated purpose.
Nick: Unique set of strategic drivers and expected behaviors will help unlock higher levels of innovation increased employee engagement and retention.
Nick: Transformative growth.
Nick: Teams across the globe made a unified effort to ensure that every one of our 11000 associates had an opportunity to discuss our purpose behaviors and drivers helping to underscore each associates connection to how they can make an impact.
Nick: As the market improves the work that we've done to enhance our already strong culture will accelerate our opportunities for growth.
Nick: We've continued to refine the organization, including recently, reducing inefficiencies, while continuing to invest in key strategic priorities.
Nick: A more efficient structure has allowed us to make strategic decisions faster and with more precision and deploy our fortune brands advantaged capabilities across the portfolio.
Nick: As we have often noted this is a multiyear journey, but one which is already showing concrete results.
Nick: Turning now to segment results.
Nick: Starting with water innovations sales declined 8%, while operating margin improved 40 basis points versus last year.
Nick: Excluding China organic sales were down 2%.
Nick: We are managing the business tightly while continuing to make key investments in our most critical priorities like brand innovation and digital.
Nick: Our North American business delivered organic sales down low single digits.
Nick: Our brand metrics remains strong with mone being number one for unaided brand awareness and the most trusted brand.
Nick: Our whole home water performance showed significant share gains.
Nick: As I mentioned earlier flow continues to gain traction with insurance companies municipalities and consumers as the leader in this emerging space.
Nick: We are finding new use cases every day for this ecosystem of products.
Nick: While the new insurance municipality partnerships are continuing to ramp up our retail and E. Commerce point of sale accelerated to 80% in the third quarter highlighting the continued adoption by consumers.
Nick: We expect sales of our digital water business to accelerate through 2024 and throughout 2025.
Nick: Turning to our luxury business.
Nick: Organic sales were down low single digits and house of ROHL, which now includes amtech.
Nick: We're now one year into our acquisition of Amtech and the work to integrate the brand into our comprehensive and complementary luxury portfolio, including in showrooms is progressing very well.
Nick: And the feedback that we've received around our combined portfolio has been very encouraging.
Nick: We will have installed over 150, <unk> displace an existing house of ROHL showrooms by the end of the year and we expect this expansion effort will continue as we head into 2025.
Nick: Finally, China sales were down more than 40% this quarter as the Chinese consumer remains cautious in the real estate market remains soft.
Nick: Government has recently announced policies designed to spur investments in growth, but it is too early to know the magnitude or timing of impact.
Nick: In the meantime, the team continues to tightly manage costs and cash flow through the current conditions.
Nick: Given the magnitude of the decline in China. The business now presents very little bottom line risk and there's a nice option for future growth when the market returns.
Nick: Looking to the remainder of 2024 and into 2025, our water segment will focus on those parts of the market with the greatest potential for growth through our leadership in brands innovation and channel.
Nick: We continue to expect our relationships with the large national builders to benefit us and we believe new innovative product offerings will further distinguish us from our competition across our channels.
Nick: And of course, our Smartwater network, including our ecosystem of leak detection products.
Nick: Should offer us attractive growth opportunities.
Nick: We will continue to make thoughtful investments in our key priorities, including core branding and digital initiatives.
Nick: We also see future fuel for growth opportunities as we leverage our fortune brands advantaged capabilities to optimize our operations and supply chain and leverage our channel pricing expertise.
Nick: We remain very excited about our water business, particularly the opportunities we see to capture outsized growth.
Nick: Turning to outdoors.
Nick: Sales were down 6% with strong results in our doors business offset by Destocking in the wholesale decking channel.
Nick: Importantly, our margins were 18% an impressive 320 basis points above prior year.
Nick: We continue to focus on leveraging our expertise and investing behind our core categories and in those areas, which we expect will offer the most attractive growth opportunities.
Nick: Our door sales were flat as tailwind from new construction in recent retail wins drove sales and we continue to take share in fiberglass.
Nick: Furniture continues to see the benefit of the increase in starts and completions, which began last year and Larson is seeing nice performance driven by recent innovation launches, which we believe will further accelerate.
Nick: <unk> sales were down more than 30% in the quarter due to inventory actions in the wholesale channel and a slower demand market.
Nick: Importantly, our point of sale in the quarter was down mid single digits. We believe the results in our fiber one business reflect one time destocking impacts from a decking season, which was softer than expected and which are now behind us.
Nick: Looking forward to the remainder of 2024 and into 2025, we expect to continue to leverage our strength in our wholesale channel as well as our expertise and innovative materials.
Nick: We will continue to benefit from our strong relationships with large builders through mature business.
Nick: Additionally, recent product resets should drive accelerated performance in retail.
Nick: We are focused on outgrowing the attractive outdoors market across our brands.
Nick: Finally, turning to our security business sales declined 14% in the quarter and organic sales were down 12% of our point of sale was down mid single digits.
Nick: Results were primarily due to market softness destocking and consumer trade down on the digital shelf is the number of inferior and Noncompliant private label alternatives is unfortunately proliferated.
Nick: We are taking definitive action to reverse this trend.
Nick: Our brands are incredibly strong and we're responding by helping consumers understand the value proposition of our trusted brands.
Nick: For example, we recently launched a compelling new AD campaign, which highlights the fact that our fire safe keep documents protected from natural disasters like wildfires and floods, while many imposter brands failed to do so.
Nick: We are already seeing positive momentum in our point of sale.
Nick: Finally, we've increased our promotional cadence to better meet the market.
Nick: Importantly, this segment also saw a 250 basis points of operating margin improvement is our continuous improvement activities supply chain optimizations and cost controls resulted in expanding margins.
Nick: The significant cost work that we have done on these brands over the past few years is allowing us to invest in marketing innovation and promotions all while growing our margins.
Nick: A year into the acquisition of Yale in August we are utilizing their teams skills and knowledge throughout the business and their expertise is being deployed across our portfolio as we continue to accelerate our digital strategies.
Nick: Looking to the remainder of 2024 and into 2025, we will continue evolving our security business by focusing on our strong brands opportunities for differentiating innovation and by reinvesting some of the efficiencies gained from our recent optimization of the business to strengthen our already iconic core brands and add meaningful innovation to our products.
Nick: Including our exciting digital products.
Nick: We are proud of how our business is helping people and companies across the world protect the things that matter most.
Nick: As we finish up 2024 and turned to 2025, our teams continue to navigate near term challenges, while executing multiple initiatives to drive our long term success.
Nick: We will continue to strategically manage the business in light of the uneven market backdrop.
Nick: Focusing on those areas, where we have the greatest potential for above market growth.
Nick: Continuing to make key investments and also looking to manage our margins.
Nick: By taking these decisive actions now I believe we will be best positioned for accelerated growth.
Nick: On the external market conditions improve.
Dave Barry: I will now turn the call over to Dave.
Dave Barry: Thanks, Nick as a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance.
Nick: Additionally, comparisons will be made against the same period last year unless otherwise noted.
Nick: Let me start with our third quarter results as Nick highlighted our results reflect our focused execution on a tight set of priorities amidst a challenging external market.
Nick: Sales were $1 2 billion down, 8% and excluding the impact of China organic sales were down 5%.
Nick: Consolidated operating income was $216 million down 2%.
Nick: Total company operating margin improved to 18, 7% and earnings per share were $1 16 down 3%.
Nick: Free cash flow in the quarter was $176 million, which brings our year to date free cash flow generation to $262 million.
Nick: Turning to sales.
Nick: Net sales results were driven by China's softness low single digit Pos declines and inventory reductions in outdoors and security.
Nick: Our operating margin of 18, 7%.
Nick: 130 basis point improvement reflects our teams focus on a narrower set of priorities and our ability to drive continuous improvement savings.
Nick: Offset by our investment in our strategic initiatives, which we are confident will result in growth as the end markets improve.
Nick: Our team's execution resulted in decremental operating leverage of 4% and a sales environment that was softer than expected.
Nick: As I will detail later, our balance sheet remains strong and we have the flexibility to manage various economic outcomes, while deploying additional capital to drive shareholder value.
Nick: Now, let me provide more color on our segment results.
Nick: Beginning with water innovations sales were $635 million down 8%.
Nick: Excluding the impact of China organic sales were down 2%.
Nick: The organic net sales results reflect the impact of lower volumes amid a softer market.
Nick: Water innovations operating income was 156 million and operating margin remained strong at 24, 6%, reflecting lower volumes, partially offset by continuous improvement initiatives.
Nick: Both MAU in North America, and house of ROHL, Pos were down low single digits.
Nick: China sales declined over 40%.
Nick: Chinese market remained soft and while encouraging policies were recently announced to bolster the market. It is too early to predict a recovery.
Nick: That said the team continues to focus on re platforming the business, while preserving growth optionality.
Nick: Turning to outdoors sales were $343 million down 6%.
Nick: Sales reflect low single digit Pos and a mid single digit channel inventory reduction in the wholesale decking channel.
Nick: Segment operating income was $62 million up 13%.
Nick: Operating margins for the third quarter were 18% an improvement of 320 basis points.
Nick: Doors sales were flat.
Nick: Sales were positively impacted by higher volumes from single family, New construction offset by continued R&R softness.
Nick: In decking, we saw sales decrease by over 30% in the quarter drew.
Nick: Driven by channel Destocking.
Nick: Importantly.
Nick: POS was down mid single digits in the quarter.
Nick: Inventory levels remain low and we expect this quarter to be an abnormal result, with evidence of improving trends as we begin the fourth quarter.
Nick: Finally in security.
Nick: Sales decreased 14% to $178 million or down 12% on an organic basis.
Nick: Because of a softer market and the impact of lower quality import brands.
Nick: Total security segment operating income was $34 million.
Nick: 1%.
Nick: While operating margin was 19, 3% an increase of 250 basis points.
Nick: As actions, we took over the past few years continue to benefit our results.
Nick: Looking forward, we will invest in our brands and in product and software innovation to further position ourselves as the leader in the mechanical and digital security space.
Nick: Turning to the balance sheet and our cash flow performance.
Nick: Our balance sheet remains strong with cash of $345 million net debt of $2 4 billion and net debt to EBITDA leverage at two five times.
Nick: We repurchased $35 million of shares in the quarter and have repurchased $190 million of shares year to date.
Nick: We continue to focus on generating cash and we will remain opportunistic and returns focused around our share repurchase strategy, while also being mindful of our leverage ratio, which are trending as expected.
Nick: To summarize the quarter, we focused on executing our priorities for long term growth, while delivering strong margin results in a soft environment.
Nick: Our margin results reflect our commitment to productivity as well as the impact of actions we took to further align the organization around our strategic focus areas.
Nick: With that in mind I'll now provide an update to our 2020 for guidance.
Nick: As todays press release indicates we are revising our full year guidance.
Nick: This change accounts for several variables, including a choppy demand market.
Nick: Short term impacts in hurricane affected regions and lower channel inventory, partially offset by continued strength of digital water.
Nick: Importantly, it also reflects our commitment to maintaining investments in key priorities that we expect will generate future growth.
Nick: Our revised EPS guidance is now $4 17 to $4 23.
Nick: We continue to have full confidence in our long term strategy around our core and digital products.
Nick: Regarding the impact of the Hurricanes, we see the impact most acutely in our mowing and doors businesses with.
Nick: With Pos and impacted states down more than 25% since the hurricane.
Nick: We expect that single family, New construction will see an outsized impact as labor is redirected towards storm cleanup in the near term.
Nick: However, we expect these orders to more than recover as operations normalize and communities rebuild.
Nick: The full details of our updated guidance can be found in our press release.
Nick: As we head into 2025, we are actively planning for a variety of scenarios around the inflection in the demand environment.
Nick: While it is impossible to predict the exact timing of this inflection we continue to believe it is a matter of when not if and when the demand and flex we will be uniquely positioned for outperformance.
Nick: While we will not provide guidance assumptions for 2025 at this point, we are able to share some initial thoughts.
Nick: Our initial planning assumptions include a market with slightly positive growth.
Nick: We expect this growth will be weighted towards the second half of 2025 and.
Nick: And we expect above market performance accelerating from both our core and digital products driven by the initiatives underway.
Nick: We also expect to make meaningful margin progress and deliver strong EPS growth in this scenario.
Nick: Our teams have done a nice job navigating the uncertainty of the past few years.
Nick: And as we approach the end of 2024, we remain confident about the future of the business and our teams ability to create value.
Nick: We are focusing on controlling what we can control and continuing to pursue our long term strategy.
Speaker Change: I will now pass the call back to Lee for Q&A.
Nick: <unk>.
Nick: 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 had like to ask a question I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.
Nick: I will now turn the call back to the operator to begin the question and answer session. Thank you.
Speaker Change: If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad.
Speaker Change: Again to ask a question at this time press Star then the number one on your telephone keypad.
Speaker Change: Our first question comes from John Lovallo with UBS. Your line is open.
John Lovallo: Hey, guys. Thank you for taking my questions a lot of information here. So hoping hoping you can help us unpack some of this so starting at the top.
John Lovallo: And lowered the consolidated sales growth for the full year from a positive $2 five to.
John Lovallo: Four and a half to Dow or sorry to flat to plus one and then lowered the organic sales outlook from down one to down three to down one five to down three and a half in the downward revisions for our cross segments.
Speaker Change: In terms of the third quarter. It looks like results were below expectations across segments. It sounds like you know the operating environment, certainly got more challenging but I was hoping you can just kind of help us better unpack some of the moving pieces in the quarter and in the outlook I mean, how much of the decline is from the third quarter being softer versus expected fourth quarter.
John Lovallo: Following versus storm impact things of that nature.
Mike: This is Mike I'll try to break it down for you.
John Lovallo: And I think about it.
John Lovallo: Sales.
John Lovallo: Hi.
John Lovallo: On a reported.
John Lovallo: Outlook for organic excluding China.
John Lovallo: All of the payments.
John Lovallo: Hi.
Speaker Change: Within that point of sale, excluding China was down low single digits.
John Lovallo: So you start to dial it in a little bit and it certainly was weaker in the quarter than we thought they were particularly in the middle of the summer July and August.
John Lovallo: Particularly you saw I think we saw it across consumer company.
John Lovallo: Recovery towards the end of the quarter, but if I look at our performance in particular.
John Lovallo: England play.
John Lovallo: One we've deliberately pivoted away from.
John Lovallo: Martin Commoditized business.
Speaker Change: In favor of focusing on our insurance categories.
John Lovallo: And while we did that.
John Lovallo: True.
John Lovallo: And did exceed our own expectations on the digital side.
John Lovallo: But we need to convert those contracts to revenue faster.
John Lovallo: And to do that we need to ramp capacity, even faster than we thought.
John Lovallo: Jim.
Jim: Question on throughput, we signed the deal they are in the pipeline.
John Lovallo: But it's a space we're learning.
John Lovallo: Just like mechanical product you've got to go through the factory.
John Lovallo: Order to produce it and we realized we need to ramp that capacity.
John Lovallo: Faster than we thought and so the pipeline that didn't materialize.
John Lovallo: And the reported results for the quarter and then the third thing I would call out that is not a marketplace dynamic as we are seeing some trade down too.
John Lovallo: Knock off.
John Lovallo: Imposture brands estimates that regular private label, which you would expect with brands.
John Lovallo: Generally important brands are making false claims about safety and performance.
John Lovallo: But we're going to come back in.
John Lovallo: We are already doing some of that we have some of that in place we've got more of it in the pipeline.
John Lovallo: But where we've done it we already seen the appointment of sales start to Reaccelerate as we have done a better job explaining our consumers what the difference is and what the brand premium.
John Lovallo: So that all three of these being confident as I've kind of pull it altogether.
John Lovallo: Wow.
John Lovallo: After that we offer that.
John Lovallo: Had some stuff moving away from us a lot of goodness coming our way.
John Lovallo: Okay.
John Lovallo: Boston.
John Lovallo: John I would add a couple of things.
John Lovallo: <unk> guidance, a little bit, but before I do that.
John Lovallo: It's also evident that the team is focused on margin and as we.
John Lovallo: <unk> platform the business.
John Lovallo: Stepped away from some of the lower margin categories, where brands and innovation don't matter as much you see that even though sales were softer we're delivering very strong margin results, 4% decremental in a quarter that was softer than we anticipated.
John Lovallo: We are up 130 basis points in operating margin year over year, and 110 year to date, so the margin still coming through.
John Lovallo: A story, we expect to continue.
Speaker Change: And then on the guidance you are right to point out the consolidated change I'd say.
John Lovallo: That's roughly three percentage points lower for the year at the midpoint, which call it $135 million of ourselves.
Speaker Change: Any of that came through in the third quarter.
Speaker Change: Which leaves about 55, then in the fourth and of that in the fourth about half is hurricane related about half is continued consumer Pos softness that we're working to combat.
Speaker Change: That said as we look at the fourth quarter. It still leaves us in a spot where sales are down low single digit.
Speaker Change: Operating margin improvement of 100 basis point, maybe a bit better than that and high single to low double digit EPS until <unk>.
John Lovallo: <unk> growth and so while not as good as we may have thought 30 days ago.
John Lovallo: Still a pretty good quarter.
John Lovallo: Not as robust from the consumer.
John Lovallo: We're hoping heading into the back half of the year.
Speaker Change: That's helpful and then maybe focusing in on some of the margin improvements I mean, an outdoors sales were down six 5% year over year op margins were up I think over 300 basis points security was down I think 14% for sales and op margins were up 250 basis points.
Speaker Change: Even on a sequential basis sales were down and margins were up I mean, so what kind of drove the margin strength in those two segments, both sequentially and year over year.
John Lovallo: Yes.
Speaker Change: The outdoor a combination of.
Speaker Change: <unk> door volume being better year over year volume, even in Larson and star wars being better year over year.
Speaker Change: And then in decking some of the work we've done to us.
John Lovallo: Some of the lower profitable business that we've talked about in the past.
John Lovallo: Exited a window supply agreement for window components, we've looked hard at our sourcing and manufacturing around.
John Lovallo: And PVC decking to make sure we're driving continuous improvement productivity, there and so a lot of internal initiatives to really drive the margin and outdoors pump.
John Lovallo: Volume coming through on the door side, and then in security I talked about the actions. We took earlier this year to drive the cost savings by altering our footprint I mean, that's really coming through now and we would expect that to continue to be a tailwind into 2025 to Nick's point.
John Lovallo: This is an area where you are investing back in the business. We're investing in innovation that will come to market next year, we're investing in marketing campaigns for the first time in a while for these brands that will come to market.
John Lovallo: Now and into next year, and it's all related to combat some challenges on the shelf for import brand.
Speaker Change: Understood. Thank you guys.
John Lovallo: Yes.
Speaker Change: Your next question comes from Phil <unk> with Jefferies. Your line is open.
Phil: Hey, guys, Dave Thanks for giving US a framework for 25 fully appreciate that guidance per se.
John Lovallo: Frankly, I thought the back half 'twenty four is not that bad I mean, if you flush out some of the noise. It sounds like organic sales are down low single digits, 1% or so so we'll keep when we kind of look out to 'twenty. Five you said slight growth in the market and usually grow faster than the market by a few points.
John Lovallo: You're kind of talking about call it low to mid single digit organic growth and a little more meat in the first half and you see better growth and then.
Speaker Change: Help us kind of think through the leverage you have at play in terms of the margin side of things for next year as well.
John Lovallo: Yes.
Speaker Change: Great question, Bill, it's tough for us to pinpoint right now and still a lot of uncertainty.
Speaker Change: When youre seeing what happened with bond markets over the past month.
John Lovallo: It will lead to higher mortgage rates on the flip side I would expect the prime rate to continue to come down which is going to lead.
John Lovallo: Affordability benefits around refinances, and HELOC and home equity loan.
John Lovallo: And just everyday borrowings so it's tough for us to say I would say.
John Lovallo: We see the outperformance really driven in two areas one improving core category.
John Lovallo: Based on the actions that we're taking now and then two as we talked about conversion of the connected pipeline into sales.
John Lovallo: And so I would expect our outperformance to accelerate through the year as both of those things.
John Lovallo: Through the P&L, but hard to say what that level is based on the underlying market.
Speaker Change: Okay. That's helpful.
Speaker Change: As we get to 25 guidance I think you will have.
John Lovallo: Another 90 days and converting that.
John Lovallo: Connected.
John Lovallo: While our contract sales and we'll have a better sense southern Indiana.
John Lovallo: <unk> been very candid that kind of caught by surprise the pace at which we were able to ramp that business. We now have as I said $8 million.
John Lovallo: Under contract.
John Lovallo: Only a 5% conversion rate at the $160 million of sales reps in the pipeline.
Speaker Change: Got it.
John Lovallo: Website, you've got a bone collateral you got it.
John Lovallo: These things activated in markets and I think as we get a better sense of how quickly we're able to do that we'll be able to protect bench market outperformance.
John Lovallo: The fact that we add another 60 million policyholders under discussion right now at least proportion of which will convert the contract. We think it's going to get us a great pipeline.
Speaker Change: Okay. That's helpful actually that was my that's a perfect segue Nick.
Speaker Change: <unk> products, if I remember correctly last quarter, you were calling for maybe two points of incremental growth in the fourth quarter.
John Lovallo: How are you kind of shaping up in <unk> and then as we look out to 'twenty five.
Speaker Change: Sounds like a high class problem to have really strong demand and you've got some natural bottlenecks here. How do you unlock that supply are you actually building facilities or are you going through third party.
John Lovallo: Partners help size up that opportunity, perhaps in 'twenty, five and how that capacity unlock like shape up next year.
Speaker Change: I'll start with the second part of your question.
Speaker Change: The sales piece of what we expect.
John Lovallo: Think about it like.
John Lovallo: You might think about building a factory, but just in the virtual world and that's exactly what we're monitoring like you have.
John Lovallo: Certainly the aviators.
John Lovallo: A lot of our teamwork.
John Lovallo: Engineers their production people theyre, helping produce a product of the software firmware side, the things that you need to actually make that sale.
John Lovallo: And that we need to do.
John Lovallo: A great job of bringing payments even faster than we have now.
John Lovallo: History.
John Lovallo: Started.
John Lovallo: Zero in 'twenty, one and we're now investing very heavily in April as I mentioned last July.
John Lovallo: Find our digital opportunity and we've done that while delivering margin expansion.
John Lovallo: Super excited that we've been able to build it.
John Lovallo: This engine is.
John Lovallo: <unk> been a little I'll bring to us.
John Lovallo: Bolden.
John Lovallo: Foster and saw that as I'm out of breath.
John Lovallo: Growing investment where the growth of the businesses.
John Lovallo: Really just invest in the people.
John Lovallo: <unk> got sort of a.
John Lovallo: Onshore offshore.
John Lovallo: It's a combination.
John Lovallo: You really need be.
John Lovallo: The leaders in the fingers and the architects are part of our organization a lot of those people came across with the August acquisition are fabulous.
John Lovallo: But then we're also going to leverage.
John Lovallo: Outside help or offshore.
John Lovallo: Might be really steep and just a particular part of digital.
John Lovallo: The puzzle that you need to deliver and so.
John Lovallo: Oh that website.
John Lovallo: Myself and my executive team.
John Lovallo: And focus over the last.
John Lovallo: 90 days on just how do we.
John Lovallo: Printing capability and capacity to ramp is quite good.
John Lovallo: And on the financials, so I would say.
John Lovallo: We look at.
John Lovallo: Pipeline in Pls activity ahead of expectation if we look at how that's converting into sales is a bit behind where we were a quarter ago and the next one that's where we're trying to ramp up some targeted investment to unlock those sales.
John Lovallo: Feel really good about the opportunity is still there and growing working hard to convert to sale and then we had a little bit of inventory to come out of the Yale channel. The other headwind not just a sales number but I feel like that's a onetime event that will be through by the end of the year and really focus on getting this pipeline through and converting into sales and 25.
Speaker Change: Okay really appreciate the color guys.
John Lovallo: Our local partner on that in a way to think about today Bobby.
John Lovallo: We signed an agreement.
John Lovallo: Taken us.
John Lovallo: Two to three months, who you want to be in the two to three week range.
John Lovallo: Oh.
Speaker Change: Okay. Thank you.
John Lovallo: Yes.
Speaker Change: Your next question comes from Mike Dahl with RBC capital markets. Your line is open.
Mike Dahl: Hi, Thanks for taking my questions.
Mike Dahl: Just starting with that I want to make sure we're clear what's kind of the terminology on.
Mike Dahl: Well when you're talking about the pipeline and you are talking about $160 million in sales and assuming.
John Lovallo: 5% conversion is that actual is that the actual agreements you have in place or.
John Lovallo: Or this is still an estimate that you are using for our conversion rate based on just the number of insurance policies that you have.
John Lovallo: Coverage for right now.
John Lovallo: Yes.
John Lovallo: Got it.
John Lovallo: Thank you.
John Lovallo: Okay frontline interest in it.
John Lovallo: There are three.
John Lovallo: The three types of agreements we thought.
John Lovallo: Type of agreement, where the product may be recommended Walker.
John Lovallo: There is some type of agreement where the product is offered with a rebate.
John Lovallo: And then theres ever agreement, where it's actually mandated where the insurer will say to the policyholder.
John Lovallo: Unless you put that and you will get no more insurance from us now.
John Lovallo: Even in the third.
John Lovallo: Bucket, whereas mandated it's not an instant off I mean, you can imagine a world without.
John Lovallo: Publicly they just turn policies also again and give that homeowners some time to comply with the navy, but those are the three types of contracts are currently out and executing in the marketplace.
John Lovallo: To get to $160 million of saying, well, we took a mere 5% conversion rate.
Speaker Change: $160 million on the contracts you've already signed now.
John Lovallo: We expect that far far higher conversion rate.
John Lovallo: Yeah.
John Lovallo: Contract those will go in at.
John Lovallo: No it shouldn't be a 100% minus whatever policyholders choose to walk away. These are not markets, where you to walk away from.
John Lovallo: The insurance because.
John Lovallo: There isn't a whole lot of other insurance sounded places where it might be recommended.
John Lovallo: They pay for itself or the discount and that's a lower conversion rate. We felt 5% is very conservative, but that's how we.
John Lovallo: Get to the number of what we've already signed.
Speaker Change: That's really helpful. Nick if I could.
John Lovallo: Just.
John Lovallo: A clarification and then a second question a point of clarification would be that 5% do you work with your partners on Hey.
John Lovallo: This is kind of when we've done other things for other other parts of insurance policies, where youre, having locked in whether it's like alarm monitoring or whatever like this is kind of the conversion rate, we think about our what informs that and then the second.
John Lovallo: Separate question just in the spirit of this week's events can you remind us theres been a lot of moving pieces in your portfolio and your sourcing initiatives. What is your current cost of goods exposure to China and then what's your total cost.
John Lovallo: <unk> exposure.
John Lovallo: Outside of the U S but brought.
John Lovallo: Onshore at this point.
John Lovallo: Oh.
Speaker Change: So just on the on your first question, yes, we use very very precise model.
Speaker Change: With the insurers to understand.
John Lovallo: A when do you expect in savings will be I would tell you they're pretty eye watering when you see the numbers.
John Lovallo: Both by the number of policies that have and then from there we work on it.
Speaker Change: I would expect that.
Speaker Change: Right now the supply chain accordingly.
John Lovallo:
John Lovallo: The 5% is quite a bit lower than that that's a conservative assumption.
Speaker Change: Well, we are actually Gary with supply chain in these contracts.
John Lovallo: Yeah.
John Lovallo: Is something in excess of that so that's the first part.
John Lovallo: Just a general comment.
John Lovallo: Concept to think about the bank's inserts and diamond spoke a little bit.
John Lovallo: The sourcing piece.
John Lovallo: I will tell you that we have been in.
John Lovallo: In.
John Lovallo: The mode of optimizing the supply chain.
John Lovallo: Managing tariffs really all the way back for plywood tariffs in 2017.
John Lovallo: The team is extremely experienced in this area one of the things that I would say has evolved pretty significantly.
John Lovallo: It is our ability to flex.
John Lovallo: That supply chain and so we moved away.
John Lovallo: Almost everywhere from single source, we now have.
John Lovallo: Two sources in your secondary source may cost you more than your primary source, but if your primary source were to become more expensive Paris, you can dial that down and dielectric secondary source and rebalance that to be the most efficient.
John Lovallo: Of course added to that we still have a very large U S manufacturing footprint that becomes part of that total network solutions not just an independent thing.
John Lovallo: Rolling into place and that total amount of installation. So I'm confident that we are very well positioned at all.
Paris: Paris I'll tell you, we don't worry about it because it's a lot of hard work, but every time that happens our share tends to accelerate because of our ability to execute relative to our competition.
John Lovallo: And that's where we're going from here.
John Lovallo: And a final thought branded today, because we do have.
John Lovallo: That's why I see the gains that have been working on this for many months.
John Lovallo: The run up to I guess today and today with the expectation that we will see tariffs.
John Lovallo: I think there might be exactly where do you see them then to what degree but with the network that are prescribed pool.
John Lovallo: And the impact Mike I'd say going.
John Lovallo: Going back to 2018 and look at these set of assets, we had over 50% of our Cogs source from China, that's down to less than 25% today.
John Lovallo: The team has been working against that for a while tariffs are still in place or so.
John Lovallo: Mark that we can get out of China at a better looking broadly at our Cogs I would say.
John Lovallo: <unk> is roughly 40% to 50% of that.
John Lovallo: If you remember outdoors is almost fully U S.
John Lovallo: Water is a big piece in the U S and that security is a piece of it.
John Lovallo: Take that add a little business in China, the balance being rest of world.
John Lovallo: A portion of that rest of world as North American base.
John Lovallo: We do have options.
John Lovallo: Operating under a best case scenario of the tariffs from China at least theyre going to increase and the team is working to optimize that.
John Lovallo: Our network around that and we do view this as an opportunity.
Speaker Change: That's very helpful.
John Lovallo: Bob.
John Lovallo: Just referring to.
John Lovallo: Discussion, we had around jonathan's question.
John Lovallo: I'll just hit on that third point, we have seen in the market.
John Lovallo: Important brands a claim to perform.
John Lovallo: Whether it be in.
John Lovallo: <unk> security and fire space in water safety.
John Lovallo: At Marvell that our own testing demonstrates they do not deliver.
John Lovallo: Something that you'll see us increasingly ramp up our communications around some of it is directly to people's well being and health and safety.
John Lovallo: I don't.
John Lovallo: I don't think that.
John Lovallo: Increased focus on some of that product that we've seen coming into the marketplace necessarily get back.
Speaker Change: Yes, it makes sense. Thank you.
Speaker Change: Your next question comes from Trevor Allinson with Wolfe Research Your line is open.
Trevor Allinson: Hey, good evening. Thank you for taking my questions. Nick I wanted to follow up on what you were just referring to with some of that non compliant product competition.
Speaker Change: Keith.
Speaker Change: Diving a bit further talk about how big of an impact that had on the quarter.
John Lovallo: Is that something that you expect to linger here going forward I know you talked about some initiatives that youre going through to mitigate some of that but just any any way you can size that for us would be helpful.
Speaker Change: Yes, I'll give you a few example.
John Lovallo: I'll start off first.
John Lovallo: First is that kind of a sort of a fireside.
John Lovallo: Our payments by a fire space.
John Lovallo: And our waterproof safe and consumers really dependent on that particularly because of the fire zone or Arkansas.
John Lovallo: We see government.
John Lovallo: The products in the market that claims on the performance, we put up their own testing.
John Lovallo: And whereas our savings will withstand a fire.
John Lovallo: Bob.
John Lovallo: These important brands.
John Lovallo: Burn within two minutes.
John Lovallo: We put collateral out into the marketplace on the first one right.
John Lovallo: The collateral into the marketplace.
John Lovallo: Investment behind telling the story and we are seeing our point of sale turnaround and start to gain actually gain share.
John Lovallo: Very quickly I'm really within weeks of activity gives.
John Lovallo: Gives us confidence that when we tell the story.
John Lovallo: The consumer sees the value in that.
John Lovallo: We've now extended some of that work and things like refinery.
John Lovallo: We're finding their process that reach.
John Lovallo: Into the waterway.
John Lovallo: It's not legal.
John Lovallo: We will tell that story and so on and so forth.
John Lovallo: When he started.
John Lovallo: Back to the security.
John Lovallo: There is no doubt an opportunity or I wouldn't say impact.
John Lovallo: But unlike a regular way private label, where we don't really compete at opening price point and we've done just fine because people see the value and the <unk>.
John Lovallo: Premium from the brand, we strategically positioned our portfolio.
John Lovallo: These are places where people are advertising in a misleading way and is there anything competitive because they claiming the same.
John Lovallo: Is that range provided at a lower price than they actually are not providing them. So again, we told the story it seems to change the trajectory.
John Lovallo: We're just now making investments and taking the time to do that and we won't be doing that more publicly as we move forward.
Speaker Change: Trevor you see that most acutely in our organic security results year to date. This is Wes.
John Lovallo: Sure.
John Lovallo: Most of the problem is showing up and where the team is taking.
John Lovallo: Taking action to offset it.
Speaker Change: Okay, Yes, it makes a lot of sense I appreciate that color and then the second question is on China.
John Lovallo: There are clearly dynamic Nick I think you used the word unprecedented so a lot of uncertainty there can you talk about how you're thinking about that market moving forward. Thank.
John Lovallo: Thank you are nearing a bottom here I think comps are clearly getting a lot easier if any color there would be greatly appreciate it.
John Lovallo: Perfect.
John Lovallo: Your question hydrological risk.
John Lovallo: One is nearing a bottom.
John Lovallo:
John Lovallo: How long has gone on how much less.
John Lovallo: Hum.
John Lovallo: Construction, there has been as well as the fact that the.
John Lovallo: Government goes.
John Lovallo: And then to creating that bottom and stimulating that marketplace.
John Lovallo: That said I will say after in a couple of years and as we just don't like to comment on that the team. There has done a fabulous job managing that cost structure in that P&L Barbara.
John Lovallo: Still a profitable business for us and so the way we think about it as long as we can keep it isolated manage it in that way and frankly, when I look at the size of the profitable today, it's really.
John Lovallo: Zero.
John Lovallo: Noticeable impact on the total company.
John Lovallo: Really is a market that should give us exposure to growth when growth returns in the demographics of Italian growth has to return at some point and also have some really nice innovation engine for the business. You know we have a great team there that's it.
John Lovallo: Very very close to a lot of great innovation and that sort of the.
John Lovallo: Pipeline for the whole business and so that's really a lot of humility to team up with another great job, how we're thinking about it and how we're managing that when that bottom actually forums.
John Lovallo:
John Lovallo: Let me make no predictions. So we'll just manage a type of thing.
John Lovallo: Yeah.
Speaker Change: Yes, I would tell you I appreciate all the color. Thanks.
Speaker Change: Your next question comes from Stephen Kim with Evercore ISI. Your line is open.
Stephen Kim: Yes, thanks, very much guys I appreciate all the color so far.
Speaker Change: I wanted to ask you in security I think you had mentioned that Pos was down mid single digits, but you're guiding to sales down I think high single digits, if I'm not mistaken in the fourth quarter. I was just curious if you could sort of talk about that.
Speaker Change: Yeah, Yeah happy to the guide implies sales down mid to high single digits in the fourth quarter, that's right I'd say it.
Speaker Change: Continued consumer Pos softness that we are starting to see.
Speaker Change: Some of the trends turn based on the investments we made but those investment came late third quarter into the beginning of the fourth quarter and so.
Speaker Change: Relative to predict a complete turnaround yet in that Pos trends.
Speaker Change: Got it okay, but maybe it.
John Lovallo: The outlook into 25 might be better hopefully.
John Lovallo: And then sort of follow on this.
John Lovallo: These.
John Lovallo: These low.
John Lovallo: A low quality.
John Lovallo: Competition.
John Lovallo: Quality competitive products youre dealing with the digital security I just wanted to get a sense is this.
John Lovallo: Issue more pronounced in maybe in the online channel.
John Lovallo: Or is it are you seeing it pretty much across you know the retail across all retail.
John Lovallo: <unk> online and can you share with us like what share of your digital products are sold online.
Speaker Change: Yeah, why don't I.
John Lovallo: And you know again.
John Lovallo: Alright.
John Lovallo: He's done a problem, where they're lower quality.
John Lovallo: Just to sort of not competing at that bottom end of the channel, that's where they're making false claims.
John Lovallo: That we are combating and combating the success.
John Lovallo: That was where we saw this issue sort of emerge.
John Lovallo: Briefly and yes, you're absolutely right, it's much more prevalent in the online.
John Lovallo: And then space we've got.
John Lovallo: And there's probably less scrutiny around you know.
John Lovallo: <unk> claims that are put on on web pages.
John Lovallo: In terms of breaking out the percentage Dave.
John Lovallo: Steve It definitely over index, our mechanical channel breakdown, the digital products more apt to be purchased online at least today as we build out the other channel.
Speaker Change: Okay. Thanks, very much guys.
Speaker Change: Your next question comes from Adam Baumgarten with Zelman Your line is open.
Adam Baumgarten: Hey, good evening, guys just back to the digital I think you talked about 150 basis points of growth contribution in the back half of 'twenty four last quarter, maybe if you could update that number and then maybe what it was in the third quarter.
Speaker Change: Yes, we've talked about that a little.
Speaker Change: Or are there items I'd say.
Speaker Change: Our Pos.
Speaker Change: And our pipeline is exceeding expectations that sales number coming through is a bit below that just given our conversion rate from the pipeline into sales and we're investing to try to unlock that.
Speaker Change: <unk> mentioned, taking the time to revenue from three months down to three weeks. It was really the goal.
Speaker Change: Third quarter similar I'd say, that's very strong is up over 80%.
John Lovallo: Signing new agreements, we just have to get them into revenue.
Speaker Change: Okay got it and then just you mentioned trade down I think it's security or maybe singly imposter products are you seeing trade down across any other areas like outdoors and water.
Speaker Change: No not across.
Speaker Change: Outdoors.
Speaker Change: And yes, the water in a game.
Speaker Change: It's not so much trade down just to open five point's going to be really clear that's always been around.
Speaker Change: It's where we've seen false claims.
Speaker Change: That we have seen the impact in water.
John Lovallo: We've seen a bit and we've got some of those products and testing.
John Lovallo: I've asked this false claims they're noncompliant.
John Lovallo: And so we're confident in our path to work back against that.
John Lovallo: But in the non connected products youre, not seeing any material trade down.
Speaker Change: Uh huh.
John Lovallo: Actually I'm going to talk about connected products at all it would be very clear, it's not really about got it.
John Lovallo: It's really in mechanical things like fire space.
John Lovallo: Kitchen profit.
John Lovallo: Some in the padlock space, it's really mechanical products.
John Lovallo: Covenants are.
John Lovallo: It makes a whole bunch of claims doesn't perform where they claim.
Speaker Change: Got it that's helpful.
Speaker Change: Your next question comes from Matt Bouley with Barclays. Your line is open.
Matt Bouley: Good afternoon, everyone. Thanks for taking the questions.
Matt Bouley: I think you made a comment in the prepared remarks.
Matt Bouley: Around 2025 with that slightly positive market growth.
Matt Bouley: And that you would outgrow that then in that scenario you would see meaningful margin progress I think I heard you say and so given.
John Lovallo: Given your outgrowth that maybe youre seeing a little bit of volume leverage, but I guess what are the other pieces of the bridge that might get us to meaningful margin progress and how do you think about incremental margins in a scenario where the market would be slightly positive.
Speaker Change: I'll give you a bit of color and context that I'd say.
Speaker Change: We see margin next year coming from a few areas right so productivity.
John Lovallo: Had a very nice trajectory SG&A efficiency as we can.
John Lovallo: Continue to bring the businesses together and we're finding more SG&A efficiency and then mix, we expect to be favorable I think price cost will be.
John Lovallo: Be a slight benefit as well.
John Lovallo: The offset and why we're not being more specific right now is the level of investment back in the business. When we when we talk to guidance and it will be clear about where and how are you investing primarily around unlocking growth in setting us up for future growth opportunities. So that's the big offset lever right now the teams are still.
John Lovallo: Looking through and Nick and I look at the decision to make how much are we going to.
John Lovallo: And how quickly can we turn that into growth at the topline.
Speaker Change: Got it okay. Thanks for that Dave and then.
John Lovallo: Secondly on the decking business I think I heard you say you were seeing some evidence of improving trends to.
John Lovallo: To enter the fourth quarter and something around Destocking, if you guys.
John Lovallo: We're talking about it potentially being one time, just maybe hit on both of those points. Just have you seen the destocking subside or is there any more to come and what are you seeing around some of these improving trends here. Thank you.
Speaker Change: The destocking.
Speaker Change: I think the channel load it up for a season that was disappointing and so that came out.
John Lovallo: It was really primarily the driver of the Destocking on the Pos side.
John Lovallo: Down mid single in the quarter, you know as we've looked over the past four weeks. It has improved from there from a Pos standpoint, which which gives us confidence.
John Lovallo: Improving out of where we were in Q3.
Speaker Change: Okay, Thanks, Dave and good luck guys.
John Lovallo: Thanks.
Speaker Change: Thank you for joining the future brands third quarter 2024 earnings Conference call. You May now disconnect have a wonderful rest of your day.
John Lovallo: Okay.
John Lovallo: Yeah.
John Lovallo: Alright.
John Lovallo: I feel like a perfect anyway.
John Lovallo: Sure.
John Lovallo: Okay.
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John Lovallo: Okay.
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John Lovallo: Okay.
Morgan: Good day, ladies and gentlemen, my name is Morgan and I will be your conference operator today I would like to welcome you to the Fortune brands third quarter 2024 earnings Conference call. All lines have been placed on mute to prevent any background noise. Following the Speakers' remarks, we will open the call for a question and answer session.
Morgan: At this time I'd like to turn the call over to Leigh <unk>, Vice President of Investor Relations and corporate Affairs.
John Lovallo: Lee. Please go ahead.
John Lovallo: Good afternoon, everyone and welcome to the Fortune brands innovations third quarter 2024 earnings call hopefully everyone's had a chance to review the earnings release, and our 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.
John Lovallo: 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.
John Lovallo: These risks are detailed in our various filings with the SEC.
John Lovallo: The company does not undertake any obligation to update or revise any forward looking statements, except as required by law.
John Lovallo: 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.
John Lovallo: With me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry Our Chief Financial Officer.
John Lovallo: During the prepared remarks, we've allowed time to address some questions I will now turn the call over to Nick Nick.
Nick: Thank you Lee and thanks to everyone for joining us today.
Nick: On this call I will walk through the highlights of our third quarter performance give some color on the drivers of this performance, including progress on our digital strategy and offer some thoughts on the macro environment.
John Lovallo: I'll, then turn the call over to Dave for a more detailed discussion of our financial results our updates to our guidance for the remainder of 2024 as well as some thoughts on our emerging expectations for 2025.
John Lovallo: Before turning to our third quarter performance I would like to provide some context around our market.
John Lovallo: While we are increasingly excited about the long term opportunities in our space and for our company. We continue to operate in a choppy environment with continuous year over year U S repair and remodel declines and unprecedented market disruption in China.
John Lovallo: Our seasoned team is managing our business tightly while continuing to prioritize investments in our strategic growth priorities, including our digital transformation.
John Lovallo: We have purposely moved away from less profitable categories to focus our resources on our supercharged higher margin opportunities.
John Lovallo: We continue to streamline our operating model, which has allowed us to operate more efficiently reduce SG&A and fuel growth.
John Lovallo: While our short term results remain pressured in a demand challenged environment. We are already seeing tangible results from the strategic actions and investments undertaken to advance our longer term growth opportunities.
John Lovallo: As in Q2, we saw areas of sales strength in our core North American Moen confirmatory businesses are.
John Lovallo: Our digital products portfolio. Once again saw some very exciting wins this past quarter and the organization continues to ramp our sales pipeline.
John Lovallo: Finally, as we approach the two year anniversary of our new operating model, we are working as a more aligned and efficient organization, including developing new marketing campaigns launching new products faster and building a new company purpose.
John Lovallo: This new purpose, which better captures the ambition of fortune brands innovations will help unify and motivate all 11000 associates across the globe behind our unique opportunity.
John Lovallo: Net sales were $1 2 billion in the quarter down 8%.
John Lovallo: Excluding China, which was again impacted by lower sales as the Chinese consumer remained very cautious our organic sales were down 5% in the quarter.
John Lovallo: Importantly point of sale, excluding China was down low single digits.
John Lovallo: We have now annualized the sales of amtech Yale in August into our organic results.
John Lovallo: Following this transaction, we remain very pleased with their performance as well as how they have helped accelerate our transformation into a digital disruptive company in luxury goods powerhouse.
John Lovallo: We were fortunate the exceptional talent that we acquired along with these brands.
John Lovallo: In the third quarter, we continued our trend of delivering strong margin results. Our operating margin in the quarter was 18, 7% up 130 basis points versus the third quarter of 2023.
John Lovallo: Our strong margin performance resulted from continuous improvement initiatives.
John Lovallo: Cost reduction activities as well as our continued focus on growing more profitable categories.
John Lovallo: These initiatives enabled us to continue to make key investments in the quarter.
John Lovallo: Our third quarter earnings per share were $1 16.
John Lovallo: Operating income was $216 million.
John Lovallo: Turning first to our digital portfolio, we have made excellent progress with our flow strategy.
John Lovallo: We have now signed seven insurance contracts. These agreements feed our opportunity pipeline, creating leads which we then convert into sales.
John Lovallo: In the third quarter alone we added around 20000 users of our flow Smartwater monitor and shut off.
John Lovallo: In retail and E Commerce, Pos performance was up 80% versus the third quarter of 2023 exceeding our expectations as consumers increasingly gain awareness of the incredible value of our flow device.
John Lovallo: We expect our flow business to grow nicely in the fourth quarter of 2024 and expect this growth to accelerate into 2025.
John Lovallo: We currently have agreements in place covering approximately 8 million policyholders and are in active discussions with homeowner insurance companies representing around 60 million homeowners.
John Lovallo: We are also having continued conversations with municipalities and water utility companies across the country, including our recently announced partnership with Miami Dade County.
John Lovallo: To give a sense of the amount of sales we have coming down the pipeline at a conservative 5% sales conversion assumption of reinsurance agreements that we currently have under contract the potential sales pipeline. We currently have for flow is over $160 million.
John Lovallo: While the timing of this backlog is hard to predict we reasonably expect to see these sales soon.
John Lovallo: The significant progress we've made in just a few short months to expand the reach of our smart leak detection is truly impressive.
John Lovallo: This past quarter, we again had some key wins in our digital product space and saw over 225000 device activations in the third quarter between both water and security and now have approximately $4 5 million users across our digital platforms.
John Lovallo: This continued acceleration gives us confidence in the strong future of fortune brands as a digital leader.
John Lovallo: In addition to the several large insurance partnerships with flow or yellow August businesses made progress with some key customers, including integrations with ADT.
John Lovallo: <unk> and Airbnb.
John Lovallo: In addition, we are excited that our new monster like connected lockout Tagout solution is now in beta testing at several facilities.
John Lovallo: More to come on this which we believe will be the next big breakout opportunity.
John Lovallo: While our digital product journey is well on its way we have much more runway ahead.
John Lovallo: As we are still learning the best and most efficient ways to get our products to our customers and partners.
John Lovallo: Expect more from us as we continue to evolve this growth engine.
John Lovallo: As we stated last quarter, we see a path for well over a $1 billion in digital sales by 2030.
John Lovallo: Turning now some thoughts on the current U S housing market and the market for our products.
John Lovallo: The external macro environment continues to be uneven and challenging.
John Lovallo: While the fed lowered interest rates earlier this quarter mortgage rates remain elevated above 6%.
John Lovallo: And many homebuyers in homeowners remain on the sidelines.
John Lovallo: Repair and remodel data has generally stabilized relative to larger declines over the prior 12 months.
John Lovallo: Be it at a lower than historical rate as consumers remain cautious.
John Lovallo: Notwithstanding the recent market softness we continue to be very excited about our future including 2025.
John Lovallo: Housing fundamentals remain positive with the need for housing remaining strong home prices holding steady and equity levels exceeding 35 trillion.
John Lovallo: As we continue to evolve our portfolio and focus on our supercharged categories and.
John Lovallo: And as we continue to build upon our already strong brands and introduce meaningful innovations, we expect that our products will further distinguish themselves.
John Lovallo: With regards to the single family New construction market large builders continue to remain resilient as they use their balance sheets to lower mortgage rates and to help get people into new homes.
John Lovallo: We expect that large homebuilders will continue to gain share and we have the added torque of the exposure to their growth.
John Lovallo: While starts were down this summer.
John Lovallo: Homebuilder market is continuing to grow.
John Lovallo: In September the single family NIH be housing market index for sales expectations for the next six months, we're up 8% versus prior year, while builder sentiment was also improving.
John Lovallo: Turning to repair and remodel.
John Lovallo: R&R is driven by several factors, including consumer confidence employment levels home equity levels and access to credit.
John Lovallo: Our R&R has been down over the last two years. We believe this has created unprecedented levels of pent up demand with one recent estimate putting it at $30 billion.
John Lovallo: As we previously mentioned Americans have more than 35 trillion dollars in home equity up 81% from the end of 2019. However.
John Lovallo: However, the usage of equity extraction vehicles like home equity loans and cash out refinancing has fallen as rates remain high.
John Lovallo: In fact, the percentage of extracted home equity fell by more than half since the fourth quarter of 2019.
John Lovallo: He is now estimated that over 14% of homeowners have mortgages above 6%.
John Lovallo: Finally, making refinancing a sensible option.
John Lovallo: In addition, as the federal Prime rate comes down next year, he likes and credit card rates should be more attractive and we would expect more people to utilize them to finance their R&R projects.
John Lovallo: As interest rates declined and as mortgage lock in effect subsides, we believe people will increasingly tap into their home equity for renovation projects through a variety of vehicles, including refinancing helix T loans and home equity agreements.
John Lovallo: Finally, we expect that there will be a short term negative impact from the recent hurricanes on our fourth quarter sales as we have seen this in our point of sale data.
John Lovallo: Our thoughts are with those impacted and we've been providing products and assistance to those in need.
John Lovallo: We expect that there will be opportunities as communities rebuild in 2025 and our teams are working actively to capture this.
John Lovallo: Additionally, these tragedies to put additional pressure on insurance companies to find innovative solutions to offset the losses that they can control through devices like slow.
John Lovallo: As Dave will detail more completely in his section we are actively scenario planning for a variety of outcomes in 2025.
John Lovallo: We believe the demand environment in the U S will inflect positively.
John Lovallo: With the recovery more weighted to the second half of the year.
John Lovallo: Additionally, as we complete our pivot from lower growth less profitable categories to supercharged categories, our mix will help accelerate growth regardless of the external conditions.
John Lovallo: We will focus on growing our core and accelerating our digital products and we'll continue to invest behind our long term growth priorities.
John Lovallo: As we head toward the end of 2024 and set our sights on 2025, we are focused on execution and delivering on our commitment to above market sales growth and margin performance.
John Lovallo: Turning now to an update on a key part of our transformation.
John Lovallo: As we approach the two year anniversary of the cabinets spinoff and the reorganization of our business from a decentralized mechanical only business into a digital innovator I wanted to highlight a key milestone.
John Lovallo: Over the past nine months, we leveraged associate feedback and senior leader conversations to develop a new purpose statement with supporting strategic drivers and behaviors.
John Lovallo: This new purpose captures the unique opportunities fortune brands innovations has to positively impact lives and communities.
John Lovallo: Our purpose is to elevate every life by transforming spaces into havens.
John Lovallo: This represents a bold multi decade vision for the company were through our products, we can impact the lives of our customers our associates and our communities.
John Lovallo: We will bring our purpose to life by executing upon a specific set of behaviors and strategic drivers.
John Lovallo: Grounding our business then tick clearly articulated purpose.
John Lovallo: <unk> set of strategic drivers and expected behaviors will help unlock higher levels of innovation.
John Lovallo: <unk> employee engagement and retention.
John Lovallo: And transformative growth.
John Lovallo: Teams across the globe made a unified effort to ensure that every one of our 11000 associates had an opportunity to discuss our purpose behaviors and drivers helping to underscore each associates connection to how they can make an impact.
John Lovallo: As the market improves the work that we have done to enhance our already strong culture will accelerate our opportunities for growth.
John Lovallo: We've continued to refine the organization, including recently, reducing inefficiencies, while continuing to invest in key strategic priorities.
John Lovallo: A more efficient structure has allowed us to make strategic decisions faster and with more precision and deploy our fortune brands advantaged capabilities across the portfolio.
John Lovallo: As we have often noted this is a multiyear journey, but one which is already showing concrete results.
John Lovallo: Turning now to segment results.
John Lovallo: Starting with water innovations sales declined 8%, while operating margin improved 40 basis points versus last year.
John Lovallo: Excluding China organic sales were down 2%.
John Lovallo: We're managing the business tightly while continuing to make key investments in our most critical priorities like brand innovation and digital.
John Lovallo: Our North American business delivered organic sales down low single digits.
John Lovallo: Our brand metrics remains strong with mone being number one for unaided brand awareness and the most trusted brand.
John Lovallo: Our whole home water performance showed significant share gains.
John Lovallo: As I mentioned earlier flow continues to gain traction with insurance companies municipalities and consumers as the leader in this emerging space.
John Lovallo: We are finding new use cases every day for this ecosystem of products.
John Lovallo: While the new insurance municipality partnerships are continuing to ramp up our retail and E. Commerce point of sale accelerated to 80% in the third quarter highlighting the continued adoption by consumers.
John Lovallo: We expect sales of our digital water business to accelerate through 2024 and throughout 2025.
John Lovallo: Turning to our luxury business.
John Lovallo: Organic sales were down low single digits in house of ROHL, which now includes amtech.
John Lovallo: We're now one year into our acquisition of Amtech and the work to integrate the brand into our comprehensive and complementary luxury portfolio, including in showrooms is progressing very well.
John Lovallo: And the feedback that we've received around a combined portfolio has been very encouraging.
John Lovallo: We will have installed over 150, <unk> displace an existing house of ROHL showrooms by the end of the year and we expect this expansion effort will continue as we head into 2025.
John Lovallo: Finally, China sales were down more than 40% this quarter as the Chinese consumer remains cautious in the real estate market remains soft.
John Lovallo: Government has recently announced policies designed to spur investments in growth, but it is too early to know the magnitude or timing of impact.
John Lovallo: In the meantime, the team continues to tightly manage costs and cash flow through the current conditions.
John Lovallo: Given the magnitude of the decline in China. The business now presents very little bottom line risk and there's a nice option for future growth when the market returns.
John Lovallo: Looking to the remainder of 2024 and into 2025, our water segment will focus on those parts of the market with the greatest potential for growth through our leadership in brands innovation and channel.
John Lovallo: We continue to expect our relationships with the large national builders to benefit us and we believe new innovative product offerings will further distinguish us from our competition across our channels.
John Lovallo: And of course, our Smartwater network, including our ecosystem of leak detection products.
John Lovallo: Should offer us attractive growth opportunities.
John Lovallo: We will continue to make thoughtful investments in our key priorities, including core branding and digital initiatives.
John Lovallo: We also see future fuel for growth opportunities as we leverage our fortune brands advantaged capabilities to optimize our operations and supply chains and leverage our channel pricing expertise.
John Lovallo: We remain very excited about our water business, particularly the opportunities we see to capture outsized growth.
John Lovallo: Turning to outdoors.
John Lovallo: Sales were down 6% with strong results in our doors business offset by Destocking in the wholesale decking channel.
John Lovallo: Importantly, our margins were 18% an impressive 320 basis points above prior year.
John Lovallo: We continue to focus on leveraging our expertise and investing behind our core categories and in those areas, which we expect will offer the most attractive growth opportunities.
John Lovallo: Our door sales were flat as tailwind from new construction in recent retail wins drove sales and we continue to take share in fiberglass.
John Lovallo: Furniture continues to see the benefit of the increase in starts and completions, which began last year and Larson has seen nice performance driven by recent innovation launches, which we believe will further accelerate.
John Lovallo: <unk> sales were down more than 30% in the quarter due to inventory actions in the wholesale channel and a slower demand market.
John Lovallo: Importantly, our point of sale in the quarter was down mid single digits. We believe the results in our fiber one business reflect one time destocking impacts from a decking season, which was softer than expected and which are now behind us.
John Lovallo: Looking forward to the remainder of 2024 and into 2025, we expect to continue to leverage our strength in our wholesale channel as well as our expertise and innovative materials.
John Lovallo: We will continue to benefit from our strong relationships with large builders through mature business.
John Lovallo: Additionally, recent product resets should drive accelerated performance in retail.
John Lovallo: We are focused on outgrowing the attractive outdoors market across our brands.
John Lovallo: Finally, turning to our security business sales declined 14% in the quarter and organic sales were down 12%.
John Lovallo: Point of sale was down mid single digits.
John Lovallo: <unk> were primarily due to market softness destocking and consumer trade down on the digital shelf is the number of inferior and Noncompliant private label alternatives is unfortunately proliferated.
John Lovallo: We are taking definitive action to reverse this trend.
John Lovallo: Our brands are incredibly strong and we.
John Lovallo: We're responding by helping consumers understand the value proposition of our trusted brands.
John Lovallo: For example, we recently launched a compelling new AD campaign, which highlights the fact that our fire safe keep documents protected from natural disasters like wildfires floods while men.
John Lovallo: Imposter brands failed to do so.
John Lovallo: We are already seeing positive momentum in our point of sale.
John Lovallo: Finally, we've increased our promotional cadence to better meet the market.
John Lovallo: Importantly, this segment also saw a 250 basis points of operating margin improvement is our continuous improvement activities supply chain optimizations and cost controls resulted in expanding margins.
John Lovallo: The significant costs work that we have done on these brands over the past few years is allowing us to invest in marketing innovation and promotions.
John Lovallo: All while growing our margins.
John Lovallo: A year into the acquisition of Yale in August we are utilizing their teams skills and knowledge throughout the business and their expertise is being deployed across our portfolio as we continue to accelerate our digital strategies.
John Lovallo: Looking to the remainder of 2024 and into 2025, we will continue evolving our security business by focusing on our strong brands opportunities for differentiating innovation and by reinvesting some of the efficiencies gained from our recent optimization of the business to strengthen our already iconic core brands and add meaningful innovation to our <unk>.
John Lovallo: Thanks.
John Lovallo: Including our exciting digital products.
John Lovallo: We are proud of how our business is helping people and companies across the world protect the things that matter most.
John Lovallo: As we finish up 2024 and turned to 2025.
John Lovallo: Our teams continue to navigate near term challenges, while executing multiple initiatives to drive our long term success.
John Lovallo: We will continue to strategically manage the business in light of the uneven market backdrop.
John Lovallo: Focusing on those areas, where we have the greatest potential for above market growth.
John Lovallo: Continuing to make key investments and also looking to manage our margins.
John Lovallo: By taking these decisive actions now.
John Lovallo: I believe we will be best positioned for accelerated growth.
John Lovallo: On the external market conditions improve.
Speaker Change: I will now turn the call over to Dave.
Dave Barry: Thanks, Nick as a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance.
Dave Barry: Additionally, comparisons will be made against the same period last year unless otherwise noted.
John Lovallo: Let me start with our third quarter results as Nick highlighted our results reflect our focused execution on a tight set of priorities amidst a challenging external market.
John Lovallo: Sales were $1 2 billion down, 8% and excluding the impact of China organic sales were down 5%.
John Lovallo: Consolidated operating income was $216 million down 2%.
John Lovallo: Total company operating margin improved to 18, 7% and earnings per share were $1 16 down 3%.
John Lovallo: Free cash flow in the quarter was $176 million, which brings our year to date free cash flow generation to $262 million.
John Lovallo: Turning to sales net.
John Lovallo: Net sales results were driven by China's softness.
John Lovallo: Low single digit Pos declines and inventory reductions in outdoors and security.
John Lovallo: Our operating margin of 18, 7%.
John Lovallo: A 130 basis point improvement reflects our teams focus on a narrower set of priorities and our ability to drive continuous improvement savings.
John Lovallo: Offsetting by our investment in our strategic initiatives, which we are confident will result in growth as the end markets improve.
John Lovallo: Our team's execution resulted in decremental operating leverage of 4% and a sales environment that was softer than expected.
John Lovallo: As I will detail later, our balance sheet remains strong and we have the flexibility to manage various economic outcomes, while deploying additional capital to drive shareholder value.
John Lovallo: Now, let me provide more color on our segment results.
John Lovallo: Beginning with water innovations sales were $635 million down 8% excluding.
John Lovallo: The impact of China organic sales were down 2%.
John Lovallo: The organic net sales results reflect the impact of lower volumes amid a softer market.
John Lovallo: Water innovations operating income was 156 million and operating margin remained strong at 24, 6%, reflecting lower volumes, partially offset by continuous improvement initiatives.
John Lovallo: Both MAU in North America, and house of ROHL, Pos were down low single digits.
John Lovallo: China sales declined over 40% the Chinese market remains soft and while encouraging policies were recently announced to bolster the market. It is too early to predict a recovery.
John Lovallo: That said the team continues to focus on re platforming the business, while preserving growth optionality.
John Lovallo: Turning to outdoors sales were $343 million down 6%.
John Lovallo: Sales reflect low single digit Pos and a mid single digit channel inventory reduction in the wholesale ducking channel.
John Lovallo: Segment operating income was $62 million up 13%.
John Lovallo: Operating margins for the third quarter were 18% an improvement of 320 basis points.
John Lovallo: Doors sales were flat.
John Lovallo: Sales were positively impacted by higher volumes from single family, New construction offset by continued R&R softness.
John Lovallo: In decking, we saw sales decrease by over 30% in the quarter.
John Lovallo: Driven by channel Destocking.
John Lovallo: Importantly.
John Lovallo: POS was down mid single digits in the quarter.
John Lovallo: Inventory levels remain low and we expect this quarter to be an abnormal result, with evidence of improving trends as we begin the fourth quarter.
John Lovallo: Finally in security.
John Lovallo: Sales decreased 14% to $178 million or down 12% on an organic basis, because of a softer market and the impact of lower quality import brands.
John Lovallo: Total security segment operating income was $34 million.
John Lovallo: 1%.
John Lovallo: While operating margin was 19, 3% an increase of 250 basis points.
John Lovallo: The actions we took over the past few years continue to benefit our results.
John Lovallo: Looking forward, we will invest in our brands and in product and software innovation to further position ourselves as the leader in the mechanical and digital security space.
John Lovallo: Turning to the balance sheet and our cash flow performance.
John Lovallo: Our balance sheet remains strong with cash of $345 million net debt of $2 4 billion and net debt to EBITDA leverage at two five times.
John Lovallo: We repurchased $35 million of shares in the quarter and have repurchased $190 million of shares year to date.
John Lovallo: We continue to focus on generating cash and we will remain opportunistic and returns focused around our share repurchase strategy, while also being mindful of our leverage ratio, which are trending as expected.
John Lovallo: To summarize the quarter, we focused on executing our priorities for long term growth, while delivering strong margin results in a soft environment.
John Lovallo: Our margin results reflect our commitment to productivity as well as the impact of actions we took to further align the organization around our strategic focus areas.
John Lovallo: With that in mind I'll now provide an update to our 2020 for guidance.
John Lovallo: As todays press release indicates we are revising our full year guidance.
John Lovallo: This change accounts for several variables, including a choppy demand market.
John Lovallo: Short term impacts in hurricane affected regions and lower channel inventory, partially offset by continued strength of digital water.
John Lovallo: Importantly, it also reflects our commitment to maintaining investments in key priorities that we expect will generate future growth.
John Lovallo: Our revised EPS guidance is now $4 17 to $4 23.
John Lovallo: We continue to have full confidence in our long term strategy around our core and digital products.
John Lovallo: Regarding the impact of the Hurricanes, we see the impact most acutely in our mowing and doors businesses with.
John Lovallo: With Pos and impacted states down more than 25% since the hurricane.
John Lovallo: We expect that single family, New construction will see an outsized impact as labor is redirected towards storm cleanup in the near term.
John Lovallo: However, we expect these orders to more than recover as operations normalize and communities rebuild.
John Lovallo: The full details of our updated guidance can be found in our press release.
John Lovallo: As we head into 2025, we are actively planning for a variety of scenarios around the inflection in the demand environment.
John Lovallo: While it is impossible to predict the exact timing of this inflection we continue to believe it is a matter of when not if and when the demand and flex we will be uniquely positioned for outperformance.
John Lovallo: While we will not provide guidance assumptions for 2025 at this point, we are able to share some initial thoughts.
John Lovallo: Our initial planning assumptions include a market with slightly positive growth.
John Lovallo: We expect this growth will be weighted towards the second half of 2025 and.
John Lovallo: And we expect above market performance accelerating from both our core and digital products driven by the initiatives underway.
John Lovallo: We also expect to make meaningful margin progress and deliver strong EPS growth in this scenario.
John Lovallo: Our teams have done a nice job navigating the uncertainty of the past few years.
John Lovallo: And as we approach the end of 2024, we remain confident about the future of the business and our teams ability to create value.
John Lovallo: We are focusing on controlling what we can control and continuing to pursue our long term strategy.
Speaker Change: I will now pass the call back to Lee for Q&A.
John Lovallo: <unk>.
John Lovallo: Thanks, Dave that concludes our prepared remarks, we will now begin taking a limited number of questions. Since there may be a number of you would like to ask a question I'll ask that you limit. Your initial questions to two and then re enter the queue to ask additional questions I will now turn the call back to the operator to begin the question and answer session. Thank you.
Speaker Change: If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad.
Speaker Change: Once again to ask a question at this time press Star then the number one on your telephone keypad.
Speaker Change: Our first question comes from John Lovallo with UBS. Your line is open.
John Lovallo: Hey, guys. Thank you for taking my questions a lot of information here. So hoping hoping you can help us unpack some of this so starting at the top.
Speaker Change: The consolidated sales growth for the full year from a positive two and a half two.
Speaker Change: Four and a half to down to flat to plus one and then lowered the organic sales outlook from down one to down three to down one and a half down three and a half in the downward revisions for our cross segments.
Speaker Change: In terms of the third quarter. It looks like results were below expectations across segments. It sounds like the operating environment, certainly got more challenging but I was hoping you could just kind of help us better unpack some of the moving pieces in the quarter and in the outlook I mean, how much of the decline is from the third quarter being softer versus expected fourth quarter.
Speaker Change: Slowing versus storm impact things of that nature.
Speaker Change: Sure. John This is Mike I'll try to break it down.
Speaker Change: Thank you.
Speaker Change: About it.
Speaker Change: Sales.
Speaker Change: On a reported.
Speaker Change: Outlook for organic excluding China.
Speaker Change: All other payments down five.
Speaker Change: Within that point of sale, excluding China was down low single digits.
Speaker Change: Start to dial it in a little bit and certainly I'd say.
Speaker Change: Weaker in the quarter than we had thought they were particularly in the middle of the Summer July August.
Speaker Change: Particularly you saw I think we saw that across consumer company.
Speaker Change: Some recovery towards the end of the quarter.
Speaker Change: If I look at our performance in particular that really brings into play.
Speaker Change: One we've deliberately pivoted away from.
Speaker Change: Martin Commoditize business in favor of focusing on our insurance category.
Speaker Change: And while we did that.
Speaker Change: Two.
Speaker Change: We work and did exceed our own expectations on the digital side.
Speaker Change: But we need to convert those contracts to revenue faster.
Speaker Change: And to do that we need to ramp capacity, even faster than we thought.
Speaker Change: Just a question of throughput we signed the deal in the pipeline.
Speaker Change: But it's a space we're learning just.
Speaker Change: Just like mechanical product you've got to go through the factory in order to produce it and we realized we need to ramp that capacity.
Speaker Change: Faster than we thought and so the pipeline that didn't materialize.
Speaker Change: And the reported results for the quarter and then the third thing I would call out that as you know our marketplace dynamic as we are seeing some trade down too.
Speaker Change: Knock off.
Speaker Change: Imposture brands.
Speaker Change: Mr regular private label, which you would expect with brands.
Speaker Change: Generally important brands are making false claims about safety and performance.
Speaker Change: That we're going to come back and as I described we're already doing some of that we have some of that in place we've got more of it in the pipeline.
Speaker Change: But where we've done it we've already seen the appointment of sales start to Reaccelerate as we are doing a better job explains our consumers what the difference is and what the premium.
Speaker Change: And so that all three of these being confident as I've kind of pull it altogether.
Speaker Change: While it has been softer.
Speaker Change: I had some stuff moving away from us a lot of goodness coming our way.
Speaker Change: Okay.
Speaker Change: In Boston.
Speaker Change: And John I'd add a couple of things and unpack guidance, a little bit, but before I do that.
Speaker Change: What is also evident as the team's focus on margin and as we re platform. The business then.
Speaker Change: Stepped away from some of the lower margin categories, where brands and innovation don't matter as much you see that even though sales were softer we're delivering very strong margin results, 4% decremental in a quarter that was softer than we anticipated.
Speaker Change: We are up 130 basis points in operating margin year over year, and 110 year to date, so the margin still coming through.
Speaker Change: A story, we expect to continue.
Speaker Change: And then on the guidance you are right to point out the consolidated change I'd say.
Speaker Change: That's roughly three percentage points lower for the year at the midpoint, which call it $135 million of ourselves.
Speaker Change: Any of that came through in the third quarter.
Speaker Change: Which leaves about 55, then in the fourth and of that in the fourth about half is hurricane related about half is continued consumer Pos softness that we're working to come back.
Speaker Change: That said as we look at the fourth quarter. It still leaves us in a spot where sales are down low single digit.
Speaker Change: We have operating margin improvement of 100 basis points, maybe a bit better than that and high single to low double digit EPS and so.
Speaker Change: UBS growth so while not as good as we may have thought 30 days ago.
Speaker Change: Still a pretty good quarter.
Speaker Change: Not as robust from the consumer we were hoping heading into the back half of the year.
Speaker Change: That's helpful and then maybe focusing in on some of the margin improvement I mean, an outdoors sales were down six 5% year over year op margins were up I think over 300 basis points security was down I think 14% for sales and op margins were up 250 basis points.
Speaker Change: Even on a sequential basis sales were down and margins were up I mean, so what kind of drove the margin strength in those two segments, both sequentially and year over year.
Speaker Change: Yes.
Speaker Change: The outdoor a combination of <unk>.
Speaker Change: Doors thermometer door volume being better year over year volume, even in Larson and star wars being better year over year.
Speaker Change: And then in decking some of the work we've done to shed some of the lower profitable business that we I think we've talked about in the past we.
Speaker Change: Exited a window supply agreement for a window components.
Speaker Change: We've looked hard at our sourcing and manufacturing around.
Speaker Change: And PVC decking to make sure we're driving continuous improvement productivity, there and so a lot of internal initiatives to really drive the margin and outdoors pump volume coming through on the door side and then in security I talked about the actions. We took earlier this year to drive the cost savings by altering our footprint.
Speaker Change: I mean, that's really coming through now and we would expect that to continue to be a tailwind into 2025 to Nick's point. This is an area where you are investing back into the business investing in innovation that will come to market next year and we're investing in marketing campaigns for the first time in a while for these brands that will come to market.
Speaker Change: Now and into next year, and it's all related to combat some challenges on the shelf or import brands.
Speaker Change: Understood. Thank you guys.
Speaker Change: Yes.
Speaker Change: Your next question comes from Phil <unk> with Jefferies. Your line is open.
Speaker Change: Hey, guys, Dave Thanks for giving US a framework for 25 fully appreciate that guidance per se.
Speaker Change: Frankly, I thought the back half 'twenty four is not that I mean, if you flush out some of the noise. It sounds like organic sales are down low single digits, 1% or so so we will when we kind of look out to 2005, you said slight growth in the market and usually grow faster than the market by a few points.
Speaker Change: We're kind of talking about call it low to mid single digit organic growth and a little more meat in the first half and you see better growth and then.
Speaker Change: Help us kind of think through the leverage you have at play in terms of the margin side of things for next year as well.
Speaker Change: Yes.
Speaker Change: Great question, Bill, it's tough for us to pinpoint right now and still a lot of uncertainty.
Speaker Change: When you've seen what happened with bond markets over the past month.
Speaker Change: He will lead to higher mortgage rates on the flip side, we expect the prime rate to continue to come down which is going to lead.
Speaker Change: Affordability benefits around refinances, and HELOC and home equity loan.
Speaker Change: And just everyday borrowings so it's tough for us to say I would say.
Speaker Change: We see the outperformance really driven in two areas one improving core category.
Speaker Change: Based on the actions that we're taking now and then two as we talked about conversion of the connected pipeline into sales.
Speaker Change: And so I would expect our outperformance to accelerate through the year as both of those things.
Speaker Change: Through the P&L, but hard to say kind of what that level is based on the underlying market.
Speaker Change: Okay. That's helpful.
Speaker Change: As we get to 25 guidance I think you will have.
Speaker Change: Another 90 days and converting that connected.
Speaker Change: While contract sales and we'll have a better sense southern Indiana.
Speaker Change: To be very candid it kind of caught by surprise the pace at which we were able to ramp that business. We now have as I said $8 million.
Speaker Change: Others under contract.
Speaker Change: Only a 5% conversion rate at the $160 million of sales rep in the pipeline, but what we're learning is you got it.
Speaker Change: Set up websites you got a bone collateral you got it.
Speaker Change: If these things activated in market and I think as we get a better sense of how quickly we're able to do that we'll be able to essentially market outperformance.
Speaker Change: Expect the fact that we had another 60 million policyholders under discussion right now at least proportionate, which will convert the contract.
Speaker Change: He's going to give us a great pipeline.
Speaker Change: Okay. That's helpful actually that was my that's a perfect segue neck.
Speaker Change: On connected products, if I remember correctly last quarter, you were calling for maybe two points of incremental growth in the fourth quarter. How are you kind of shaping up in <unk> and then as we look out to 'twenty five that sounds like a high class problem to have really strong demand and you've got some natural bottlenecks here how do you unlock that supply are you ask.
Speaker Change: Building facilities or are you going through a third party.
Speaker Change: Partners help size up that opportunity, perhaps in 'twenty, five and how that capacity unlock like shape up next year.
Speaker Change: I'll start with the second part of your question.
Speaker Change: The sales piece of what we expect.
Speaker Change: Think about it like.
Speaker Change: You might think about building a factory, but just in the virtual world and that's exactly what we're monitoring like you have.
Speaker Change: Certainly the aviators.
Speaker Change: A lot of our teamwork.
Speaker Change: Engineers their production people theyre, helping produce a product with a software firm where sites are things that you need to actually make that sale.
Speaker Change: And that we need to do.
Speaker Change: A great job of ramping even faster than we have now.
Speaker Change: History.
Speaker Change: Started almost zero in 'twenty, one and we're now investing very heavily in April Dimensionalize for July.
Speaker Change: Find our digital opportunity and we've done that while delivering margin expansion.
Speaker Change: Super excited that we've been able to build it.
Speaker Change: This engine.
Speaker Change: It's been a little eye opening to us that we probably have to Goldman.
Speaker Change: Foster and saw that as you know.
Speaker Change: Growing investment where the growth of the business and really just invest in the people.
Speaker Change: Got it.
Speaker Change: Is it onshore offshore.
Speaker Change: Combination.
Speaker Change: E D.
Speaker Change: The leaders in the fingers and the architects are part of our organization a lot of those people came across with the August acquisition. They are fabulous.
Speaker Change: But then we're also going to leverage.
Speaker Change: Outside help or offshore parties that might be really steep and just a particular part of digital piece of the puzzle that you need to deliver and so.
Speaker Change: Oh that websites.
Speaker Change: I felt my executive team.
Speaker Change: Really the focus over the last.
Speaker Change: 90 days or just how do we.
Speaker Change: The capability and capacity to ramp this even quicker.
Speaker Change: And on the financials, so I would say.
Speaker Change: We look at.
Speaker Change: Pipeline in Pls activity ahead of expectation if we look at how that's converting into sales, it's a bit behind where we were a quarter ago and the next one that's where I'm trying to wrap up some targeted investment to unlock those sales.
Speaker Change: But feel really good about the opportunity is still there and growing working hard to convert to sale and then we had a little bit of inventory to come out of the Yale channel. The other headwind not just a sales number but I feel like that's a onetime event that will be through by the end of the year and really focus on getting this pipeline through and converting into sales and 25.
Speaker Change: Okay really appreciate the color guys.
Speaker Change: Our local partner on that in a way to think about today Bobby.
Speaker Change: <unk> signed an agreement.
Speaker Change: Taken us.
Speaker Change: Two to three months, who you want to be in that two to three week range.
Speaker Change: Nicole.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from Mike Dahl with RBC capital markets. Your line is open.
Mike Dahl: Hi, Thanks for taking my questions.
Speaker Change: Just starting with that I want to make sure we're clear what's kind of the terminology on well.
Speaker Change: Well when you're talking about the pipeline and you are talking about $160 million and in sales and assuming.
Speaker Change: 5% conversion is that actual is that the actual agreements you have in place or.
Speaker Change: Or this is still an estimate that you are using for conversion rate based on just the number of insurance policies that you have.
Speaker Change: Coverage for right now.
Speaker Change: Yes.
Speaker Change: Got it.
Speaker Change: Okay frontline interest in it.
Speaker Change: There are three.
Speaker Change: Three types of agreements resigned.
Speaker Change: Type of agreement, where the product may be recommended Robert.
Speaker Change: There is some type of agreement where the product is offered with a rebate.
Speaker Change: And then theres ever agreement, where it's actually mandated whereas the insurer will stay to the policyholder unless you put the thing you will get no.
Speaker Change: More insurance from us.
Speaker Change: Even in the third.
Speaker Change: Bucket, whereas mandated.
Speaker Change: In spin off.
Speaker Change: Imagine what would happen publicly they just turned policies.
Speaker Change: They give that homeowners some time to comply with the navy, but those are the three types of contracts are currently out and executing in the marketplace, but we did to get to $160 million was saying well, we took a mere 5% conversion rate.
Speaker Change: $160 million on the contracts you've already signed now I'll tell you, we expect that far far higher conversion rate with them. It is.
Speaker Change: Contract those will go in at.
Speaker Change: It should be 100% minus whatever policyholders choose to walk away and not these are not markets, where you to walk away from the insurance because.
Speaker Change: Isn't a whole lot of other insurance sounded places where it might be recommended.
Speaker Change: Paid back for itself with the discount and that is a lower conversion rate. We felt 5% is very conservative, but that's how we.
Speaker Change: Get to the number of what we've already signed.
Speaker Change: That's really helpful. Nick if I could.
Speaker Change: Just point of clarification, and then a second question point of clarification would be that 5% do you work with your partners on Hey.
Speaker Change: This is kind of when we've done other things for other other parts of insurance policies, where youre, having locked in whether it's like alarm monitoring or whatever like this is kind of the conversion rate, we think about or what informs that than the second.
Speaker Change: Separate question just in the spirit of this week's events can you remind us theres been a lot of moving pieces in your portfolio and your sourcing initiatives. What is your current cost of goods exposure to China and then what's your total cost of goods exposure.
Speaker Change: Outside of the U S, but brought onshore.
Speaker Change: Onshore at this point.
Speaker Change: Oh.
Speaker Change: So just on the on your first question, yes, we use very very precise model.
Speaker Change: With the insurers to understand.
Speaker Change: A when do you expect in savings will be I would tell you they're pretty high water when you do the numbers.
Speaker Change: Multiplied by the number of policies that have and then from there we were.
Speaker Change: Got it.
Speaker Change: I would expect that.
Speaker Change: Right and I'm curious the supply chain accordingly.
Speaker Change:
Speaker Change: 5% is quite a bit lower than that that's a conservative assumption.
Speaker Change: Well, we are actually Gary our supply chain in these contracts.
Speaker Change: Is something in excess of that so that's the first part.
Speaker Change: Just a general comment.
Speaker Change: Concept to think about it that can start to diversify a little bit.
Speaker Change: The sourcing team.
Speaker Change: I will tell you that we have been in.
Speaker Change: In.
Speaker Change: The mode of optimizing the supply chain.
Speaker Change: Managing tariffs really all the way back to fiber tariffs in 2017.
Speaker Change: The team is extremely experienced in this area one of the things that I would say has evolved pretty significantly.
Speaker Change: Our ability to flex.
Speaker Change: That supply chain and so we moved away.
Speaker Change: Almost everywhere from single source, we now have.
Speaker Change: Two sources and Secretary May cost you more than your primary source, but if your primary source where does it come more expensive Paris, you can dial that down and dielectric secondary sourcing rebalance that to be the most efficient.
Speaker Change: Of course added to that we still have a very large U S manufacturing footprint. It becomes part of that total network solutions not just an independent thing.
Speaker Change: All the other players in that total number installation. So I'm confident that we are very well positioned to handle increased tariffs I'll tell you. We don't invite it because a lot of hard work, but every time it happens our share tends to accelerate because our ability to execute relative to our competition.
Speaker Change: And that's where we're going from here.
Speaker Change: And a final thought where is it today because we do have.
Speaker Change: That's why I see the gains that have been working on this for many months.
Speaker Change: Run up too I guess say in today with the expectation that we will see tariffs.
Speaker Change: She may be exactly where you see them then to what degree but with the network that I've described.
Speaker Change: And the impact Mike I'd say going.
Speaker Change: Going back to 2018 and look at these set of assets, we had over 50% of our Cogs source from China, that's down to less than 25% today.
Speaker Change: The team has been working against that for a while tariffs are still in place or so mark.
Speaker Change: And we can get out of China at a better looking broadly at our Cogs I would say.
Speaker Change: <unk> is roughly 40% to 50% of that.
Speaker Change: If you remember outdoors is almost fully U S.
Speaker Change: Water is a big piece in the U S. And then security is a piece of it.
Speaker Change: Take that add a little business in China, the balance being rest of world.
Speaker Change: A portion of that rest of world as North American base.
Speaker Change: We do have options.
Speaker Change: Operating under our base case scenario, the tariffs from China at least theyre going to increase and the team is working to optimize that.
Speaker Change: Our network around that and we do view this as an opportunity.
Speaker Change: That's very helpful.
Speaker Change: Bob.
Speaker Change: Just referring to.
Speaker Change: Especially we had around jonathan's question.
Speaker Change: I'll just add on the third point, we have seen in the market.
Speaker Change: Important brands a claim to perform.
Speaker Change: Whether it be in secure.
Speaker Change: Security and fire saves in water safety.
Speaker Change: At levels that are on testing demonstrates they do not deliver themselves.
Speaker Change: Thing that you'll see us increasingly ramp up our communications around some of it is directly to people's well being and health and safety.
Speaker Change: I don't think that increase.
Speaker Change: Increased focus on some of that product that we've seen coming into the marketplace with necessarily a bad thing.
Speaker Change: Yeah makes sense. Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from Trevor Allinson with Wolfe Research Your line is open.
Trevor Allinson: Hey, good evening. Thank you for taking my questions. Nick I wanted to follow up on what you were just referring to with some of that Darren compliant product competition.
Speaker Change: Keith.
Speaker Change: Diving a bit further talk about how big of an impact that had on the quarter.
Speaker Change: That something that you expect to linger here going forward I know you talked about some initiatives that youre going through to mitigate some of that just any any way you can size that for us would be helpful.
Speaker Change: I'll give you a few example.
Speaker Change: Start off the numbers.
Speaker Change: So kind of on fire.
Speaker Change: Our payments by a fire space.
Speaker Change: And our waterproof safe and consumers really dependent on that particularly because of the fire zone or Arkansas.
Speaker Change: We see.
Speaker Change: Research, you'll see products in the market that claims on the performance we put up there.
Speaker Change: Our own testing.
Speaker Change: Whereas our savings will withstand a fire.
Speaker Change: Bob.
Speaker Change: These import brands.
Speaker Change: Within two minutes.
Speaker Change: We put collateral out into the marketplace over the first one right.
Speaker Change: Collateral into the marketplace and invested behind telling the story and we are seeing our point of sale turnaround and start to gain actually gained share.
Speaker Change: Very quickly I'm really within weeks of activity gives.
Speaker Change: It gives us confidence that when we tell the story.
Speaker Change: The consumer sees the value in that.
Speaker Change: We've now extended some of that work and things like refinery.
Speaker Change: We're finding their process that leach let into the waterway.
Speaker Change: It's not legal.
Speaker Change: We will tell that story and so on the software.
Speaker Change: He started on that.
Speaker Change: Securities.
Speaker Change: There is no doubt an opportunity or I wouldn't say the impact was that.
Speaker Change: But unlike a regular way private label, where we don't really compete at opening price point and we've done just fine because people see the value and the premium for the brand we strategically positioned our portfolio. These are places where people are advertising in a misleading way at least theoretically competitive because they.
Speaker Change: Meaning the same benefit.
Speaker Change: As our brands provide a lower price than they actually are not providing them and so again, we told the story it seems to change the trajectory.
Speaker Change: We're just now making investments and taking the time to do that and we won't be doing that more publicly as we move forward.
Speaker Change: And Trevor you see that both acutely in our organic security results year to date.
Speaker Change: Where most.
Speaker Change: Most of the problem is showing up and where the team is taking.
Speaker Change: Taking action to offset it.
Speaker Change: Okay, Yes, it makes a lot of sense I appreciate that color and then the second question is on China conditions. There are clearly dynamic Nick I think you used the word unprecedented a lot of uncertainty. There can you talk about how youre thinking about that market moving forward do you think you're nearing a bottom here.
Speaker Change: I think comps are clearly getting a lot easier if any color there would be greatly appreciate it.
Speaker Change: Okay perfect.
Speaker Change: Your question Hydrological you would think.
Speaker Change: One is nearing a bottom.
Speaker Change: How long has gone on how much less of you.
Speaker Change: Construction, there has been as well as the fact that the.
Speaker Change: Government goes.
Speaker Change: In addition to creating that bottom and stimulating that marketplace.
Speaker Change: That said I will say after a couple of years, because we just don't like to comment on that the team. There has done a fabulous job managing that cost structure in that P&L for that.
Speaker Change: Solid profitable business for us and so the way we think about it as long as we can keep it isolated manage it in that way and frankly, when I look at the size of the profitable today, it's really.
Speaker Change: Go to zero and we never know.
Speaker Change: Notable impact on the total company it.
Speaker Change: It really is a market that should give us exposure to grow and drive returns in the demographics and telling your growth has to return at some point and also had some really nice innovation engine for the business. You know we have a great team there that's it.
Speaker Change: Very close to a lot of great innovation and pipeline.
Speaker Change: Pipeline from the whole business and so that's really a lot of humility to team up with <unk> done a great job, how we're thinking about it and how we're managing that when that bottom actually forums.
Speaker Change:
Speaker Change: Let me make no predictions so we'll just manage it tightly.
Speaker Change: Yes, I would tell you I appreciate all the color. Thanks.
Speaker Change: Your next question comes from Stephen Kim with Evercore ISI. Your line is open.
Stephen Kim: Yes, thanks, very much guys I appreciate all the color so far.
Speaker Change: I wanted to ask you in security I think you had mentioned that Pos was down mid single digits, but you're guiding to sales down I think high single digits, if I'm not mistaken in the fourth quarter. I was just curious if you could sort of talk about that.
Speaker Change: Yeah, Yeah happy to do it the guide implies sales down mid to high single digits in the fourth quarter, that's right I'd say it.
Speaker Change: Continued consumer Pos softness that we are starting to see.
Speaker Change: Some of the trends turn based on the investments we made but those investments came late third quarter into the beginning of the fourth quarter and so.
Speaker Change: Not ready to predict a complete turnaround yet in that Pos trends.
Speaker Change: Got it okay, but maybe.
Speaker Change: The outlook into 25 might be better hopefully.
Speaker Change: And then sort of follow on this.
Speaker Change: Yeah.
Speaker Change: Low quality.
Speaker Change: Competition.
Speaker Change: Quality competitive products Youre dealing with digital security I just wanted to get a sense is this.
Speaker Change: Issue more pronounced in maybe in the online channel.
Speaker Change: Or is it are you seeing it pretty much across.
Speaker Change: The retail across all retail.
Speaker Change: Including online and can you share with us like what share of your digital products are sold online.
Speaker Change: Yeah, why don't I start.
Speaker Change: And you know again.
Speaker Change: I'll reiterate I extend a problem where the lower quality.
Speaker Change: Or just sort of not competing.
Speaker Change: At that bottom end of the channel, that's where they're making false claims.
Speaker Change: That we are combating and combating the success. So that's that was where we saw this issue sort of emerge.
Speaker Change: Please.
Speaker Change: And yes, you're absolutely right, it's much more prevalent in.
Speaker Change: Claims space, where you've got.
Speaker Change: Yes.
Speaker Change: And there is probably less scrutiny around you know.
Speaker Change: Product claims that are put on on web pages.
Speaker Change: In terms of breaking out the percentage day, but yes, I would just say.
Speaker Change: Definitely over index in our mechanical channel breakdown, the digital products more apt to be purchased online at least today as we build out the other channel.
Speaker Change: Okay. Thanks, very much guys.
Speaker Change: Your next question comes from Adam Baumgarten with Zelman Your line is open.
Adam Baumgarten: Hey, good evening, guys just back to the digital I think he talked about 150 basis points of growth contribution in the back half of 'twenty four last quarter, maybe if you could update that number and maybe what it was in the third quarter.
Speaker Change: Yes, we've talked about that.
Speaker Change: Or are there items I'd say.
Speaker Change: Sure.
Speaker Change: Our pipeline is exceeding expectations that sales number coming through is a bit below that just given our conversion rate from the pipeline into sales and we're investing to try to unlock that.
Speaker Change: Mentioned, taking the time to revenue from three months down to three weeks it was really the goal.
Speaker Change: Third quarter similar I'd say, that's very strong is up over 80%.
Speaker Change: Signing new agreements, we just have to get them.
Speaker Change: Revenue.
Speaker Change: Okay got it and then just you mentioned trade down I think it's security or maybe singly imposter products are you seeing trade down across any other areas like outdoor and water.
Speaker Change: No no no.
Speaker Change: Outdoors.
Speaker Change: Yes, the water in a game.
Speaker Change: Not so much trade down just to open $5 going to be really clear that's always been around.
Speaker Change: And that's where we've seen false claims.
Speaker Change: We have seen the impact in water.
Speaker Change: We've seen a bit and we've got some of those products and testing.
Speaker Change: I've asked this false claims they're noncompliant.
Speaker Change: And so we're confident in our path to work back against that.
Speaker Change: But in the non connected products youre, not seeing any material trade down.
Speaker Change: Actually I'm going to talk about connected products at all that would be required it's not really about got it.
Speaker Change: It was really in mechanical things like fire space.
Speaker Change: Kitchen profit.
Speaker Change: Something in the padlock space, it's really mechanical products.
Speaker Change: Covenants.
Speaker Change: It makes a whole bunch of claims doesn't perform where they claim.
Speaker Change: Got it that's helpful.
Speaker Change: Your next question comes from Matt Bouley with Barclays. Your line is open.
Matt Bouley: Good afternoon, everyone. Thanks for taking the questions.
Matt Bouley: I think you made a comment in the prepared remarks.
Speaker Change: Around 2025 with that slightly positive market growth.
Speaker Change: And that you would outgrow that then in that scenario you would see meaningful margin progress I think I heard you say in so.
Speaker Change: Given your outgrowth that maybe youre seeing a little bit of volume leverage but.
Speaker Change: I guess what are the other pieces of the bridge that might get us to meaningful margin progress and how do you think about incremental margins in a scenario where the market would be slightly positive. Thank you.
Speaker Change: I'll give you a bit of color and context that I'd say.
Speaker Change: We see margin next year coming from a few areas right so productivity.
Speaker Change: We've had a very nice trajectory.
Speaker Change: SG&A efficiency.
Speaker Change: We continue to bring the businesses together and we're finding more SG&A efficiency and then mix, we expect to be favorable I think price cost will probably be a slight benefit as well.
Speaker Change: Offset and why we're not being more specific right now is the level of investment back in the business when we when we talk to guidance.
Speaker Change: It will be clear about where and how are you investing primarily around unlocking growth in setting us up for future growth opportunities. So that's the big offset lever right now the teams are still working through and Nick and I looked at it the decision to make how much are we going to invest back in and how quickly can we turn that into grow the topline.
Speaker Change: Got it okay. Thanks for that Dave and then second.
Speaker Change: Secondly on the decking business I think I heard you say you were seeing some evidence of improving trends.
Speaker Change: To enter the fourth quarter and something around Destocking, if you guys.
Speaker Change: We're talking about it potentially being one time, just maybe hit on both of those points. Just have you seen the destocking subside or is there any more to come and what are you seeing around some of these improving trends here. Thank you.
Speaker Change: The destocking.
Speaker Change: I think the channel load it up for a season that was disappointing and so that came out.
Speaker Change: It was really primarily the driver of the Destocking.
Speaker Change: POS side, we were down mid single in the quarter you know as we've looked over the past four weeks. It has improved from there from a Pos standpoint, which which gives us confidence.
Speaker Change: Improving out of where we were in Q3.
Speaker Change: Okay, Thanks, Dave and good luck guys.
Speaker Change: Thanks.
Speaker Change: Thank you for joining the future brands third quarter 2024 earnings Conference call. You May now disconnect have a wonderful rest of your day.