Fortune Brands Innovations, Inc. (FBIN) Earnings Call Transcript & Summary

Good morning, everyone. This is Mike Rehaut, I'm the senior analyst for the Homebuilding and Building Products franchise at JPMorgan's Equity Research Group. I'm pleased to kick off today 13th -- our 13th Annual Homebuilding & Building Products Conference, now virtual in the current environment, but we think it will be better than ever and open to a wider audience. We're thrilled to start off the conference this morning with Fortune Brands Home & Security, as many of you know, a leader in the building products sector of our universe coverage. Fortune Brands known for the Moen brand anchoring its plumbing -- global Plumbing group as well as its Cabinets division, being a leader in that industry as well. And finally, its third segment, Doors & Security, which owns several prominent brands, including Master Lock, Fiberon decking, and Therma-Tru doors. I'm pleased to have with us CEO, Nick Fink; as well as CFO, Pat Hallinan. This session will be a fireside chat that I will lead off with several questions for the management team, followed by any questions that can come in virtually through the conference itself. I'll be moderating those questions and passing them along to management as well. So gentlemen, thanks again for joining us. And again, thrilled to have you kick off our conference this morning.

I'm going to start off with just kind of a broader overview question echoing a little bit from your conference call a couple of weeks ago, a few weeks ago, and that's around the current environment and your comments around managing through adversity. As you kind of talked about on the conference call, taken a number of steps to position yourselves across your different segments and from an overall corporate structure point of view, I was hoping if you could just elaborate on that to a degree what that means, maybe with some more granular detail or examples by segment? And how it performs -- how it positions yourself for outperformance over the next couple of years?

Sure, Michael. I'll start off. But firstly, thanks for having us and excited to be here on the technological frontier we've got today. So hopefully, it all goes without a hitch. Why don't I jump in, I'll speak about some broad strokes, and then Pat may have some more granularity. But I'd say, as we said on the call, I mean, we pride ourselves in managing through adversity. We don't invite adversity, but it's something that our team knows how to do, knows how to manage really, really well. And even if you go all the way back to the global financial crisis, '08, '09, I think this business really distinguished itself, not just in moving really, really quickly to address what was ahead of it and tackle that and take it straight on, but also to then position our business for growth and a recovery. And that was a big part of the value creation thesis. Get the business rightsized early, make sure that we were maintaining strategic capability and capacity there when we needed it, so that we would grow very quickly out of the recovery. And if you look back at that across that time, it was a good decade for housing, but it wasn't without its crises. And you look -- and whether it was things like the tariff situation we've been dealing with, which for us goes all the way back 3 years, starting with plywood tariffs to the mini-housing recession we just had in '18 through the middle of '19, this team has built a capability around addressing change and getting after that very, very quickly and distinguishing themselves. And I think those are the 2 examples. I mean you look at kind of the performance '18 and '19, grew 5% in that period, took share and delivered for investors. And you go back and look at how we've managed tariffs over the tariff period, again, by getting after it very, very quickly and working global supply chains, we were really able to address tariffs pretty well and mitigate a lot of the pain, both for our customers and shareholders. And so it's really with that approach. In this case, we obviously started with Asia and our business in China, managing through the situation there and then our Asian supply chain. And really by the end of February, had set up our task force as it moved westward. And we were dealing with first supply chain issues coming into the U.S. and then the broader health and safety issue as it really started to expand into U.S. and European and other Western markets. And so we've been at it for a while. The first thing we really needed to do was secure the health and safety of our individuals that we said is the number one priority, it really is our number one priority to go after that. I think when you look now at how we're doing, I'm really, really proud of the results. I mean it says to me that the steps that we took, and we took them really early, are working. Our incidents -- if I back out here, of our facility in Waterloo, Iowa and our facility in Sioux Falls, South Dakota, both next to the big meat packing plants. But if you just put those as the company average, I mean, we would be within the really, really bottom on an incidence per 1,000 compared to, say, a U.S. state, which tells we were able to operate through this environment. We're able to do it in a safe way and the procedures that we put in place are working. And so that was really the first thing to do. The second thing was then to get off to our facilities and say, how do we keep our facilities operating and operating safely, so beyond the individual, the collective. And our team did some phenomenal work. And as we said in the call, wasn't always as efficient, it isn't always as efficient as we would like, but we're able to do it -- we've been able to do it safely. And with a few exceptions, we've been able to stay open throughout. And so we've been able to avoid the huge disruption of a giant shutdown and then giant ramp-ups. And then the third thing really was to get off to the business and say, where do we believe this is going and how do we make sure that our business is not just rightsized from a cost, cash and capacity perspective for what's ahead of us, but then also coming into a recovery, what are those critical strategic capabilities that we really want to make sure that we lean into so that we can capture recovery and do it really well. And so I'm proud to say, I think we got off to that quickly. And we got off to that with a mindset that we will come out of this stronger than we went into it. And so we're going to make permanent structural change. We're going to position the business to be even stronger. We'll -- and we're doing it with a long-term strategic lens. It's not just a short term, let's cover a gap, but it's really how does this actually make a step change to the business, take it to the next platform. A lot of those actions are happening in real time. Some -- a great deal, in fact, have already taken place, and some are rolling out, and we feel very strongly that this positions us. We've targeted, I'd say, a range beyond what we indicated we're seeing from demand level. And so we've sized the business to be pretty efficient to be able to withstand more headwinds than we anticipated seeing as we talked about it on the call and, I think, that we've been seeing in the marketplace. So Pat, with that, I don't know if you'll have much more granularity around it or if that kind of covers it.

No, but I think -- I mean I think to add to it is we -- even in the best of times when Nick and I meet with investors, the thread through almost every conversation is how does the business perform in a down cycle. That question comes up continually. And we think we did a very respectable and leading job in the last downturn, and we had decremental margins in the last downturn, about 35%. And as we talked about on the earnings call, as a leadership team, we're committed to beating that. And that has forced all of our business units to get after this situation quickly because there's no way to deliver something in the range we talked about, 20% to 30%, if you react to after the volume has come out of your business. You have to be anticipating and reacting ahead. And that's a big reason why we're doing it not just out of a reaction to the pandemic, but strategically because, as Nick said, we want to go and take cost out where it fits the longer-term strategy, but also delivers against the near-term need of getting our costs realigned with demand.

No, that's helpful. Thanks so much for both of those answers. And Pat, your last comments there, maybe I'll just work off of those. That was one of the questions I had. So let me just jump forward to that as well. On the decremental margins, that is a positive goal relative to your last cycle in terms of shooting for, I believe you said on the call, a 20% to 30% range not for the second quarter, but as we look into the back half. Is that a goal that, as you stand now a few weeks after your conference call, something that you think certainly it's based on, predicated on an outlook for a sales decline, but assuming that, that outlook still holds, is that something that you feel comfortable that could be achieved as soon as the third quarter? Or would be something more as you kind of go into the fourth quarter or how you look at the full year?

No, I mean, we sit in an uncertain period. So it's hard to speak with precision, but we would expect to be very much tracking for a good part of the third quarter, if not the majority of the third quarter at those types of levels or below, given we're not likely to be at those levels in the second quarter. And so as Nick hinted, a lot of this is unfolding in real time. But as a leadership team, we're working closely together throughout the month of March. We really didn't see volume softness until very late March, like quite literally like the last week of the month. But as a leadership team, we were already planning structural cost change mid-March-ish and enacting it -- some of it before we exited the first quarter, some of it, as Nick said, is unfolding in real time. But to deliver against that, you're talking of SG&A changes of 10% plus across all of our businesses. And we're pretty much hitting the second quarter at that kind of a run rate. And then what takes time is actually rebalancing production facilities to both get the head count and the cost of the production facility aligned with demand, but also the productivity back to where it was at prior volume levels.

Great. Thank you for that. Wanted to shift also towards the sales trends. You mentioned and I think it was a positive surprise that came out of the call as well with regards to an outlook, as far as you saw it at that point in time, for 2Q sales to decline about 10% to 20%. And I think you even went further and said on the call at one point that a low to mid-teens part of that range being more plausible range of that spectrum. So now as we stand mid-May, we actually just got a positive update earlier this morning from Meritage Homes, where their builder order trends actually came in down 15% for April versus a down 25% to 30% as originally expected, and more positively, expecting based on current trends and traffic, May orders to actually be flat year-over-year. So that's certainly, I think, above investor expectations. So I was just curious if what you've seen over the last few weeks has -- how do you think about that low to mid-teens range now for 2Q if any of the recent trends you've seen over the last few weeks makes you a little more optimistic or maybe, let's say, within that range or even towards the higher end, down 20%? How are you feeling about that range as you laid out earlier?

Mike, I'd say -- I preface it by saying we're very aware that we're still in very early innings of the recession part of this crisis, right? I mean, hopefully, the health care part is going to start to stabilize here. But how we navigate this recession and what it looks like is still very early stage, I think. I think, that said, we were happily surprised when we got on the call with what we were seeing in terms of trends. And what I'd tell you is that I don't think there's been anything that we've seen that isn't consistent with the discussion that we had on the call. And so it's been kind of right where we would have expected it. And within that, then you start to unpack it and there are some pockets that are very strong. And there are some pockets that are much weaker, more in line with some of the early report outs about where people thought this would go. And it's really fascinating. I think what may be evolving a little bit, as you go a few weeks back, there were some hypotheses about secular trends around housing and the impact that this might have for the housing consumer, what people may do. Some of those trends are just a few more weeks' data, and again, this is very early, but are showing some really interesting secular trends around the sector for housing. I mean search -- web searches around -- dipped for a few weeks and now they're up year-on-year. We saw a recent BCG survey on where people plan to trim expense, maintain expense and grow expense and the number one area where they're going to maintain expense was around their homes and their mortgages. We've seen it in credit card data, which has stayed flat throughout, which has been pretty remarkable. And so again, we need to run our business in anticipation that a few weeks' data is not necessarily a trend. We're going to anticipate some potential headwinds and then leave the opportunity open to really capture share on better results or a better market or a better early recovery. And so we're kind of doing that work in parallel. But I think the short answer is, it's about where we expected it. And I think what we are seeing, and I'm hopeful that we're seeing, is a consumer through this that is while sheltering at home, they're kind of very focused on the home and the use of the home, moving from just literally a shelter to a place where people are working and living and studying and playing and entertaining and doing all of these things and that some of that is playing through in some of the data that we see.

Great. Thank you. I also wanted to focus on the Cabinet segment. I think this was a big positive highlight of the quarter. The sales up 8%, I looked it up afterwards, that was the best quarterly sales growth you had in that segment, I think, going back 4 years. And so really kind of demonstrated some of the early fruits, I think, of the turnaround efforts that you've had in place. So on that turnaround plan, given the results in the first quarter, I think what would be helpful is, has all of the heavy lifting in effect -- if you just kind of looked at those results, where are you in that turnaround from the stand -- because I think a quarter or 2 ago, you had talked about that there are still things you were trying to do and lay out over the next several quarters. So where are you with that turnaround? Would you say that most of the heavy lifting has been done around new products and capacity adjustments and now it's more of a matter of just execution? Or should we still see some additional actions or strategic initiatives to drive this segment even further?

Right. It's a great question. I laughed a little because I think if our [ comrades ] start to listening in and they heard me say the heavy lifting wasn't done, they'd probably beat me with a stick because they're working hard every day. But I think to answer your question, right, you had to kind of set the business in a couple of directions and get the momentum going, right? And if I think about those, it was really getting capacity and product in the part of the market that is growing and growing very nicely. And then driving efficiency into the part of the business that was more challenged or at the higher price points that go above $400 a box. And that's been -- as we refer to the pivot, that's been unfolding over the last couple of years. And that was a lot of work. Where are we today? Well, even in those results in the quarter, we saw, if I just start with the higher end, semi-custom and above, we saw a lot of that efficiency start to play through and really deliver. So that moved from -- we're seeing momentum building to where we want to go to it was actually delivering for us. And so not done, the team still has a lot of work to do to continue to execute, but they're on their way, and there is momentum there. And the results, we can -- Pat can touch on them a little bit more detail, but the results were really encouraging and that is underway. We're seeing the benefit actually come through the P&L of the steps that we took. And then on the value side of the business, we've taken a number of steps in both retail and dealer to introduce products at price points that were going to be, both the products and the price points, very, very competitive with other low-cost countries that we saw in the market, China or otherwise. Now on top of that, the industry was successful with the antidumping case, which has helped take illegal subsidy out of the market, which has only helped. But we've seen that be very successful and not just because we invested in capacity there but because we invested in capacity and product and innovation to really get at the heart of that market and that sweet spot. Now still more work to be done there. I think we still need probably to have more capacity in that part of the business and to continue to invest behind it. It's one of the strategic areas we've said. This will continue to deliver really well for us, and we're going to protect even as we make some tough choices around managing through the pandemic and the recession that will come with it and has come with it. But again, a lot of momentum there, and that you were seeing really through the top line that you referenced, right? That kind of growth at 8%. It's because we've got the right suite of products, we've got the capacity to meet the market and the markets continue to be robust. And so there is work yet to do, but I would classify it much more now as execution mode. I think the strategy is well set. The big infrastructure is in place. The momentum is there. And so we need to continue to execute upon it and probably tweak and change and add and reduce where we need to do that, but you're seeing the business really deliver now. And in fact, I think even internally, you're seeing our own team kind of even raise the sights over what they think that this business will do over the long term. Pat, I don't know if you've anything to add to that?

No, I concur. I mean I think the pandemic has certainly thrown a wrinkle into the time line just in the sense of I'm sure it's going to put further pressure on higher price points and probably some tailwinds to the lower price points. So -- but what I would say, and it's consistent with what Nick just said, is I feel like we kind of hit the trough in the 2018, early 2019 time frame in terms of having to navigate performance while changing the business very significantly. And I feel like from here, whether it's smooth every quarter, probably not, but from here, I kind of feel like every half year increment, we're going to be demonstrating both improvement on the top line and improvement in margin performance.

That's good to hear. And I actually got a question from the audience. As I said before, I would take them after we had our set questions here that I prepared. But it's actually on this topic around looking at that performance through a share gain lens, that certainly, there were some solid share gains there demonstrated in the quarter. So is it -- from your comments, your answer to this question that I just posed, it would seem that you feel comfortable that -- if I can kind of throw it out there, that what you've done and the performance that first quarter demonstrated with some solid share gains, also given the trends that have occurred in terms of the imports that you referenced, I mean, is it fair to expect continued share gains through this year and perhaps next, given all those dynamics coming into play?

Yes, I think, absolutely. I think absolutely. And again, that's what we're seeing. And I referenced having the right set of products and the right price points and the right capacity, that -- it's certainly a big part of the longer-term plan. In the shorter term, our team's just been incredible about it. When I talked about keeping people safe and continuing to operate, it hasn't been without its challenges for anybody. But I think the fact that they've been able to do it as effectively has only fed into the share gain thing. So I think the business is very well positioned to continue to gain share. And even as we see imports from other countries start to build, some legitimate and some not, and where they aren't, we're going to be at the forefront of working on that as well, our product is very well positioned to compete with any low-cost country. Because we're seeing that pull, I think it gives us a great degree of confidence the share gain will continue.

Right. No, that makes sense. Thank you. I guess on this topic of share gain and solid performance, I wanted to shift towards your Plumbing segment. And Nick, this is the segment that you kind of -- you led before being promoted to your current position. And I believe, before your current role, you were promoted to COO, but that was off of the success that you had in putting together the Global Plumbing Group. I wanted to zero in, though, within that umbrella on the Moen business itself, but as it relates to the broader set of products that you were able to acquire and integrate, by all means answer it from that vein as well. But just wanted to get -- if I can get a sense from you, the market share gains and the growth above market that you've witnessed for this segment over the last couple of years, if you're able to quantify it at all from 100, 200, 300 basis point type of dynamic. If you have any sense of how that outperformance has been from a number standpoint, from a quantifiable standpoint? And what do you think are the key drivers of that outperformance, be it new products, be it channel gain or distribution gains? You've often referenced some of the advertising and brand management prowess that you've put out into the marketplace. So I think it would be helpful for investors to kind of understand the amount of those share gains in the Plumbing segment and what do you think the key drivers have been.

Okay. A multipart question. And so maybe let me start. And quantifiable, I may defer to Pat. It's -- well, because we actually reset how we were measuring market share, we kind of tried to expand the aperture a little bit as we entered new products. And so as I'm just thinking back here to kind of what we used to report internally and what we're reporting now, we kind of raised the bar on ourselves to gain more share. So we'll come back, maybe Pat knows offhand. But what I'll tell you is I can't remember the last quarter, because we track it quarter-on-quarter, in which we didn't gain share. It's been at least a couple of years in the making here with Q1 being lights out. I mean it was a good quarter across the industry. But the performance -- I'll come back to it, but the performance across the whole business from a share gain perspective is light out. And particularly, if we even just took Moen U.S., we're looking at point-of-sale data in the low double-digit range. So really, really strong, well above the sales growth number, even if you -- say, if you backed out the COVID impact, it would have been around 9%, but POS a couple of hundred basis points above that. And so I probably guess it's probably been 200 to 300 over the couple year period. But if I -- if you look at the drivers of it, of course, there are several drivers, but it really started with reenergizing the Moen brand. And so it is the leading consumer brand in the marketplace, in the North American market. But it started with reenergizing that brand. And that's kind of a twofold attack. The first is really on the brand itself and the brand building done around the brand. And so you've started to see the brand not just speak, but speak and act in a very different way, in a much more energetic way, in a way that was really targeted to the entry-level consumer. We -- a lot of work and we knew we were very, very strong with the boomer and the Gen X consumer. But as we saw that millennial consumer come into the marketplace to start to buy their first homes, we really wanted to build the bridge. And what's wonderful about these generations is you can actually build a bridge with the millennial generation, they self-reinforce. It's not -- you're not having to choose -- give away this generation to go work with the other because they actually like each other and they inform each other's opinions. And so as we went there, we really refreshed the brand, and we talk about it as the hero for beautiful water, kind of with a higher order thing and you start to see the brand not just do things but actually act. We hired a Water Director. We did a water census, got a ton of feedback. We're out in the marketplace doing things that really resonated with consumers. And as of the last quarter, and I referenced this on the call, you saw some of our key brand metrics at their historic all-time highs, right? And so that will just drive share gain. I mean, if you're doing that and you're getting it right, you will drive share gain. But the other very important part of that, which is very self-reinforcing, is the innovation that comes with it. And so getting that innovation engine going. And I would say over the last few years, we measure our Vitality Index, and that's probably come up 800 basis points over where it was. And so we really wanted that innovation engine going. And not just as a sales driver, but brands that innovate or brands that are relevant. And we've actually gotten it up with fewer projects. So it became about getting bigger better hits off the stuff we're doing, being very, very focused about it and going out and really winning in. We've got stuff in the market currently that continues to surprise us with the performance and that's resonating with consumers. And so that's really been the strength, I mean, in channel. I think we've continued to hopefully please customers. We're trying to get more and more strategic every day about key customer relationships and building those as long-term relationships and doing all the things you'd expect a top-tier company to be doing and that's resonating. But it really started with our consumer and wanting to resonate with the consumer. And so that's the U.S. picture. And then, of course, in China, the business has not just kind of built the brand franchise, but also innovated and innovated in new categories as well as built out some new channels. And while doing that, has continued to leverage really, really nicely through the P&L. I mean we're very proud that it's a growing and profitably growing business in China. Anyone can grow. You got to know how to grow with discipline and do it really, really profitably, and that's been really nice to see. And so those 2 things have really reinforced what you've seen coming through the Moen bran. Pat, if you -- anything to add to that?

No, I think you covered it. I mean I think it's also a place where turn the clock back 5, 6 years, I feel like we didn't really have the capability in digital e-commerce, both marketing and connecting with consumers. And I think we've been -- made a great deal of progress there in the U.S. market. And as Nick was saying, in China, and in China, we were very thoughtful about our expansion into ceramic categories in China, and we wanted to make sure the supply chain was there and the products were -- have the Moen DNA, which is quality and functionality at a great value. And both of those initiatives have been very, very fruitful in both the U.S. and China, respectively.

And I might just say that -- to round it out, I think the other thing is, maybe talk about it a bit less, but really important to understand is, even before I was in the group there, that group has been driving efficiency programs very, very successfully for a number of years and using the dollars that those generate to reinvest behind the growth of the business. And that's been part of the flywheel that's been just turning there. And I think they're only getting better at it. And so that -- it's important because you talk about all these things, you're like, well, it costs money, and that's going to come from somewhere. And that's really because the business has gotten really good at prioritizing what's most important and choosing not to do things, driving efficiency and then reinvesting in itself.

That actually brings us right to the end of the 35 minutes. And just before I sign off, I just wanted to clarify, Nick, on that answer, just to make sure I heard it right. You said the Vitality Index up roughly about 800 basis points from that -- those new product innovation efforts. Most companies in the consumer products realm target, and it depends on the product certainly, I've heard numbers in the 20s, in the low 30s. I was just curious if you would venture to kind of give us a sense where that 800 basis point gain places you as a company? And if that's something that you're still looking to improve upon?

Well, there's a healthy level, and there is a level which you don't want to go beyond because your customers only have so much capacity to take it and consumers only have so much capacity to absorb it. If you were to wind the clock a few years, we were in the high teens. It's not where we wanted to be. And so we really said something north of 25% was the right place. And -- but the trick was really to do it with fewer projects and to get just a few big winners that were successful. And so we actually trimmed the tail and drove that improvement over the same period.

Okay. That's perfect. Well, that actually brings us to the end of the session. We're actually a couple of minutes over. So appreciate your time. As always, thanks for participating and kicking off our 13th annual conference. We will be resuming at 9:45 with LGI Homes. Thanks again, Nick and Pat. And if you have any other questions or need to get in touch with the company, please reach out to myself, also the IR team at Fortune Brands, Matt Skelly and Brian Lantz. Thanks very much, and we'll resume at quarter of with LGI Homes. Thanks again, gentlemen.

Thanks, Mike, and good luck for the rest of the conference.

Thank you. Have a great day.

Thank you.

Take care.