Q4 2024 Fortune Brands Innovations Inc Earnings Call
Good afternoon, everyone. My name is Joe and I'll be your conference operator today.
Welcome to the Fortune Brands' fourth quarter 2024 earnings conference call.
All lines are muted to prevent background noise.
When you speakers remarks, we will open the call for a Q&A session.
Lee: At this time I'd like to turn the call over to Lee answer.
Speaker Change: I'm, just gonna Vice President external affairs, and chief of staff.
Speaker Change: Please go ahead.
Good afternoon, everyone and welcome to the Fortune brands innovation fourth quarter and full year 'twenty 'twenty four earnings call and webcast.
Speaker Change: Hopefully everyone has had the chance to review the earnings release issued earlier in the earnings release and an audio replay of the webcast of this call can be found in the investors section of our website at B I N Dot com.
Speaker Change: To remind everyone that the forward looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session.
Speaker Change: 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 U S. D C.
Speaker Change: The company does not undertake any obligation to update or revise any forward looking statements, except as required by law.
Speaker Change: Any references to operating income margin EBITDA earnings per share cash flow on today's call will focus on our results on a non-GAAP before charges and gains basis, unless otherwise specified please visit our website for a reconciliation.
Speaker Change: Joining me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry Our Chief Financial Officer.
Speaker Change: Following our prepared remarks, we have a lot of time to address <unk> question.
Speaker Change: I will now turn the call over to Nick Nick.
Nick Fink: Thank you Lee and thank you to everyone for joining us today.
Speaker Change: As we finished 2024 and begin 2025 I'm proud.
Speaker Change: The progress we've made to continue to re platform the business and unlock our long term growth potential.
Speaker Change: We took several important steps this past year amidst a challenging backdrop.
Speaker Change: We further focused our portfolio on the highest growth and most profitable opportunities within our categories. We.
Speaker Change: We simplified and aligned our organization uniting our associates behind a new visionary purpose.
Speaker Change: We saw market outperformance in key core portions of our portfolio.
Speaker Change: We integrated and scale, our digital business and announced milestone partnerships and digital water.
Speaker Change: We had impressive free cash flow it made sustainable margin progress across our portfolio.
Speaker Change: We did so while also continuing to make strategic investments in brand building innovation and our ongoing digital transformation.
Speaker Change: All of which have delivered real assets that we plan to activate to accelerate growth.
Speaker Change: The actions, we took over the past year to better leverage the strength of our aligned organization.
Speaker Change: And sharpened our focus on our leading brand.
Speaker Change: Meaningful innovation and our advantaged channel relationships.
Speaker Change: Give me confidence in our ability to outperform in 2025 and beyond.
Speaker Change: A portion brings advantage capability are now more effectively deployed across the organization, allowing us to advance our growth and margin journey by reducing costs, optimizing our pricing and enabling a high growth focused areas like digital product luxury and outdoor living.
Speaker Change: As we continue our transformation into one aligned organization, we will be able to further leverage our fortune brands advantaged capabilities to create even more value.
Speaker Change: Fortune brands was recently named to the Wall Street Journal's top 250, best managed companies list of 2024.
Speaker Change: This recognition is a testament to the progress we've made as a company, especially are growing prominence as a digital brand and our digital products portfolio.
Speaker Change: And reflects the tenacity and innovation of our entire team.
Speaker Change: Before we continue I want to touch on our recent announcement.
Speaker Change: Starting in the summer of this year Fortune brands will begin to move its regional offices into one state of the art campus headquarters in Deerfield, Illinois.
Speaker Change: We are fortunate to have found a modern and tech forward environment to call that a new home.
Speaker Change: The result will be a world class collaborative environment fueled the company's innovation accelerate our digital solutions and grow our core product.
Speaker Change: Additionally, this campus will further our ability to retain and attract top talent and further build our exceptional culture.
Speaker Change: Around our purpose.
Speaker Change: We expect this action will drive bigger thinking in elevated execution, even foster and will unlock opportunities for growth and shareholder value.
Speaker Change: We also know that we have simplified our leadership structure.
Speaker Change: This allows the senior commercial leaders to now report directly to me and it allows for quicker decision, making and more direct involvement across the businesses.
Speaker Change: Additionally, Dave Barry will move into a newly created role of President security and connected products.
Speaker Change: He will lead our iconic legacy security business and have direct responsibility for growing fortune brands digital business, including Yale Smart residential Lux Master lock connected lockout, tagout and the MAU and smartwater ecosystem, including the Mullen flow leak detection solutions.
Speaker Change: These businesses will greatly benefit from days focused on growth is.
Speaker Change: As acute business insight and company experience in it.
Speaker Change: His passion for our brand.
Our connected products opportunity.
Speaker Change: By deploying some of our best talent against some of our biggest opportunity.
Speaker Change: I am confident that we will achieve our full exceptional potential.
Speaker Change: Now turning to the market and our results on this call I will walk through the highlights of our fourth quarter and full year 2024 performance.
Speaker Change: I will also offer some thoughts on the current macro environment and why we believe fortune brands is optimally positioned now more than ever to deliver on our commitment of long term growth and sustained value creation.
Speaker Change: I will then turn the call over to Dave for a discussion of our fourth quarter and full year financial results and our performance expectations for 2020 funds, including our view of the market.
Speaker Change: For the fourth quarter, we saw net sales of $1 $1 billion, a 5% decrease versus the fourth quarter of 2023.
Speaker Change: Importantly, our fourth quarter sales were impacted by a third party software outage in our security distribution centers.
Speaker Change: The hurricanes in the southeastern United States and continued softness in China.
Speaker Change: Adjusted for these impacts are.
Speaker Change: Our fourth quarter organic sales were down 1%.
Speaker Change: Also notable is that when you exclude hurricanes in China fourth quarter organic sales grew by water endorsed business and we estimate our total company point of sale, excluding China and the one time disruption outperformed the larger market.
Speaker Change: Fourth quarter 2024, EPS were <unk> 98 up three.
Speaker Change: 3% versus Q4 2023.
Speaker Change: Operating margins for the quarter was 16, 4%.
Speaker Change: The 60 basis point improvement over the fourth quarter of 2023.
Speaker Change: For the full year 2024, our teams delivered net sales of $4 6 billion flat versus 2023.
Speaker Change: Full year organic sales were $4 4 billion down.
Speaker Change: Down, 5% or down, 2%, excluding China, and the onetime fourth quarter disruption.
Speaker Change: Our full year operating margins increased 90 basis points versus 2023.
Speaker Change: Our impressive margin results reflect the actions we've taken to optimize our businesses.
Speaker Change: Including strategically aligning our operational footprint.
Speaker Change: And focusing our portfolio on the most profitable parts of our business.
Speaker Change: Accordingly, with strong margin performance includes the strategic investments, we have made to facilitate future growth.
Speaker Change: Our 2020 for free cash flow was approximately $475 million with a cash conversion of more than 100% of net income.
Speaker Change: Our cash flow performance is another proof point of our more efficient organization.
Speaker Change: Our full year earnings per share were $4 and close it up.
Speaker Change: <unk>, 5% over full year 2023.
Speaker Change: Our strong balance sheet and advantaged capital structure enabled us to strategically deploy capital both organically and Inorganically.
Speaker Change: We invested inorganically and strategic platforms, including water filtration and connected lockout tagout.
Speaker Change: Both of which we believe have significant secular growth opportunity.
Speaker Change: Finally, we announced that our board of directors has approved a new $1 billion share repurchase authorization.
Speaker Change: Demonstrating the confidence we have in our cash generation.
Speaker Change: As well as our focus on creating long term shareholder value.
Speaker Change: Now I would like to highlight in more detail. The actions. We took in 2024 that will position our company for future growth.
Speaker Change: Starting first with our digital business.
Speaker Change: As a reminder, our digital business includes all of our digital product and both our water and security segments.
Speaker Change: In 2024 digital sales were $214 million.
Speaker Change: Significant growth in the flow business.
Speaker Change: At the end of 2020 for our full digital business is $4 7 million users.
Speaker Change: <unk> of over 200000, new device Activations in the fourth quarter.
Speaker Change: And with a strong point of sale trajectory.
Speaker Change: Heading into 2025.
Speaker Change: And our digital water business flow success, both in terms of sales and partnerships far exceeded our expectations at the end of 2024, we had 12 partnerships with insurance companies and other key sales partners.
Speaker Change: <unk>, a precedent setting partnership with farmers insurance.
Speaker Change: This is particularly impressive as we started 2024 with a new team and no part.
Speaker Change: In 2025, we have already signed another one of the largest insurance companies in the United States with significant accident.
Speaker Change: Our high net worth homeowners.
Speaker Change: As we discussed on the last call. The number of homeowner policies collectively represented by these insurance partners is in the tens of millions and we are laser focused on converting these opportunities into sales.
Speaker Change: For our fourth quarter retail and E Commerce Pos for flow was up over 100% versus the fourth quarter of 2023 and sales for the full year grew well over 100%.
Speaker Change: We invested meaningfully inflows, including an innovative marketing designed to drive awareness as well as key functionality and design update.
Speaker Change: To make the user and partner experience more seamless.
Speaker Change: We're converting sales opportunities foster having recently added additional dedicated resources.
Speaker Change: In the quarter, we reduced the partner Onboarding time by two thirds and we are now able to implement marketing and sales activation and less than 30 days at this time.
Speaker Change: Looking to 2025, we will continue our focus on not only entering into new partnerships.
Speaker Change: The accelerating our sales conversion with the partners that we already have.
Speaker Change: We expect our flow sales to continue to increase rapidly and have already seen an acceleration as we begin 2025.
Speaker Change: Based on the strong sales trajectory.
Speaker Change: See a path towards a 100 million in annualized sales in 2025.
Speaker Change: We're looking to launch new subscription based pricing models in the first half of 2025.
Speaker Change: We've increased our awareness campaign in response to the increment weather across the nation as well as the tragic fires in California, which have elevated public awareness around the need to address the interconnected insurance and affordability.
Speaker Change: Our digital security business also took some transformative actions this past year.
First we continued to build partnerships with our Yale but.
Speaker Change: Signed 14, new partnerships in 2024 with companies like Airbnb <unk> and ADT.
Speaker Change: As we lap significant destocking and product lifecycle headwinds, we expect these new partnerships will reaccelerate our growth.
Speaker Change: We acquired a stake in a connected lockout Tagout software platform, which we expect will greatly accelerate our leadership in this emerging space.
Speaker Change: As companies look to keep their employees safe.
Speaker Change: Insurance costs.
Speaker Change: Make their operations more efficient.
Speaker Change: Connected lockout, Tagout hardware and software platform will be the best in class.
Speaker Change: As we looked at 2025, we're very excited about the future of our connected business and its ability to generate recurring revenue.
Speaker Change: Under Dave's focus leadership and commitment to growth.
Speaker Change: We believe that connected opportunity is better than ever.
Speaker Change: We continue to expect connect itself to be at least $1 billion by 2030.
Speaker Change: This growth will be driven by rapid expansion of our digital portfolio, including growth in flow are emerging master lock see lot of solution.
Speaker Change: They returned to growth by Yale as our new partnerships ramp up in our inventory stabilize.
We expect digital will contribute 150 basis points of growth to our full year 2025 net sales.
Speaker Change: We are working on accelerating this performance.
Speaker Change: We took steps to streamline the portfolio optimize our operations and work more quickly and efficiently.
Speaker Change: Throughout 2024, we strategically focus on the highest growth and most profitable part of our core portfolio.
Speaker Change: And walked away for some of the less attractive and non strategic parts of the market.
Speaker Change: We estimate had a 150 to 200 basis point impact on our 2024 states.
Speaker Change: This has allowed us to focus our best resources on our biggest and most attractive opportunity.
Speaker Change: Especially when the markets return to growth.
Speaker Change: We also took key operational steps, including aligning our footprint opening two new sites for our water business and optimizing our supply chain ahead of 2025.
Speaker Change: These capacity investments leave us with room for expected growth in the coming years.
Speaker Change: Importantly in 2024, we also took steps to prepare for potential supply chain disruptions related to tariffs.
Speaker Change: Or other geopolitical situations.
We have significantly increased our flexibility and reduced our tariff exposure from China with a line of sight grape costs to reduce this exposure to less than 10% of total cost by the end of 2025.
Speaker Change: You have a similar spend in Mexico and are executing on strategies to reduce this exposure as necessary.
Speaker Change: We have leveraged our digital capabilities for ourselves.
Speaker Change: Quickly any environment.
Speaker Change: And we believe are the blind and supply chain teams.
Speaker Change: For both data and strong supplier relationships leave us well positioned relative to our competitors.
Speaker Change: Now turning to some thoughts on the market for our product in 2025.
Speaker Change: As we enter 2025, we are prepared for a dynamic environment.
Speaker Change: We're confident in our ability to return to top line outperformance based on the actions. We took in 2020 for the strength of our brand our meaningful innovation and new product introductions in our connected product growth potential.
Speaker Change: The need and desire for homes remains incredibly strong and our products are well positioned in the context of the larger macro environment.
Speaker Change: Within the larger market issue.
Speaker Change: Issue of housing affordability, and substandard imposture brand or both are of Paramount importance and receiving a lot of attention.
Speaker Change: We believe this current bucket will provide us with opportunities for both our core products as well as our digital products.
Speaker Change: We will be very focused on articulating the value and benefits consumers get for our products and why purchasing strong brands that stand behind the safety and effectiveness of their product matters more than ever.
Speaker Change: While it is difficult to call when exactly a recovery will occur we believe the fundamental demand together with our strong and optimally position brain.
Speaker Change: The result in medium to long term tailwind for our business, both new construction and repair and remodel.
Speaker Change: The R&R market has generally stabilized relative to the post COVID-19 normalization period.
Speaker Change: Although it is still negative and existing home sales have likely found a bottom up to three years of decline.
Speaker Change: That said recent rate trends and uncertainty regarding policy inflation and geopolitics.
Speaker Change: Likely to inhibit market growth in the near term.
Speaker Change: Starting with new construction we.
Speaker Change: We expect the single family new construction market to be flat in 2025.
Speaker Change: With both start and complete up low single digits, partially offset by that lag impact from the 2020 for second half slowdown.
Speaker Change: As a reminder, new construction represents around a quarter of our total sales.
Speaker Change: Our businesses, particularly our mone and number two brands enjoy very strong relationships with many large national production builders and the channel partners that serve them.
Speaker Change: Despite higher for longer rate large boulders are offering incentives to support volume in the near term, which will continue to be a tailwind for us.
Speaker Change: Turning to R&R.
Speaker Change: The R&R market remains dynamic and there are many variables that are impacting the repair and remodel space, including consumer savings and confidence employment levels home equity levels existing home turnover.
Speaker Change: We currently expect the R&R market for our products to be flat to up in 2025 with growth weighted towards the back half.
Speaker Change: R&R is impacted by a variety of factors.
While we expect rates will be higher for longer we also expect higher existing home sales and increased rate home equity extraction.
Speaker Change: Even when accounting for the Covid boom the levels of R&R volumes since 2019 are under trend.
Speaker Change: However, as consumer confidence improves and consumers increasingly look towards their homes as a source of capital equity.
Speaker Change: We believe people will increasingly leverage their home equity for renovation projects for a variety of vehicles, including refinancing HELOC P loans and home equity agreement.
Speaker Change: Now, let me turn to segment results.
Speaker Change: Starting with water innovation, our fourth quarter sales were down 3%, excluding China and the impact of the hurricanes in the southeastern United States.
Speaker Change: <unk> sales increased 2% with above market point of sale growth in our house of ROHL and <unk> businesses.
Speaker Change: Our margins increased 190 basis points over fourth quarter of 2023, while we continue to invest in their priorities like digital and marketing.
Speaker Change: Our margin results reflect our focus on the most profitable parts of the market as well as the work we've done to align and streamline the organization and improve the efficiencies of our businesses.
Speaker Change: For the full year water innovation sales were flat and organic sales, excluding the impact China and hurricanes were down 2%.
Speaker Change: For the full year, we saw 80 basis points of margin growth.
Speaker Change: Looking forward to 2025, we continue to expect a dynamic environment, especially in the first part of the year with clear opportunities for us to differentiate ourselves.
Speaker Change: We will focus on delivering above market sales performance across the segment.
Speaker Change: By focusing on the highest growth areas within our core businesses and continued to accelerate our leadership in digital water.
Speaker Change: We plan to help consumers and customers better understand what our product standpoint design dependability and innovation.
Speaker Change: We once again won Americas, most trusted faucet brand and plan to leverage that strong consumer and pro sentiment.
Speaker Change: The face of the number of imposter and counterfeit brand in the marketplace.
Speaker Change: We will continue to invest in our key priority, including branding and marketing and our digital products.
Speaker Change: These targeted investments will help drive our strategy to grow the core and accelerate digital and connected products.
Speaker Change: 2024 represented a tipping point, where moen Flo smartwater leak detection business.
Speaker Change: We expect this to only accelerate in 2025.
Speaker Change: Our sales pipeline is substantial and even with conservative conversion estimate.
Speaker Change: We had the opportunity to realize significant sales.
Speaker Change: We will continue to invest in this growth opportunity both to support product functionality as well as marketing and other activation efforts.
Speaker Change: We believe the current focus on insurance and affordability together with our leading position in this space.
Speaker Change: Will result in outsized growth.
Speaker Change: Our house of ROHL portfolio, which now includes amtech grew in the fourth quarter as our brand product and showroom strategy resonated with luxury consumers and design.
Speaker Change: We opened a new manufacturing and distribution facility in the U K and better serve our customers, which will continue to come online in 2025.
Speaker Change: We're also still rolling out our synergy wins for roll in amtech, particularly in showrooms.
We're excited about the future of our luxury portfolio is our powerhouse brands continue delight consumers and designers a lot.
Speaker Change: Finally, China was again a headwind in this quarter.
Speaker Change: We have re platform the cost structure of the business given the challenging market.
Speaker Change: As a result, any future declines should not have a significant impact on our P&L.
Speaker Change: We believe the market has largely stabilized at the bottom.
Speaker Change: So we will have one more quarter of challenging comparable.
Speaker Change: Now turning to outdoors.
Speaker Change: Our fourth quarter sales were down 2%.
Speaker Change: With low single digit point of sale growth in the segment driven by our doorstep.
Speaker Change: Our margins were 18, 2% an increase of 430 basis points over the fourth quarter of 2023.
Speaker Change: For the full year outdoor sales were up 1% and we saw impressive 310 basis points of margin growth.
Speaker Change: In 2024, we benefited from our strong relationships with the big builders.
Speaker Change: Accelerated the evolution of the brands in our outdoor segment and introduced exciting new product innovations.
Speaker Change: Looking forward to 2025.
Speaker Change: Our focus is on continuing to grow our outdoor brands by leveraging our strong brand position and channel relationships coupled with innovation.
Speaker Change: We're particularly excited about the potential for our Washington Grant.
Speaker Change: We recently unveiled a new license perfect aisle product reset at a retail partner.
Speaker Change: And the initial results from our refreshed and innovative approach to this category are very encouraging.
We expect to have over 1700 stores refreshed product displayed by the middle of 2020.
Speaker Change: Turning to security.
Speaker Change: As I already mentioned, our security segment was impacted by a third party suffered around it.
Speaker Change: Distribution centers, which exacerbated the soft sales environment and customer destocking.
Speaker Change: Our teams are laser focused on delivering on our commitments to our customers and I. Thank them for their tireless work to recover from these challenges.
Speaker Change: Our fourth quarter sales and margin performance reflect these issues.
Speaker Change: Our fourth quarter sales were down 17%.
Excluding the impact of the tougher outage of fourth quarter sales were down approximately 10%.
Speaker Change: Our margins were nine 3% because of the impact of the outage as well as the expected timing of investments related to our yield.
Speaker Change: For the full year 2020 for ourselves were $694 million down, 4% and organic sales, excluding the tougher outage were down approximately 10%.
Speaker Change: For the full year margins were 16, 1%.
Speaker Change: <unk> basis point increase versus last year.
Speaker Change: The performance of this segment in 2024 did not meet our standards.
Speaker Change: And we have identified critical areas for us to focus on as we work to address these challenges directly and head on.
Speaker Change: We've already taken actions under Dave's leadership, and I'm confident that we will improve this business.
Speaker Change: We've made progress on some exciting brand and product work, which will be unveiled in 2025, including the first major branding campaign for master lock in several decades.
Speaker Change: We're already seeing proof of our brand strategy in action.
Speaker Change: For example, recent safe advertising, highlighting the performance and trustworthiness of our brands accelerated point of sale, which further improve after the recent tragic L. A fire.
Speaker Change: As consumer space this terrible crisis.
Speaker Change: And as it was highlighted around the globe.
Speaker Change: The work that we have done around helping people understand what our brand stands for namely safety.
Speaker Change: <unk> ability and quality.
Speaker Change: Even more important.
Speaker Change: It gives us confidence in our largest strategy focusing on meaningful brands and innovation.
Speaker Change: We saw significant point of sale growth in those markets, where consumers were focused on these routes.
Speaker Change: Looking forward to 2025, we have a new proven leader a renewed focus on differentiating our iconic brands and products.
Speaker Change: Robust partnership pipeline.
Speaker Change: We are rolling out a connected lockout tagout solution and see it as a breakout opportunity for our security business.
Speaker Change: To recap.
Speaker Change: 2024 was a year of transformation and execution, Fortunately amidst a dynamic external environment.
Speaker Change: Our teams, both new assets across brand innovation, and digital which will accelerate growth as we deploy them in the marketplace.
Speaker Change: Our margin results and market outperformance in key parts of our portfolio give us confidence in the future.
Speaker Change: We took decisive steps this year to better position ourselves and I'm proud of what our teams achieved in <unk>.
Speaker Change: <unk> thousand 24.
Speaker Change: In 2025, which Dave will speak to in greater detail, we will focus on driving above market growth.
Speaker Change: Accelerating our areas of the budget.
Speaker Change: We will look to sustainably grow margins and continue investing behind our most strategic opportunities.
Speaker Change: We will execute our largest strategy of focusing on our supercharged category.
Speaker Change: We expect 2025 to be another breakout year for our connected product, particularly a flow device.
Speaker Change: We will take concrete actions in our business to ensure that we are best positioned for long term growth.
Speaker Change: Additionally, we will manage in a period of continued volatility by responding quickly and remaining focused.
Speaker Change: All while actively positioning fortune brands innovation for the future.
Dave Barry: I will now turn the call over to Dave.
Dave Barry: Thanks, Nick.
Dave Barry: As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance.
All comparisons will be made against the same period last year unless otherwise noted.
Dave Barry: Before I begin I would like to take a moment to address my new role.
Dave Barry: I have found my experiences as CFO to be incredibly rewarding and I am grateful to all those with whom I've built a relationship including many of you on the call today.
Dave Barry: I look forward to the next phase of my career in journey with Fortune brands in my role as President of our security and connected products businesses.
Dave Barry: I'm fully confident in the long term growth opportunities of both of these businesses and I'm excited to help advance our value creation.
Dave Barry: In the meantime, it'll be assisting with the search for our next CFO and will partner closely with my successor, ensuring a very smooth transition.
Speaker Change: As Nick highlighted our teams focused on a tight set of priorities amidst a dynamic external market, while continuing to best position the company for the future.
Speaker Change: For the fourth quarter sales were $1 1 billion down, 5% and organic sales were down 1% when adjusting for the impact of China and excluding the one time event.
Speaker Change: Consolidated operating income was 181 6 million and total company operating margin was 16, 4%.
Speaker Change: We're 98%.
Speaker Change: Fourth quarter free cash flow was approximately $212 million.
Speaker Change: For the full year sales were $4 6 billion or flat versus last year and organic sales were down 2%, excluding the impact of China and the onetime disruptions in the fourth quarter.
Speaker Change: Consolidated operating income was $780 6 million.
Speaker Change: Total company operating margin was 16, 9%, a 90 basis point improvement.
Speaker Change: Our EPS was $4.12.
Speaker Change: Our total free cash flow generation was an impressive $475 million.
Speaker Change: Now, let me provide more color on our segment results.
Speaker Change: Beginning with water innovation sales for the fourth quarter were $645 million down 3%.
Speaker Change: Organic sales were up 2%, excluding the impact of China and the hurricane.
Speaker Change: For the year sales were flat with organic sales, excluding China and the impact of the hurricanes down 2%.
Speaker Change: Water innovations operating income was $152 6 million in the fourth quarter.
Speaker Change: Operating income for the full year was $603 8 million.
Speaker Change: Operating margin was 23, 7% for the quarter and 23, 5% for the full year.
Speaker Change: Consistent with our returns focused investment strategy.
Speaker Change: Our moen brand investments are generating results as we focused on accelerating the consumer and channel awareness of our new to world flow technology and invested in our core brand.
Speaker Change: As we discussed we selectively focus on the portions of our portfolio with the highest potential for returns.
Speaker Change: And our luxury portfolio, we made key investments in capacity, where our house of ROHL product.
Speaker Change: Now as one combined entity with Amtech, we are excited about the future of our luxury brands.
Speaker Change: In China sales declined 30% in the fourth quarter and 31% for the full year.
Speaker Change: While the market seems to have stabilized we do expect another challenging comparable in the first quarter of 2025 due.
Speaker Change: Due to lapping accelerated completion in Q1 2024.
Speaker Change: Looking to 2025 and beyond this business will continue to provide innovation and growth optionality.
Speaker Change: As a result of its re platform side. It is no longer a material portion of our business and future declines if any should be less impactful to our P&L.
Speaker Change: Turning to outdoors fourth quarter net sales were $303 million down 2%.
Speaker Change: For the full year sales were $1 4 billion or up 1%.
Speaker Change: For doors sales were flat in the quarter and up low single digits for the year.
Speaker Change: Decking sales were down mid teens in the quarter and were down low teens for the full year as a result of softer demand environment in destocking.
Speaker Change: Outdoor segment operating income was $55 2 million during the quarter up 29%.
Speaker Change: Operating income for the full year was $218 million an increase of 25%.
Segment operating margin for outdoors was 18, 2% in the quarter, an increase of 430 basis points and 16, 1% for the full year, a 310 basis point increase.
Speaker Change: Outerwear has delivered a strong sales and operating margin year.
Speaker Change: These impressive margin results are a direct impact of the work, we're doing to drive innovation and expand distribution for our leading brands.
Speaker Change: Finally, turning to security as.
Speaker Change: As Nick discussed we were impacted in the fourth quarter by a third party software outage, which impacted our distribution centers.
Speaker Change: Fourth quarter sales were $157 million down, 17% or down 10% when adjusting for the outage.
Speaker Change: Our fourth quarter operating margins were nine 3%.
Speaker Change: Full year sales decreased 4% to $694 million in.
Speaker Change: An organic sales decrease around 10% when adjusting for the impact of the software out of it.
Speaker Change: Our full year operating margins were 16, 1%.
Speaker Change: Looking forward, we will be investing in the core business with new marketing and product innovation. Additionally.
Speaker Change: Additionally, we will focus on advancing our connected portfolio, including our residential smart locks and our connected lockout Tagout platform to return this segment to growth.
Speaker Change: Turning to the balance sheet.
Speaker Change: Our balance sheet remains strong with cash of $381 million net debt of $2 3 billion and our net debt to EBITDA leverage is four times.
Speaker Change: We finished the year with a full 1.25 billion available on our revolver.
Speaker Change: Our strong 2024 of free cash flow of $475 million as a proof point of how the entire fortune brands organization effectively working together.
Speaker Change: We also opportunistically repurchased $50 million of shares in the quarter and $240 million of shares in the year.
Speaker Change: In the first quarter of 2025, we repurchased an additional $75 million a share.
Speaker Change: Today, we announced that our board of directors has approved a new $1 billion share repurchase authorization to replace our existing authorization.
Speaker Change: This new repurchase authorization demonstrates the confidence we have in our business as well as our ability to drive cash flow and working capital initiatives, while being mindful of our leverage target.
Speaker Change: To reflect on 2020 for the external environment remained challenging and impacted demand for our product.
Speaker Change: However, our team is focused on executing key strategies and leveraging our strength in brand innovation and channel to drive strong margin and cash flow.
Speaker Change: We work to transform into an aligned and increasingly agile organization that is prepared to respond to any macro condition.
As Nick outlined in his remarks, we believe that fortune brands is uniquely positioned.
Speaker Change: Now more than ever to deliver on our commitment of long term growth and sustained value creation.
Speaker Change: I remain fully confident in our ability to deliver results by focusing on those categories, where there are unique growth opportunities and where we have the right to win.
Speaker Change: As we enter 2025, we are taking a cautious view on our core market given recent interest rate volatility and geopolitical uncertainty.
Speaker Change: However, medium to long term trends remain favorable and the consumer remains engaged with our category.
Speaker Change: For example, Google search results on home renovations are up 7% versus last year.
Speaker Change: We remain committed to delivering above market growth, expanding our margins and accelerating cash generation, while continuing to deploy our capital and effective and impactful way.
Speaker Change: As we have demonstrated over the past few years.
Speaker Change: Our company has the ability to generate significant amounts of cash even in down environment.
Speaker Change: Additionally, our recent capacity investment leave us well positioned to drive volume leverage through the P&L as volume returns.
Speaker Change: For 2025, we expect the global market for our products to be down 2% to up 1% with.
Speaker Change: With the U S housing market also down 2% to up 1%.
Speaker Change: Within this market forecast, we expect U S R&R to be down 1% to up 2%.
Speaker Change: In U S single family, new construction to be down 2% to up 2%.
Speaker Change: We expect the market in the first half of the year to be below the midpoint of our full year range as R&R remains at the lower end of our estimate and the lag impact from the second half of 2020 for a slowdown in single family New construction materializes in the business.
Speaker Change: As the year evolves, we will continue to monitor market trends as well as our performance and will update our guidance if warranted.
Speaker Change: Based on those assumptions, we expect full year net sales to be flat to up 3%.
Speaker Change: We expect operating margins between 16, and a half and 17, 5%.
Speaker Change: This includes our expectations that digital products will contribute 150 basis points of growth on full year consolidated company sales.
Speaker Change: And we are working on accelerating this performance.
Speaker Change: Based on these assumptions, we expect full year EPS within the range of $4.15.
Speaker Change: The $4 45.
Speaker Change: The midpoint of which represents a 4% increase versus our 2024 result.
Speaker Change: Now, let me speak to our outlook for each segment as it relates to our overall guidance.
Speaker Change: We expect water net sales flat to up 4%.
Speaker Change: We expect segment operating margins between 23, and a half and 24, 5%.
Speaker Change: We expect outdoor net sales to be flat to up 3% with segment operating margins between 16% and 17%.
Speaker Change: We expect security net sales to be flat to up 3% and operating margins between 16% and 17%.
Speaker Change: We remain hyper focused on generating and deploying cash and are pursuing incremental working capital reduction initiatives in 2025.
Speaker Change: We expect 2025 free cash flow conversion of around 115% to 125% of net income.
Speaker Change: Which implies free cash flow of around $580 million to $620 million.
Speaker Change: <unk> capital expenditures of around $100 million $240 million.
Speaker Change: Consistent with our track record following organic investment and paying an attractive dividend.
Speaker Change: M&A and opportunistic share repurchases remain our top allocation priorities.
Speaker Change: We plan to actively monitor for dislocations in our share price and take advantage of these opportunities to repurchase shares enhancing shareholder value.
Speaker Change: As discussed we are going into 2025 as a more focused organization.
Speaker Change: Well positioned for acceleration when the market returns to growth.
Speaker Change: With a solid for an exceptional opportunities for growth in digital.
Speaker Change: We remain confident in both the long term fundamentals of our market and our ability to outperform by focusing on those parts of the market with the best opportunities for long term growth.
Speaker Change: Maintaining a margin journey and generating cash.
Lee Thank: I will now pass the call back to Lee Thank.
Lee Thank: Thank you.
Lee Thank: Thanks, Dave that concludes our prepared remarks, we will now begin to take a limited number of questions.
Lee Thank: There may be a number of you who'd like to ask a question I'll ask that you limit your initial questions to queue and then re enter the queue to ask additional questions I will now turn the call back over to the operator to begin the question and answer session.
Speaker Change: Operator can you open the line for questions. Thank you.
Thank you.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press.
Speaker Change: Two if he would like to remove your question from the queue.
Speaker Change: For participants even cheaper equipment it may be necessary to pick up your handset before pressing the star.
Speaker Change: And our first question comes from the line of Susan Mccrory with Goldman Sachs. Please proceed.
Susan Mccrory: Good afternoon, everyone.
Nick: Sure Nick.
Speaker Change: Hi, Nick.
Speaker Change: You did a nice job of outlining a lot of the initiatives and the actions that you've taken over the last 12 months in your remarks, I guess, given the environment that we're coming into in 2025 can you talk a bit about how we should be thinking about those efforts as we do look to this year put some context, perhaps around what <unk> can mean for.
Speaker Change: The business over the coming quarters.
Dave Barry: Sure I'd be I'd be happy to and I'll give you some context and then maybe Dave can dimensionalize. Some of it is we kind of think of how it moves through the year.
Dave Barry: But if I take a step back just look at 24, I mean, obviously it was still.
Speaker Change: It's challenging.
Dave Barry: Although stabilizing towards the end of the year macro environment.
Speaker Change: And within that certainly some choppiness.
Speaker Change: If I step back and kind of look at what are the big profit drivers of the business.
Speaker Change: And where do we look to see those.
Speaker Change: Look at water.
Speaker Change: Taking China out of the mix, which does create a lot of noise from the Hurricanes. We had at the end of the year, we've got water growing 2% in the quarter. So nice growth there I looked at.
Speaker Change: Furniture, which is the profit engine of the outdoors business grew well above 2% in the fourth quarter and so you had some really big parts of the core.
Speaker Change: So they're growing really nicely and we're driving more momentum I'll touch on that into those and then look at kind of future Court right. We've talked about the flow point of sale, that's retail and e-commerce point of sale being.
Speaker Change: Being up over 100% in the quarter flow itself inclusive of insurance grew over 200% in the quarter and 100% for the year and that momentum we see continuing in the 2025 and so you've got both the big profit drivers with momentum as well as future core momentum certainly.
Speaker Change: As I said in the remarks security is a hotspot point of sale was down mid single digits, so better than the <unk>.
Speaker Change: Reported result by far.
Speaker Change: But there is work to do there to get that portfolio to recover and we've got some innovation coming in some some brand work for the first time in a very very long time coming.
Speaker Change: Coming for that business that we believe is going to drive some real differentiation. So when I take a step back.
Speaker Change: I look at that.
Speaker Change: We've done a lot of work in the ear to build digital asset in the connected business those are coming online you're seeing the performance in floor in particular.
Speaker Change: We built a marketing assets, which are a product of bringing the company together in a more aligned way in leveraging our marketing team across the entire business I think youre going to see those really for the first time ever come to life in 'twenty five.
Speaker Change: Have a very solid marketing plan with solid investment behind it.
Speaker Change: And their innovation efforts I mean, youll see new product in places like must select you're going to see as I referenced already.
Speaker Change: Innovative display rolling out in a place like Larson.
Speaker Change: So a lot of really solid assets developed in 'twenty four to drive growth in 'twenty, five and then final point and I'll let.
Speaker Change: David some color if he wants is we do lap a lot of noise.
Speaker Change: In 24 that won't be there. So we see China is actually normalized and stabilized in terms of quarterly sales. There is noise in the lap that goes away. After the first quarter and then we walked away from a lot of commoditize business in 2000 and for things like steel doors or window lineal boss safety and as we work.
Speaker Change: Through those labs that was you know 150 to 200 basis points of headwind just in those you don't have those repeat in 'twenty five that gives us a lot of cars.
Speaker Change: Confidence in our outperformance of the market just based on momentum.
Speaker Change: Things are prescribed.
Speaker Change: Yes.
Speaker Change: Sue I'm happy to give a bit of context around our guide and what's implied.
Speaker Change: <unk> throughout the year I think.
Speaker Change: One point as we step back and look at it we are erring on the side of conservatism from a market standpoint, given the current environment, but.
Speaker Change: But accelerating areas, where we have growth momentum.
To drive 200 basis points of market outperformance, regardless of the macro background backed backdrop, so I'll start with that.
Speaker Change: Step back and look at our first half second half sales cadence.
Speaker Change: There is 49% of sales in the first half we expect 51% in the second half it was very normal seasonal build for us across the year.
Speaker Change: I think importantly, the guide does not include a significant ramp in the market in the back half. So we're going to see a normal seasonal level of sales.
Speaker Change: When you translate those sales to prior year comps.
Speaker Change: Any of the first half down around 1% in the second half up around 4%, but again very seasonal cadence across the year from a sales perspective.
Nick Fink: Nick touched on some of the reasons to believe but fully lapped low margin business, we have exited.
Nick Fink: China being challenging in the first quarter, we expect it to be roughly flat the balance of the year.
Nick Fink: Digital accelerating through the year and then the non repeating impact from the fourth quarter headwinds. So I feel confident in the sales guide we have that there isn't a big back half ramp driven by the market or other characteristics.
Speaker Change: Looking specifically at the first quarter Sue I'd say sales.
Speaker Change: Our lowest quarter for the year and again inclusive of China with sales down around 4%.
Speaker Change: China is going to be a two percentage point headwind.
Speaker Change: Low single digit Pos in the first quarter and Thats roughly what we've seen year to date.
Speaker Change: <unk> support that.
Speaker Change: And then looking at margin cadence I'd say there are three things that we have really good visibility to given our inventory positions and lead time. So one we.
Speaker Change: We see the timing of some operational costs and absorption coming off the P&L and hitting the first quarter, specifically those are going to reverse out as we move through the year.
We had some incremental investment timing and then we have those favorable prior year comps in the fourth quarter that won't repeat.
Speaker Change: I look at our margin cadence I see no first half down first half operating margin of 14, 5% 15%.
Speaker Change: With our first quarter around 12% to 13, including about 225 basis points of margin compression from those ops cost that ultimately reverse out.
Speaker Change: That leaves the second half margin of around 20% and again there are reasons to believe as we look at it.
Speaker Change: The cadence of those operational costs moving through and the absorption moving through the continued ramp of digital driving mix.
Speaker Change: And non repeated one times in the fourth quarter Theyre going to boost that margin as we get there in the back half.
Speaker Change: Well I think we're taking a prudent approach to the year and really looking to accelerate the growth momentum that we have and have really good line of sight to what's coming on and off our balance sheet and in and out of the cost of our as we move through.
Speaker Change: Okay. That's very helpful color. Thank you both and maybe just following up it sounds from your remarks at the high end of the market is still holding on fairly well given what youre seeing in la and in some of the other parts of the business.
And Terry on how Youre thinking about the state of the consumer coming into the year and what you are seeing across the different price points and how maybe that could play out over the coming quarters.
Speaker Change: Yeah, I'd say look the consumer generally I think is still being very cautious the way even in the start of the year, we're seeing consumer behave.
Speaker Change: Similar to Q4.
Speaker Change: I would say even the point of sale.
Speaker Change: Daily read everyone is almost tracking maybe just slightly under.
Speaker Change: <unk>, which was consistent with how they track last year.
Speaker Change: On a dollar basis I think in general.
Speaker Change: The consumer is still very cautious to general consumer bit you're absolutely right at the higher end.
Speaker Change: Seeing a lot of resilience.
Speaker Change: And to see that performance at a hospital is great. In the household has got a lot of stuff coming online. This year, so you've seen.
Speaker Change: A lot of back to Brazil is we'll continue to lean into that and then for the rest of the portfolio. We've done a lot of work in 24 that will rollout in 'twenty five to really better. If you had on the differentiation around our brands and you heard a lot in the prepared remarks around the trustworthiness.
Speaker Change: 50 <unk> week.
We've seen a lot, but I've talked about it before what we call counterfeit or imposture products in the marketplace.
Speaker Change: That are very sharply priced and im not talking about private label Thats been around Recompete. That's no problem I'm talking about things that claim falsely claim to have.
Speaker Change: Product attributes where safety standards that they don't.
Speaker Change: We're going to we've already started to talk about some of that in our safety business you've seen very strong response.
Speaker Change: Cell level, we're not going to get talking about it more in water and in other parts of the security and I think as you do you didn't really sort of give into those reasons to believe why should a consumer pay for these products being absent that.
Speaker Change: There's a lot of consumer caution I think with that we.
Speaker Change: We see strong consumer response.
Speaker Change: Okay.
Speaker Change: Well. Thank you both for all the color and good luck with everything.
Dave Barry: Thanks, Dave.
Speaker Change: The next question comes from the line of Matthew Bouley with Barclays. Please proceed.
Speaker Change: Good evening, everyone. Thank you for taking the questions.
Speaker Change: Can I ask on connected products.
Speaker Change: You spoke about a 150 basis points additive to growth in 2025.
Speaker Change: I guess just a few questions. If you can kind of level set us I think I heard you say $214 million as a starting point and correct me if I'm wrong from 2024.
Speaker Change: So can you speak to the building blocks of the 150 basis points is is that coming already in Q1 or does it kind of ramp through the year.
Speaker Change: And kind of what do you have clear line of sight to already versus kind of additional milestones we should be looking forward to yourself. Thank you.
Speaker Change: Hey, Matt, It's David happy to touch on that and as Nick mentioned in his remarks made significant progress in this space.
Speaker Change: As I move into my role to work closer with this team and really focused on.
Speaker Change: Executing sales activation and conversion.
Speaker Change: While also expanding the aperture on our strategy and where we can play and where we have the right to win and I'm excited to do that they get into this role. So as we look at what's what's embedded in the guide correct full year impact on growth for the total fortune growth is 150 basis points in the first half.
Speaker Change: 100 ish basis points of growth in the.
Speaker Change: Second half maybe closer to 200, maybe a bit more than that of growth and remember in the second half. We're comping. The Yale inventory reduction. So this is net sales growth that we're talking about and not.
Speaker Change: I mean, we continue to see Pos ramped strongly.
Speaker Change: It's up in the.
Speaker Change: 77%, 70% to 80% in the first quarter of this year already so that trend has continued for water.
Speaker Change: We see Pos growth on on the security side as well in our core channels. It's really just on the partnership side, bringing new product in.
Transitioning old product out and getting that back to growth as we expect to occur.
Speaker Change: By about second quarter to third quarter.
Speaker Change: So we're excited.
Speaker Change: Let them continuing to build the team continues to fill the top of the funnel from a partnership standpoint, and we're really focused on pulling those sales through the funnel and executing.
Speaker Change: Okay got it. Thanks, Thank you for that and then.
Speaker Change: Secondly, I wanted to touch on the tariffs, which you had mentioned at the top.
Speaker Change: I think you said maybe.
Speaker Change: Low double digit or 10% in our line of sight to getting below 10% in China and I think you said Mexico was similar.
Speaker Change: Can you just elaborate a little bit.
Speaker Change: On I guess, what you can do specifically with Mexico.
Speaker Change: Since this is obviously.
Newer this time relative to a few years ago, and then Canada as well and specifically any other kind of international sourcing that we should consider given the kind of uncertainty for how this is all going to play out so just kind of any framework around the tariffs there. Thank you.
Matt: Yes, Matt I'll start with.
Matt: Just give me some exceptionally in fluids, obviously, I, probably should take and can give you some of the specifics, but we've talked about this really over the last few years, but remember it like going back we've sort of been at this tariff thing since plywood tariffs first hit I think around 2017, and we have to move $100 million worth of spend that we did that very quickly as the team is really.
Matt: Both are very very strong bench in managing tariffs our philosophy.
Matt: Over the last couple of years has really been around supply chain agility.
Matt: Versus trying to pick a specific geography to bet on and so doing things.
Matt: It's a competitively sensitive.
Matt: Detailed doing things around the portfolio that allows us to move product very very quickly and then building out.
Matt: Redundant supplier networks that allow us to move things very very quickly around the place and so you know.
Matt: Well, it's certainly been.
Matt: Testing to watch exactly where tariff may land or may not land, we've done a lot of work to be able to move very quickly as that happens and so that's been the approach and I'll tell you I'm glad we have it versus making singular say on one geography.
Matt: The other thing I'll, just add I've spent a lot of time.
Speaker Change: Lee you also made shoes external affairs.
Matt: D C.
Matt: We're talking to the administration and it's clear that there is certainly is the idea of trading balanced tariffs, but there is an idea around universal test and to the extent that that comes to fruition. We have a very strong north American and U S. We have exited.
Matt:
Matt: We're vertically integrated in some parts of the business and still have maintained very strong manufacturing.
Matt: Footprint.
Matt: In all other parts of the business and so we view that as essentially actually being quite a competitive advantage given that we can combine this flexibility with our existing footprint with a great workforce.
Matt: And we think we can very very quickly move to service to our consumers and customers in a competitively advantaged way.
Matt: Yes, Matt I would add just clear what's in the guidance.
Matt: We have the impact from the 10% incremental China included in the guide and we also believe that our EPS range captures any potential impact from Mexico and Canada.
Speaker Change: Given what Nick said the team is working on.
Speaker Change: For Mexico, specifically and for Canada actually structuring options.
Speaker Change: Different ways to think about our U S content in those products.
Speaker Change: To reduce our exposure and ultimately reduce the price that we would take in the market, but ultimately while we work all of our internal levers and actions.
Speaker Change: At the end of the day, what's left will pass through and then invest behind what we pass through to tell the story of our brand and why they are superior.
Speaker Change: Great. Thanks, guys. Good luck.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Michael Rehaut with J P. Morgan. Please proceed.
Michael Rehaut: Thanks for taking my questions good afternoon, everyone.
Michael Rehaut: First question I wanted to just to circle back to the organic growth ambitions or guidance.
Michael Rehaut: He kind of highlighted obviously.
Michael Rehaut: Digital contributing 150 out of the 200 bps of growth.
Michael Rehaut: Above the market.
Michael Rehaut: Prior years.
Michael Rehaut: You've kind of.
Michael Rehaut: When giving guidance.
Michael Rehaut: Often laid out maybe 100 to 150 basis points of growth above your end market. So.
Michael Rehaut: I think some people were.
Michael Rehaut: You may be thinking of the digital opportunity is something above and beyond.
Michael Rehaut: Your normal.
Michael Rehaut: Above market growth opportunity so.
Michael Rehaut: When you think about the 50 basis points.
Michael Rehaut: Outside of the digital that's contributing to the topline, maybe maybe being a little less than before.
Any thoughts around let's say the core portfolio and the opportunity to contribute to above market growth versus digital I know.
Michael Rehaut: Italy, you know you kind of think of them together, but at.
At the same time I think most people view digital as kind of an incremental opportunity to the core business. So just any thoughts around you know.
Growth contribution from the non digital side of the business how thats.
How you think about that over the next couple of years.
Michael Rehaut: Look I think that's a very fair challenge.
Michael Rehaut: If you look at 'twenty four.
Michael Rehaut: As we said earlier, we did walk away from some low margin business that we did it very purposely as we concentrated the efforts of the business on the digital side right in order to achieve what we've achieved in digital.
Michael Rehaut: When we've had to make choices around do we pursue things that were like OEM products for millennials et cetera, we've chosen to focus.
Michael Rehaut: There, where we know the future growth is going to be and so as we built this year's plan.
Michael Rehaut: Certainly want to see.
Michael Rehaut: Core.
Michael Rehaut: Outperform.
Michael Rehaut: We do as I said earlier has some real assets that we're deploying into the market there is.
Michael Rehaut: Some innovation, that's coming that Youll see that.
Michael Rehaut: That is very exciting there is branding assets and there are more dollars going against driving those grating assets into the market and telling that story and so we expect that to deliver but I think as we just designed this year, it's still in a chat.
Michael Rehaut: Challenging market.
Michael Rehaut: A lot going on and we put some conservatism around that I, certainly think as you see the consumer stabilized and you see the activity that we have in the marketplace resonate.
Michael Rehaut: <unk> will be.
Michael Rehaut: Targeting something in excess of about 50 basis points from the court.
Michael Rehaut: But I think Thats fair might be a couple of things I'd add.
Michael Rehaut: Still have China down about 30% in the first quarter.
Michael Rehaut: If you.
Michael Rehaut: We have a push that through fortune 25, 25% to 40 basis points of headwind.
Michael Rehaut: Smooth out going forward, but it impacts the year and then as we've talked about we're not pleased word for security and there's still some work to do at the beginning part of the year to get that portfolio back performing and back performing above market.
Michael Rehaut: We intend to fully do.
Michael Rehaut: Okay.
Michael Rehaut: Those are fair points and appreciate the candor there.
Michael Rehaut: I guess secondly, maybe just circling back to the tariff for a moment.
Speaker Change: Yeah, I believe Dave you just said that the.
Michael Rehaut: China and potential Mexico tariffs.
Michael Rehaut: Our are reflected in the guide.
Michael Rehaut: So what does that mean in terms of how we should thinking about volume versus price.
Michael Rehaut: Zero to 3% guide I would assume that you know when you're trying to offset the impact of Paris and it would appear that.
Michael Rehaut: Your guide is reflecting the ability to offset most if not all of the.
Michael Rehaut: Impact of Paris.
Michael Rehaut:
That that most.
Michael Rehaut: Most companies.
Michael Rehaut: I think kind of take a price first apply.
Michael Rehaut: Supply chain simultaneous.
Michael Rehaut: Where you're not going to get the full impact of the supply chain. So I'd assume that theres some bright.
Michael Rehaut: In that guide in part of your view around being able to include towers and the guidance and maybe have a minimal impact maybe you can address some of those points there.
Speaker Change: Yes, let me, let me clarify a couple of things so the China impact of 10% is in the fully embedded in the guide.
Speaker Change: Our EPS range would cover Mexico, and Canada, though if those go into effect I think our sales and margin would look different because we would take more price.
Speaker Change: To cover the dollars and margin would probably look a little bit different as a result of that.
Speaker Change: Two point, China fully in the guide.
Speaker Change: Less than low single digit price across the whole portfolio.
Speaker Change: 1% less than 1% of price across the whole portfolio to cover.
Speaker Change: The Mexico, Canada to your point, yes, we would expect to cover that impact through pricing and supply chain actions, but that hasnt been flown through kind of the sales and margin piece because it is still uncertain.
And as Dave said very manageable price.
Speaker Change: From what we see certainly to that yes.
Speaker Change: I actually.
Speaker Change: Mike.
Speaker Change: The removal of the de Minimis <unk>.
Speaker Change: <unk> is actually an opportunity for US right I mean, we've talked about these imposture brands and a lot of them are using that loophole to ship directly to our consumers in the U S. As that goes away and stays that that is.
Speaker Change: The opportunity for our teams to take share.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Adam Walsh.
Speaker Change: Gordon with Zelman and associates. Please proceed.
Adam Walsh: Hey, everyone. Good evening.
Adam Walsh: Just on gross margin it really stepped up nicely in 2024.
From 2030 can you maybe talk about the drivers behind that and how sustainable that is going forward.
Adam Walsh: Yes, Im happy to do it.
It's been on a nice trend all year right and we talked about some of the actions we've taken like clothing, our Milwaukee plant for security.
Adam Walsh: To help.
Adam Walsh: So let's start gross margin.
Adam Walsh: Our continuous improvement initiatives as a result of our new aligned supply chain driving incremental sourcing and then some product mix benefits as the portfolio continues to shift to higher margin opportunities. So we do think it is sustainable I think it is the right jumping off point as we look forward to 'twenty five as I mentioned in my talking through the guidance in the face.
Adam Walsh: There'll be some lumpiness in the quarters based on how some of our inventory is moving from the balance sheet into the P&L at a higher cost base that will even itself out through the year.
Adam Walsh: As we look at the full year that we do expect gross margin expansion again in 'twenty five.
Adam Walsh: Okay, Great and then just on the share repurchases big authorization here and it looks like based on the guide and the share count that Youre not building in any repurchases beyond maybe the January number that you gave I guess is that just conservatism do you still expect to.
Adam Walsh: Repurchase shares in 2025, given the authorization.
Yes.
Adam Walsh: I would say consistent with our guiding practice, we put it in share repurchase authorization to offset dilution. So that's what's in the guide.
Adam Walsh: It is our intent to be aggressive when we see dislocations in our share price.
Adam Walsh: We're generating a lot of cash and pursuing incremental opportunities to reduce our working capital. We have some process improvements going into effect this quarter and looking at some other working capital initiatives.
Adam Walsh: Actually even accelerate our cash flow guide above and beyond where it is today so it will be.
Adam Walsh: Aggressive when the opportunity exists to buy back shares and still be mindful of our leverage target, but I think given the cash generation.
Adam Walsh: To do that and still delever down towards where we want to be.
Ed: This is Ed.
Adam Walsh: Okay.
Speaker Change: Fine point on that we're very focused on cash generation this year.
Speaker Change: Going forward, we're very pleased with cash generation over 100%.
Speaker Change: Targeting 25 to be somewhere between 115, and 125% alright, so targeting.
Speaker Change: $600 million ish as Dave said, there is some initiatives we have in mind that we think we can get even more out and I think as Dave described the phasing of margins for the year Youll see us be.
Speaker Change: And be able to turn some inventory into cash earlier in the year end.
Speaker Change: That has a short term margin impact that cash generation, particularly when we see dislocations can be a very favorable thing. So we're we're very focused on it.
Speaker Change: And we think it's something that we can use to really create shareholder value here.
Speaker Change: Okay, great. Thanks.
Speaker Change: The next question comes from John Lovallo with UBS. Please proceed.
John Lovallo: Hey, guys. Thank you for taking my questions as well maybe the first one just on the Capex outlook of a 100 to 140, I mean, that's down pretty meaningfully obviously year over year, but it almost seems like it could be approaching kind of maintenance capex levels, I mean am I thinking about that correctly.
John Lovallo: Are you comfortable with the ability to continue investing in growth.
Speaker Change: Yes, absolutely so maintenance Capex John for US is about 1% of sales so call. It in that $50 million range. So this would include.
Speaker Change: Growth capital why it's stepping down as a reminder, we've put an incremental capacity over the past couple of years I think we've been clear that that capex rate of 23 and 'twenty four we're not the go forward rates for this business.
Speaker Change: That said, we now have capacity and as volume comes back we have more efficient newer capacity in certain parts of the business, which will lever.
Speaker Change: Substantially through the P&L.
Speaker Change: But part of that strong cash flow generation is actually getting back to what is more like that 2% to 3% of sales capex right, which is our longer term target and still leaves us plenty of capital for growth, we're not starving the business for any any growth initiatives.
Speaker Change: Rich.
Rich: I would just say to.
Rich: To go further on that I mean, just over the last few years. The I've mentioned I think that in the remarks, we've opened.
Rich: Just in last year into this year, two new facilities for water, we put more capacity into outdoors.
Rich: Obviously with the <unk>.
Rich: Footprint moves in security incremental capacity going in there more intense so actually the business is now really well capacity.
Rich: And we're confident that over the next few years, we're going to be able to not just generate a lot of cash but really grow into.
Rich: That capacity and leverage through it so from that perspective, I think we're actually in a really good spot and the fact that we've been able to grow margins. While doing this I think is a testament to how we've been leveraging the fortune brands advantage across the entire company to be superefficient for deploying extra cash into capacity redeploying cash into things like.
Rich: <unk>.
Rich: Digital and yet growing margins at the same time, it's really sets us up as volumes come through to drive a lot of leverage to the business.
Okay. That's helpful. And then maybe just a point of clarification I thought last year. At this time you guys had talked about digital sales kind of running at an annualized rate of $250 million.
Rich: And in that context at 214 that you guys printed in 2024. It seems it seems a bit light. So wanted to ask that and then just on the flow portion.
Speaker Change: Can you provide any more color on the other insurance company wins.
Rich: Yeah, why don't I start.
Speaker Change: Art.
Speaker Change: More specifics I'd say firstly on the on the dollar and we wanted to sort of give it for the year.
Speaker Change: And then as we progress through 'twenty five we'll tell you what the run rate is.
Speaker Change: Flow.
Speaker Change: Performing as we said exceptionally well.
Speaker Change: D C. A lot of business now coming online and then <unk> sort of interesting as we integrated that business and brought it on board.
Speaker Change: As we've always said sort of mid cycle startup and it kind of act like a solid a sign big partnerships I think we said 14 and.
Speaker Change: In 2024, but then you also exit all products the external partnerships and so there is choppiness in the number and we saw a lot of that Choppiness in 'twenty four frankly.
Speaker Change: Where it actually went backwards, but as the 14, new partnerships ramp and it returns to growth I think part of our objective for that business needs to be we need to smooth that out, which we will do by maintaining and building those <unk> to be partnerships, but also building out more of a b to C business as we have in flow. So you have as we do at flow.
Speaker Change: So the beta reinsurance that you have the BDC business and you get much much smoother ramp so that kind of choppiness in the number but I'd say, if you step back from that and you look at what we're signing up and when you look at where it's going in.
Speaker Change: We're absolutely delighted with it and then from the insurance partnership perspective.
Speaker Change: There are a variety of flavors from.
Speaker Change: Affiliates recommended too.
Speaker Change: Discounts to mandate.
Speaker Change: A reason we talk a lot about farmers and the reason we think farmers as a milestone deal is really it was the first.
Speaker Change: <unk> an insurer says this is mandated for a certain subset of homes. If you want to have continued insurance we have to take cost out of the system you have to put the product in.
Speaker Change: We continue to sign up insurers.
Speaker Change: All three.
Right.
Speaker Change: And we will continue to do that and what should ramp I think youll see more happen and it's somewhat regulatory where it can happen, but I think you'll see more happen in both the discount.
Speaker Change: As well as the mandate the other thing that we talked about we're going to start trialing.
Speaker Change: In this quarter is a subscription recurring revenue model around this business, which we think will make it much much easier not just for those consumers to absorb the cost but also for the insurer to mandate it because the.
Speaker Change: Entry level price point, if you will will be.
Speaker Change: A much much lower number than the cost of installing.
Speaker Change: A device.
Speaker Change: From the get go.
Speaker Change: Tell you the financials actually work out much better for us to move online because you develop lifetime customers and the lifetime value of those customers are far greater than a single onetime sale, but we view that as the next big milestone step forward in bringing these partnerships to life.
Speaker Change: Great. Thank you.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: This concludes our Q&A session.
Speaker Change: Concludes today's conference as well you may disconnect your lines at this time and enjoy the rest of your day.
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Speaker Change: Yeah.
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Speaker Change: Sure.
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Speaker Change: Okay.
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Speaker Change: Yes.
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Speaker Change: Okay.
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Speaker Change: Okay.
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Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
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Speaker Change: Good afternoon, everyone.
Joe: My name is Joe and I will be your conference operator today.
Welcome to the Fortune Brands' fourth quarter 2024 earnings conference call.
Joe: All lines are muted to prevent background noise.
Joe: Following the speakers remarks, we will open the call for Q&A session.
Lee Thank: At this time I'd like to turn the call over to Lee answer.
Joe: Executive Vice President external affairs, and chief of staff.
Lee Thank: Please go ahead.
Speaker Change: Good afternoon, everyone and welcome to the Fortune brands innovation fourth quarter, and full year 2024 earnings call and webcast.
Speaker Change: Everyone has had the chance to review the earnings release issued earlier.
Speaker Change: Earnings release, and an audio replay of the webcast of this call can be found in the investors section of our website at.
Speaker Change: I N dot com.
Speaker Change: I want to remind everyone that the forward looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session are based on current expectations and market outlook and are subject to certain risks.
Speaker Change: 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.
Speaker Change: Company does not undertake any obligation to update or revise any forward looking statements, except as required by law.
Speaker Change: Any references to operating income margin EBITDA earnings per share cash flow on today's call will focus on our results on a non-GAAP before charges and gains basis, unless otherwise specified please visit our website for a reconciliation.
Speaker Change: Joining me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry Our Chief Financial Officer.
Speaker Change: Following our prepared remarks, we have a lot of time to address some questions.
Nick Fink: I will now turn the call over to Nick Nick.
Nick Fink: Thank you Lee and thank you to everyone for joining us today.
Nick Fink: As we finished 2024 and begin 2025 I'm.
Nick Fink: I'm proud of the progress we've made to continue to re platform their business and unlock our long term growth potential.
Nick Fink: We took several important steps this past year amidst a challenging backdrop.
Nick Fink: Further focused our portfolio on the highest growth and most profitable opportunities within our categories.
We simplified and aligned our organization uniting our associates behind our new visionary purposes.
Nick Fink: We saw market outperformance in key core portions of our portfolio.
Nick Fink: We integrated and scale, our digital business and announced milestone partnerships and digital water.
Nick Fink: We had impressive free cash flow it made sustainable margin progress across our portfolio.
Nick Fink: We did so while also continuing to make strategic investments in brand building innovation and.
Nick Fink: Our ongoing digital transformation, all of which have delivered real assets that we plan to activate to accelerate growth.
Nick Fink: The actions, we took over the past year to better leverage the strength of our aligned organization.
Nick Fink: And sharpen our focus on our leading brand.
Nick Fink: Meaningful innovation and our advantaged channel relationships.
Nick Fink: Give me confidence in our ability to outperform in 2025 and beyond.
Nick Fink: Our fortune brands advantaged capabilities are now more effectively deployed across the organization, allowing us to advance our growth and margin journey by reducing costs, optimizing our pricing and enabling a high growth focus areas like digital product luxury and outdoor living.
Nick Fink: As we continue our transformation into one aligned organization, we will be able to further leverage our fortune brands advantaged capabilities to create even more value.
Nick Fink: Fortune brands was recently named to the Wall Street Journal's top 250, best managed companies list of 2024.
Nick Fink: This recognition is a testament to the progress we've made as a company, especially are growing prominence as a digital brand and our digital products portfolio.
Nick Fink: And reflects the tenacity and innovation of our entire team.
Nick Fink: Before we continue I want to touch on our recent announcement.
Nick Fink: Starting in the summer of this year Fortune brands will begin to move its regional offices into one state of the art campus headquarters in Deerfield, Illinois.
Nick Fink: We are fortunate to have found a moderate and tech forward environment to call out a new home.
Nick Fink: The result will be a world class collaborative environment fueled the company's innovation accelerate our digital solutions and grow our core product.
Nick Fink: Additionally, this campus will further our ability to retain and attract top talent.
Nick Fink: Further build our exceptional culture.
Nick Fink: Third around our purpose.
Nick Fink: We expect this action will drive bigger thinking in elevated execution, even foster and will unlock opportunities for growth and shareholder value.
Nick Fink: We also announced that we have simplified our leadership structure.
This allows the senior commercial leaders to now report directly to me and it allows for quicker decision, making and more direct involvement across the businesses.
Nick Fink: Additionally, Dave Barry will move into a newly created role of President security and connected products.
Nick Fink: He will lead our iconic legacy security business and have direct responsibility for growing fortune brands digital business <unk>.
Including Yale Smart residential locks master lock connected lockout, tagout, and the MAU and smartwater ecosystem, including the Mullen slow leak detection solutions.
Nick Fink: These businesses will greatly benefit from days focus on growth.
As acute business insight and company experience and his passion for our brand and our connected products opportunities.
Nick Fink: By deploying some of our best talent against some of our biggest opportunity.
Nick Fink: I am confident that we will achieve our full exceptional potential.
Nick Fink: Now turning to the market and our results on this call I will walk through the highlights of our fourth quarter and full year 2020 for performance.
Nick Fink: I'll also offer some thoughts on the current macro environment and why we believe fortune brands is optimally positioned.
Nick Fink: Now more than ever to deliver on our commitment of long term growth and sustained value creation.
Nick Fink: I will then turn the call over to Dave for a discussion of our fourth quarter and full year financial results and our performance expectations for 2025, including our view of the market.
Nick Fink: For the fourth quarter, we saw net sales of $1 1, billion% to 5% decrease versus the fourth quarter of 2023.
Nick Fink: Importantly, our fourth quarter sales were impacted by a third party software outage in our security distribution centers the hurricanes in the southeastern United States and continued softness in China.
Nick Fink: Adjusted for these impacts.
Nick Fink: Our fourth quarter organic sales were down 1%.
Nick Fink: Also notable is that when you exclude hurricanes in China fourth quarter organic sales grew by water endorsed business. We estimate our total company point of sale, excluding China and the one time disruption outperformed the larger market.
Nick Fink: Fourth quarter 2024, EPS were <unk> 98.
Nick Fink: 3% versus Q4 2023.
Nick Fink: Operating margins for the quarter was 16, 4% to.
Nick Fink: The 60 basis point improvement over the fourth quarter of 2023.
Nick Fink: For the full year 2024, our teams delivered net sales of $4 6 billion.
Nick Fink: Flat versus 2023.
Nick Fink: Full year organic sales were $4 4 billion down.
Down, 5% or down, 2%, excluding China, and the onetime fourth quarter disruption.
Nick Fink: Our full year operating margin increased 90 basis points versus 2023.
Nick Fink: Impressive margin results reflect the actions we've taken to optimize our businesses.
Nick Fink: Including strategically aligning our operational footprint.
Nick Fink: And focusing our portfolio on the most profitable parts of our business.
Nick Fink: Accordingly, with strong margin performance includes strategic investments that we've made to facilitate future growth.
Nick Fink: Our 2020 for free cash flow was approximately $475 million with a cash conversion of more than 100% of net income.
Nick Fink: Our cash flow performance is another proof point of our more efficient organization.
Nick Fink: Our full year earnings per share were $4 in Tulsa up 5% over full year 2023.
Nick Fink: Our strong balance sheet and advantaged capital structure enabled us to strategically deploy capital both organically and Inorganically.
Nick Fink: We invested inorganically and strategic platforms, including water filtration and connected lockout tagout.
Nick Fink: Both of which we believe have significant secular growth opportunities.
Nick Fink: Finally, we announced that our board of directors has approved a new $1 billion share repurchase authorization.
Nick Fink: Demonstrating the confidence we have in our cash generation.
Nick Fink: As well as our focus on creating long term shareholder value.
Nick Fink: Now I would like to highlight in more detail. The actions. We took in 2024 that will position our company for future growth.
Nick Fink: Starting first with our digital business.
Nick Fink: As a reminder, our digital business includes all of our digital product and both our water and security segments.
Nick Fink: In 2024 digital sales were $214 million.
Nick Fink: Significant growth in the flow business.
Nick Fink: At the end of 2020 for our full digital business was $4 7 million users.
Nick Fink: <unk> of over 200000, new device Activations in the fourth quarter.
Nick Fink: And with a strong point of sale trajectory as we head into 2025.
And our digital water business flow success, both in terms of sales and partnerships far exceeded our expectations at the end of 2024, we had 12 partnerships with insurance companies and other key sales partners, including a precedent setting partnership with farmers insurance.
Nick Fink: This is particularly impressive as we started 2024 with a new team and no part.
In 2025, we have already signed another one of the largest insurance companies in the United States with significant accident.
Nick Fink: Our high net worth homeowners.
Nick Fink: As we discussed on the last call. The number of homeowner policies collectively represented by these insurance partners is in the tens of millions and we are laser focused on converting these opportunities into sales.
Nick Fink: For our fourth quarter retail and E Commerce Pos for flow was up over 100% versus the fourth quarter of 2023 and sales for the full year grew well over 100%.
Nick Fink: We invested meaningfully as well, including an innovative marketing designed to drive awareness as well as key functionality and design update.
Nick Fink: To make the user and partner experience more seamless.
We're converting sales opportunities foster having recently added additional dedicated resources.
Nick Fink: In the quarter, we reduced the partner Onboarding time by two thirds and we are now able to implement marketing and sales activation and less than 30 days at this time.
Nick Fink: Looking to 2025, we will continue our focus on not only entering into new partnerships with accelerating our sales conversion with the partners that we already have.
Nick Fink: We expect our flow sales to continue to increase rapidly and have already seen acceleration as we begin 2025.
Nick Fink: Based on the strong sales trajectory.
Nick Fink: See a path towards a 100 million in annualized sales in 2025.
Nick Fink: We're looking to launch new subscription based pricing models in the first half of 2025.
Nick Fink: We've increased our awareness campaigns in response to increment weather across the nation as well as the tragic fires in California, which have elevated public awareness around the need to address the interconnected insurance and affordability.
Nick Fink: Our digital security business also took some transformative actions this past year.
Nick Fink: First we continue to build partnerships with our Yale, but we signed 14, new partnerships in 2024 with companies like Airbnb <unk> and ADT.
Nick Fink: As we lapped significant destocking and product lifecycle headwinds, we expect these new partnerships will reaccelerate our growth.
Nick Fink: We acquired a stake in a connected lockout Tagout software platform, which we expect will greatly accelerate our leadership in this emerging space.
Nick Fink: As companies look to keep employees safe reduce insurance costs.
Nick Fink: Our operations more efficient.
Nick Fink: Our connected lockout, tagout hardware and software platform will be the best in class.
Nick Fink: As we look to 2025, we're very excited about the future of our connected business.
Nick Fink: The ability to generate recurring revenue.
Today's focus leadership and commitment to growth.
Nick Fink: We believe our connected opportunity is better than ever.
Nick Fink: We continue to expect connected sales to be at least $1 billion by 2030.
Nick Fink: This growth will be driven by rapid expansion of our digital portfolio, including growth in flow are emerging master lock Teladoc solution.
Nick Fink: A return to growth by Yale as our new partnerships ramp up in our inventory stabilize.
Nick Fink: We expect digital will contribute 150 basis points of growth to our full year 2025 net sales.
Nick Fink: And we're working on accelerating this performance.
Nick Fink: We took steps to streamline the portfolio optimize operations and work more quickly and efficiently.
Nick Fink: Throughout 2024, we strategically focus on the highest growth and most profitable part of our core portfolio.
Nick Fink: And walked away for some of the less attractive and non strategic parts of the market, which we estimate had a 150 to 200 basis point impact on our 2024 states.
Nick Fink: This has allowed us to focus our best resources on our biggest and most attractive opportunities.
Nick Fink: Especially when the markets return to growth.
Nick Fink: We also took key operational steps, including aligning our footprint opening two new sites for our water business and optimizing our supply chain ahead of 2025.
Nick Fink: These capacity investments leave us with room for expected growth in the coming years.
Nick Fink: Importantly in 2024, we also took steps to prepare for potential supply chain disruptions related to tariffs.
Nick Fink: Or other geopolitical situations.
Nick Fink: We have significantly increased our flexibility and reduced our tariff exposure from China with a line of sight grape costs to reduce this exposure to less than 10% of total costs by the end of 2025.
Nick Fink: We have a similar spend in Mexico and are executing on strategies to reduce this exposure as necessary.
Nick Fink: We have leveraged our digital capabilities for ourselves.
Nick Fink: Quickly any environment.
Nick Fink: And we believe are aligned and supply chain teams.
Nick Fink: Robust data and strong supplier relationships leave us well positioned relative to our competitors.
Nick Fink: Now turning to some thoughts on the market for our product in 2025.
Nick Fink: As we enter 2025, we are prepared for dynamic environment.
Nick Fink: We're confident in our ability returned to top line outperformance based on the actions. We took in 2020 for the strength of our brands are meaningful innovation and new product introductions in our connected product growth potential.
Nick Fink: The need and desire for homes remains incredibly strong and our products are well positioned in the context of the larger macro environment.
Nick Fink: Within the larger market issue.
Nick Fink: Issue of housing affordability and substandard imposture brands are both are of Paramount importance and receiving a lot of attention.
Nick Fink: We believe this current market will provide us with opportunities for both our core products as well as our digital products.
Nick Fink: We will be very focused on articulating the value and benefits consumers get from our product and why purchasing strong brands that stand behind the safety and effectiveness of their product matters more than ever.
Nick Fink: While it is difficult to call when exactly a recovery will occur we believe the fundamental demand together with our strong and optimally position brain.
Nick Fink: Will result in medium to long term tailwind for our business, both new construction and repair and remodel.
Nick Fink: The R&R market has generally stabilized relative to the post COVID-19 normalization period.
Nick Fink: Although it is still negative and existing home sales have likely found a bottom after three years of decline.
Nick Fink: That said recent rate trends and uncertainty regarding policy inflation and geopolitics.
Nick Fink: Likely to inhibit market growth in the near term.
Nick Fink: Starting with new construction.
Nick Fink: We expect the single family new construction market to be flat from 2025.
Nick Fink: With both start and complete up low single digits, partially offset by that lag impact from the 2020 for second half slowdown.
Nick Fink: As a reminder, new construction represents around a quarter of our total sales.
Nick Fink: Our businesses, particularly our mone and number two brands enjoy very strong relationships with many large national production builders and the channel partners that serve them.
Nick Fink: Despite higher for longer rate large builders are offering incentives to support volume in the near term, which will continue to be a tailwind for us.
Nick Fink: Turning to R&R.
Nick Fink: The R&R market remains dynamic and there are many variables that are impacting the repair and remodel space, including consumer savings and confident employment levels home equity levels in existing home turnover.
Nick Fink: We currently expect the R&R market for our products to be flat to up in 2025 with growth weighted towards the back half.
Nick Fink: R&R is impacted by a variety of factors.
Nick Fink: While we expect rates will be higher for longer we also expect higher existing home sales and increased rates from home equity extraction.
Nick Fink: Even when accounting for the Covid boom the levels of R&R volumes since 2019 are under trend.
Nick Fink: However, as consumer confidence improves and consumers increasingly look towards their homes as a source of capital equity.
Nick Fink: We believe people will increasingly leverage their home equity renovation projects for a variety of vehicles, including refinancing HELOC P loans and home equity agreements.
Nick Fink: Now, let me turn to segment results.
Nick Fink: Starting with water innovation, our fourth quarter sales were down 3%, excluding China and the impact of the hurricanes in the southeastern United States.
Nick Fink: <unk> sales increased 2% with above market point of sale growth in our house of ROHL and amtech businesses.
Nick Fink: Our margins increased 190 basis points over fourth quarter of 2023, while we continue to invest in their priorities like digital and marketing.
Nick Fink: Our margin results reflect our focus on the most profitable parts of the market as well as the work we've done to align and streamline the organization and improve the efficiencies of our businesses.
Nick Fink: For the full year water innovation sales were flat and organic sales, excluding the impact of China and Hurricanes were down 2%.
Nick Fink: For the full year, we saw 80 basis points of margin growth.
Nick Fink: Looking forward to 2025, we continue to expect a dynamic environment, especially in the first part of the year with clear opportunities for us to differentiate ourselves.
Nick Fink: We will focus on delivering above market sales performance across the segment.
By focusing on the highest growth areas within our core businesses and continued to accelerate our leadership in digital water.
Nick Fink: We plan to help consumers and customers better understand what our product standpoint design dependability and innovation.
Nick Fink: We once again won Americas, most trusted faucet breaks and plan to leverage that strong consumer and pro sentiment.
Nick Fink: The face of the number of imposter and counterfeit brands in the marketplace.
Nick Fink: We will continue to invest in our key priority, including branding and marketing and our digital products.
Nick Fink: These targeted investments will help drive our strategy to grow the core and accelerate digital and connected products.
Nick Fink: 2024 represented a tipping point for our Moen, Flo Smartwater leak detection business.
Nick Fink: And we expect this to only accelerate in 2025.
Nick Fink: Our sales pipeline are substantial and even with conservative conversion estimate.
Nick Fink: We had the opportunity to realize significant sales.
We will continue to invest in this growth opportunity both to support product functionality as well as marketing and other activation efforts.
Nick Fink: We believe the current focus on insurance and affordability together with our leading position in this space.
Nick Fink: Will result in outsized growth.
Nick Fink: Our house of ROHL portfolio, which now includes amtech grew in the fourth quarter as our brand product and showroom strategy resonated with luxury consumers and design.
Nick Fink: We opened a new manufacturing and distribution facility in the U K and better serve our customers, which will continue to come online in 2025.
Nick Fink: We're also still rolling out our synergy wins for roll in amtech, particularly in showrooms.
Nick Fink: We're excited about the future of our luxury portfolio is our powerhouse brands continue to delight consumers and designers a lot.
Nick Fink: Finally, China was again a headwind in this quarter.
Nick Fink: We have re platform the cost structure of the business given the challenging market.
Nick Fink: As a result, any future declines should not have a significant impact on our P&L.
Nick Fink: We believe the market has largely stabilized at the bottom.
Nick Fink: Though we will have one more quarter of challenging comparables.
Nick Fink: Now turning to outdoors.
Nick Fink: Our fourth quarter sales were down 2%.
Nick Fink: With low single digit point of sale growth in this segment driven by our doorstep.
Nick Fink: Our margins were 18, 2% an increase of 430 basis points over the fourth quarter of 2023.
Nick Fink: For the full year outdoor sales were up 1% and we saw impressive 310 basis points of margin growth.
Nick Fink: In 2024, we benefited from our strong relationships with the big builders.
Nick Fink: Accelerated the evolution of the brands in our outdoor segments and introducing exciting new product innovations.
Nick Fink: Looking forward to 2025.
Nick Fink: Our focus is on continuing to grow our outdoor brands by leveraging our strong brand position and channel relationships coupled with innovation.
Nick Fink: We're particularly excited about the potential for our Washington Grant.
Nick Fink: We recently unveiled our new licensed perfect aisle product resets at our retail partners.
Nick Fink: And the initial results from our refreshed and innovative approach to this category are very encouraging.
Nick Fink: We expect to have over 1700 stores refreshed product displayed by the middle of 2020.
Nick Fink: Turning to security.
Nick Fink: As I already mentioned, our security segment was impacted by a third party soft rounded.
Nick Fink: <unk> centers, which exacerbated the soft sales environment and customer destocking.
Our teams are laser focused on delivering on our commitments to our customers.
Nick Fink: And for their tireless work to recover from these challenges.
Nick Fink: Our fourth quarter sales and margin performance reflect these issues.
Nick Fink: Our fourth quarter sales were down 17%.
Nick Fink: Excluding the impact of the tougher outage of fourth quarter sales were down approximately 10%.
Nick Fink: Our margins were nine 3% because of the impact of the outage as well as the expected timing of investments related to our Yale but.
Nick Fink: For the full year 2020 for ourselves were $694 million down, 4% and organic sales, excluding the tougher outage were down approximately 10%.
Nick Fink: For the full year margins were 16, 1% a 10.
Nick Fink: 10 basis point increase versus last year.
The performance of this segment in 2024 did not meet our standards.
Nick Fink: And we have identified critical areas for us to focus on as we work to address these challenges directly and head on.
Nick Fink: We've already taken actions under Dave's leadership, and I'm confident that we will improve the system.
Nick Fink: We've made progress on some exciting brand and product work, which will be unveiled in 2025, including the first major branding campaign for master lock in several decades.
Nick Fink: We're already seeing proof of our brand strategy in action.
Nick Fink: For example, recent safe advertising, highlighting the performance and trustworthiness of our brands accelerated point of sale, which further improve after the recent tragic L. A fire.
Nick Fink: As consumer space this terrible crisis.
And as it was highlighted around the globe.
Nick Fink: The work that we have done around helping people understand what our brands stand for namely safety.
<unk> ability and quality.
Nick Fink: Even more importantly.
Nick Fink: It gives us confidence in our largest strategy of focusing on meaningful brands and innovation.
Nick Fink: We saw significant point of sale growth in those markets, where consumers were focused on these routes.
Nick Fink: Looking forward to 2025, we have a new proven leader a renewed focus on differentiating our iconic brands and products.
Nick Fink: Robust partnership pipeline.
Nick Fink: We are rolling out a connected lockout tagout solution and see it as a breakout opportunity for our security business.
Nick Fink: To recap.
Nick Fink: 2024, it was a year of transformation and execution, Fortunately amidst a dynamic external environment.
Nick Fink: Our teams, both new assets across brand innovation, and digital which will accelerate growth as we deploy them in the marketplace.
Nick Fink: Our margin results and market outperformance in key parts of our portfolio.
Nick Fink: Give us confidence in the future.
We took decisive steps this year to better position ourselves and I am proud of what our teams achieved in <unk>.
Nick Fink: <unk> thousand 24.
Nick Fink: In 2025, which Dave will speak to in greater detail, we will focus on driving above market growth.
Nick Fink: Accelerating our areas of the budget.
Nick Fink: We will look to sustainably grow margins and continue investing behind our most strategic opportunities.
Nick Fink: We will execute our larger strategy of focusing on our supercharged category.
Nick Fink: We expect 2025 to be another breakout year for our connected products, particularly our flow device.
Nick Fink: We will take concrete actions in our business to ensure that we are best positioned for long term growth. Additionally.
Nick Fink: Additionally, we will manage in a period of continued volatility by responding quickly and remaining focused.
Nick Fink: All while actively positioning fortune brands innovation.
Nick Fink: For the future.
Dave Barry: I will now turn the call over to Dave.
Dave Barry: Thanks, Nick.
Dave Barry: As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance.
Dave Barry: All comparisons will be made against the same period last year unless otherwise noted.
Dave Barry: Before I begin I would like to take a moment to address my new role.
Dave Barry: I have found my experiences as CFO to be incredibly rewarding and I am grateful to all those with whom I've built a relationship including many of you on the call today.
Dave Barry: I look forward to the next phase of my career in journey with Fortune brands in my role as President of our security and connected products businesses.
Dave Barry: I'm fully confident in the long term growth opportunities of both of these businesses and I am excited to help advance our value creation.
Dave Barry: In the meantime, I'll be assisting with the search for our next CFO and will partner closely with my successor, ensuring a very smooth transition.
Dave Barry: As Nick highlighted our teams focus on a tight set of priorities amidst a dynamic external market, while continuing to best position the company for the future.
Dave Barry: For the fourth quarter sales were $1 1 billion down, 5% and organic sales were down 1% when adjusting for the impact of China and excluding the one time event.
Dave Barry: Consolidated operating income was 181 6 million and total company operating margin was 16, 4%.
Dave Barry: We're 98%.
Dave Barry: Fourth quarter free cash flow was approximately $212 million.
Dave Barry: For the full year sales were $4 6 billion or flat versus last year.
Dave Barry: And organic sales were down 2%, excluding the impact of China, and the onetime disruptions in the fourth quarter.
Dave Barry: Consolidated operating income was $780 6 million.
Dave Barry: Total company operating margin was 16, 9%, a 90 basis point improvement.
Dave Barry: Our EPS were $4 12 10.
Dave Barry: Our total free cash flow generation was an impressive $475 million.
Dave Barry: Now, let me provide more color on our segment results.
Dave Barry: Beginning with water innovation sales for the fourth quarter were $645 million down 3%.
Dave Barry: Organic sales were up 2%, excluding the impact of China and the hurricane.
Dave Barry: For the year sales were flat with organic sales, excluding China and the impact of the hurricanes down 2%.
Dave Barry: Water innovations operating income was $152 6 million in the fourth quarter operating income for the full year was $603 8 million.
Dave Barry: Operating margin was 23, 7% for the quarter and 23, 5% for the full year.
Dave Barry: Consistent with our returns focused investment strategy, our moen brand investments are generating results.
Dave Barry: Focused on accelerating the consumer and channel awareness of our new to world flow technology and invested in our core brand.
Dave Barry: As we discussed we selectively focus on the portions of our portfolio with the highest potential for returns.
Dave Barry: And our luxury portfolio, we made key investments in capacity, where our house of ROHL product.
Dave Barry: Now as one combined entity with Amtech, we are excited about the future of our luxury brands.
Dave Barry: In China sales declined 30% in the fourth quarter and 31% for the full year.
Dave Barry: The market seems to have stabilized we do expect another challenging comparable in the first quarter of 2025 due.
Dave Barry: Due to lapping accelerated completion in Q1 2024.
Dave Barry: Looking to 2025 and beyond this business will continue to provide innovation and growth optionality.
Dave Barry: As a result of its re platform side. It is no longer a material portion of our business and future declines if any should be less impactful to our P&L.
Dave Barry: Turning to outdoors fourth quarter net sales were $303 million down 2%.
Dave Barry: For the full year sales were $1 4 billion or up 1%.
Dave Barry: Doors sales were flat in the quarter and up low single digits for the year.
Dave Barry: Decking sales were down mid teens in the quarter and were down low teens for the full year as a result of softer demand environment in destocking.
Dave Barry: Outdoor segment operating income was $55 2 million during the quarter up 29%.
Dave Barry: Operating income for the full year was $218 million an increase of 25%.
Dave Barry: Segment operating margin for outdoors was 18, 2% in the quarter, an increase of 430 basis points and 16, 1% for the full year, a 310 basis point increase.
Outerwear has delivered a strong sales and operating margin year.
Dave Barry: These impressive margin results are a direct impact of the work, we're doing to drive innovation and expand distribution for our leading brands.
Dave Barry: Finally, turning to security as.
Speaker Change: As Nick discussed we were impacted in the fourth quarter by a third party software outage, which impacted our distribution centers.
Speaker Change: Fourth quarter sales were $157 million down 17%.
Speaker Change: 10% when adjusting for the outage.
Speaker Change: Our fourth quarter operating margins were nine 3%.
Speaker Change: Full year sales decreased 4% to $694 million and.
Speaker Change: An organic sales decrease around 10% when adjusting for the impact of the software out it.
Speaker Change: Our full year operating margins were 16, 1%.
Speaker Change: Looking forward, we will be investing in the core business with new marketing and product innovation. Additionally.
Speaker Change: Additionally, we will focus on advancing our connected portfolio, including our residential smart locks and our connected lockout Tagout platform to return this segment to growth.
Turning to the balance sheet.
Speaker Change: Our balance sheet remains strong with cash of $381 million net debt of $2 3 billion and our net debt to EBITDA leverage is two four times.
Speaker Change: We finished the year with a full 1.25 billion available on our revolver.
Our strong 2024 of free cash flow of $475 million as a proof point of how the entire fortune brands organization effectively working together.
Speaker Change: We also opportunistically repurchased $50 million of shares in the quarter and $240 million of shares in the year.
In the first quarter of 2025, we repurchased an additional $75 million a share.
Speaker Change: Today, we announced that our board of directors has approved a new $1 billion share repurchase authorization to replace our existing authorization.
Speaker Change: This new repurchase authorization demonstrates the confidence we have in our business as well as our ability to drive cash flow and working capital initiatives, while being mindful of our leverage target.
Speaker Change: To reflect on 2024.
Speaker Change: The external environment remained challenging and impacted demand for our product.
Speaker Change: However, our team is focused on executing key strategies and leveraging our strength in brand.
Speaker Change: Innovation and channel to drive strong margin and cash flow.
Speaker Change: We work to transform into an aligned and increasingly agile organization that is prepared to respond to any macro condition.
Nick Fink: As Nick outlined in his remarks, we believe that fortune brands is uniquely positioned.
Nick Fink: Now more than ever to deliver on our commitment of long term growth and sustained value creation.
Nick Fink: I remain fully confident in our ability to deliver results by focusing on those categories, where there are unique growth opportunities and where we have the right to win.
Nick Fink: As we enter 2025, we are taking a cautious view on our core market given recent interest rate volatility and geopolitical uncertainty.
Nick Fink: However, medium to long term trends remain favorable and the consumer remains engaged with our category.
Nick Fink: For example, Google search results on home renovations are up 7% versus last year.
Nick Fink: We remain committed to delivering above market growth, expanding our margins and accelerating cash generation, while continuing to deploy our capital and effective and impactful way.
Nick Fink: As we have demonstrated over the past few years.
Nick Fink: Our company has the ability to generate significant amounts of cash even in down environment.
Nick Fink: Additionally, our recent capacity investment leave us well positioned to drive volume leverage through the P&L as volume returns.
Nick Fink: For 2025, we expect the global market for our products to be down 2% to up 1%.
Nick Fink: With the U S housing market also down 2% to up 1%.
Nick Fink: Within this market forecast, we expect U S R&R to be down 1% to up 2%.
Nick Fink: In U S single family, new construction to be down 2% to up 2%.
Nick Fink: We expect the market in the first half of the year to be below the midpoint of our full year range as R&R remains at the lower end of our estimate and the lag impact from the second half of 2020 for slowdown in single family New construction materializes in the business.
As the year evolves, we will continue to monitor market trends as well as our performance and will update our guidance if warranted.
Nick Fink: Based on those assumptions, we expect full year net sales to be flat to up 3%.
Nick Fink: We expect operating margins between 16, 5% and 17, 5%.
Nick Fink: This includes our expectation that digital products will contribute 150 basis points of growth on full year consolidated company sales and.
Nick Fink: And we are working on accelerating this performance.
Nick Fink: Based on these assumptions, we expect full year EPS within the range of $4.15 to.
Nick Fink: The $4 45.
Nick Fink: The midpoint of which represents a 4% increase versus our 2024 result.
Nick Fink: Now, let me speak to our outlook for each segment as it relates to our overall guidance.
We expect water net sales flat to up 4%.
Nick Fink: We expect segment operating margins between 23, and a half and 24, 5%.
Nick Fink: We expect outdoor net sales to be flat to up 3% with segment operating margins between 16% and 17%.
Nick Fink: We expect security net sales to be flat to up 3% and operating margins between 16% and 17%.
Nick Fink: We remain hyper focused on generating and deploying cash and are pursuing incremental working capital reduction initiatives in 2025.
Nick Fink: We expect 2025 free cash flow conversion of around 115% to 125% of net income.
Nick Fink: Which implies free cash flow of around $580 million to $620 million.
Nick Fink: <unk> capital expenditures of around 100 million to $140 million.
Nick Fink: Consistent with our track record following organic investment and paying an attractive dividend.
Nick Fink: M&A and opportunistic share repurchases remain our top allocation priorities.
Nick Fink: We plan to actively monitor for dislocations in our share price and take advantage of these opportunities to repurchase shares enhancing shareholder value.
Nick Fink: As discussed we are going into 2025 as a more focused organization.
Nick Fink: Well positioned for acceleration when the market returns to growth.
Nick Fink: With a solid for an exceptional opportunities for growth in digital.
Nick Fink: We remain confident in both the long term fundamentals of our market and our ability to outperform by focusing on those parts of the market with the best opportunities for long term growth.
Nick Fink: Maintaining a margin journey and generating cash.
Nick Fink: I will now pass the call back to Lee Thank.
Lee Thank: Thank you.
Speaker Change: Thanks, Dave that concludes our prepared remarks, we will now begin to take a limited number of questions.
Speaker Change: There may be a number of you who'd like to ask a question I'll ask that you limit your initial questions to queue and then re enter the queue to ask additional questions I will now turn the call back over to the operator to begin the question and answer session.
Speaker Change: Operator can you open the line for questions. Thank you.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: And a confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Speaker Change: All participants even cheaper equipment, they may be necessary to pick up your handset before pressing the star.
Speaker Change: And our first question comes from the line of Susan Macquarie with Goldman Sachs. Please proceed.
Speaker Change: Good afternoon, everyone.
Speaker Change: Sure.
Speaker Change: Hi, Nick.
Speaker Change: You did a nice job of outlining a lot of the initiatives and the actions that you've taken over the last 12 months in your remarks, I guess, given the environment that we're coming into in 2025 can you talk a bit about how we should be thinking about those efforts as we do look to this year put some context, perhaps around what some of them can mean for the.
Speaker Change: The business over the coming quarters.
Speaker Change: Sure I'd be I'd be happy to and I'll give you some context and then maybe Dave can dimensionalize. Some of it is we kind of think of how it moves through the year.
Speaker Change: If I take a step back just look at 24, I mean, obviously it was still.
Speaker Change: A challenging.
Speaker Change: Although stabilizing towards the end of the year macro environment.
Speaker Change: And within that certainly some choppiness.
Speaker Change: If I step back and kind of look at what are the big profit drivers of the business.
Speaker Change: And where do we look to see those.
Speaker Change: Look at water.
Speaker Change: Take China out of the mix, which does create a lot of noise from the Hurricanes. We had at the end of the year, we've got water growing 2% in the quarter. So nice growth there I look at.
Speaker Change: Furniture, which is the profit engine of the outdoor business grew well above 2% in the fourth quarter and so you had some really big parts of the core.
Speaker Change: So they're growing really nicely and we're driving more momentum I'll touch on that into those then look at kind of future court right and we talked about the flow point of sale, that's retail and e-commerce point of sale being.
Speaker Change: Being up over 100% in the quarter flow itself inclusive of insurance grew over 200% in the quarter and 100% for the year and that momentum we see continuing in the 2025 and so you got both the big profit drivers with momentum as well as future core momentum certainly.
Speaker Change: As I said in the remarks security is a hotspot point of sale was down mid single digits, so better than the <unk>.
Speaker Change: Reported results by far.
Speaker Change: But there is work to do there to get that portfolio to recover and we've got some innovation coming in some some brand work for the first time in a very very long time coming.
Speaker Change: Coming for that business that we believe is going to drive some real differentiation. So when I take a step back.
Speaker Change: I look at that.
Speaker Change: We've done a lot of work in the ear to build digital asset in the connected business those are coming online you've seen the performance in Florida in particular.
Speaker Change: We built marketing assets, which are a product of bringing the company together in a more aligned way in leveraging our marketing team across the entire business I think youre going to see those really for the first time ever come to life in 'twenty five.
Speaker Change: Have a very solid marketing plan with solid investment behind it.
Speaker Change: And their innovation efforts I mean, you'll see new products in places like most likely going to see as I referenced already.
Speaker Change: Innovative display rolling out in a place like Larson.
Speaker Change: So a lot of really solid assets developed in 'twenty four to drive growth in 'twenty five and then the final point.
David: David some color if he wants is we do lap a lot of noise.
David: In 24 that won't be there. So we see China is actually normalized and stabilized in terms of quarterly sales there's noise in the labs that goes away. After the first quarter and then we walked away from a lot of Commoditized business in 2000 and for things like steel doors or window lineal by safety and as we work.
David: Through those labs that was you know 150 to 200 basis points of <unk>.
David: Headwind just in those and you don't have those repeat in 'twenty five that gives us a lot of.
David: Confidence in our outperformance of the market just based on momentum.
Things are described.
David: Yes.
David: I'm happy to give a bit of context around our guide and what's implied.
David: <unk> throughout the year I think.
David: One point as we step back and look at it we are erring on the side of conservatism from a market standpoint, given the current environment, but.
David: But accelerating areas, where we have growth momentum.
David: To drive 200 basis points of market outperformance, regardless of the macro background backed backdrop, so I'll start with that.
David: Step back and look at our first half second half sales cadence.
David: There is 49% of sales in the first half we expect 51% in the second half it was very normal seasonal build for us across the year.
David: I think importantly, the guide does not include a significant ramp in the market in the back half. So we're going to see a normal seasonal level of sales.
David: When you translate those sales to prior year comps.
David: And you have the first half down around 1% in the second half up around 4%, but again very seasonal cadence across the year from a sales perspective.
David: Nick touched on some of the reasons to believe but fully lapped low margin business we've exited.
David: China being challenging in the first quarter, we expect it to be roughly flat the balance of the year.
David: Digital accelerating through the year and then the non repeating impact from the fourth quarter headwinds. So I feel confident in the sales guide we have that there isn't a big back half ramp driven by the market or other characteristics.
Speaker Change: Looking specifically at the first quarter Sue I'd say sales.
Speaker Change: Our lowest quarter for the year and again inclusive of China would see sales down around 4%.
Speaker Change: China is going to be a two percentage point headwind.
Speaker Change: Low single digit Pos in the first quarter and Thats roughly what we've seen year to date.
Speaker Change: Trends support that.
Speaker Change: And then looking at margin cadence I would say there are three things that we have really good visibility to given our inventory positions and lead time. So one we.
Speaker Change: We see the timing of some operational costs and absorption coming off the P&L and hitting the first quarter, specifically those are going to reverse out as we move through the year.
Speaker Change: We had some incremental investment timing and then we have those favorable prior year comps in the fourth quarter that won't repeat.
Speaker Change: I look at our margin cadence I see now first half down first half operating margin of 14, 5% 15%.
Speaker Change: With our first quarter around 12% to 13, including about 225 basis points of margin compression from those <unk> costs that ultimately reverse out.
Speaker Change: That leaves the second half margin of around 20% and again no reasons to believe as we look at it.
Speaker Change: The cadence of those operational costs moving through and the absorption moving through the continued ramp of digital driving mix.
Speaker Change: And non repeated one times in the fourth quarter Theyre going to boost that margin as we get there in the back half. So I think we're taking a prudent approach to the year and really looking to accelerate the growth momentum that we have and have really good line of sight to what's coming on and off our balance sheet and an in and out of the cost of our as we move through.
Speaker Change: Okay. That's very helpful color. Thank you both and maybe just following up it sounds from your remarks at the high end of the market is still holding on fairly well given what you've seen enrolling in some of the other parts of the business.
Speaker Change: And Terry on how Youre thinking about the state of the consumer coming into the year and what you are seeing across the different price points and how maybe that could play out over the coming quarters.
Speaker Change: Yeah, I'd say look.
Speaker Change: The consumer generally I think is still being very cautious the way even in the start of the year, we're seeing consumer behave.
Speaker Change: Similar to Q4.
Speaker Change: I would say even the point of sale.
Speaker Change: Daily read everyone is almost tracking maybe just slightly under.
Speaker Change: <unk>, which was consistent with how they track last year.
Speaker Change: On a dollar basis I think in general.
Speaker Change: The consumer is still very cautious to general consumer bit you're absolutely right at the higher end.
Speaker Change: Seeing a lot of resilience.
Speaker Change: And to see that performance at a hospital is great. In the household has got a lot of stuff coming online this year, so you're seeing.
Speaker Change: A lot of that to Brazilians will continue to lead into that and then for the rest of the portfolio. We've done a lot of work in 24 that will rollout in 'twenty five to really better if you get on the differentiation around our brands and you heard a lot in the prepared remarks around the trustworthiness.
Speaker Change: 50 <unk>.
Speaker Change: We've seen a lot of I've talked about it before you know, what we call counterfeit or imposture product in the marketplace.
Speaker Change: That are.
Speaker Change: Very sharply priced and im not talking about private label Thats been around Recompete, but that's no problem I'm talking about things that claim falsely claimed to have.
Speaker Change: <unk> attributes where safety standards that they don't.
Speaker Change: We've already started to talk about some of that in our safety business you've seen very strong response.
Speaker Change: I'm quite a cell level, we're not going to get talking about it more in water and in other parts of the security and I think as you do you then really sort of give into those reasons to believe why should a consumer pay for these products think absent that.
Speaker Change: There's a lot of consumer caution I think with that we see strong consumer response.
Speaker Change: Okay. That's good.
Speaker Change: Helpful. Thank you both for all the color and good luck with everything.
Speaker Change: Thanks, Dave.
Speaker Change: The next question comes from the line of Matthew Bouley with Barclays. Please proceed.
Speaker Change: Good evening, everyone. Thank you for taking the questions can.
Speaker Change: Can I ask on connected products.
Speaker Change: You spoke about a 150 basis points additive to growth in 2025.
Speaker Change: I guess just a few questions. If you can kind of level set us I think I heard you say $214 million as a starting point and correct me if I'm wrong from 2024.
So can you speak to the building blocks of the 150 basis points is is that coming already in Q1 or does it kind of ramp through the year.
Speaker Change: And kind of what do you have clear line of sight to already versus kind of additional milestones we should be looking forward to yourself. Thank you.
Dave Barry: Hey, Matt, It's David happy to touch on that and as Nick mentioned in his remarks made significant progress in this space.
Dave Barry: As I move into my role to work closer with this theme and really focused on.
Executing sales activation and conversion.
Dave Barry: While also expanding the aperture on our strategy and where we can play and where we have the right to win and I'm excited to do that they get into this role because we look at what's what's embedded in the guide it correct full year impact on growth for the total fortune growth is 150 <unk>.
Dave Barry: <unk> point, the first half probably 100 ish basis points of growth.
Dave Barry: Half, maybe closer to 200, maybe a bit more than that of growth and remember in the second half. We're comping. The Yale inventory reductions. So this is net sales growth that we're talking about and not.
Dave Barry: I mean, we continue to see Pos ramped strongly.
Dave Barry: It's up in the seventies.
Dave Barry: 77%, 70% to 80% in the first quarter of this year already so that trend has continued for water and we see Pos growth on on the security side as well in our core channels. It's really just on the partnership side, bringing new product in.
Dave Barry: Transitioning old product out and getting that back to growth as we expect to occur.
Dave Barry: By about second quarter to third quarter.
Dave Barry: So we're excited.
Dave Barry: Continuing to build the team continues to fill the top of the funnel from a partnership standpoint, and we're really focused on pulling those sales through the funnel and executing.
Dave Barry: Okay got it. Thanks, Thank you for that and then.
Dave Barry: Secondly, I wanted to touch on the tariffs, which you had mentioned at the top.
Dave Barry: I think you said maybe.
Dave Barry: Low double digit or 10% in our line of sight to getting below 10% in China and I think you said Mexico was similar can.
Dave Barry: Can you just elaborate a little bit.
Dave Barry: On I guess, what you can do specifically with with Mexico.
Since.
Dave Barry: This is obviously newer this time relative to a few years ago, and then Canada as well and specifically any other kind of international sourcing that we should consider given the kind of uncertainty for how this is all going to play out so just kind of any framework around the tariffs there. Thank you.
Dave Barry: Yes, Matt I'll start with just give me some exceptionally in fluids, obviously, probably should take and can give you some of the specifics, but yes. We've talked about this really over the last few years, but remember like going back sort of been at this tariff thing since plywood tariffs first hit I think around 2017, and we have to move $100 million worth of spend we did that very.
Dave Barry: Quickly as the team has really built a very very strong bench in managing tariffs our philosophy.
Dave Barry: Over the last couple of years has really been around supply chain agility.
Dave Barry: Versus trying to pick a specific geography to bet on and so doing things.
Dave Barry: It's competitively sensitive.
Dave Barry: Detailed but doing things around the portfolio that allows us to move product very very quickly and then building out.
Dave Barry: Dundon supplier networks that allow us to move things very very quickly around the place and so you know.
Dave Barry: Wow.
Dave Barry: Certainly Ben.
Dave Barry: Interesting to watch exactly where tariff may land or may not learn we've done a lot of work to be able to move very quickly as that happens and so that's been the approach.
Dave Barry: I'm glad we have it versus making singular back say on one geography.
Dave Barry: The other thing I'll, just add I've spent a lot of time.
Lee Thank: Lee you also may choose external affairs in D C.
Lee Thank: We're talking to the administration and it's clear that there is certainly is the idea of trading balanced tariffs, but there is an idea around universal test and to the extent that that comes to fruition. We have a very strong north American and U S manufacturing base.
Lee Thank:
Lee Thank: We're vertically integrated in some parts of the business and still have maintained very strong manufacturing.
Lee Thank: Footprint.
Lee Thank: In all other parts of the business and so we view that as essentially actually being quite a competitive advantage given that we can combine this flexibility with our existing footprint with a great workforce.
Lee Thank: Here and we think we can very very quickly move to service, our consumers and customers in a competitively advantaged way.
Speaker Change: Yes, Matt I would add just clear what's in the guidance.
Speaker Change: We have the impact from the 10% incremental China included in the guide and we also believe that our EPS range captures any potential impact from Mexico and Canada.
Speaker Change: Given what Nick said the team is working on.
Speaker Change: For Mexico, specifically and for Canada actually structuring options.
Speaker Change: Different ways to think about our U S content in those products.
To reduce our exposure and ultimately reduce the price that we would take in the market, but ultimately while we work all of our internal levers and actions.
Speaker Change: At the end of the day, what's left will pass through and then invest behind what we pass through to tell the story of our brand and why they are superior.
Great. Thanks, guys. Good luck.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Michael Rehaut with J P. Morgan. Please proceed.
Michael Rehaut: Thanks for taking my questions good afternoon, everyone.
Michael Rehaut: First question I wanted to circle back to the organic growth ambitions or guidance.
Michael Rehaut: He kind of highlighted obviously.
Michael Rehaut: Digital contributing 150 out of the 200 bps of growth.
Michael Rehaut: Above the market.
Michael Rehaut: Prior years.
Michael Rehaut: You've kind of.
Michael Rehaut: When giving guidance.
Michael Rehaut: Often.
Michael Rehaut: Laid out maybe 100 to 150 basis points of growth above your end market. So.
Michael Rehaut: I think some people were.
Michael Rehaut: You may be thinking of the digital opportunity, it's something above and beyond your normal.
Michael Rehaut: Above market growth opportunity so yeah.
Michael Rehaut: Yeah, when you think about the 50 basis points.
Michael Rehaut: Outside of the digital that's contributing to the topline, maybe maybe being a little less than before.
Michael Rehaut: Any thoughts around that.
Michael Rehaut: Let's say the core portfolio and the opportunity to contribute to above market growth versus digital I know certainly you kind of think of them together, but.
Michael Rehaut: At the same time I think most people view digital as kind of an incremental opportunity to the core business. So just any thoughts around you know.
Growth contribution from the non digital side of the business how thats.
Michael Rehaut: How you think about that over the next couple of years.
Michael Rehaut: Look I think that's a very fair challenge.
Michael Rehaut: If you look at 'twenty four.
Michael Rehaut: As we said earlier, we did walk away from some low margin business or we did it very purposely as we concentrated the efforts of the business on the digital side in order to achieve what we've achieved in digital.
Michael Rehaut: When we've had to make choices around do we pursue things that were like OEM products for millennials et cetera, we've chosen to focus.
Michael Rehaut: There, where we know the future growth is going to be and so as we built this year's plan.
Michael Rehaut: Certainly want to see.
Michael Rehaut: Core.
Michael Rehaut: Outperform.
Michael Rehaut: We do as I said earlier has some real assets that we're deploying into the market there is.
Michael Rehaut: Some innovation, that's coming that you'll see that.
Michael Rehaut: That is very exciting there is no branding assets and theyre more dollars going against driving those grading assets into the market and telling that story and so we expect that to deliver but I think as we just designed this year still in a chat.
Michael Rehaut: Challenging market.
Michael Rehaut: A lot going on and we put some conservatism around that I, certainly think as you see the consumer stabilized and you see the activity that we have in the marketplace resonate.
Michael Rehaut: <unk> will be.
Michael Rehaut: Target ing something in excess of about 50 basis points from the court.
Michael Rehaut: But I think that's fair might be a couple of things I'd add.
Michael Rehaut: Still have China down about 30% in the first quarter.
Michael Rehaut: If you.
Michael Rehaut: We have pushed that through fortune 25, 25% to 40 basis points of headwind.
Michael Rehaut: That smooths out going forward, but it impacts of the year and then as we talked about we're not pleased word for security and there's still some work to do at the beginning part of the year to get that portfolio back performing and back performing above market.
Michael Rehaut: <unk>, which we intend to fully do.
Michael Rehaut: Okay.
Michael Rehaut: Fair point and I appreciate the candor there.
Michael Rehaut: I guess secondly, maybe just circling back to the tariff for a moment.
Speaker Change: I believe Dave you, just said that the China and potential Mexico tariffs.
Speaker Change: Our are reflected in the guide.
Speaker Change: So what does that mean in terms of how we should thinking about volume versus price.
Speaker Change: Zero to 3% guide I would assume that.
Speaker Change: No.
Speaker Change: Trying to offset the impact of tariffs and it would appear that you.
Speaker Change: Your guidance, reflecting the ability to offset most if not all of the.
Speaker Change: Impact of Paris.
Speaker Change:
That debt.
Speaker Change: Most companies.
Speaker Change: I think kind of take a price first supply.
Speaker Change: Supply chain simultaneous.
Speaker Change: Where youre not going to get the full impact of supply chain. So I'd assume that there's some bright.
Speaker Change: In that guide in part of your view around being able to include towers and the guidance and maybe have a minimal impact maybe you can address some of those points there.
Speaker Change: Yes, let me clarify a couple of things so the China impact of 10% is in fully embedded in the guide.
Speaker Change: Our EPS range would cover Mexico, and Canada, though if those go into effect I think our sales and margin would look different right because we would take more price.
Speaker Change: To cover the dollars and margin would probably look a little bit different as a result of that.
Speaker Change: Two point right there in China it fully in the guide.
Speaker Change: Less than low single digit price across the whole portfolio.
Speaker Change: 1% less than 1% of price across the whole portfolio to cover.
Speaker Change: Mexico, Canada to your point, yes, we would expect to cover that impact through price and supply chain actions, but that hasnt been flown through kind of the sales and margin piece, because it's still uncertain.
Speaker Change: And as Dave said very manageable price.
Speaker Change: From what we see certainly to that yes.
And actually the China piece Mike.
Speaker Change: The removal of the de Minimis.
Speaker Change: <unk> is actually an opportunity for US right I mean, we've talked about these imposture brands and a lot of them are using that loophole to ship directly to our consumers in the U S that goes away and stays that that is.
Speaker Change: An opportunity for our teams to take share.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Adam.
Gordon: I am Gordon with Zelman and associates. Please proceed.
Speaker Change: Hey, everyone. Good evening.
Speaker Change: On gross margin it really stepped up nicely in 2024.
Speaker Change: From 2000, <unk> can you maybe talk about the drivers behind that and how sustainable that is going forward.
Speaker Change: Yes, Im happy to do it.
Speaker Change: Been on a nice trend.
Speaker Change: All year right and we talked about some of the actions we've taken like clothing, our Milwaukee plant for security.
Speaker Change: To help.
Speaker Change: So let's start gross margins.
Speaker Change: Our continuous improvement initiatives as a result of our new aligned supply chain driving incremental sourcing and then some product mix benefits as the portfolio continues to shift.
The higher margin opportunities. So we do think it is sustainable I think it is the right jumping off point as we look forward to 'twenty five as I mentioned in my talking through the guidance and the phasing there'll be some lumpiness in the quarters based on how some of our inventory is moving from the balance sheet into the P&L at a higher cost base that will even.
Speaker Change: Self out through the year.
Speaker Change: As we look at the full year, we do expect gross margin expansion again in 'twenty five.
Speaker Change: Okay, Great and then just on the share repurchases big authorization here and it looks like based on the guide and the share count that Youre not building in any repurchases beyond maybe the January number that you gave I guess is that just conservatism do you still expect the.
Speaker Change: Repurchase shares in 2025, given the authorization.
Speaker Change: Yes.
Speaker Change: I think consistent with our guiding practice, we put it in share repurchase authorization to offset dilution. So that's what's in the guide.
Speaker Change: It's our intent to be aggressive when we see dislocations in our share price.
Speaker Change: We're generating a lot of cash and pursuing incremental opportunities to reduce our working capital. We have some process improvements going into effect this quarter and looking at some other working capital initiatives.
Speaker Change: Actually even accelerate our cash flow guide above and beyond where it is today so it will be.
Speaker Change: Aggressive when the opportunity exists to buy back shares and still be mindful of our leverage target, but I think given the cash generation, we're able to do that and still delever down towards where we want to be.
Ed: This is Ed.
Ed: We're fine point on it we're very focused on cash generation right. So this year.
Ed: Any forward were very pleased with cash generation over 100%.
Ed: Targeting 25 to be somewhere between 115, and 125% right so targeting it picks.
Speaker Change: $600 million ish as Dave said Theres. Some initiatives we have in mind that we think we can get even more out and I think as Dave described the phasing of margins for the year, you'll see us be.
Speaker Change: And be able to turn some inventory into cash earlier in the year end.
Speaker Change: That has a short term margin impact that cash generation, particularly when we see dislocations can be a very favorable thing. So we're we're very focused on it.
Speaker Change: And we think it's something that we can use to really create shareholder value here.
Okay, great. Thanks.
John Lovallo: The next question comes from John Lovallo with UBS. Please proceed.
John Lovallo: Hey, guys. Thank you for taking my questions as well maybe the first one just on the Capex outlook of 100 to 140, I mean, that's down pretty meaningfully obviously year over year, but it almost seems like it could be approaching kind of maintenance capex levels, I mean am I thinking about that correctly.
John Lovallo: Are you comfortable with the ability to continue investing in growth.
John Lovallo: Yes, absolutely so maintenance Capex John for US is about 1% of sales so call. It in that $50 million range. So this would include.
John Lovallo: Growth capital why it's stepping down as a reminder, we've put an incremental capacity over the past couple of years I think we've been clear that that capex rate of 23 and 'twenty four we're not the go forward rates for this business.
John Lovallo: That said, we now have capacity and as volume comes back we have more efficient newer capacity in certain parts of the business, which will lever substantially through the P&L below.
John Lovallo: But part of that strong cash flow generation is actually getting back to what is more like that 2% to 3% of sales capex right, which is our longer term target and still leaves us plenty of capital for growth, we're not starving the business for any any growth initiatives.
John Lovallo: <unk>.
John Lovallo: And just to go over further on that I mean, just over the last few years I've mentioned that the grid in the remarks, we've opened.
John Lovallo: Just in last year into this tier two new facilities for water, we put more capacity into outdoors.
John Lovallo: Obviously with the.
John Lovallo: The footprint moves in security incremental capacity going in there more intense so actually the business is now really well capacity.
And we're confident that over the next few years, we're going to be able to not just generate a lot of cash but really grow into.
That capacity and leverage through it so from that perspective, I think we're actually in a really good spot and the fact that we've been able to grow margins. While doing this I think is a testament to how we've been leveraging the fortune brands advantage across the entire company to be superefficient for deploying extra cash into capacity redeploying cash into things.
John Lovallo: Mike.
John Lovallo: Digital and yet growing margins at the same time, it's really sets us up as volumes come through to drive a lot of leverage to the business.
John Lovallo: Okay. That's helpful. And then maybe just a point of clarification I thought last year. At this time you guys had talked about digital sales kind of running at an annualized rate of $250 million.
John Lovallo: I mean in that context at 214 that you guys printed in 2024. It seems it seems a bit late so wanted to ask that and then just on the flow portion.
Can you provide any more color on the other insurance company wins.
Speaker Change: Yes, I don't know.
John Lovallo: Start.
A few more specifics I'd say firstly on the on the dollar and we wanted to sort of give it for the year.
John Lovallo: And then as we progress through 'twenty five we'll tell you what the run rate is.
John Lovallo: Flow.
John Lovallo: Performing as we said exceptionally well.
John Lovallo: D C. A lot of business now coming online and then <unk> sort of interesting as we integrated that business and brought it on board.
John Lovallo: As we've always said sort of mid cycle startup and kind of act like it's holiday time Big partnerships I think we said 14 and.
John Lovallo: In 2024, but then you're also exit old products your external partnerships and so there is choppiness in the number and we saw a lot of that Choppiness in 'twenty four frankly.
John Lovallo: Where it actually went backwards, but as the 14, new partnerships ramp and it returns to growth I think part of our objective for that business needs to be we need to smooth that out, which we will do by maintaining and building those b to b partnerships, but also building out more of a b to C business as we have in flow. So you have as we do at flow.
John Lovallo: So the BBB insurance with you of the BDC business and you get much much smoother ramp so that create choppiness in the number but I'd say, if you step back from that and you look at what we're signing up and when you look at where its gone in.
John Lovallo: We're absolutely delighted with it and then from the insurance partnership perspective.
John Lovallo: There are a variety of flavors from.
John Lovallo: I'd say affiliates recommended to.
John Lovallo: Discounts to mandate.
John Lovallo: The reason, we talk a lot about farmers and the reason, we think farmers as a milestone deal Theres really a it was the first.
John Lovallo: For an insurer says this is mandated for a certain subset of homes. If you want to have continued insurance we have to take cost out of the system you have to put the product in.
John Lovallo: We continue to sign up insurers.
John Lovallo: All three.
John Lovallo: Right.
John Lovallo: And we will continue to do that and what should ramp I think youll see more happen and it's somewhat regulatory where it can happen, but I think youll see more happen in both the discount.
John Lovallo: As well as the mandate the other thing that we've talked about we're going to start trialing.
John Lovallo: In this quarter is a subscription recurring revenue model around this business, which we think will make it much much easier not just for those consumers to absorb the cost but also for the insurer to mandate it because the.
Entry level price point, if you will will be.
John Lovallo: A much much lower number than the cost of installing.
John Lovallo: A device.
John Lovallo: From the get go.
Either financials actually work out much better for us in the long run because you develop lifetime customers and the lifetime value of those customers are far greater than a single onetime sale, but we view that as the next big milestone step forward in bringing these partnerships to life.
John Lovallo: Great. Thank you.
John Lovallo: Sure.
John Lovallo: Thank you.
John Lovallo: This concludes our Q&A session.
John Lovallo: This concludes today's conference as well you may disconnect. Your lines at this time and enjoy the rest of your day.