MasterBrand, Inc. (MBC) Earnings Call Transcript & Summary

Good morning, everyone. I'm Dave Barry, Senior Vice President, Finance and Investor Relations with Fortune Brands, and I'm excited to welcome you all today to the Fortune Brands Home & Security 2022 Investor Day. To those in the room and those joining online, we're excited that you're able to be with us and our teams look forward to introducing you to the supercharged growth opportunities ahead of Fortune Brands innovations. And the transformational journey already underway at MasterBrand. Before we begin, just a couple of quick housekeeping items. Today, we will be discussing non-GAAP metrics and using forward-looking statements. A full disclaimer is on the screen behind me and also available in the investor presentation that is posted to our website. We will be conducting Q&A sessions after both presentations today. [Operator Instructions] As you can see from the agenda, we have a great day planned for everybody and leaders from both businesses will provide an in-depth view of each business' industry, strategy, competitive advantages and financial performance and targets. Additionally, you'll have an opportunity to informally meet with our leaders over lunch and at a cocktail reception following the MasterBrand's presentation. While it's my pleasure to introduce Nicholas Fink, CEO of Fortune Brands, before Nick takes the stage to begin the day, we have a brief video introducing Fortune Brands Innovations. Thank you, and enjoy the day. [Presentation]

Good morning. Thank you for being here. And thank you for your interest in Fortune Brands Innovations. And I couldn't be more excited to be able to talk to you about our very, very special business. So I'm going to start by formally introducing for the first time, Fortune Brands Innovations. And what are we? We're brand, innovation and channel leader. We're also a new company. We've been very, very purposeful in how we've spoken both to external world and ourselves about this separation. We don't view it as an opportunity to just shift the portfolio or focus. This is an opportunity for us to relaunch our company with new focus, new strategies and even more commitment to doing what we do. And this company is going to operate in these sectors I am going to take you through. But as we walk through today, I'm going to talk to you about our leading positions in very exciting segments of our categories powered by tailwinds. I'm going to talk to you about our advantaged business model and how that is poised to unlock even more growth and more productivity over time. And I'm going to talk to you about this immensely talented team who are here in the room with you today, what they're capable of, what they've done and what they will do over time. You'll see how all this comes together, showcase us as an ESG leader, not just in our ability to do things well, for our communities, but in our ability to tap into tailwinds that will be driven in the future in serving those markets. We're going to touch on a disciplined acquisition strategy and how that has driven incremental growth over time. And Pat is going to also take you through some of that. And all of this comes together to show you how we're poised to deliver accelerated growth and productivity. So just a few quick reminders, where do we operate. We operate essentially in 3 exciting categories: water, outdoors and security with leading brands. And our execution through those categories has delivered over time, and this is one segment of time but you can take many, differentiated growth on both the top line and our profitability consistently for our stakeholders. Now if you look a little bit back in time, of course, for those who have been around a little bit, that Fortune Brands, Home & Security is itself the product as a spin in 2011, which allowed this business to really focus on, first, outperformance through the housing recovery. Business was very, very focused on taking its portfolio and making sure that we're building the brands and the capacity to capture the housing recovery. And over that time, the team performed consistently while adding to our portfolio. We then entered the next stage which is really execution excellence through a series of global disruptions. Going all the way back to tariffs in 2017, moving through some of that border shutdowns and of course, COVID a mini housing downturn inside of that in '18, the team continued to perform with a focus on operational excellence and delivering consistently over time. And so now we enter this new area, winning with our brands in the supercharged categories of water, outdoors and Security and taking that ability that we've built, the capability to outperform over time, and driving it consistently into this new future. So I'm going to start by talking about those categories. So we operate in 3 high-growth categories today: water, outdoors and security. And we're very excited about these categories. We've been very specific in our focus. And one of the things that excites us the most is that these categories are powered by tailwinds that will continue to deliver incremental growth over time. Things like water management, connected products, material science and conversion, outdoor living, safety and wellness and sustainability. And as we now concentrate more and more of our efforts, our innovation, our brand building and our focus to these tailwinds, over time, we expect these tailwinds to become a greater and greater proportion of our portfolio and our own market tailwinds. And it's not enough to just play in good categories with really exciting tailwinds. But we do it with leading brands. And this is very much part of the Fortune Brands business model. It's knowing how to operate with leading brands in categories and knowing how to manage those categories and be a best-in-class partner to our customers and our consumers. And as you look across this page, it's pretty remarkable, right? Our brand positions over time that we have built allow us to speak to the consumer, to innovate, to manage the shelf and to manage price and value realization for stakeholders. And as you look these #1 brands, we're also excited to have in our portfolio brand that isn't yet #1. But to take all the power of what we know how to do is Fortune Brands and put that against new opportunities to build those brand positions over time. So if that is where we play, how do we play there? Well, we've made some changes over the last few years as we become increasingly more and more closely coordinated as a company with an aligned business model that is designed to keep our customer intimacy and our consumer intimacy and end-to-end accountability as close to our markets as possible, but unlock what we saw is huge productivity and growth opportunities inside of the portfolio. And it starts with the Fortune Brands Advantage, right? This is our business system. These are the few things that we, as a management team, got together and decided that we were going to do consistently well across the entire portfolio. And it isn't enough to just decide that you're going to be good at something, right? You actually have to invest. You have to make choices. And these are areas where we've invested millions of dollars to be world class of these capabilities, but those investments have unlocked many times the underlying investments that we've made. So things like category management. If you're going to have leading brands, you need to be able to speak with insight and data to what is happening in their categories and help manage those categories for your customers and consumers. Business simplification. The ability to take complexity out of the business always, to simplify and give us room to be able to continue to innovate and do great things in the marketplace, a global supply chain excellence, right? We have completely shifted the model. Ron Wilson will be up here in a little bit talking about that, but the model of how we manage our global supply chain from what I'd call the old school, Ron calls it the tin cup asking for a little bit more every year to a completely data-driven capability that allows us to do analytics, understand what things should cost and actually put those prices to the market. And then, of course, our digital transformation which is, without a doubt, our huge capability that is going to drive us into the future. These are not static. Over time, these will become ways of working in our business that are just what we do. And that will give us the opportunity to bring more Fortune Brands advantages into the system that we will drive as a top team and let some of these move into the business and just become everyday ways of working. And so if that is the business system, it is underpinned by an operating structure and approach, which for us is quite new. And so you saw on September 6, we announced a new aligned operating model with Cheri Phyfer, leading our brand innovation and channel and Ron Wilson, leading our supply chain, complemented by all of our functions that support Fortune Brands. But what's most interesting about this model twofold. One, we have now brought together our global supply chain. This allows us to work at scale, to work with best-in-class talent, to leverage opportunity and to drive a lean culture and best-in-class way of executing through the supply chain. This will be a big productivity unlock for us. Bringing our brand innovation and channel organization together is equally as exciting. We could see opportunities where we were executing with excellence in one part of the business and wanted to bring that across the business. And so in designing this organization with 5 business units and 5 presidents reporting to Cheri Phyfer, we also built out value-driving functions underneath, brand development and direct commerce, innovation and development, product development, right? We very purposely chose not to have these report to me. They don't need to. We want them closest to the market. So our principle is unless it needs to report on the senior leadership team, it shouldn't. Everything that we can drive closest to the market will be closest to the market. And with this structure, we will maintain our customer-consumer intimacy that unlock the value of our scale to be able to do brand, innovation, product development with speed and with scale. And I'm incredibly excited about this because I think we're just getting started with what we can do to unlock value over the next few years. And of course, this is underpinned by an incredibly, on the slide, talented team and culture. So in the room today, you have a remarkable diverse and talented team that I am so honored and humbled to work with. There are incredibly smart. They're incredibly agile. They're incredibly hardworking. I'm sure you hear that from a lot of companies, but they lead with heart. These are people that will run through walls for this business and this team. And I'd ask you just to look at what this team has accomplished in the last few months, as evidence of what this team has done and will do. And of course, it's not just the team in this room, but it is our 12,000 associates at Fortune Brands Innovation that really stand with us and alongside us that make our business so special. And with team comes culture and doing the right thing is key to our culture. It is in our DNA, and these aren't just words, right? Our values that we talk about are aligned, agile and accountable. We're aligned because we work as a team. We could disagree, but we align. We're agile. And boy, we've had to be agile over the last few years in responding to the changes in the world, and we're accountable. We do what we say we will do, and we look to those values. And then we do our best to do right by associates, whether it's not home for all, which invites people to be their true selves inside of our organization; a safety record, which is world class, is something that we hope to further share with our customers and our partners as we take these metrics, which are off the charts and share them and teach others. And of course, our environment will continue to receive accolades for the responsibility and quality with which we are custodians of the parts of our planet that we touch. And so when you take those segments and our leading positions, our Advantage business model and this incredibly talented team, we also have the ability to deliver products that help make our world the go to place, whether it's through saving water, utilizing recycled materials like Fiberon there, 94% recycled in that cladding product, help us conserve energy as we do with Therma-Tru doors, or protect people, which is a big part of our Master Lock business. We are very privileged to be able to sit in these categories with these brands and this team and bring those things to life. So having talked about the markets in which we operate and the brands that we have, our business model and our team, I'm going to take you a little bit through our winning formula, how are we going to take those things and win over time. And it starts with our 3 key areas of focus: brand, innovation and channel. Brand, innovation and channel. These are choices. These are choices that we have made to focus in these areas because these are what we believe will be the drivers of our ability to do what we plan to do and more over the next few years. And that's underpinned, of course, by our global supply chain, which is going to help drive productivity, [ get ] investment back into the portfolio with excellence, our digital initiative that Dong Lee is going to come and talk to us about which is off to a fantastic start. And our M&A disciplined approach and ability to leverage this portfolio and this platform to continue to do value-accreting M&A for the portfolio over time. And of course, none of this comes to life without talent in culture. And so starting with the inside of that circle, brands. Brands are at the core of our DNA. It is in the name, Fortune Brands. Why do we believe in brands. Because brands drive consumer pull. Brands bring innovation to life. Brands are sustainable, brands will offer pricing power, brands are at the heart of what we do. We build brands. And I think you've seen some of that from us in the past. I will tell you something. We are just getting started. Work that Cheri and her team are doing in their new aligned structure is going to unlock our power to build brands across our entire portfolio with the same quality and focus that you've seen from brands, like Moen. Innovation. Innovation, of course, drives top line growth, [indiscernible] drives margin. But it also resonates with brands. It drives brand building. And we love to think of ourselves as innovators. And we innovate for our customers and our consumers, we innovate for our pros, they're in the blue, you have our Flo by Moen Water ecosystem that Cheri is going to touch on in more detail. But we also innovate in our own operations. In that picture there is the work that we did at Fiberon, right? Having purchased Fiberon, we challenged ourselves to see what we could do to increase production and productivity and efficiency, and we actually brought in hydro fluid dynamic experts from Moen to help us figure out how to use water more efficiently and more effectively to cool our deck boards even faster, so we get down the line even faster. And that just tells you the culture of engineering inside of the company. And by the way, led by the same people who want to solve problems. And then channel, we have broad and deep trusted channel relationships. This is one of the things that Fortune Brands is known for. And we want to build on this and build on it, not just by saying, well, we have got broad customer base, we're going to take care of them, but investing further in our channel development, through things like category management capabilities where we can bring value add to our customers and change the dialogue as we have in the last few years from win-lose or lose-win to win-win. How do we manage these categories of these brands together to generate incremental value for us, for the customers and for the consumers. And again, these aren't things you just want to do. These are multimillion dollar investments in data and analytics and insights that make us true channel partners and trusted category leaders. So as you move from that key core, efficient and resilient global supply chain. I'd like to think we've done pretty well over the last few years. During COVID, we're beating ourselves up for some of our performance levels only to learn from some of our customers that they were almost double the industry average, double, right? Talk about a team that will run through walls and do it smartly and intelligently but we're just getting started. We have opportunities to take what we've done in pockets of the business and play it out everywhere, things like strategic sourcing, more opportunity there, using AI to better predict demand and manage our supply chain accordingly, automation into our facilities. Leveraging our true global scale, something we started, but there's more opportunity behind. And really, really getting more data driven, more insights. John will touch on some of this stuff. But even in the last year, just being able to see our spend taking analytics run a single item from months to a second push of a button with the data cube with the machine can tell us exactly what we're spending where and we can put it up to bid, huge change. And that is a great segue into our digital transformation. Again, a choice, a commitment. These aren't cheap. A lot of companies will talk to you about their digital transformation. But you have to ask them what are they actually doing, what are they investing and how are they bringing it to life. We chose to really focus, looking across an enormous opportunity set, on things like connected product, our e-commerce capabilities, our data cube and ability to drive productivity out of our portfolio and of course, the talent machine that underpins this. Because it is very different to legacy businesses. And over the course of the last year, 18 months, we've made significant investments and the results that John will take you through, I am not going to steal all his thunder, have been simply remarkable, delivering on time, above target and in a rapid and agile fashion. And that might be the most exciting thing about this because things that used to take us months, if not years, we can now iterate and change in 2-week sprints, take the Moen app rating, which went from okay to world class inside of 2 months of having a team work in an agile fashion on it. Because we completely shifted the way we're working, the way we funded it and our expectations. And the best part about this is this transforming the way we work as a company. Because once others in the company see what you can do in agile fashion and the spirit in which you can do it, they are adopting that and playing that through. And actually, a great example is the separation, right? When we announced it on April 27, I believe, or 28, there are really just a handful of us that were aware that we were going to do this, and we exposed it to our team and said, "This is a heavy lift, probably take a year". And they looked over at the digital transformation and said, well, those guys are doing stuff in like 2 weeks sprint, it seem to me making a lot of progress, how about we do that. And you can see the result, again, delivering as promised well ahead of schedule. When you build that platform of brands, innovation, channel strength, this business model, our ability to bring digital to life, it really gives you a powerful platform with which to do M&A. And we pride ourselves on being disciplined. We pride ourselves to be returns focused. We need to know that we are going to create value, both by purchasing well, but by also creating value ourselves. If we at Fortune Brands Innovations cannot bring value to the table and unlock it, we won't look at something no matter the price. Because it has to connect into our organization, and we have to have a thesis that we can execute on. And I think you know well, 11 major acquisitions since 2011, more than $2 billion deployed. Of course, I'll talk about it in a second, we just announced a very exciting transaction late last week. We will continue to focus on using our free cash flow and our platform to find other opportunities to drive value in these supercharged categories and further enhance our exposure to those tailwinds over time. And so a great example, right? Just last week, we announced a strategic transaction with the focus on supercharge categories. That's the purchase of the Yale and August residential business in the U.S. and Canada and the Emtek and Schaub business globally. Now Yale gives us -- and August gives us exposure to that fast-growing connected device area. It gives us greater exposure in security, and it gives us an engineering firmware and software platform that we can leverage across our business to unlock more, whether it be in how we connect in the ecosystems we build or quite simply, in the chipsets that we design and how we go out and source them. Scale matters. Emtek gives us a leadership spot in an adjacent but new category for us with leading brands, strong design and wonderful margins. And so what do we think we can do with these? Well, on the security side, we're going to be able to expand our retail omnichannel presence, we're going to broaden our whole connected ecosystem, including the door, which today is really a dumb door with a smart lock, will in the future be a fully connected device. And I would challenge you to think about how many people actually use a key today versus a keypad or garage door. And then, of course, leveraging our Fortune Brands advantage and our platform to unlock further value. On the hardware side, we already have a lot of premium showroom exposure through our House of Rohl where our ability to create products that are differentiated with different brands, match them and bring them together and bring them to life in a setting has unlocked a ton of growth and value for us, this is a perfect complement to that. We also have other channel relationships on the Therma-Tru side, also in the premium area, where some of our customers want to be able to access the ability to attach product and add value to the door system all the way through. And so more to come on this, but we are very, very excited for what these will do to unlock further value. And I think they are a good indicator of where we intend to take this portfolio. They are connected, they are great brands, they're smart, and they're going to drive growth in margin. And so with that, where we're going. Well, 2022, net sales will finish around $4.7 billion. Pat is going to take you through some of these in more detail. Operating margin is 17%, EBITDA margin of about 20%. You want to spend anything but a simple year. I'm pretty proud of the team's performance. They have not let up on executing with excellence no matter the environment. And we have seen tumult and we have seen change. And I think when you look at these numbers, and particularly the margin performance that tells you what our brands and segments, what our business operating model and what the team is capable of delivering through cycles and through the environment. Over time, we tend to outgrow our markets. We peg a global housing market at 4% to 6%. We intend to deliver net sales CAGRs in the 6% to 9% range. As I mentioned, over time, as we increase our exposure to those tailwinds that underlying sea is going to help raise the ship. Operating margin, we're going to continue to focus on the productivity of our business for 2 key regions. One, it is the fuel that fuels that top line. And as we've delivered some incredible productivity over the last few years, we've driven some of that into the bottom line margin, and we've driven some of that into investments to continue to drive that top line. That algorithm works for this business, and we intend to continue it. And so expect to see operating margins improve so we can deliver for investors or we're delivering for our customers and consumers by reinvesting in the business and driving that top line. And so with that, I hope I've given you a brief and fairly high-level overview of what makes this business so special, of how we intend to focus and how we intend to run it. And I am immensely proud now to turn it over to my team who're going to take you through a lot more detail as to how we bring these things to life. So with that, I'm going to introduce John Lee.

Thank you, Nick. And good afternoon, everyone. It's a pleasure to be here today. My name is John Lee. I lead global strategy and growth for Fortune Brands Innovations as well as digital on an interim basis. I'm excited here to talk to you today about our markets and our categories. We have a lot of great things to say, and I'll start with the housing sector and why Fortune Brands Innovation stands to benefit from what we believe are very positive long-term fundamentals in both the residential remodel market, as well as new construction. So starting with R&R. As you can see on the chart today, it's an incredibly resilient market. Actually, in the last 25 years, it's been growing at a compound annual growth rate of 5%, and it's been pretty steady through that period. And there's -- and even though inflation today and some consumer spending headwinds will have an impact on R&R, we believe that the core, the overall fundamentals of R&R are still very healthy and with real reasons to believe. The New York Times said -- reported that in the last 2 years, housing wealth in the U.S. has gone up $6 trillion. It's incremental $6 trillion of housing wealth in the last 2 years, enjoyed by 65% of people that own homes, that's an incredible wealth creation. And even with the recent housing price pullback, that's $300,000 in average home equity. That is ample means and incentive to continue investing in your home. And even there, we see the aging housing stock and aging housing stock, as you all know, means aging housing products, aging housing systems that do need to be repaired and refreshed over time. And as the housing supply remains tight, the existing homeowners that are staying or going to thoughtfully continue renovating and remodeling their homes to meet their changing needs. And we're actually already seeing that in the data. Google search trends would show that the search for home renovation projects remain at 25% to 30% above pre-pandemic levels. And even in a recent house survey, recent as October, the vast majority of homeowners are saying that they're continuing with their home renovation projects into 2023. Now with R&R representing 2/3 of our business, we are very positive and feel very good about the strength of our underlying business. Moving over to new construction and why we also believe in the long-term fundamentals here, it's really too much demand chasing too little supply. Timing is discretionary when it comes to housing construction, but the need is absolutely not. Harvard Joint Center I'd say has estimated that 12 million new households will be formed in the next 10 years. And that's into a market supply environment that we believe is underbuilt by 3 million homes. That's a lot of homes. And according to some estimates, that's actually conservative. And there's additional upside as well because there's still a lot of young people that are living at home with their parents today, a very higher proportion than what we saw before 2008. And as this cohort continues to age, they get married, they have families of their own, it's going to be a tailwind, it's going to be an upside potential for housing demand. And while near-term home construction may slow, that's only going to make the need even more pressing. And so it's important to also realize that Fortune Brands is not only looking to navigate through this cycle, we're looking to lead. In Fortune Brands, our performance in new construction has persisted over time and for a real good reason. I mean, we have an incredibly large installed base of loyal consumers that know and trust our brands. And that is a dependable moat that you can count on through the cycle. Pivoting now I'd like to talk to you about the exciting tailwinds that we see in our respective categories. And it's not necessarily a coincidence. For a number of years now, we've made a conscious strategic shift to selectively pursue and invest in categories that had real market tailwinds that market tailwinds, consumer tailwinds, trends inside the category where we are seeing an increasing rate of adoption for new technologies and new disruptions, things like mechanical products going into digital products, where you see single-point water fixtures now moving towards a connected water management ecosystem, where we see natural products converting over to advanced materials that offer superior functionality and are also good for the world. And for products that really have functional value but now are adding health and safety benefits that add data and analytics that actually get smarter after you purchase them, that are getting actually better, these are great trends. And these are trends that when you think about R&R, repair and remodel, think repair-remodel upgrade, when is the last time you changed your phone because your last one didn't turn on. If there's more value to be had, you don't necessarily have to wait for the big remodel. You don't have to wait for the product that you have to break down. And that's what's exciting about these categories because they share in a lot of these segment characteristics both in the residential as well as in the commercial space. And as you heard from Nick, that's the thing that's going to take our market from 4% to 6% growth rate to something substantially higher as these segments grow inside these categories. So let me double click into water and why we're excited. You heard Nick talk about digital products in water, and that is exciting. I don't think you'd be surprised to hear that during and following the pandemic, the demand for digital touchless faucets nearly doubled. And it continues to stay there. But digital demand is not just about the single point fixtures, as I mentioned, water management control is something that consumers are increasingly aware about and understand the importance. If you're a homeowner, you understand that water is an essential network in your home. But like any network, it can fail. And unfortunately, increasing number of homeowners know that is expensive when it fails. In fact, damage from water accounts for more than fire and theft combined. But many of us here have alarm systems, have control systems for fire and theft, but we don't have it for water. But we do have products, and Cheri is going to share with you just how exciting that prospect is inside of this category. But in water, it's not just the digital trends that we're seeing, we're seeing real sustainability trends and conservation trends. Everybody says that they want to have a great experience with their water in their homes, their showers, their baths. But 90% of consumers also say that they want to take concrete steps to reduce their use of water. In fact, 2 or 3 consumers would say that they're willing to pay a premium for sustainable product. And we absolutely see this in the data as well. This is going to be a long enduring trend for new products and new technologies and innovations that are going to help solve this. Where climate change has been over the last 5 years, water is going to be an increasing part of that message. And we are really excited about the disruptive innovations that we're going to be seeing in this domain. And these are not only the only tailwinds that we see in water, we see water quality and filtration and new things in data analytics. But suffice to say, I want you to understand that we are very, very bullish in the water category and believe that it is poised for accelerated growth over the long term. I'm going to move now and talk about outdoors. And outdoors is an exciting category. It's not just exciting to me because it's apparently exciting to all of you as well because 90% of homeowners would say that they are thinking more about their outdoor living space than they ever had before. And it remains the #1 home exterior upgrade today. So consumers are really excited about this space. But in this category, especially when it comes to doors and decking, materials matter. Consumers are willing to pay a premium for superior advanced materials that offer improved functionality and durability without sacrificing form and beautiful design. And we see that actually playing out in the categories in which we compete. And fiberglass doors is 50% of the door market today, and it continues to gain share over wood every year. And in the decking market, we see composite decking and PVC decking currently at 25% penetration and an accelerated growth rate following that same trend taking share over pressure-treated lumber. But just like materials matter and just like in water, sustainability also matters in this category. 70% of consumers say that the environmental impact of their products is a more important part of their purchase decision. And you heard Nick mention that Fiberon decking is made of nearly 95% recycled content. 95% recycled content that not only saves millions of trees, but it looks great with minimum maintenance, and it lasts 2 to 3x longer than pressure-treated lumber. That's an incredible value proposition. And we also see that with our Therma-Tru doors, our fiberglass doors that save a lot of energy. In fact, fiberglass doors have 4x the insulating value of a wood door. And they also look durable and can match any design aesthetic. And so I think in this category, you have to remember that it's not just a category with a lot of consumer momentum and excitement, it's a winning category. But inside this winning category, there is an engine that's growing even faster, behind these sustainable advanced materials. And that's why we believe that this is going to continue to accelerate the growth rate of this category over the years. Finally, I want to talk to you about our security category and how we are seeing tailwinds in both digital as well as health and safety and safety and wellness. In the digital space, we see digital products, again, similar to water going from mechanical to digital. But particularly in security as well, we see that value proposition expanding. It's not just about electrifying the lock and just being -- conveniently be able to remotely open it, but you can remotely give other users access to it, you can find user history on the lock. It becomes a new proposition, not only to the homeowner, but to real estate companies, to multifamily properties, as well as single-family rentals. And with the exciting and anticipated acquisition of the Yale and August brands in this space, we are even more excited to be able to bring more innovations at a faster pace with a broader ecosystem of products to the residential sector. So this is going to be a phenomenal win for us. Also, there is a tailwind behind safety and wellness as well. And that's something that's actually very important. It's something that all of our employees take to heart. Employee health and safety is a top ESG issue, and 90% of EHS professionals would say that their organizations are doing more to mitigate employee health and safety risk today than before. And still, we see things like lockout/tagout still ranking among the top 10 OSHA violations. We really feel a responsibility to do something about that, to provide products that are going to be uniquely able to help mitigate that risk, that important risk better. And so we are also seeing a lot of great tailwinds behind security. Now before I introduce my next speaker, I want to just leave you with this, that Fortune Brands Innovations is not just looking to win inside of the housing sector, we are absolutely dedicated and focused on winning in the winning categories in housing. And to do that, you can't just be in the right place and stand to benefit, you have to lead in those categories with your innovations. And that is what's going to allow us to deliver great performance, market outperformance through the cycle and over the long term. So now I'd like to introduce Cheri Phyfer, who's going to talk about exactly how we're going to win in those categories with our great brands, our innovations and our channel management capabilities. Please welcome Cheri to the stage.

Thank you, John, and good morning. It's a pleasure to be here with you. I'm Cheri Phyfer, the Group President of Fortune Brands Innovations. And Nick did a great job earlier today, really talking about this winning formula for supercharged growth and margins. And I'm going to focus on that bright blue, those 3 areas of focus that Nick talked about: brand, innovation and channel today. And I'll bring those to life for you using various case studies. And I think you'll experience why this is a sustainable competitive advantage for us. And it all starts with brands. You saw Nick's obsession with brand and how we're excited to bring that across the entire portfolio. We know we're in the right categories. We know we're in the right products, and we have a strong record of brand development, and we excel for 3 reasons here. One, because of the expertise that we have, the knowledge we have with consumers and the industry; secondly, because we strategically and meaningfully invest in these brands and the people behind them; and third, as you'll hear more today, we are entrenched in innovation as well as our channels that we play. So when we look at our products, we like to think about the link that they have to our brands. And our products allow you to create beautiful functional spaces that represent your style. They also help you think about safety, comfort and security that you want. And when we add that together, we think this is the moment that you spend with the people that matter the most to you. And our brands reflect that promise as well. Let's watch this video and see. [Presentation]

So Mark-Hans did a great job of really talking about how we build powerful brands and how we leverage that across the portfolio. And our first case study today is the strength of the House of Rohl. So in 2016 and '17, if you think about the road map that Nick showed, we acquired 5 different luxury brands. Victoria and Albert, Riobel, Shaws, Perrin & Rowe and Rohl. They had 3 different distinct paths to market, and they all focus singly on one category. We started doing some research and we realized Rohl was actually the #1 brand in recognition out of those. And we found this trademark that existed inside Rohl, House of Rohl. We bought those together under an umbrella brand that really allowed you to own the room, own the kitchen, own the bathroom by delivering curated luxury and bringing a sink and a faucet together in both the bathroom or the kitchen. And so you can see we had on route to market, one umbrella brand under the House of Rohl and 17% compounded annual growth rate from 2019 to 2022. The team really is excited to bring these brands to life. And the reason we're so excited to bring these brands to life is that we know in bringing brand strength to the market, it doesn't just help us create the demand and the pull, it allows us to take price in the market, which is extremely important to that margin journey that we're on. And that journey starts for customers very early on as they go to search. And one of the things we realized is that consumers once a brand gets in their mind, it stays in their mind. And I was shocked to learn that of our categories in 3 of those above 40% of the time, 2 of them close to 50%, the search has started with brands, not the destination where they're going to stop. And we have an opportunity, as Nick pointed out earlier to get to #1, both with Moen and Fiberon of those searches that are there. But this tells you before a customer steps foot into a brick-and-mortar or before they get online, that they have a product in mind, and we want to be that brand that they have in mind. So while brand is really important, and we spend money towards brand, we also know that one of the things that is driving our success with brand is innovation. It's a culture of continuous improvement bringing new products as well as existing products new life. And so when we look at our innovation roadmap, we have over 1,200 ideas a year that come in from customers, come in from consumers, come in from academia, come from insights from our internal employees, and we vet those down to about 100 concepts, you can see 0.2 on our road map, and then we bring those concepts into prototypes into new products. And we have a goal of 25% to 30% new product vitality. So products launched in the last 3 years will be 25% to 30% of our business. And we're not just throwing ideas. These are actual tangible products, and I'm going to walk you through several of these in water, outdoors and security when we're looking at our innovations that are coming. And these are examples of technology that is ahead of the curve, products that are market leading, that not only help us with our brand, but they also help us with our channel partners as we're bringing this innovation to them first to market. And so as we look at this, one of the examples would be our water ecosystem. Rather than just faucets and showers, we now are leveraging technology to give water a new life. And so when we look at this, this all started with the smart shower back in 2017. And now we have faucets, we have a leak detection device, smart water detectors, a sump pump, and we're launching this next spring, smart irrigation. I'm going to go back to that smart water shutoff that John talked about. He talked about you having a burglar alarm, having a fire alarm in your house, but not having that water alarm. This was a product that detects the smallest leak in your house, and it'll actually turn the wetter off. And then using the integrated app, you can turn your water back on from wherever you are. That's incredible in itself. But this actually we realized could be the brains behind a water ecosystem. And so what this did is in Texas a few years ago where you had the freeze, we actually could have detected that freeze and flushed water through your lines, so there'll be a burst protect. If you're traveling or if this is a second home, a lot of people are worried about water staying in the pipes and waterborne diseases. It actually can flush the water lines for you. So if -- it works as the brain behind this integrated app. And let me show you this video that brings it to life more for you. [Presentation]

Well, we're really excited about this from hardware perspective, we're even more excited about the data and analytics that we're gaining from this and the reoccurring revenue model that having that app gives us. So as we move on to our next case study, we want to talk to you about doors. So we have the #1 brand in storm doors and the #1 brand in fiberglass entry doors. And people tell us that storm doors are important to them because it lets in light and air into their home, but they hate the way it looks like a bolt-on. So today, only 25% of consumers buy a storm door and an entry door. And we have an opportunity here by bringing to light a door system that is an integrated storm and entry door. So it's aesthetically pleasing and consumers have told us in shopping journeys that they want this. It just did not exist out there. And if you think about this opportunity of combining these #1 brands aesthetically pleasing, there is 300 million doors. So as people go to redo their homes and they want this light and air ability in their front doors or back doors, they're able to do this now with our impressions door. And moving on to security. Most of us think about security and think about Master Lock and you think about that high school combo lock that you bought at your local retailer and used when you were in high school. But this is such an opportunity for us. You heard John Lee talk about it a little bit. This case study here, we went to the Metropolitan Indianapolis Board of Realtors. We sold over 9,500 locks in 1 sale. And they put them on the door. And as John said, they are able to take their app and connect in their back end and connect into our app. So we can give you the history of who's been in the homes, you can schedule an appointment and get that code to get into access a house. We provided the training and the technology that was behind obviously the lock and helping the people adapt to this, but we're extremely excited about what this does for us to take selling a lock to selling a ton of locks at the same time, providing a service. And what excites us the most is this works with realtors, and there's 1.4 million realtors out there. This also can be used in that lockout/tagout opportunities. And so we're extremely excited to take that kind of technology and take it into the commercial space and see what that can do for us. So shifting a little bit over to our channels. I know that you're always interested in what do our sales look like by country and then how diverse are we. So when we look on the left side of the page, the sales by country, about 85% of our sales are in the U.S. and Canada and over 10% in China now. And I think it's really important -- we don't talk about China a lot, but our China team is homegrown. And they are China for China. And they have their self-funding, and they are self-sustaining. And they have been on a double-digit profit journey and are doing amazing work. And so we're pleased that, that's now over 10%, close to 11% of our business. Moving over to the right side of the page, really looking at that channel, john talked about it. We're heavily weighted towards R&R, a growth segment in the business. And so we are exposed to growth categories, and you'll see the diversity. And when you look at the diversity, look at it when you click a slide further, breaking it down by water, outdoors and security. You see the diverse mix in all of the businesses. And it's really underpinned by deep channel relationships with the customers in that diverse portfolio. And so Nick mentioned category management, and this is so important to us because we pride ourselves on this diversity and this diversity because of those channel relationships I talked about. And what enables us to have those channel relationships is you want to be the go-to person. You want to be the company that they're calling when they have a question. And so we pride ourselves on knowing everything about the competitor and everything about ourselves and things that we don't even know yet. So when I break this into 3 different areas, the white space analysis, we are constantly out there doing trends work, finding out what's next, what's going to hit the markets. We're in people's homes actually watching them use our products to try to find those unmet needs that we know consumers will pay for. Moving over to shelf optimization. We know where the gaps exist and we know where there's redundancy. So we're constantly looking at those gaps, whether it's brand, style, price or other things and moving products around that all ships rise for us and our partners selling those products for us. And then lastly, features and benefits. It really brings together those first 2, those white spaces and that shelf optimization. It's finding those untapped needs, those unmet needs that consumers are willing to pay for, figuring out the right customers to partner with on it and making sure we're optimizing that shelf. And with that, getting the close rate and the productivity up across our partners. So extremely excited about what we do and how we are going to leverage that across all of our product portfolio. And so just some case studies around our channel and what has been so successful for us. We acquired Fiberon. And you can see we were about 61% retail, a little under 40% wholesale. And as we looked at what we wanted to be in this channel, we knew is very functional. We wanted to be more aspirational and inspirational, and we felt that we could grow on both sides. But we really knew that there was growth in margins over on the wholesale side of the business. So we intentionally looked at that wholesale business. And what we were able to do is take those deep channel relationships that we had with our Therma-Tru customer. So OrePac and Huttig, for example, they wanted Fiberon because of the relationship we had because of the category management that we were able to provide them on the Therma-Tru side of the business, and you can see that we have more than doubled our wholesale business since the acquisition of Fiberon and now sit at a 56%-44% split between wholesale and retail. And deep touching on that Therma-Tru and that brand and channel that we had. When you think about this, it's the #1 entry door. And we have been extremely successful with builders for decades, but we don't spend a lot of money on advertising here to the consumer. We believe, as you heard Mark-Hans say that there's an opportunity here to speak more to the consumer, but this isn't necessarily where it's all about ASM. It's about innovation that has really led this for us. We were the first fiberglass door, and we haven't stopped there. We're continuing to look at skins and features and benefits that we can bring to the door to make it something that everybody wants. If you think about that 47% of those consumers that slide I showed you, search by doors, and they search Therma-Tru. 47% of people start and Therma-Tru is the #1 brand. So we have an opportunity to not just take the brand work we've done, but now through digital transformation, really bring that product to life that as people start that search, they start it with Therma-Tru, and they stay with Therma-Tru for the acquisition of actually the product. So extremely excited about the channel partnerships that we have and really hear what we've done with brand and innovation and channel to leverage that across all of them and drive margin and incredible sales. And pretty exciting here, maybe not for you, garbage disposals. But if you want to look at a case study that really brings brand innovation and channel together, this is it. So Moen was #1 in kitchen faucets. As I said, we look at things and we think how do we own that room? What are the other categories or adjacencies we could play in? And we looked at garbage disposals and saw that it was a pretty sleepy category. The garbage disposal had not been innovated in a long time. So we bought not only product innovation to the market, but innovation in our go-to-market strategy. We were able to leverage our channel relationships, and so you will find these garbage disposals at Menards, Lowe's and Depot, all of the big brick-and-mortar. You'll find it on the first page of Amazon, Page 1. And you'll find it in many new homes as we've added this to our exclusive builder contracts and the builders are running with these Moen disposals. We had our supply chain friends to thank we were able to service disposals when some of our competition was not and that helped us grow in that wholesale business during the COVID years and the downturn. So what was really exciting about this, though, was that, that go-to-market. You went in to shop a [indiscernible] and you shopped on horsepower. And nobody really knew what a horsepower meant. It was really confusing. So people looked at a shelf, and they kind of looked at which one has the most gone. And I guess that's the one people are buying, so I'll buy it. And instead, today, you go in and you shop by your lifestyle. So whether you're the [ light, ] you just once in a while, have people over, you don't cook a lot or whether you're the chef and you really need a superpower. And it makes it an easy category for people to shop and to feel comfortable with what they're getting. So while it's not very exciting to think about garbage disposals, when you think about what we did with the Moen brand, what we did with the channel relationships we had and what we did with innovation, not just in product but in go-to-market, extremely excited about taking this type of just obsession over these 3 pillars and these 3 focus areas across our portfolio and seeing what we can do. And so as we do -- as I wrap up and get ready to turn the stage back over to John Lee to talk about our digital transformation, what I will tell you is we are so excited. We are just getting started, and there is so much runway in front of us. We're going to continue to drive these 3 pillars, these 3 focus areas of innovation, brand and channel. We know that, that will drive accelerated sales and margins for us. We are building incredibly strong e-commerce capabilities that John Lee is going to talk about. We're going to double down in that connected space. You hear the energy from all of us talking about these connected products and what that does from a reoccurring revenue standpoint, what that does from a data and analytics standpoint, and how we're going to use all that to continue to win in this omnichannel market. We're going to accelerate into the commercial business with brands like Master Lock. And lastly, we're going to continue to transform the portfolio, always looking at beating whatever has happened in that market with sales and margins. So I'm extremely excited to have the opportunity to lead the innovation, brand and channel for Fortune Brands and excited to see what we'll do in the future. John, I'll turn it back over to you for digital transformation.

Thank you, Cheri. As I mentioned before, I lead the digital transformation of Fortune Brands Innovations on an interim basis. And I'm excited to hear -- to be here today to talk to you about some of the great progress that the team has made. And as you heard from Nick, digital transformation is a key part of our Fortune Brands Advantage. It is something that is going to clearly enable our growth across the entire enterprise. But I want to first start by saying that our digital transformation did not start with technology. It started with our business strategy, really understanding our business model today, how we are evolving it, what makes us win in the marketplace today and really projecting out what is the market, the consumer and the customer look like in the future. Really trying to understand that is how we came up with our transformation strategy. And as you heard from Nick, as you heard from Cheri, we have a lot of great digital products and ecosystems in water, in security and safety that are in the market today as well as in the pipeline. And all of those things need to be supported by the best-in-class digital technologies as well as data science and analytics. And that's going to be really key to not only supporting the products but opening up new revenue streams in the future like recurring revenue streams. But digital is not just about products for Fortune Brands, it's way bigger. It's across the enterprise, and there's a lot of opportunity we found that we can unlock. Starting with things like our integrated tech organization, our tech organization across all our businesses are now integrated today. And they're going to be focusing on core technologies that are going to help us streamline our processes and optimize our value chains and our back-office functions for the entire enterprise. It's about raising a data-centric organization, not just products, but the data and what does that data tell us. And in order to do that, you need to connect. You need to collect that information and you need to look for patterns in that data about your businesses and again, about your consumers and how they shop, how they engage with your brands through the entire journey and how they engage with your brands after they buy it and they take it home. These are the things that are going to help us not only understand our consumers, but design new products and features that are going to delight them and keep them coming back for more. And it also means having an organization that is running on a modern, agile ways of working through this very iterative cycle and a very quick process at coming up with working solutions, working products and working services at a faster rate that is actually keeping up with the fast pace of market change. And so it is important to realize that digital transformation for us is across the enterprise. And I talked a little bit about the holistic change. Let me dive a little bit deeper into one area, and that is our digital factory. This is where our technology and our people meet to scale those new products and solutions at a rapid agile case. Our digital factory is comprised of a number of cross-functional teams that have technical, dedicated technical people on those teams and -- but they're business-led, and they're very mission-focused in turning around solutions at a quick pace, and they're working against some of our biggest opportunities, including developing some of the connected products we talked about today as well as feature-rich apps to support them. Also, accelerating our e-commerce business and helping that channel continue to increasing productivity every year as well as savings throughout our supply chain, you heard Nick talk a little bit about the savings in our indirect spend and consolidating that spend into one single spend cube across our entire organization accessed by a single digital tool. And then finally, linking up our technology and our data to really get to a single source of truth. We have a lot of great businesses in Fortune Brands, and we can leverage all of that data together to provide insights across our businesses to understand that consumer better. And so -- and we're actually seeing really positive outcomes, early wins already, including 120 e-commerce tests that have been launched. And these are teams that are testing a lot of new concepts on our sites and trying to find what's the fastest way that you can get to the first page on Amazon more often, how do you increase your click-through rate, how do you increase your conversion rate once they click through. And the fact that we have large-scale brands and lots of transactions in that speed, that gives us more information. And when we find these insights and when we scale these insights, that has a bigger impact on our business. We also -- Nick also mentioned that the Moen app rating increased by 33% in the first -- within the first 8 months of the teams working on it. And then $8 million in indirect spend has been found with that consolidated spend cube that I just mentioned. And so I mentioned a lot about digital. I think it's just important to take away 3 key things, which is we find incredible enterprise value potential through our digital transformation. We are leaning in as an organization to connect, to learn and to change at the pace of the market, and that we are going to be the industry leader in digital in the next 5 years. Now before -- I think we have a short break. I think it's going to be a 15-minute break. And after the break, we'll welcome Nick back up to the stage. He's going to talk a little bit about our Fortune Brands Advantage, specifically as it relates to our global supply chain. He'll be joined by Ron Wilson, our Chief Supply Chain Officer, and he will be sharing about our world-class capabilities. Thank you. [Break]

Perfect. Well, welcome back. I'm here with Ron Wilson, our Chief Supply Chain Officer. We're going to have a little bit of a Q&A session. But before we get to that, I'd just like to give a quick reminder to the extent that you have questions, [Operator Instructions] But as I kick this off, you heard both me and some of the others talk today about the importance of our supply chain. At the end of the day, we are a manufacturer. We have a hugely complex global supply chain that we manage. I think that we manage it incredibly well. Yet we see opportunity to do even better. And that supply chain not just serves our customers, keeps them in stock and brings our innovation to life, but it fuels our growth, right? It is the productivity engine to continue to fuel our growth. So I'm very excited to have Ron Wilson up here with me.

And Ron, just starting out, why don't you just tell us a little bit about your background and how you came to join Fortune Brands in this role?

Yes, sure. So engineer by trade and ended up with GE for over 30 years and really came up in that career through operations, manufacturing, all the jobs that you would think of. Lighting business for a lot of that time, a lot of consumer products work on the appliance side, got to lead operations for lighting, while we were in the big industrial change from incandescent to LED lighting. And all the implications that came with that. Went to corporate for a while on the sourcing front and then ended up in industrial solutions, which was our electrification, switchgear, circuit breakers. We got divested to ABB, helped integrate that. And 7 months later, came to water innovations with Fortune Brands 3 months before COVID hit. So even though it's been 3 years, it's feels more like dog years like 14 years or something, I don't know. But it was -- but had the opportunity to really lead the team through COVID and what -- all the implications that came with that.

A lot of disruptions in lighting, hopefully, we're the ones doing all the disrupting now. So good to be on this side. Tell me a little bit about your role now as Chief Supply Chain Officer of the integrated supply chain and some of the initiatives you're most excited about.

Yes. So if you take a look at Fortune Brands Innovations, so we handle everything from raw material to manufacturing and getting the product out to the customer. And we source from hundreds of suppliers literally around the globe. We manufacture across 4 different continents. We distribute equally among those continents in several countries. And so everything is involved in A to B in getting to the customer. In terms of what excites me about what we're doing now with Fortune Brands Innovations and bringing all those businesses together as an operations person, you love the idea of can I have less input and get more output. One of the things that we're seeing very early on is we've built what I think is an incredible team in operations, we're able to take the best of the best talent, let them work across the enterprise, and we're seeing the productivity right off the bat. We're going to get double-digit productivity on the people side, but we're also going to elevate the game across the board because we're going to take best practices that I've seen that we've all seen across the network and how do you go with higher speed and push those across the entire Fortune Brands Innovation network to kind of up the game in total. So whether it's digital, whether it's factory automation, whether it's data analytics, we can take those pockets and just accelerate the impact we can have across the broader space.

Well, I'm so excited to be able to drive that best-in-class manufacturing culture, that lean culture through an integrated organization, which I think is an untapped opportunity for us. As you think about the efforts and the initiatives, would you say they're more focused on driving cost out or driving revenue?

So the short answer would be both, in a sense, right, operations, we're always going to be focused on driving cost out, getting efficiencies, both in terms of the number of people it takes to do it as well as getting material costs out, getting efficiencies in our factories, getting efficiencies in sourcing. But I'd say the other piece is, right, we want this to be a competitive differential for us in the marketplace. We want supply chain to matter. A great example, we're building a new distribution center with Water innovations out in Vegas. That DC as opposed to just -- and we're doing it, we have a DC there. We need more space because of the growth that we've seen. And it's not just duplicating what we have in a bigger space, it will be a highly automated distribution center. And so what that does for us, yes, it's going to get cost. It's going to drive resiliency because we won't be as dependent on the labor market. But the other thing it's going to do is it's going to open up channel opportunities for us that we can deliver efficiently as you think about direct-to-owner, direct-to-consumer that we see as potential growth. So we're building that DC to be able to handle that different channel to enable that revenue. Another quick example, which I think is where we can bring relevance, we had one of our large customers in from Water Innovations. So we kind of walked down through what our strategies are, what we're doing. One of the things we shared with them is that through the 2 years of COVID, we dropped our accident rate by 50%, even while we were hiring like crazy, onboarding people going through this chaos, and they stopped, and they said, "Hey, can we ask you, how did you do that? What was the key things you changed in culture? Can we talk to your distribution team because they ran tons of distribution centers across the country." So it was relevance, not just in terms of getting them product but how we do it. And that stickiness and whenever we can create that with a customer, that's leveraging world-class operations to grow the business also.

Yes. And it speaks to those deep channel relationships because you establish those, you're worth more than just what you do from yesterday, you're actually driving value into their businesses. And I think we saw that too. I mean you -- but [indiscernible] opening the Columbus distribution center in the midst of COVID, underbudget, early and the fill rates for our customers have been spectacular. And I think that did drive revenue because that led to share gain.

Absolutely.

As you think about the digital strategy that John was talking about, how do you see that playing into the supply chain? And are there any milestones or sort of early metrics you could share?

Yes. So I think as you look at digital, it will impact us across the board, whether it's how we source product, how we manufacture product. And those are kind of the easy ones that people think about how you distribute product. And what we found right across business, there's places that we're doing some good stuff now is how do you drive that, how do you drive what we have across the enterprise. So one example, I will give with that is in our planning process and you talked about the customer that came in and I've never had a customer do this in like 3 decades, right? They showed us -- our service metrics to them were not necessarily where we'd want it to be, but like mid-80s on first-time fill, the rest of the plumbing category is at 40%. And it wasn't just that we worked harder as we found ways to work smarter through digital enablement. So what we ended up doing, we built with our data scientists through a machine learning program that literally looked at 200-plus data points, external and internal that regenerates every month as they draw more data, it goes back 17 years, and it just models out what's happened with demand. Because we knew as supply chains got longer, shipping times got longer, it wasn't good enough to forecast out a couple of months. We ought to be looking what's the market doing 5 months from now, 6 months from now. And we found that this was more reliable than anything that we could come up with on spreadsheets. And so we leaned into it, and we took steps to get out in front of the growth that we're seeing. I think it's one of the reasons why our customers consistently told us, well, you're 6 months ahead of the competition. It was really that digital enablement that we used on the forecasting side. So we're taking a look at that machine learning that process saying, how do you put that into the other [BUs] now, so how do you take what we currently have and go leverage that. And that was an example of digital enabling growth and market share gain and customer success.

And what's remarkable about that is you built that AI because you needed it somewhat organically, the ability to now put it into a digital factory just have it accelerate and constantly iterate and improve will be exponential. Could you touch on a little bit in the sourcing arena in particular, how is the digital technology, the enablement helped us in our sourcing efforts?

Yes. So when you think about Fortune Brands Innovations, right, sourcing for us is key because the amount of material costs that we have and that we deal with. So if you think about buying in the ballpark of $2 billion of direct material, you think if I can get a 1% gain, it's huge from a margin percent, right? If I can get 1% better in how I do that. So we've been doing for the last 2 or 3 years, what we call next-gen sourcing and different techniques. Like you said, I talked historically, you [indiscernible] and give me 3% do this. And so we've gotten some good gains from that on the Water Innovations. We're building that in security and in other places. The one thing now that we want to get to is this should costing. So should costing, we've got a software program that we use. We did this with injection molding on the Water Innovation side, and we'll spread this out quickly. You kind of build this digital factory, you feed it, [indiscernible] parts you're getting, and it comes out and says, based upon the tolerances that you have, the size of the part, the country it's built in, this is what it should be costing your supplier to make. And one of the things that we found was there are some pieces that it says, you're getting a pretty good price. Other pieces, you ought to be buying this us for 20% less. So what that does for the sourcing leader, it allows them to use their time a lot more effectively. They start to focus in on the places that there's the biggest opportunity as opposed to spreading their time out over everything. The other unique thing we found, it wasn't that, gee, these are bad suppliers, right, it was with injection molding, some suppliers were better at different types of parts than others. So literally, you could move parts between 2 suppliers, get double-digit deflation, they're happy, their volume is still there, but you're leveraging your suppliers in what they're good at better because of the data that we were able to get out of that should costing.

It's game changing. It's game changing. [indiscernible] any other areas where you think the digital factory is really going to drive value for the supply chain organization in this?

Yes. So I would look at it in a couple of ways. So like digital factory, John talked about what we were able to do with taking all the data from all the different businesses, bringing it in on indirect sourcing, get that spend cube. And again, now it gives more tools in the toolkit to our indirect sourcing team. This is I can look out at total, total buys in certain areas. I can look at freight in total better than I was able to before. And we'll get those benefits. John was talking about $8 million on there. So we're going to leverage that. We're looking at can we do that on direct material as we purchase also. I think the other one you get into the factories, and this is where it will get fun as we take it to the next level. I was in our plant in Nogales for the first time. There's one to make safes, the other that makes locks there. So in the safe factory, they're doing big injection molding machines, and they have built sensors on the equipment, looking at pressures, temperatures, recording that, looking at trending on that. So their first phase is they're just giving feedback to that operator that's working the machine so that they can be -- do better, smarter with it, right? So the next part of their journey is how do they make that a closed loop system. So as they start to see things move, it will talk to the machine, right, and tell it go increase pressure on this point, go increase the temperature on this. So that's Phase 2 that they're looking at. Phase 3 that we'll get to is give me predictive maintenance now. Start to monitor amperage on motors, start to monitor when this goes to a certain point and get out and fix the equipment prior to it breaking. And as they go on that journey, right, there's implications that we can use in Fiberon, which is a very process-centric business. Shaws sinks with ceramic processing, Victoria and Albert tubs. So leveraging that -- and that's -- you look at that, and it's really front end -- front-edge digital enablement in the manufacturing environment. You're like, "Well, get this right, and we'll just cookie-cutter this across the network".

You talked about your GE career and obviously left them and given that it's been such a quiet time geopolitically, [indiscernible] the opportunity to enter a new phase of your career manager global supply chain. Do you want to talk for few minutes on just how you think about volatility, the geopolitical challenges, resiliency and some of the things that we're going to work on?

Yes. So no doubt, as you look at supply chain over the last few years, just -- I think we've learned anything, the uncertainty is not going to stop, and geopolitical risks are not going to stop. And how you adapt and how agile you are to those changes will make the difference if you're in front or behind, right? So I think the good thing is, as I look at -- at Fortune Brands, we -- it's not like we're starting from ground zero, we've been at this for 3 or 4 years, at least, as tariffs started and different things. So what I'd say, look, we do -- we have a lot of suppliers in China. Certainly, a volatile situation with COVID and lockdowns and all the geopolitical side. The good thing is a lot of these suppliers we have great relationships with. They're very smart owners, and they get the geopolitical risk. So they have gone with us and we have said, we need to diversify. Cheri talked about disposals, right? We went to our disposal supplier. We knew we wanted to grow that category. They're going to need to build a new factory, so we don't want you to build it in China, right? So they went to Cambodia. And what that did is it gave us great flexibility, great start-up in Cambodia, but when we saw a surge, we leveraged the China factory too. And it was in 2 different places. And what -- I think historically, we used to think about dual sourcing is the name of the game, right? As long as you got 2 suppliers, that's great. But now we're thinking more about dual geography. It can't be 2 suppliers in China, that's not going to be good enough. It can't be 2 in the same country. So we are putting a team in place and really working on more near-shoring opportunities both in terms of finding existing suppliers that are there in certain places as well as maybe taking some of our current partners with us to drive that. And then I talked a little bit about automation that we're doing, I think, resiliency -- the other thing that we learned during COVID, the labor market in the U.S. has changed, right? It's harder to hire. It's harder -- people aren't loving the factory jobs as much. But we've looked in some of our places, Fiberon, I'll use this as an example, some of the toughest jobs that they had the highest turnover, the team did a great job at automating those jobs, right? So you're less dependent on labor and you're taking out the toughest part of the jobs out of it. And the jobs that are left are those that are more rewarding for people to go in and work day in and day out. What we're doing in the Vegas DC like I talked about. Again -- so it's -- we know we need resiliency on the labor front, too. And so we want to build agility. We want to build speed. We've done a lot, but there's definitely more to do for us in that.

Well, Cheri talked earlier about our deep customer relationships and our channel relationships and how we can use those to really unlock innovation and growth. You're right to touch on those deep supplier relationships because those are the partnerships that we are leveraging to really make a more resilient supply chain. It's not just about scratching them and going finding new, it's building on those partnerships. And adding that automation, which I think you're right our team is delighted and they don't have to do those harder jobs. I touched on in my talk our new aligned operating model and structure and how we really want to unlock both growth and productivity. What benefits do you see now that you've been in this for about 3 months, and you're starting to bring that team together. How do you see that unlock?

So I think on the operations side, for us, it's really taken the Fortune Brands Advantage and moved it from PowerPoint to real world, right, as we looked at combining that organization. I think people are seeing that, yes, we're getting the productivity. But the other thing that was there as people are looking at what we're doing across their organizations, transportation is a great example, right? So transportation, we don't need 5 different transportation teams for -- using one transportation team that thinks about ocean freight, outbound freight. And so not only are you going to do it with less people, you start to look around the BUs and there are certain ones that are doing certain things better than others and you start to align on that and you're going to get better results. And you see the team just going like, oh my gosh, this is -- yes, we're getting some good stuff upfront, but what we can do over the next 2 or 3 years is amazing, right? Just by taking what we're already doing [ some we're ] not by creating something new. So I think that part is extremely exciting for myself and the team.

Well, I think back to even when we acquired ROHL and found some things that they were doing better and less expensive inside of their business. And yes, we played that through our water business with the opportunity to play across the whole portfolio quickly and unlock those, it's just an easy example of how that comes to life. So how do you define success?

Wow, that's a big -- I'll take it -- you just mean for supply chain, not for life...

No, wherever you want to go with this Ron, it's yours.

Sure. So if I look at supply chain, I'll take it from that route, right? How do we going to define success in supply chain. Supply chain is really about outcomes in my mind, right? So I'll start with outcomes for our employees, right? And we have more employees in supply chain than anywhere else in the business. As you look at our manufacturing plants, distribution, the people that make the execution pieces happen, right? So we want those jobs to be more fulfilling. We want them to have the right tools. We want them to feel more successful and energized by the jobs they're doing. And I think we're absolutely going to see that. The second piece, we do have to get cost. We are a manufacturing company. We're operations. That's what we do for living. And we'll accelerate, I think, that cost out, not just on the people side, but as we look at -- we have a culture of continuous improvement and material cost out, manufacturing cost out, I feel like we're going to be able to accelerate that by 25% over where we've historically been by leveraging the Fortune Brands Advantage, better ideas, all that stuff. Third, we'll move faster with being 1 team. And then finally, I'd say we're going to get better results for our customer. I mean at the end of the day, I believe wholeheartedly, our customers are going to feel the difference, and we are going to be a competitive advantage for this company as a supply chain.

Excellent. Right, actually almost out of time. So final question. You are a talented musician. During COVID, you lifted all of our spirits with online concerts. I think that was -- I'm not sure I have a lot of favorite COVID memories, but that would be one of them. Are we going to get to see you perform for the group at some point?

We could probably make that happen at some point. It probably will not be today. [indiscernible] nobody wants to hear it today, but no, it was something that was good for me to do too during COVID, it was just one of those things that helps your mind, be better, and I think people enjoyed it too.

All right. It was wonderful. Well, thank you, Ron. I think we're just sort of scratched the surface of some of the things you're doing. But hopefully, the conversation gives the group here some insight. And with that, we've discussed a lot of words and a lot of numbers, but I'm going to hand it over to our esteemed Chief Financial Officer, Pat Hallinan, who's going to come up here and round out some of these numbers and talk about where we're going.

Great. Thanks for the opportunity.

Ron, it's very disappointing to hear that you and Nick aren't prepared for your some other's brothers audition today. That's very disappointing. Well, thank you. I am going to start by highlighting our value creation track record. I think it's important to start with what we've done over the last decade and then attach that to where we're going from here. We are a brands innovation and channel management leader. We have consistently driven growth and are a growth company. You could see that we have grown reported sales at various intervals over the last decade at double-digit levels. And we have grown organic sales consistently at high single-digit CAGRs. This means acquisitions have added 300 to 500 basis points to growth, accounting for that difference between the reported and organic growth. And represent every bit of the reason we pursued the opportunity you heard about last week. But more importantly, we turned this growth into rewards for investors. We have a proven track record of growing profit faster than sales. We use our Fortune Brand's Advantage capabilities to expand margin and drive profit growth ahead of revenue growth. Over the last 3 years, you see we've grown net sales, operating income and EBITDA at double-digit CAGRs with sales growing at 12% and op income and EBITDA at 15%. As a Fortune Brand's Innovations leadership team, we expect to continue this track record of exceptional value creation. As we look forward, our refined portfolio is designed to continue to produce exceptional growth and margin expansion. The portfolio is aligned against categories with exceptional growth potential and long-term secular tailwinds. We have designed an Advantage business model, and we keep adding differentiating capabilities to this business model, including the digital capabilities that John and Cheri and others have talked about today. This year, a very challenging year with the separation going on would have been a very convenient year to pause those types of activities and investment. But this year, we made a $25 million investment in long-term growth capabilities that we expect to continue to deploy. The separation of the cabinets business enables us in a more focused manner to get leverage from our capability deployment and our capital allocation. We believe the separation sets us up to accentuate this growth track record that we have. More importantly, though, let's talk about where we go from here. '22, we experienced solid share and margin performance. We expect to deliver margin expansion in '22. These are the '22 outlook for Fortune Brands Innovations. These '22 numbers are completely consistent with the guidance we gave on the third quarter call. So nothing new there, nothing intended to be new there. For '23, we are preparing our teams and our cost structures for '23. Our focus will be on margin and cash generation though we are going to be committed to keeping our business positioned for growth over the long term and margin expansion. So we are going to, even during what we expect will be at '23 that presents some challenges, make sure that we're positioned to support our key priorities and keep our brands healthy. We'll provide more specific guidance for '23 on the fourth quarter earnings call. You should know whatever the market conditions are then, we'll still be positioned to outperform the market. And right now, if we looked at '23 and said, if the market declines are in the range of mid-single digits or better, we are targeting decremental margins in the 20% to 30% range. But more importantly is where we go from here. And where do our strategic plans in this refined portfolio take us from here. Our longer-term value creation objectives through the cycle are to grow our top line at a CAGR of 6% to 9% relative to a market CAGR of 4% to 6%. So think of that as U.S. R&R in the 3% to 5% range. U.S. new construction in the 6% to 8% range. That's how we get to that market. We expect to drive growth in our water and outdoors business 7% to 9% CAGR, and our security business at 3% to 6% CAGR. On a consolidated basis, we expect to drive towards an operating margin of 20% to 22% from a base of 17% today. That's a 300 to 500 basis point improvement. We get there with the water business at 25-plus percent margins. And with the other 2 businesses, outdoors and security in the 18% to 20% operating margin range. And we expect that same 300 to 500 basis points of margin improvement to drive EBITDA to the range of 23% to 25%. Our operational excellence and value creation track record underpins these targets, and we will drive to these objectives. Five, breakdown and illustrate for a moment where this margin improvement comes, from a basis of 17% operating margin today where we'll end this year. We expect to drive the 300 to 500 basis points of margin improvement from 4 levers from continuous operating improvement; from footprint improvement, meaning where our factories and distribution centers based and how do we leverage them; through continuous improvement to SG&A productivity; and through volume leverage. Importantly, volume leverage is only about 25% of this equation. So this is not a margin improvement story that is hinged to very, very bullish volume assumptions. This is a lot of self-help and continuous improvement. And our track record is that we achieved this level of margin improvement. Also part of this is a set of SG&A improvement. Over the next 3 to 4 years, Fortune Brands Innovation is going to be targeting gross SG&A improvements of about $50 million to $100 million. Now we'll invest a chunk of that back for growth. So probably producing a net SG&A productivity improvement of $50 million to $75 million. That won't all be in our corporate line item. A number of people today have kind of come up to me and want to know about the corporate line item today. Those of you who are familiar with Fortune Brands Home & Security, we produce a corporate line item in our reporting. This year, it will be around $130-ish million. I would say, going forward, for just next year, it's probably in the 110, plus or minus 10. Next year, we'll try to drive in the corporate line item somewhere in that $10 million to $15 million improvement range. But that's not the only place where we have SG&A. We have SG&A across the business. So as we give guidance for '23 and as we talk to you beyond '23, we'll point out where you're seeing that SG&A improvement. But SG&A improvement is important to invest in growth, but also such that this separation doesn't just result in dissynergies of SG&A. In terms of capital allocation, consistent with our track record, we are going to be very thoughtful and active allocators of capital. Our go-forward capital allocation priorities will be very consistent with those of our past. Our top priority, because it's such a high return opportunity for us is to invest in our own organic growth in terms of innovation and capacity and brand. We will carry out targeted M&A in particular, in areas where we have powerful distribution and ops and supply chain synergies. And then finally, we'll return capital to shareholders in the form of dividends and opportunistic share buyback. In terms of dividends, today, we're not announcing an official dividend for FBIN that our Board will meet on that next week. But you can expect Fortune Brands Innovations to have a dividend and to have a payout and cadence of dividend that is similar to that of FBHS adjusted for the EBITDA that goes to MasterBrand as they separate. We expect to have about $4 billion to $6 billion of capital to deploy. We remain committed to maintaining an investment-grade balance sheet. Given the higher margin and lower volatility of the Fortune Brands Innovations portfolio, we expect to be able to do that with a higher net debt-to-EBITDA leverage than we've traditionally had. For those who've talked to us about this in the past, we've tended to keep our net debt to EBITDA around 2.5x at FBHS. We think we probably could push that towards 2.7, 2.8 and keep the same level of investment grade balance sheet ratings. And most importantly, this capital deployment will provide that catalyst of accretive acquisitions that you saw generated 300 to 500 basis points of growth on top of our organic growth. In terms of our recent M&A activity, just to give you an update on that and build on some of the things that both Nick and John touched on. So we have agreed a contract to acquire some very exciting complementary growth assets. And we've done it at a very attractive multiple, net of tax benefits below 8x, roughly $90 million of EBITDA. These assets have strong synergy potential with our House of Rohl, outdoors and our security businesses. By roughly 2025, 2026, we expect those synergies to be producing like $7 million to $15 million a year of incremental EBITDA on top of that $90 million base, and we expect to grow those synergies from there. In 2023, we expect the acquisition, assuming it closes, to be roughly EPS neutral and that's with $0.16 to $0.17 of purchase accounting amortization per share. Of course, the deal is contingent on a legal proceeding, a legal proceeding surrounding the ASSA's acquisition of Spectrum's HHI assets. The best we can tell is that, that will resolve itself around the second quarter of '23, and that's about the time that we would expect to close shortly thereafter. Then a separation update. We are very much ahead of schedule, as Nick said, that's what has us all here today. But 2 weeks ago, our Board officially approved, which is the final internal legal step to consummating the separation, our Form 10 went effective last week. The separation itself happens with the distribution on the 14th of December, and regular way trading will start on the 15th of December. The MasterBrand leadership team and Board are in place. It's an exceptional team. Many of you are probably staying this afternoon to hear from the leadership team this afternoon. We believe very, very strongly that MasterBrand is well positioned to be a very successful public company. And as it separates from FBHS, it will go out with a balance sheet where the net debt to EBITDA is about 2.2x. And finally, to conclude, I and the rest of the Fortune Brands Innovations leadership team are very confident in the future and in our ability to take the capabilities we have built and the refined portfolio of assets that we have to continue our exceptional and proven track record of value creation. We are rapidly executing our winning formula. The new org structure and our Fortune Brands Advantage capabilities are critical to us efficiently pursuing a path of continued value creation. We have a really strong team, a team that has demonstrated its ability to perform through cycles. And while '23 may present some challenges, we have every confidence that we're going to keep our brands healthy and keep our priorities in place and launch forward from there to pursue the growth objectives we reviewed with you today. We're a very passionate team. We love our brands and our people. We really thank everybody here for their interest in and support of Fortune Brands in the past and going forward. And we really look forward to your questions today and to continuing our work together. So with that, I'll pass it back to Dave, and then we'll get ready for your questions.

We have a number of questions submitted through the Q&A platform. So thank you for that. While we're getting the stage set, if there are additional questions, please go ahead and have them submitted, and we'll cover them with the group. I have about 30 minutes or so for Q&A before we break for lunch. This is it. So got a good list of questions. Why don't we start, Nick, with you, a lot of questions in around the new structure. Can you share with us what you're most excited about? And how you see the structure really driving the accelerated growth and margin potential that Pat shared in the organic targets?

Sure. What I'm most excited about growth, growth, growth and growth. As Pat pointed out in some of the numbers we went through, we've had a phenomenal track record of growing above the market. And I said this humility because it long exceeds my tenure. There are not a whole lot of companies that can consistently beat the market year in and year out on a multi-decade basis, which this group has done even prior to being an independent public company. So very proud of that. However, still see plenty of opportunities to accelerate the things that are working inside of the business. And I think as Cheri well knows, right, a lot of those will get stuck in one place and perform in one place, and we sort of internally negotiated to apply those elsewhere. I think this is a major unlock for growth, both in the ability to take those things and play them very quickly across the portfolio, but also to take some of the productivity that Cheri and Ron and Pat just referred to and redeploy that into our innovation engine, into our talent engine, into our brand engine. And so at the end of the day, when I think about the structure, it's all about growth, it's about maintaining that customer intimacy, the consumer intimacy that leveraging our scale. And finally, unlocking the things that we do really well across the portfolio at pace.

And Ron, a lot of questions on supply chain, so a lot of interest coming in. As you think about Fortune Brands Innovations post cabinets, can you help the team or the group understand a bit more of the opportunities that could be available across the entire network that maybe weren't unlocked before?

Yes. I think what I would say is a couple of things, right? I look at sourcing even though these are different products, and in some cases, we don't have that much overlap, but sourcing is a process. Sourcing is a process about giving your team the right data, it's about doing the right analytics, and it's about spreading that fast, so that they can do well within their commodities that they're buying. But the second thing is there is some overlap that we're going to see. And so we will have one metals commodity leader. And whether they're buying for doors or whether they're buying for security or for water, they are now going to have a larger portfolio of suppliers that they're going to know. They're going to figure out strategically where to go, and it will help us accelerate other places where we may want to nearshore and maybe securities using the supplier that we didn't know about on the water innovation side and as opposed to having to go out and seek and find that supplier there it is. So I think if you look at sourcing as a process and some of the things that we can spread fast, we're going to accelerate deflation, as well as just supplier awareness and be able to leverage higher volumes in some cases, over that supply base.

I think as a follow-on to that, Pat, maybe you can help the audience understand how we think about productivity, savings, targets and continuous improvement targets as we kind of model our financial growth.

Yes. I mean, we do our annual planning, our traditional algorithm, and these will remain part of the go-forward algorithm is that in terms of materials inflation and things like that freight, we try to both through continuous cost improvement predominantly in the operations and distribution world and in pricing, try to cover those. And then we try to drive continuous improvement in operations in the SG&A framework to offset the labor inflation that we naturally have in our business. But in addition to that, with this new aligned structure where we're effectively removing a holding company type approach to organizing our business and trying to drive much more productivity and capability deployment through the organization more quickly, on top of that, we're going to be driving $50 million to $100 million of SG&A over the next 3 to 4 years. We'll probably invest some of that back in digital stuff. But that is on top of what would be our normal traditional continuous improvement approach.

A handful of questions around the recently announced acquisition. So maybe, Nick, starting with you. Security, historically, has been less of a focus, right? We talk a lot about water and outdoors. This acquisition brings a lot of opportunity for security. Can you talk a bit about how this acquisition is going to fit in the portfolio? And what are the key kind of growth and cost synergies that we'll be pursuing?

Yes. I'll take on a couple of vectors. Firstly, you look at the security business in and of itself. And I think if we hadn't taken it to the place that Cheri was showing in part of her presentation, you're right, it's padlocks and it's [indiscernible] where does this -- where is the connectivity there? What we've done is we've looked at it and we said, well, we got a world-class brand. I mean a world-class brand and a market position. And we have an opportunity to drive brand, to drive innovation, to drive that margin so that we can reinvest in the business. And as we look at the places to do that, they really coalesce around keeping that core really healthy, but investing in the connected product. And where we found the connected product has had the most play is in the commercial space, interestingly, right? And so products like lockout/tagout, products like the MIBOR platform you just showed, where it's not just the ability to sell 9,000 or 10,000 locks, it's the back-end system that allows a customer to manage all of that together, right? And so you start to make investments in these back-end systems in the technology that can power that. Well, if you look at this acquisition, Yale and August, perfect fit, right? We've agreed to acquire the U.S. and Canadian residential business of those, but it comes with a really, really powerful technology core that we can start to leverage not just the IP but the know-how, the software engineering, the firmware engineering, the talent, the scale, doing the ability to simply just spin boards and source boards and simplify and take cost out and get leverage across all of our connected products, not just in security, but in the water ecosystem as well. And so that -- it brings a lot of advantage that way. The other spot is it does then connect security more tightly to right, we do have, as you heard, the market's leading fiberglass entry door, right, and the leading brand in that space. And I would guess that not all doors are going to be dumb doors forever. I mean many of us don't even know where our keys are. We enter via garage. We enter via keypad. And today, these things are bolted on. Tomorrow, they're truly integrated and connected. So we have an opportunity to build that system, which, frankly, is an opportunity we're going to pursue regardless of this acquisition, but to do it with the power of that platform and the power of the brands that come along with that and create that connected space, it can be hugely impactful.

Great. And I think to build on that, Pat, can you just educate people on the organic targets that we presented, do they include or exclude this recent deal? And then what's the time frame that we think about with those targets?

Yes. The targets exclude M&A, so they would exclude this recent deal, their organic targets. And there are targets that run through the cycle. So through a housing cycle, so typically over like a 3- to 5-year period or thereabouts. So that's how you should think of them.

Okay. Thank you. A couple of channel questions Cheri, for you. A lot of excitement around the Moen smart water network. Can you help us understand the work the team is doing to drive consumer adoption? And can it further penetrate in the consumers with our products?

Yes. And so first, I'll just set the stage by saying our adoption has been limited only by chip availability. So we really had to slow down the adoption last year. And now that we have the availability, we're doing things behind the scenes to quickly be able to go. So on the builder side of the business, we're putting spacers in so they can go back in and quickly put that product in. But on the retail side, it goes back to that water alarm. People looked at this, they didn't know what leak detection meant, didn't know why they wanted it. When you really put it under that theft and fire and then water alarm it comes to life for people and it's a little bit more approachable. And the other thing is, is the partnerships. You go into one of our partners today, and you'll see that this is compatible with Google. It's compatible with Apple. It's Alarm.com. I mean, on and on the partnerships, the Nest. And so this is with those name brands and people are going to learn more about kind of water security, which I think is really important. The other thing is, is we learned that, that main brand is really important, but some people are kind of scared to take that first step. So we have those water detection devices that we talked about in the sump pump. So some less expensive ways to enter into that smart water network. And then we're going to constantly try to sell you on the whole network as it comes to life. So excited about the opportunity that we have there and what's in front of us.

And Cheri talk a little bit about the plumber outreach that we're doing.

Yes. And so Dave, great point that I missed there. I mean our plumbers are so important to us. And as I talked about having these spacers that a DIY customer, a do-it-yourself customer could do. But if you wanted to go in, if you had a leak of some sort or you have a plumber there changing out of faucet, we want these plumbers actually in the home selling it. We also want to make sure if they buy it at one of our retailers or offline, that there's a plumber that can come in and install it. So we are doing outreach, making sure plumbers are behind this product. And probably the other piece that, that comes into it is insurance agencies have been great partners for us here. If any of you have built or bought a new home, you might actually need to have this before they'll give you an insurance policy, or in different states, they're actually offering you a rebate on your insurance because you have this because it's just proven to save that money in water leaks. So not only is it the Pro, it's different avenues for us, advertising the brand, Dave.

Great. And Cheri, there's a recurring revenue component to Flo today, right? You can pay few dollars a month, you get upgraded data and insights into your home, where else in the portfolio do you see the opportunity for increased service or recurring revenue going forward?

Yes. So extremely excited about what we're doing in water and you're already seeing it in security. So when we talked about MIBOR, that opportunity for them to use data behind the scenes and get a reoccurring revenue is really important. Nick talked about, lockout/tagout. I mean think about those clipboards, where somebody was going through and checking each of the locks, it's a very manual process that we're bringing automation to and being able to get those data and analytics and the reoccurring revenue model that comes with that. And then I think Nick just hinted to it, you think about a door and rather than all of this being bolt-on, how is this built that you're actually able to go in to your house, have it look esthetically pleasing, but then able to give out codes to different areas and have it there, too. So I see it across water security and outdoors.

And I'll just add, I think we talk about investing in data science, we've invested pretty heavily in data science and it's one of those things you sort of got to put a toe in the water and make that investment and start to get the information back to even start to learn how you could monetize it. But it's been astounding what some of the use cases are for how people are using our products and the data that comes back. I mean we learned with Flo by Moen that people were installing it as a nonintrusive way of checking on elderly parents. Did they get up in the morning, did they turn the shower on, is the water flowing? I know they're good. How can you help people better understand what's going on in the home by using that data. Similarly with lockout/tagout. I mean it's a safety system that allows people to make sure energy sources are turned off before they access an energy source in the machine. We're the leaders in that space. And as you automate and digitize that, you're going to find out information about people's productivity, their work styles, standard work, what's working/what's not working. And so again, it's early days, I think, as we kind of dip our toes into this data science space and analytics and what we can do with it, but over time be very powerful stuff.

Great. Let's shift gears a bit and move to Fiberon. And so we showed a slide about the channel transition from Fiberon with -- in Fiberon from wholesale to retail. And the numbers behind this slide imply double-digit wholesale growth in low single-digit retail growth over time. Can you -- Nick, we'll start with you, one, provide a bit of context of what was going on in the business during that period? And then how do we feel about that channel mix and where are we going forward with Fiberon?

Sure. Well, I'll start with the big picture since, Dave, you might be looking for the fly in the ointment. The Fiberon growth obviously has been spectacular, right? And we have been very choiceful in how we've built that growth. And so as you will recollect, when we acquired Fiberon, it was really an entry-level deck board, mostly with single customers. And we had really perfected that entry-level deck board, which is very, very hard to do. I think as people familiar with the category has seen, as others tried to enter that space, the engineering behind that is very challenging. But that was the space that we own. Where we saw the opportunity was to move up market and into wholesale. Those things, by the way, go hand in hand because as you move up market, there are more SKUs, more variability. It tends to be stocked at wholesale. You could special order it through retailers or through wholesalers. But that's where we saw the opportunity to grow the brand, to grow the margins and to get that top line going. And so that's where we really focused our limited resources, and strategy is all about choices, right? And so we chose to grow it in those channels, but not just the channel exposure, it's the exposure to the higher price points and the richer mix. And so that's what you're seeing in the numbers where that kind of entry level was less of the mix as we really focused on that. Now going forward, there's still more work to do in getting that mix absolutely nailed in bringing the next generation of deck board to life. If you think about that board today, I'd say we're in sort of Gen 2.0 when people figured out how to cap the composite and make it look beautiful. We've got some exciting ideas about 3.0. And having now secured a much broader channel exposure, right, which had to be the priority, now we would then be able to play that innovation across all channels. And so we feel really good about this [ flowing ].

Yes. And I would just quickly add there, Nick, it goes back to that white space exploration. We know what the trends are and we know what the unmet needs are. And so when we look at this, there's an opportunity to play at a lower and a higher level and really kind of own that deck category with some features and benefits that consumers are willing to pay for and also making it more attainable and usable in a DIY format. So excited that we continue to look at that white space and those features and benefits and category management to really bring life behind where we're going with this category.

Great. John, a couple of digital questions coming in for you. So one, can you talk a little bit about just the relative size of the digital investment that we're making today. And then with respect to digital products, how are we bringing the consumer along the journey and making it an easier sell on the R&R side for digital.

So in terms of the investments that we made on digital, we spent about $25 million in incremental investment this year on digital and we're going to scale that appropriately as we see. But I don't want you to hear that number and think we spent $25 million on an ERP implementation. That's not digital transformation for us. In fact, we are spending some of those dollars to defragment our tech stacks to get more out of our technologies. And a lot of these -- a lot of this investment is actually already having positive ROI as we talked about with the tools and indirect sourcing. And so there's a lot going on with digital. There's a lot of setting up of new teams and setting up of data teams. We're trying to become a new -- not just a digital products company, but a digitally-oriented company where we can really do things, like Ron was saying, we're -- it's kind of hands off the wheel. It's let the data run the show. And so we're retooling and we're investing there. In terms of how do we make it more accessible to consumers. I think -- of course, we are marketing ourselves better for our products. We're making sure that they are available at where all the DIY consumers are. But we're also making sure that they're having a great experience with it. That's the best thing that you're going to do for digital product is to have great ratings and great experiences with those digital products. And that was actually a journey for us: from a company that made products to a company that makes products that has continued services throughout the life cycle of those products. And so we have a dedicated team, both in the factory that's just working on the connected products, but also on the software and making sure that they are addressing any issues with the products and making sure that they are getting high app ratings, and high app ratings really equate to just delighted customers. And that's what they're 100% focused on and that's the thing that's really going to get really -- get the ball moving in our connected products.

Great. Thank you. Pat, a question for you on margin opportunities. So the guide for our financial targets implies a greater opportunity within Outdoors & Security than at Water Innovations. So the first part of the question, how do we think about the Water Innovations margins? And is there more improvement to come there? And then second part, what are the real drivers behind the Outdoors & Security's margin?

Yes. And first of all, I'll start with our track record, right? This has been a pretty tumultuous last 4 years of a total FBHS environment. We've delivered over, by the time we get to the end of this year, over 50 points a year of margin improvement on average over those 4 years as FBHS. So it's very much a commitment, and it's a commitment to both keep our brands and our capabilities in a winning position but to reward shareholders. I would say, as you try to put each of those margins into perspective, it's all about how do we take the assets we have and the competitive dynamics in which those assets compete and give investors the best mix of top line and bottom line growth. The fact that Water is already at a relatively high level, will probably finish this year around 24-ish percent and go to 25%, it's not because it couldn't go higher than 25%. And it may very well go higher than 25%. But we're always going to be striking the balance of keeping the brands healthy and keeping the innovation at the leading edge. And it's been long industry leader in terms of both growth and margin potential, and we feel like that's a good algorithm inside of the competitive dynamics of that industry to keep the brand on a long-term growth trajectory and give investors great share potential. You are seeing in the numbers we shared and in the question more upside in both Outdoors & Security. In the case of Outdoors, it's tapping the full integration and leverage potential that we have in businesses like Fiberon and LARSON that are still in the early days of their journey in fully integrating with other Fortune Brands businesses and getting the productivity of their physical assets and their human assets to the level we expect at Fortune brands. And so there is a lot of great opportunity in LARSON and Fiberon to get up that curve. And then as make some potential footprint and product changes in security and we bring in, hopefully, the assets that were contractually working to acquire and the recent acquisition activity, get a like set of footprint and scale advantages to the Security business. So you are seeing in the numbers and in our intent a greater upside, but that's not because Plumbing is limited. That's because Plumbing is already at a very high margin performance level with more upside to be tapped, but always through the lens of keeping the brand and its innovation relevant relative to the competitive dynamics.

Great. And I think, Pat, staying with you on margins but shifting to 2023. Remind people, there's a 20% to 30% decremental margin that we shared. Is that purely on volumes? Or are there initiatives to drive to that level in '23?

We would -- I mean if all we did was just let potentially volume flow out, it would probably produce a result that's going to be less favorable than that 20% to 30%. So we will be pursuing -- probably on the corporate side of things, just consistent with our objective of pursuing those long-term SG&A objectives over a 3- to 5-year period, we'll be in the $10 million to $20 million of just pure corporate savings. And then we're going to be very choiceful using this new organizational rollout to be very focused on what our priorities are for '23, both near term and long term, and then leaning out the organization to drive in a quicker fashion the capability leverage across the organization. So that we'll be taking very significant actions. We've already been doing that. We haven't been sitting on our hands. We will have a good portion of the game plan enacted before the clock even turns to '23.

Great. I'm going to transition the line of questioning to China. We've got a decent amount of questions come in on China. So Nick, let me start with you and then, Cheri, maybe add some color. Nick, just give everyone just an overview of our China business. But then given some of the volatility in the China market currently, where do we see the growth opportunities to outperform that market over time?

Sure. Well, I'd be happy to talk about it. And we're blessed for our business in China. I've run other businesses in China and it's not easy. This business is particularly a special one. For one thing, as Cheri mentioned, we've got a homegrown team in China that really started organically almost 30 years ago, right, as we were producing product in China, just started to see if they could sell it, and over that time, has built a fabulous business. Two leaders in all that time, 2 leaders, right, homegrown team. And it's really a China for China business today. And so we built a wonderful manufacturing facility in China. I would say pre-2017, we envisaged a world in which that would supply other markets, but a combination of tariffs and the growth that we experienced in China, that became the manufacturing facility for China built on our innovation engine in China, which is actually one of the benefits of having it in the portfolio as it's one of our strongest innovation engines and it feeds the rest of the world. And so because of, I'd say, almost this closed-loop system, they're extremely agile, right? And it is a high-growth market. It's also been a volatile market, not just now. And that team is able to manage their P&L to continue to drive growth in the [ investment ] there and manage the profitability and actually grow the profitability very, very well over time. So I think we're at an interesting time for China because it has been fueled by a lot of big, somewhat speculative new construction. We've shied away from that business as much as we could, we really focused on Tier 1 and Tier 2 cities and not in the Tier 3 and 4 cities. And I think what is going to happen now as that market matures and changes, it's going to become a much stronger R&R market, which really is not a bad thing long term. And when you look at our business, Mark-Hans has talked about the brand building we're doing, #2 international brand now. Well, our share, I'd say, just sub-10%. It's 25% in Shanghai, right? So by focusing on these cities that are prime for renewal, we want to position that business to really be able to capture that R&R as it comes through. And I think we'll get through this next period, which the teams digested incredibly well and really be positioned to continue to benefit from the growth in the world's 2 best housing markets, which are the U.S. and China because you're not going to change the fact that there is still a huge population that is coming into cities and are going to need housing and going to need to renew that housing that already exists. The final point I'd make before I hand it over is that the other thing that the team has done exceptionally well is look for and spot areas where we have almost no share today and grow there. So for example, we launched a sanitary ware line in China because that is so central to the purchase decision of the consumer. It's been a knockout success and we've probably gone up from no share to a 2 share. So a lot of room just to go organically as that portfolio becomes more and more complete over time.

Yes. You nailed it. I'll echo just a couple of things. One, they are very aggressive in their category expansion and really owning the room and leaning in there. And they can do that. I think Ron and Nick talked on it earlier because of the deep supplier relationship. So we are very blessed obviously, as Nick said, to have 30 years of leadership there that have those relationships. And we talked about being able to leverage those relationships to even get out of China, it really is in large part because of that China team. The respect over there is just absolutely amazing. So excited about what that has done. I would also say, as Nick said, we see it emerging, too, in R&R and we think we're on the front side of that. And so really unlocking a way of shopping and doing repair that they haven't done before. But the housing age of the housing stock there is prime for that. So we are leaning in there. And I would just close by saying that this gives us reason to believe in the new Fortune Brands structure. China has been run that way out of the Water Innovations for a while. So end-to-end control, but really leaning in behind the scenes with those Fortune Brands advantages. So we've leveraged things behind the scene, but we've let them own that market. And that's why we know as we bring these Outdoor, Security and Water together under Fortune Brands, we have a winning combination here. We've seen it, we've done it.

Great. We are up against the lunch break. I know there are additional questions in the queue that we weren't able to answer live on stage, but the team will be around and happy to take Q&A throughout the day when available. So I want to thank everyone for being on stage for the Q&A session. And Nick, I turn it to you for any closing remarks before we break.

Yes. I would just perhaps say thank you to those in the room and those watching online for your interest. It is an immense privilege to be up here showcasing this incredible company. We spent, I would say, the last few years, 2 to 3 years, really preparing for this moment, doing hard work to get the foundation set to really disrupt ourselves and really start to do something different. And hopefully, what you've seen today is how we're increasingly exposing our business to those growth tailwinds that are there inside of what is really a pretty growthy market. But growth tailwinds in excess of that, that as we get more and more and more exposure to that, our underlying growth and markets will grow. An advantaged business model that I think you can tell we're all very excited about because we could see that opportunity, and we have yet to tap into it. And then finally, and I'd say with most humility, just an incredible team. The people you're seeing up on the stage are Chief Legal Officer, Hiranda Donoghue, who's over there; our CHRO, who couldn't be here today, Sheri Grissom; and the 12,000 people that stand alongside us and the passion that they bring every day to making this reality is second to none. Because you can have these brands, you can have these market positions and you can have a great business model, but if you don't have people with that kind of passion bringing that extra 10% every day, it doesn't happen. And we have that in spades. And it's a privilege to be part of leading it. And I hope that some of that came across today. And I just want to thank you for your time and attention and your interest in our great company. And while, as Pat alluded to, I think we might have a bumpy '23 ahead, this team is undaunted because of all the things that we've done to prepare ourselves to outperform and we will get through that as we have other cycles. But on the other side, I think we're at risk of doing something pretty incredible. So thank you.

Great. Thanks, everybody. So we'll take a lunch break and then reconvene shortly before 12:30 for the MasterBrand presentation this afternoon. Thank you for your attention. [ Break ]

All right. Thanks. Welcome back, everybody. Thank you for coming back here after lunch. I think we've got a great afternoon plan. I just want to introduce myself. My name is Farand Pawlak, I'm the Vice President of Investor Relations here at MasterBrand. Like the morning session, we are going to be making forward-looking statements. Those forward-looking statements in the presentation are based on current market outlook and expectations, and the results may vary greatly from those expectations. If you want to know more about the risk and uncertainties, you can look that up on our Form 10 and our other SEC filings, and we undertake no obligation to go ahead and update those, as except required by law. With that said, I want to go ahead and welcome Nick and Dave Banyard to the stage and get the afternoon going. Thanks a lot.

Well, good afternoon. So for those of you who've stayed through the morning session, thank you for being here. And I'm just going to make a very brief introductory comment and then hand it over to Dave and his team to present. But if you were here this morning, I think you saw the pride and enthusiasm of the Fortune Brand's innovations team, and you're going to see the same pride and enthusiasm with the MasterBrand team. I think in doing a separation, it is fair to judge your CEO not just by the performance of the business that, that person remains with but the performance of the business that they separate and stand up for success. And I know, having spent the last few years working with Dave and his team, that this business has been prepared in terms of its platform, its capability and its talent to stand up as its own independent public company. And you do these things when business is ready to perform and be strong and outperform. And this is a great time, Dave, for your business and for your team and I'm very fortunate and lucky to be here helping you kick it off. So with that, I'm going to hand it over to Dave and you're going to learn a lot about this wonderful company, the machine that they're building and plenty of more room to go.

Okay. Thanks, Nick. Appreciate it. Feels like an official handshake there, we're done. I'm going to start us off -- everybody's finishing lunch here. I'm going to start us off with a short video to get things rolling. So go ahead and roll the video, please. [Presentation]

Well, welcome. Good afternoon. I'm Dave Banyard, CEO of MasterBrand, and we're delighted to welcome you here today to introduce you to MasterBrand Cabinets. Now when Nick called me about this opportunity, he described the company this way. He said it's a market leader, it's in a great industry and it's got a wealth of opportunity. But he said it also needed to transform the way it operated. Now I've spent my entire career transforming businesses for companies like Danaher, Roper and Myers. And so this sits right in my wheelhouse and I was really excited about it, so I jumped on the opportunity. We're excited to be here today to talk you through the progress we've made on that transformation as well as tell you about the wealth of opportunities we have to continue to drive market-leading value. So let's jump right in. A lot of people think that a market leader is just the largest. And indeed, we are the largest residential cabinet manufacturer in North America. But being a market leader is a lot more than that. And I learned that at Roper when we had companies that weren't the largest, but were still leaders. Being a leader in your market requires a couple of things. First, you have to have a great channel, and we do. And then you have to have great product to cover that channel, and we have that as well. The third thing you need to have, though, is you have to have a great culture and a business system, a way to deliver that product through that channel to your end customer. And that's what we've been working on over the past 3 years, and we're excited to tell you about that today. And our business system is built on great tools, well-established tools and it is part of our culture. And that's a really important part of that. We're going to talk a lot today about how you execute. Now when it comes to execution, you can see on the right side of the page here, this is how we've executed over the last few years and I'll go into more detail on this later. But what you don't see behind that is the tremendous disruption that's occurred in most markets, but particularly in ours, and yet we've consistently delivered improved results every year. Now MasterBrand has been around for a while. We've built this company through the past almost 70 years through a combination of organic and inorganic growth. But when I got here, I realized that we really hadn't integrated this company together and so there was an opportunity to do that. And the reason to integrate was to be able to use the scale that we had, both in channel, product as well as our operations to really drive market-leading value. When I talk about integration, what I've got on the page here are a number of, there are plenty more than this, to show you how complicated the different capabilities you need to have to be effective in the cabinet business. A lot of people -- and it was the same way when I first started here, you talk about a cabinet, it's a wooden box, right, how hard could that be? Well, you have a plethora of choices as a consumer to make about how you want that product to look, how you want it to be finished, what species you want to have. But beyond that, there's a multitude of ways that you can manufacture and construct that box and so on and so forth. So when I talk about integrating, it's about combining capabilities in a way that helps us take advantage of and use our scale most efficiently and most effectively. So you want to talk about scale. This is our extended supply chain here on the page. Now cabinets is a very local business in that you have to be in the region that you're serving with your manufacturing operations. And the reason for that is you're shipping a lot of air. So it's not economical to ship cabinets over long distances. So you have to cover a lot territory with your operations. If you don't do this in an effective and efficient way, it's a tremendous amount of costs that you're adding to the business. We've built an extended supply chain, including our own internal operations that takes advantage of that scale in the most efficient way possible. And we're going to spend a lot of time today talking about how we do that. Today, we are the only cabinet company in North America that can deliver the full range of products at this kind of scale. Now being a leader also means you have to be a good steward of your resources. And as we looked at this topic, we wanted to make sure we were focused, that what we were focused on was relevant to our business and that we drive value. So let's dig in a little bit here. On environmental, obviously, our product is made out of wood. And we believe that wood, if sourced properly, is one of the best renewable resources on the planet. It regrows itself. But you have to focus on that and you have to do it the right way. And that's why we're committed to making sure our supply base uses sustainable practices to source their raw material. But we go beyond that. We also know that, over time, that hasn't always been the case. And that's why we support organizations and partner with organizations like the National Forest Foundation. And for those of you that don't know what that is, it's an organization that's committed to planting over 50 million trees by 2025 and they're well past halfway on that journey. They're planting 8 million trees a year to refurbish the forests that have been depleted. And if you combine that with the efforts we have with our supply chain, we're building a long-term renewable resource that not only helps our business, but has a profound and excellent impact on the planet. Now being good stewards means we have to be good stewards for our people as well. And the first thing that comes to mind when you think of that is safety, and we are maniacal about safety. It's in everything we do, it's every day through every aspect of our business we talk about safety. Because for us, to be great at safety, it has to be part of your culture and you're going to hear that kind of thing a lot from me today. We have an OSHA recordable rate that's around 1. Our industry average is about 3 and most manufacturing industries is higher than 3. So while 1 is good compared to our competitors and our peers, we're not satisfied with that. For safety, there's only one goal and that's 0. The way to get to 0 as you talk about and you use tools every single day and everything you do focus on that. We have a program called Always Aware that's a behavior-based safety program. And it goes beyond what you might think about when it comes to safety in terms of inspecting and auditing and all those sorts of things. This is -- we talk about safety and we look for safety in everything we do. You're going to hear a little bit later that we talk about Kaizen events that we do every week at MasterBrand. In our Kaizen events, it's required that as you change, you also pay attention to what may change from a safety perspective. We also go above and beyond with things like our ergonomic program. Every operation that we do within our organization gets evaluated for its ergonomics. Repetitive motion industries -- or injuries, excuse me, are one of the most common things we see. We need to eliminate those and so our ergonomic program is designed to identify them so that we can eliminate them throughout our operations. And that's how you get the kind of industry-leading results that we get in safety. Now safety is not just about the safe workplace in terms of the traditional way you think about safety. We also look at safety in terms of we want people to feel safe when they come to work. We have a very diverse workforce, which we're excited about. We want to make sure we have a workplace where everyone feels welcome to be who they are when they come to work. And we feel that one of the best ways to promote that is have your leadership represent that diverse population. Our executive team is made up of 50% women. 25% of our executive team are women of color. As another example, our Texas and Mexico operation are 100% led by Latinos. We feel that's how you make people feel safe at work because they recognize their leaders and they feel comfortable being who they are at work. And that's the environment and culture that we want. But again, we go above and beyond. We train throughout our organization on allyship, and we have employee resource groups that help promote that allyship throughout the organization. Now lastly, you have to be good stewards of your capital, and that comes down to governance. We've adopted a lot of the world-class governance practices from Fortune Brands as we chart our own course here. And we've built a very diverse and world-class Board of Directors, 80% of which has significant public board experience for our Board of Directors and we're excited to join with them as we move forward. Now the tough part about being a leader is once you're there, you've got to stay there. When you're #2 or #3, the goal is easy: you want to be #1. Well, we're #1. So as we took a step back and looked at our strategy, we kept that in mind and said our goal is to stay #1. But to stay #1, you've got to change and you've got to adapt with the market around you. I know you've heard this earlier from the Fortune Brands innovations team, but we've also seen that the consumer has changed in that they want more of an experience from the products that they buy. Now we know today that we deliver, in the end state, a wonderful experience. Most of you probably spend a lot of time in your kitchen. And if you have one of our beautiful kitchens in your house, first of all, thank you. Second of all, you probably love the experience. Cabinets dominate a kitchen. So the experience of our consumers using our product is great. But we also know that we have to adapt to how they buy our product, and that's part of our strategy is continuing to adapt. And if you think about our vision on the page here, it's to continually innovate how we work so we can continue to delight our customers. Now as I said earlier, a big part of being a leader is having a business system and a culture that drives that improvement and change and that transformation. We call ours the MasterBrand way. And as I also said, it's built on well-established tools and I'm going to spend a bit of time later going through each one of them to explain not only what they are if you don't know what they are, I think many of you will recognize them, but also how we use them because they interlock in a lot of different ways. Now I'm honored to partner with a world-class management team to do this. And the team we've assembled is a combination of industry veterans and people from outside the industry that are coming together to help transform this business. You're going to hear from a number of them today. But again, like I said, we have folks leaders within our organization who've been around this industry for a long time, understand the nuances. And we partner them specifically with leaders that have transformed businesses in other industries like myself to find the best solutions that work for our industry. Now strategy is great, but it's got to yield results. We are already delivering market-leading results in our business, but we're aiming higher than that. Our strategy is going to enable us to continue to deliver value and these kind of market-beating results into the future, and we're going to walk you through all that as we go through the strategy. So I thought we'd take a step back for a few minutes as we move forward here and talk about what we've done over the past few years to set the table for what's coming next with our strategy. As I mentioned, as MasterBrand came together, we put together a world-class channel coverage and we cover all the important channels within this market. I'll start with retail and builder because they're the largest and most consolidated within our industry. We work with the market leaders in each of those categories and we serve them in a wide variety of ways, and we serve them with excellence. Now I'll direct your attention to the dealer channel, which happens to be the largest part of the market, but it's also the most fragmented. It's the largest portion of our business and it's the largest part of the market, very fragmented. To give you an indication of that fragmentation, no single customer within our dealer network is greater than 3% of our sales. But in order to be effective in that part of the market, you have to have great relationships and you have to pick the best ones. There are tons of large and small dealers throughout North America. You have to have the skill to be able to pick the right ones and interlock that network of distribution so that you're hitting the best parts of the market and covering all the consumers that might be wanting to buy cabinets. And that's what we've done. We have long-standing relationships with the best dealers in the market. Our top 20 customers we've had relationships with and great business with for over 20 years. Second thing I said was product. We have the most comprehensive product offering in the market. We're the only cabinet company at scale that offers everything from very high-end and customized premium all the way down to off-the-shelf stock. Now on the one hand, you say, well, great, so you can sell product to everybody. But this also gives us a lot of insight. It gives us insight to the trends that are happening in the market. And when I say trends, it's a couple of different things. One, it's where are people buying? What's the right price point? What's really hitting the mark in terms of how the consumer is behaving in terms of what they can afford. Very appropriate in the current environment, which we'll talk about a bit later. The other thing it allows us to get insight to, which is unique for us, is that we can see style trends early on. Most style changes occur in the very customized portion of the market and then they migrate throughout the other product portfolio. We see that early because we're selling into it every day. That allows us to update our product categories at a greater speed than others. And lastly, by having this great product portfolio, we're able to deliver with efficiency and speed to wherever the consumer wants to meet us. So if a consumer wants to buy at a dealer, we're there and we're there with a product portfolio that's going to fit their need. Same thing with a home center or for a new construction home when they're looking to buy new. Now the big breakthrough for us was on the operating side, and I highlighted that earlier when I talked about transforming the operations. I want to talk to you through a little bit about what the old model was first so that you can understand the challenges with that. The way cabinet companies have been set up over time is you build a brand in 1 factory in 1 region. And if you get bigger, you might build another factory of that same brand somewhere else. But that was about it. And so as we acquired and grew, we had a lot of pockets in islands in different regions throughout the country. Now on the one hand, those are very entrepreneurial. The people that are running those business really understand their local market and can be effective. But to really use your scale, it provides some challenges. When the market is nice and steady, we haven't seen that in a while so it's one of those things we all hope for and keep waiting for. When the market is nice and steady, having these little islands doesn't really bother anybody. It's easy to manage. But when the market changes, either up like we've seen over the past couple of years or down as we see in our forward-look, you really have challenges when you have all these pockets. And I'll give you a couple of examples. So let's say you have cabinet company A in one location and market demand for that product goes through the roof. Your only choice as a manufacturer is to add capacity, either an addition to that plant or build another plant. That's capital that you have to put into the business. You can do it, but, again, you have to put the capital into the business. Now flip that around. In a down market when that particular brand starts coming down below a certain level, that factory becomes very inefficient. There's no real way around that. You've got stranded capital at that point. And your choice is either run it inefficiently, not make as much money or shut it down. And if you shut it down in that kind of situation, you're effectively eliminating that product line and that brand. Not an easy choice to make. So how are we addressing this? I'm going to talk to you a little bit later about our strategy and the tools that we're using with align-to-grow and lead through lean and tech-enabled. But what we've done over the past few years is network our plants together. And effectively, what that allows us to do is shift volume across our platform to any plant that has the right level of capacity for us to move that volume. We have several platforms that I'm going to go into detail a little bit more later. But effectively, we're able to flex up and down this organization in great times, and you see that in the results that we've delivered, market-beating growth results over the last few years and driving that to the bottom line, not just growing on the top line. But also it builds a model that allows us to handle a down cycle as well because we can take capacity off in a controlled fashion where we're still able to offer that same product across the spectrum as needed. It also allows us to move with the consumer. So if the consumers are starting to trade down to lower price points, we know that we have enough capacity to handle those shifts throughout our network. That's unique, that wasn't the case a couple of years ago. These are the results over the last couple of years. Now we know it's been an upmarket. In an upmarket, good things happen. But what's underlying this that you don't see on the page here is all the chaos that's been going on in the world around us that affects these kinds of results. So inflation. I'll share with you that the inflation we've experienced the last couple of years dwarfed the total operating profit we made a few years ago. I mean that's the magnitude of it. You don't see labor constraints or challenges in here, but we all know that everybody experienced that. And we were no -- we weren't immune to it. But every manufacturer experienced significant labor challenges in the last few years. You don't see that in these numbers. Supply chain challenges, even worse than the other 2 things I just said. Snarls, no ability to get product delivered, challenges with capacity at suppliers because of labor and their problems getting material. All those things have occurred over the last 2 or 3 years, and yet we consistently delivered market-leading value through that time period. That's because of the operating model that we have and the work that we're doing on our strategy and our transformation. So let me shift gears a little bit here. I know it's a big front-of-mind topic about what's going on in the industry. So I want to talk a little bit about that. Some of these things are things you've heard before, but let me take a moment here to just talk about we do have some near-term challenges, obviously. Andy is going to talk about how we're viewing the market for next year, but we feel that we've built this company for the cycle. We know that we're exposed to a cycle, and so we've built our business to be able to handle that. On top of that, we've already prepared, this discussion that I was just having about how we flex our capacity up and down, because we cover the market so broadly, we're able to see these trends happening near real time. And we're able to start moving our capacity in the right direction very early and we've already prepared ourselves for what's to come in 2023 in terms of our capacity and our cost structure. Now the other thing that we have the ability to do is go after opportunities. And I think one of the hallmarks that we hope to demonstrate to you over the next couple of years is that we're going to continue to invest in this business regardless of whether it's an upturn or a downturn. And we're going to continue to drive value throughout that because we see opportunity even when there's challenges in the market. For us, as you see on the right side of the page here, we cover the market with our product breadth. We feel that allows us to move where the customer wants to be and still deliver products to them. Now I know that Cabinet is a bigger-ticket item and some of the things that Fortune Brands Innovations talked about earlier, but we still feel that the consumer is able to come in to buy a kitchen, that we can meet them where they are at the price point they need to be because of our flexibility and the breadth of product that we have. We also see pockets in the market where we still see opportunities for growth even in a down market. I'll give you an example. We had a gap that we saw in the lower end of the market a couple of years ago. We launched a product. And in the past 3 years, we built that product growing at 140% per year. It's now a $150 million business. Three years ago, it was 0. We were able to do that because we had the market insights. We understood what the product needed to be. And then we have the capability of delivering that, and that's a product that has a very short lead time, and we're able to deliver that consistently, and that allowed us to grow that with that level of pace. There's also still a tremendous amount of fragmented manufacturers within this industry, and you can see it on the page here. 45% of the market are still small manufacturers. Again, we see that as opportunity to bring our advantages to customers in a bigger way. Now I'm going to shift gears here a little bit. I know that there's a lot of attention on what's going to happen over the coming 12 months and the current cycle. But long term, the residential housing market is very favorable for us. I know you've heard these stats before, but I'm going to say them again because they're absolutely true and they make it very different from the last time there was a big housing down cycle. There's a significant underbuild in housing. There's also a significant aging that's gone on over that period of time. The average house has gone up to 39 years, as you see on the page here. We have 2/3 of our business exposed to the repair and remodel space which allows us to be a big player in that dynamic, where people have old houses and they want to repair and remodel their kitchens. On the builder side, we're built very differently than we were during the last cycle. That networking that I described earlier and then I'll go into more detail here in a little bit really sets us up to be able to flex with the market in a way that we weren't able to do before. And as people redo their kitchens, 95% of them do the cabinets as part of the project. So while there's a bit more amplitude in the swing of the cycle for larger-ticket items like ours, once that consumer makes the decision to buy a kitchen, they're going to buy cabinets. And why wouldn't you? I mean, that's a gorgeous kitchen. You're not just going to do the appliances because you're not going to get that look. The cabinets make the kitchen. And so when you make that change, you're going to put those great cabinets in. So let's look towards the future. The strategy we're going to describe today is already in action. These are a set of tools that everyone in the company is familiar with, and we're executing on these every single day. So let's talk about that a little bit because I think a lot of times when you get in a presentation like this, everybody wants to hear about the strategy. But to me, strategy is important, but execution is critical. Here's how we execute. First and foremost, we have a tool, and we're going to hear that a while. And no surprise, it's a lean tool. It's called strategy deployment. Strategy deployment effectively takes your stretch goal, a future state that you want to be that you're not sure how to get to and methodically walks backwards to present day, building a plan the entire step of the way in whatever increment chunks you choose. You're going to hear that a lot from us because that's how we think. When it comes to a customer, we think about what they want first and walk our way back to where we are today and bridge that gap. Same thing with strategy. And strategy deployment is a tool that allows you to do that execution really, really well. Here's how it works. Strategy deployment helps you focus on what's most important. What do you got to do first? It's always the hard part of a strategy, you have a lofty goal, and you're not quite sure how to get there. When you walk backwards, you know what you have to do first. You also have to give these projects appropriate resources. The teams that are working on our strategy deployment and our initiatives are 100% dedicated to that. And again, I'll refer you back to our financials. You don't see that in those numbers. These are investments we are making in our business to ensure the execution of these initiatives. And that's why we've been successful over the last few years at changing our operating model so rapidly. And then lastly, you got to measure things. We're maniacal about measuring things. As you can imagine, if you're a lean practitioner, that's what you do. And you're going to hear that from some of our executives here in a bit. We measure what matters and we measure the progress that we're making towards using initiatives, and we review this every month. This is the most critical part of our operating model. It's what we have to get right. We all come together as a team every month, we review the progress. We make sure that focus is still there. Oftentimes, when you're doing strategy, it's really easy to get fraud and start wandering down paths that don't yield anything. We keep the teams focused. We make sure they're resourced properly, we measure what they're doing and then we go around the next cycle. So talk a little bit about the tools now. These are, again, as I said, they're well-established tools. And the beauty of these tools in being well established is they give your team the confidence in their ability to execute. So how many of you out there try to go fix something in your house and you sort of don't bother to pull off the instruction book and just go at it. And then after an hour, you realize that probably should have pulled out the instruction book. Well, we want to make sure our team has an instruction book. How do you do this? Strategy is hard that way is really, in a lot of ways, are an instruction book. But if you have tools that work right, you're going to get there. And that's what we really encourage in our culture with our organization is use the tools, and we're going to talk about that in a bit as well. So let's start with the first one, align to grow. This is based on so called 80/20. And it's called align to grow specifically for a reason. 80/20 is a growth tool. Many people understand 80/20 is a way of organizing and simplifying, but it's not that, 80/20 is a way of aligning your organization to grow, and that's why we call it align to grow. I'm going to give you a quick overview of how it works and then explain what we've done on this. First and foremost, you find a great customer. You figure out what they want, you deliver it exactly what the way they want it, and then you get value from that. They get value and you get value. It's as simple as that. The hard part is figuring all that out. And for us, as I highlighted earlier, we weren't effectively integrated so it was really difficult to execute on that middle part that you see us there. So we've spent a lot of time in the last 3 years making sure we could execute on the middle part of that. So let me walk you through how we've done that. As I said, we have a very extended supply chain. So it first came down to what's the footprint need to look like. And we've organized ourselves around that. We had to move some factories. We closed a couple of factories to make sure that we had the footprint in the right regions with the right type of capacity so that we can serve the customer with excellence. And the next part of that is making sure your product is hitting the mark. And you can see on the right side of the page here, and if you look at our display out there you've seen this as well, we've significantly reduced the number of SKUs that we've had over the last couple of years. Now you may say, well, David just told us that you have this broad product selection, you can offer anything to anybody, how that's kind of conflicting with that, right? This was just unnecessary complexity. We had different product lines that had very similar products, almost completely invisible to the human eye, differences that require different capabilities to manufacture. Each [indiscernible] difference between a particular profile, very, very slight pigment difference in a color. All those things add complexity, require different capabilities and jumble up their ability to deliver to a customer consistently. And also, if you think about it, from an extended supply chain standpoint, it really makes it difficult to have a great extended supply chain that's consolidated and efficient. So we fixed that. And then lastly, it's building in common and standard processes throughout our plants so that anyone in our company can go to any client and understand how it works. You're going to hear about a little bit later that there's a lot of complexity in how things arrive at the assembly line in our plant. If you've ever been in an automotive plant, it's very similar to that. Lots of components arriving in one place. In order to get that done, you've got to have some standardization throughout. Now the beauty of this is we still have a lot more to go. We're in the process right now of really dialing in exactly what those customer segments want so that we can align to that and sell effectively through that and deliver that outsized value and get paid for it. We also have just gone through one of the most disruptive supply chain environments that I've ever seen in my career. That precluded us from really organizing our extended supply chain in a way that is most effective. So we have work to do still there. Some parts of the business are well established in that, but we still have tons of opportunity ahead of us to organize our extended supply chain in a way that makes the most sense for us and the way that we can deliver to our consumer. And then lastly, internally, as I'll talk about next, we use lean tools within our factories and standardize as much as we can. But that's a process and it's an ongoing journey that really never ends. And so we still have a lot of that opportunity in front of us, which is going to continue to help us deliver the market-leading value that we have so far. So our next set of tools, we call lead through lean. And I'm sure many of you in the room have heard of lean before, interacted with companies that either use or say that they use lean. And you're probably looking at this slide and saying, what do these other things have to do with lean? That's not the lean toolbox I'm used to looking at, right? Well, everything you're used to looking at is down in the foundational section there. It's the same tools, and you're going to hear an example here where we're going to run a video. You're going to see the tools that we use, and they are going to be ones that you recognize. But we look at lean as the ultimate associate engagement tool. And I'm going to tell you a little bit about how that works. So we do a plethora of events every week, 3 to 10. Any given week at MasterBrand, you can come and there are that many events running. Now a lot of people that do lean like to brag. Look at how many events I do, how great that is. It's not about how many you do. I'm telling you that number to tell you that this is a regular thing that's going on. It's not the goal to do x number of events. But within each of those events, every week on Friday, we have a very standard report out format. It's all on Zoom now. It was one of the benefits of COVID as we figured out how to do this type of activity broadly. And anybody at MasterBrand, any Friday morning consists of half-hour report-outs on all these events. The best part about these events is they are all led by the people in the location, whether it be back office or in the plants, that are doing the work. The people that are doing the work are the ones that raise their hands and say, I want to do this event. Management comes in to facilitate to train with the tool and to help them with any resources they may need. This effectively flips the model in terms of how a company normally operates. In the past, company's management would come in and tell the workers what to do, and they would go and do the work. Our model is those closest to the work understand where all the challenges are. So they should be the one bringing those forward and helping to fix them, and we do that all throughout our organization. I'll tell you a quick story on that. I was at a plant in the Western part of the U.S. And one of the associates came up to me to tell me about the event that he'd been. And this is a guy that's worked in our factory for over 20 years. And he said, "We did an event last week and we moved this piece of equipment from here over to there. He said I've been here for 20 years' time, I've always known that piece of equipment should have been over there, but I never felt like I could say something about that. It's like the first day we started this event, people were asking me for ideas, and I said we should move this piece of equipment over here. And then we had the tool to help explain why that was. Well, of course, he understood why that needed to be over there. He is doing the work every day. But the tool showed everybody else that he was right. And his comment to me was great. He said, "I have tons more ideas here, and I can't wait to get more events so I can get those ideas out. That is the power of lean, and that's what we do every week at MasterBrand. Now it's also a great way for us to see talent. As I said, we have a great diverse employee base. We see that talent in action leading every week when they report out on these events. They're leading change within their own plants, and we get to see them in action and decide if they have opportunities elsewhere in the company to continue to do that or to promote from within that plant. We get to see that every week, YTD, in these report outs. There's no better talent development process in my view, because everybody in the company can see that any day of the week. And the last piece of it is the recognition. I can't be everywhere. And we have -- as you saw earlier, I have a very -- we have a very large internal footprint. None of our leaders could be in all these places at once. The way we do this allows for us to be a participant in all these events and recognize the great work that our associates do every day and they get a charge out of it. I think if you were to interview people within our company, they would say this process is one of the best team-building processes they've ever been a part of. We go a step further on the recognition. We actually have an app, they make these apps these days which are great, and you can give a recognition via this app to anybody in the company at any point. And it's almost like a little Facebook feed that you can see a continual stream of the recognitions that people are passing forth, whether peer-to-peer, worker to manager or manager to the associate. Over 250,000 recognitions, and we've had this in place for about 1.5 years, almost 2 years. So it's really been a wonderful part to bring our company together and really drive our culture forward using these tools. And ultimately, our goal is a lofty one. We want to be the best place to work. We define that by great retention that we are able to promote -- remember, I talked to you about being good stewards and want to have a leadership team that reflects the diversity of our organization, that's how we're going to do that, through internal promotion. And then lastly, engagement scores. Now we do associate engagement scores, many companies do. Our associated engagement score went up by 7% from 2021 to 2022. For those of you that read the paper, you know that, that period is also called the Great Resignation, right? Our associate engagement scores went up during that time. Statistically significant if you're a stats geek like me, is about 2%. So we tripled that. I'll tell you one other thing about our associate engagement surveys, and it was really interesting for me to watch this. I've done these at other companies. And often, especially the first few times you do it, management sort of gets a little clenched up. I'm going to hear some bad things. And you do. You hear the raw feedback when people are able to give you that unbiased feedback in an anonymous way. A lot of times management is a little -- has some trepidation about engagement scores. What you see from our management team now, this is a great thing for me to see, was our management team actually is excited to get this feedback because now we know what to go fix. We understand what the problems are. When people are telling us what the problems are, we know what they are, so we can go fix them. Our culture is about running towards problems, not running away from them. And it shows in the way our leadership teams jump in when we get these engagement surveys back. So look, at the end of the day, we all know that lean done well drives results. You can see some of the results that we have here -- but really, again, I'll go back to -- it's only effective if it's part of your culture. It's like any other skill, it can access you over time. And if it's not part of your culture, it ends up being words on a wall that don't drive anything and you go backwards. We've driven lean, and that's why we call it lead through lean, because it is a leadership scale. It requires you to understand the tools but lead with the tools. And as part of our culture, we talk about it in the tags of tagline that we have at the bottom of the screen here. Trust the tools. I've been talking about the tools a lot, gives you confidence to know you have the right tools for the job, trust them. Whenever we have a problem and someone starts going down a path using an opinion or some other non-standard method for solving the problem, most people in the organization will orient them right back to, well, let's get the right tool out here to solve that. And power of the team, I just talked about how lean is the ultimate associate engagement tool. It empowers those doing the work to fix their own problems. And then move forward, we have that because speed is important. You have to keep making progress. We want people to move at pace. We know that there are going to be failures. Indeed, we have a ton of these events that we've done that haven't yielded the kind of results that you're going to see here in a minute in the video. That's okay. Learn from your failures, continue to move forward. That's our culture in a nutshell. And lead through lean and align to grow really help drive that throughout the organization. Let me talk about one last piece here, and then we're going to do a quick video. Navi is going to come up a bit later to talk about our digital efforts. So I want to just tee it up. I won't steal her thunder. She's got a lot more to say about this. But ultimately, the final tool in our toolkit tech-enabled is grounded in the tools of agile. And I know you've heard from John Lee earlier about what that is if you're unfamiliar. But it's essentially a way to bring a focused team together and move quickly to change and get results in a quick fashion, iterate and move on. That's a methodology that we actually use beyond just our digital teams. We use it in our marketing teams. We use it on the factory floor. It just builds in a speed tempo that's very different from what typical manufacturers will do, and that's a big benefit that we've gotten from interacting with leaders like Navi. But ultimately, we've got a lot of work to do, and Navi's going to explain to you the path here, but we need to continue to simplify, and that's a lot of our systems and our data. We need to streamline and make that data available so we can take action on it. And then ultimately, we see tech-enable as a big opportunity for growth for us, because we think the insights that we have, because we have that scale, and we see the market, we believe those insights can really help us pinpoint where the best places to grow are and take advantage of that using our other tools. So to wrap up here real quick and we'll take a -- and sorry, we'll take a -- I missed the video. So let me do the video real quick and then we'll jump right into the wrap-up. So we have a quick video to talk about one of the events that we did using lead through lean. Why don't you roll the tape? [Presentation]

All right. So we're going to take a short break and then jump into a fireside chat with a couple of our leaders. So 5 minutes, 10 minutes, something like that. I appreciate it. [Break]

Ladies and gentlemen, we'll resume the program in about 3 minutes. Thank you. All right, we're back. We're on.

Thanks. We've determined up here that we think we need a little more rocking music here in the New York Stock Exchange. We're Cabinet makers. So we're a country rock. In any event, I'm excited to introduce Gay McMichael and Kurt Wanninger joining me on the stage. Gay and Kurt are responsible for products, customer service and operations across all of MasterBrand. So we're going to talk about a couple of various topics together, and I'm excited to introduce them to you. You guys want to introduce yourselves to everyone here, please?

Sure. Good afternoon, everyone. Gay McMichael. I've got a 32-year career with MasterBrand. That career has sort of been divided into thirds, first third working in brand and channel marketing; second third, doing sales and sales leadership in big box retail; and most recently, doing general management and business unit leadership.

My name is Kurt Wanninger, and three things about me. Been in manufacturing over 40 years, so quite some time. Half of that has been -- over half of that has been at MasterBrand Cabinets. And probably the third thing is automotive, wash machine, weed eaters, cabinets has kind of been my career. And the last few years in Cabinets has been kind of my favorite. So we've got a nice tailwind behind us here and we just really had some momentum, so.

So, tell us a little bit about what's different about MasterBrand, from how the company operated in the past. How is it different today than it was in the past since you've both been here for a while?

Yes. I think the biggest difference in the last few years has been the MasterBrand way and how that's helped us focus on lean and how we now practice lean throughout the whole organization, whether it's standard works and just driving consistency throughout the processes each and every day.

I think a great example of that, I'm not sure if you remember, an event we had last spring at West. And the team there that was doing door manufacturing was really faced with excessive over time and they knew it wasn't sustainable. So the team actually put their hand up and said, "We need an event. We need to do something." So we organized an event, a week-long event. And the team got down to work, looked at current state, really worked to identify ways and come up with some potential solutions. And then they tried storm, which is basically put into action for a couple of days potential solutions and how they could drive the waste out. What was really cool about that event is that entire department couldn't participate, but the department was willing to take their lunch hours and they all sat down together, really looked at what the titer team was looking at and say, yes, that works for us. No, it won't. Have you thought about that? So really having a total department engagement. The team was then able to come up with some great solutions. And by the end of the week, when they did the report of, they really had a solution that would allow them to not only significantly increase output in the department, but almost eliminate all the overtime. So that really is the power of some of the tools and what we're doing.

It's amazing when you have a group of employees that eliminates their own over time, they went after that, and that was a fun event.

The align to grow, and you talked about that just a little bit. And that uses, as you mentioned earlier kind of the tools of 80/20 to reduce complexity. It really helps us focus on delivering products and services that our customers really respect. And just a brief example. You even talked about MasterBrand, a lot of acquisitions, a lot of different companies and we never really integrated those businesses. So out on the Board, it kind of describes one of the journeys there. One of those journeys was a number of white paints we had and as a different -- as a lot of different companies came together, each company kind of had their own pallet of white paint. So we ended up with dozens and dozens of different white paints. And part of the 80/20 was to reduce that complexity and reduce the number of white paints from dozens down to less than a dozen. And we still offer all the same kinds of paints. We have color choice program, where our customers can get any white that they actually want, but really helped us take complexity out of the business.

But to get any color you want, you have to -- you're moving up the curve in the cost and you're getting paid for that. And it's -- you really have to use data to be able to see this. So when you look at the data, you realize that the things you're getting rid of really are not things that people -- you're not eliminating a choice from a consumer, you're really eliminating the things you don't need to be there.

Yes. Dave, I'm glad you brought that up because that really is total align to grow and 80/20 is all about. And that's another thing that's different for us is how we then use our data to bring new products to market. Traditionally, because of the acquisition we talked about and independent factories, our new product development was really pretty siloed. It was usually centered around a brand or a product platform. Today, what we're doing is really different. What we're developing is an innovation process that is really more agile-focused. It's structured around the number of channel-focused agile pods. And their mission is to really understand what it takes to win in the channels that they're focused on. The outset of their work really will feed our innovation funnel with the products and programs and solutions that will be true value creators for our channel partners and ultimately their customers.

Great. It's about cleanup first. You got to clean up all the complexity. And then once you do, you are very clear that you're not going to add that complexity, but it gives you the ability to really focus your energies on where we think. And then Mantra was a great example of that, the Mantra product line that I described earlier, that's grown 140% a year, it's an example of being able to hit the mark with a particular product, so great. I know we've been talking about this, but it's so ingrained in our culture that we talk a lot about it, but how does the MasterBrand way helped you and your team run the business more effectively?

Yes, I'll start with that. Standardization by far. We have standard measures. We have common metrics throughout all of the 20 manufacturing plants that really help us consistently drive the business and identifying opportunities to improve. Our teams have gotten very adept at using the tools, whether it's an A3 to attack an opportunity, a value stream map to look at waste in the work. And really, we do our Kaizen events around that type of activity. So my favorite example this year in 2022 was we significantly increased the capacity of one of our vanity plants, and we added several different assembly lines. And we were able to staff those assembly lines through free work from standard work events. So we didn't have to go to the outside and hire. We freed that labor through events.

Yes. So you effectively added a ton of capacity to your existing plant and no labor, because it was automated. Some automation, but not completely. Great.

I think what I would say is it's really given us more depth, depth of engagement of our employees, depth of understanding of our business and depth of alignment around really what is the right thing to do to give our customers a great experience. It really reminds me of an event we had up in our Canadian operations about this time last year. They had just got a new product launch, and it was really successful and they were faced with a tremendous increase in their demand for paint capacity and they had to do something fast. So they pulled the tool kit out and have started to do a value stream map to really understand where the opportunities were. They reflowed the entire department and also redefined all the standard work for the area. And within 90 days, they were able to really increase their capacity in a way that they could keep up. And actually, the really cool thing about that story it's 1 year later and they've been able to sustain that momentum.

Great. So why don't we -- we've talked a lot about how this is ingrained in our culture, but what does a typical day look like? Describe us -- for us what -- how these tools work on a daily basis.

Well, I think a typical day is a combination of run the business and change the business. From a run the business perspective, our operations folks will probably start out with a morning huddle and a morning stretch. Production will start. And to keep track of the pace of the business, they'll use hourly -- hour-by-hour boards. At some time during the day, at multiple levels within the plant, we'll be doing daily management. And the daily management is a lean tool. It centers around a daily management board. You actually saw one in the video. You saw the group's large, almost like a billboard, right, with a large report card on it. But it's not just a scorecard. What that board does is to facilitate discussion, understanding how the plants or how the department is operating on the key metrics that really drive performance. It will show trending. It will also do greater analysis, like have a lot of data so that the teams can understand if they aren't meeting the metrics, where do they need to go to look to start to establish root cause and develop countermeasures. Using daily management, the teams can really address issues before they come systemic and make sure that they're all aligned on their priorities as well as what it takes to win the day and the week.

I think your lean is one of those tools and our lead through lean efforts are all about doing it over and over again. It requires practice and a lot of plants have scorecards in them. But if you're not doing anything with that information and using the tools to make a positive change, it's really a waste. It's not -- it doesn't add any value. And that's not how we think about it. These are insights for us to really drive results every day.

Gay touched on it, Dave. In the video, in that -- in our Ferdinand plant, that Kaizen event, that changed the business and we went to know why it changed. It was big. That's something that we really worked on and tried to accomplish for a number of years. And the tools really enabled us to be able to do that and do it very successfully. And you can see the pride and the team, extremely proud. It's just another example where within any plant, any given week, whether it's on the production line or in the back office, there's a number of events going on utilizing the tool each and every week.

Okay. So let's shift gears and talk about the marketplace and these tools and our performance. What stands out for you in the marketplace? What are customers saying about what we've been able to accomplish here over the past few years?

I think a lot of people in business would answer that question saying these are my capabilities. I have this capability, I've got that capability. We really try to approach it differently and go all the way to the customer and then work our way back to say, how are we going to align our capabilities with what our customers need from us? So for instance, you might have channel A who is a dealer channel. Channel B, who is a dealer channel. But channel A has more of a repair and remodel business or channel B is more new construction-focused. They both need cabinets but they need them very differently, different product platforms, lead times, service models, et cetera. So really by looking at it through the lens of the customer and the lens of the channel and what they need, it allows us to use that broad portfolio that we have and our extensive manufacturing network to really be able to deliver targeted solutions for our channel partners. And then basically, we know when they win, then we win.

Dave, you talked about the Mantra, the example of our fastest-growing product line that we've had in a few years. And great customer requests and experience that we had is that product line is really all e-commerce-driven. It's ordered online by our customers. And our customers really wanted the ability to see the available to ship inventory online. And we just weren't really able to provide that. So one of our events really were to have an event where we can identify the value stream, the waste associated with it and where the opportunity was to pull the available to ship inventory in. So our digital team really was part of the event. And through the data lake, they took the opportunity to link the systems. And we through 21 different countermeasures, we were able to do that within 30 days, get the available to ship inventory online. So you asked what our customers would say. I think our customers would say they recognize and they appreciate our approach, and they value our service and our capability of helping our customers be successful. And within each of our channels, we have great partnerships with every channel within our business. So I think they would really value that.

Well, it was a good segue, Kurt, on the digital and tech front. So thank you both for joining us today. And I'd next like to invite Navi Grewal to come up, and she's going to talk you through tech-enabled in more detail.

Thank you, Dave, and thank you Gay and Kurt for the plug-in for digital and tech. Good afternoon, everyone, I'm Navi Grewal. I'm the Executive Vice President of Digital and Technology for MasterBrand. I've been with the company a little over a year and have 24 years of experience leading different technology teams, actually leading business transformation in many different companies, mainly focused in consumer goods and multi-industrial space. So as Dave, Gay and Kurt mentioned, MasterBrand is on this transformation journey. We are innovating how we work by streamlining and automating our back-office processes, making our employees more productive and self-sufficient. How we make our products by digitizing our manufacturing sites, working very closely with our plant managers and our lean leaders so that we can scale those capabilities across the manufacturing sites. And finally, enhancing how we sell, so that we can become one of the best partners for our customers and through that provide best experiences for our end consumers. Now Dave and Gay talked about it, we have also implemented as a methodology to drive feed to value and greater adoption. Now what that helps us is prioritize that effort and create focused-agile teams to drive the business outcomes that we talked about. As you saw in earlier slides, in the past, MasterBrand has come from multiple different acquisitions. So as complex as our product continuum and factory network was, our data and system landscape was even worse. We had hundreds of different ways of doing things and dozens of different ways to describe the component that goes into a cabinet. Now imagine the amount of complexity it creates for the back office processes, where we had to constantly reconcile transactions among the different systems and translate data and transform data using Excel and Access to drive business insights, which at the point was days and weeks and months old. So I would say we had a lot of data within MasterBrand, but we were not able to use it in a timely and efficient manner. Said another way, we were data --we had a lot of data but we were insight force. So data retrieved insight for. So in today's world, we've implemented our data lake technology that Kurt also talked about which has helped us standardize our data landscape, and it is quickly becoming the single source of data and insights for our company. As Kurt mentioned, we run quick insights and quick events, and we are able to give the insights that the teams come up with running some of these Kaizen events. So our plan in the next 6 to 12 months is to further build that data lake with additional data domains like manufacturing, customer and consumer 360 and pricing analytics. Now another area of key focus for us is our ERP modernization project, which is focused on consolidating our ERP instances, standardizing the order management layer and setting the foundation for a robust technology architecture, so we can implement the capabilities with speed and agility, and that further sets the foundation for the modern data architecture and the governance we talked about. Now here, I'm not talking about a big bang ERP implementation, but more around standardizing our current footprint with a focus on process and data simplification. Now we already have industry-leading software, both for our back office and most of our manufacturing sites. And the plan is that we uplift that standard footprint across the sites that do not have it. Now all this work in data and the system front really excites me because this sets the foundation for a smart enterprise, which will quickly become the source of competitive advantage for us. Now if you visit our plants, you will see how magic happens where the different components come together in the assembly area to form a cabinet. Now this is a very complex process, where our line managers and the project -- and the factory workers have to constantly make these decision points on a daily basis to produce a cabinet that goes into an order. Any mistake could lead to reorder, additional cost, delays in the order. So what we are doing is we are early on our journey looking for opportunities to unlock the data across our plants so we can eliminate or automate these decision points. Now the process to identify these automation opportunities is a part of our value stream mapping process, which is a part of the lean tools that Dave and team talked about, where we highlight areas to eliminate ways that could maximize the business value that we're looking for. And the digital tools are helping us accelerate those efforts. One of the examples is the RFID technology implementation, which we've implemented in a couple of plants, which helps us track the components across a plant to make it easier to find and assemble the components into a cabinet. Now we have successfully, as I said, implemented in a couple of plants. In the next 2 years, we plan to scale that at the rest of our plants. And so far, this capability, we've seen has saved a couple of million dollars to our bottom line. Now we have stood up a center of excellence to scale these capabilities across MasterBrand. And this COE is comprised of internal cross-functional team members and niche external vendors, so that we can learn what's out in the market and the teams can pilot these capabilities. And once we have successfully piloted in 1 plant and see the business value that we were expecting, we can easily scale that across the other plants. Now coming from a consumer goods background and leading customer experience teams in the industrial space, this is an area of passion for me. There is so much value that we can unlock for the customer and our end consumers by focusing on the services and the experiences around our products. In today's world, especially after the pandemic, we have learned that people buy on experience. Product quality is a given. What creates the differentiation, the stickiness is the experience factor. And as Dave mentioned, our teams are already working on customer segmentation based on the channels we serve and crafting services and experiences based on the channel segment and so that we can create some personalization there. And we have also started to work on the customer journey so that we can further understand the steps that our customers go through to sell our product, and the moments that matter and how we can simplify that and remove any friction across that process. We are relaunching a brand-new customer portal, which is focused on providing self-service, which empowers our customers to do more and become self-sufficient and enable our customer service teams to focus on energy on interactions, which drive higher value for the customer. Now this portal will provide information like where is my order, easier core to order process and also warranty registration. Focusing on the customer helps us delight our end consumers. We have a lot more coming in this area. So stay tuned. To summarize, leveraging digital and technology, we are driving operational excellence, agility and scale and exceptional customer experience, and also, we're going to continue our journey into data modernization. With that, I'm going to hand it over to Andi Simon, who is the Chief Financial Officer.

All right. Thank you, everybody, and thanks for continuing to listen to us as we continue this journey. So hi, everyone. I'm Andi Simon. I'm the CFO. I'm very excited to be here today. I joined MasterBrand about 2 years ago. Prior to that, I held various positions, a lot of traditional audit, accounting, finance positions and then also held some positions in IT, strategy and supply chain. And most recently, I was the GM of a smaller turnaround. So as I prepared for today, I reflected a bit on why did I come to MasterBrand, and I thought it was relevant to our story today. So first, I came here because I could see that it was a really good company. And when you looked at and heard people talk about their operations, their people, their products, it had great potential to be great. Second, I really enjoy being a part of transformation. It's very satisfying. It's very fun for me. And third, in the interview process, what I was confident that the people of MasterBrand wanted to be on this transformation journey. And I think that's a very critical component in making sure our transformation is successful. So what I wanted to say briefly as an introduction is, I'm really proud of where we've come, and I'm here to show you or demonstrate our performance to date and where we expect our performance to be in the future. So starting out, again, you saw the timeline that Dave presented. Here, we show the story of the MasterBrand evolution in basically 3 chapters. The first chapter was pre 21st century, let's call it. That's when MasterBrand was defined by acquisitions, ownership changes. It developed its customer relationships, it's channel. It widened its footprint. And then it moved into the 2000s, the second chapter. In that time frame, acquisitions continued. However, they were more focused on companies that had specialties in products or specialties in capabilities. And it was in this time frame that MasterBrand became a true market leader. Now we're entering a new chapter. Dave Banyard came on board, and we're entering a transformation of MasterBrand. And what the next slide is going to show you, which Dave briefly showed earlier is that this transformation is working financially. You'll see in the top 2 charts that we expect net sales CAGR or to end up over the last 3 years to be 11%, while the adjusted EBITDA CAGR is at 18%. It's phenomenal performance. And again, as Dave briefly mentioned, there was a lot of world and market turbulence over this time from COVID to weather events, the inflation, interest rates, supply chain disruptions, there was a lot of disruptions. But what MasterBrand did was stuck to its strategy, kept using the tools and performed. Now when you look at the bottom chart, you'll see that in the last 2 years, MasterBrand has decided to invest in its business, particularly in the strategic initiatives. Those initiatives really are what secured our flexible platform for growth in the future. And keep in mind, though that CapEx looks like quite an increase, in both of those years, the CapEx is still less than 1.2x depreciation, so relatively modest. So really, the question now is, how does MasterBrand continue to perform? How does it perform in varying markets and in the short term? So first, in the long term, how is MasterBrand going to continue? Well, we're going to continue executing our strategy. So from a top line perspective, we're going to continue to align with our customers and grow in the most attractive market areas. We're going to continue to lead through lean. And that's going to allow us to improve our service and our deliveries so that our customers continue to choose us as their preferred customer vendor. And then lastly, we're going to continue to improve our digital capabilities. And this will not only improve the overall experience for our customer, it will improve the overall work experience for our employee. So therefore, again, our customer chooses us as a preferred vendor and our employees choose us as their improved employer -- or their chosen employer. From a bottom line perspective, the same strategies apply. Do are aligned to grow strategy? We've made adjustments to the business so that margins now are attractive across products and across channels. This is huge to our performance because it allows us to be flexible when the markets change, when consumer preferences change without sacrificing profitability. Second, from a bottom line perspective, we're going to continue to lead through lean, and we're going to take waste and cost out of this business, not only in the plants, but also in the back office. And then lastly, we'll continue to enable our technology from a very basic perspective, just being able to make decisions better and faster. So now how do we perform in changing markets, right, whether we're growing or whether the market is declining. We believe we have a resilient and nimble platform now so that we perform in all market conditions. So firstly, the foundation of operational excellence is now already established. As Dave briefly went over earlier, our tools and events have resulted in annual savings of over $40 million. And keep in mind, we've just started to learn these tools, and now we're starting to get good at them so we're -- good at them. So we expect this progress to continue. Secondly, we have a well invested capital base already established. With the investments we've done over the last couple of years, we believe we can increase our current volume output by more than 20% with our current capital base. And then third, an important item that allows us to perform in various markets is that we have a very high variable cost structure. When you look at variable costs as a percentage of adjusted operating costs, it's at 75%. That's a 5-point improvement just from 2019 despite the capital investments that brought depreciation. That improvement is really can be attributed to our transformational efforts and the use of the tools. So now we know there's a lot of headwinds coming at us. So it's prudent to talk about it, and I will into in just a minute on the right side of the slide. But first, looking at 2022, we expect 2022 to be another great year for Cabinets. Our net sales growth will be at the high end of the market. And keep in mind, this is all organic growth for us. And then our adjusted operating margin as historically reported by Fortune, will reach to about 12%. And this is despite all the inflation that we had this year. And as Dave mentioned earlier, I'm going to repeat it again because it's such an amazing point of reference is, we had more inflation dollars this year than we've delivered an operating profit in previous years, yet we still performed as we did. Now looking at 2023, we all know there's headwinds and a lot of challenges. We do expect the market to come down in the high single digits. It will definitely be weighted in the first half, particularly in Q1. However, with that said, we will deliver decrementals -- market-leading decrementals of 25%. So how are we going to do that? Well, first, obviously, we're going to continue to lead through lean and take waste and cost out of the business. But more importantly, and a big impact right now is we have taken very proactive measures already in the fourth quarter of 2022 in anticipation of this downturn in the market. We have closed the plant. We have repurposed the plant. We have [ mocked ] all the plant actually this week. We have reduced shifts and other headcounts across the business. And we have various cost initiatives going on, this includes customer and vendor contract renegotiations. Our goal is to reach $100 million in savings, and we are well on our way with most of this not only identified but already executed. From a cash perspective, we believe cash will be resilient in 2023, and that's really for three reasons. One, our favorable decrementals. Two, we will again have relatively modest CapEx. It will be less than 1.3x depreciation. And we'll have a gradual improvement in our working capital dollars. That will mostly come from inventory. In 2022, we purposely built up our inventory and it was to combat all the supply chain disruptions and some of those issues now are starting to subside. Also in 2023, we expect to have solid operating leverage. We will start the year or basically at close, we expect to have a net debt-to-equity ratio of 2.3x. And we do expect to start the year with ample liquidity that will last us through the year with an undrawn revolver of about $300 million. So our achievable long-term targets, as Dave put out there, we are aggressive. We want to continue to grow this business and deliver profit. We plan to deliver market-leading net sales and market-leading margins, and we will do that through implementation of our strategy and using of the tools. So finally, I just wanted to briefly go over our capital allocation priorities. I mean, first, we are going to reinvest in this business, especially in high-return areas where we see value, particularly in our customer experience and our digital technologies. That will continue to happen. And I should mention in those 2023 decremental numbers that I gave you that doesn't -- excuse me, does include continued investment in our strategic initiatives. Second, we will maintain a strong balance sheet. We have near to midterm goals of obtaining investment-grade metrics. Thirdly, as our balance sheet allows, we will seek opportunities to return capital to our shareholders. And then finally, also as our balance sheet allows, we will look at and investigate M&A, and we'll do it in a disciplined manner. So with that, welcome, Dave, back to the stage.

So we're going to jump into Q&A here in a minute, but I just want to take a minute to wrap up. What you heard about today is, MasterBrand is the market leader, and we intend to stay a market leader. And we're going to do that using our strategy, which has really become part of our culture, which is a set of well-established tools that are designed to continue to drive market-leading value both to our customers and to our associates but also to you, shareholders. And that's our commitment to you. So now I'll invite Andi to come up and we'll -- and sorry, excuse me, also Farand to come up and -- similar to Fortune Brands innovations, there is an online tool for you to ask questions, and Farand will moderate, and we'll be happy to answer. Thanks for your attention.

Yes. As Dave mentioned, the QR code of [indiscernible] questions we've got several coming in here that we'll start with, but if people have more, just use the QR code on the agenda [indiscernible]. We'll get to as many as we can. And with that, let's take the first question. We've got a couple on kind of this related to the current margins where we are. Maybe this is one for Andi. When you just went through some of the margins and the outlook where we are in kind of bridging and what we see kind of the levers to get there over a period of time. Could you maybe provide a little color there? Because we've got a few questions on that.

Yes. So I mean, in the short term, if it's referring to those decrementals, it's all about being proactive in our cost reduction efforts and managing our plants and our capacity accordingly. In the long term, it's continuing those efforts and being willing to act quickly using our variable cost base to act quickly to market results. So it's about making those decisions on a timely manner without sacrificing capabilities of the future.

And I'd say the -- if you look longer term at our long-term financial targets, it's a methodical build to that. As I highlighted earlier, strategy deployment is all about setting that long-term bar out there and then working backwards to current state. And the specific areas start with things like lead through lean, where every year, we redo the value stream maps for every part of our organization, and that continues to identify those opportunities. And when we first started this, you had to push the teams to do that. Now, they do that independently. Every part of our business does that every year to set themselves up to identify what those opportunities are for next year. I think the other key thing, I mentioned it earlier, but I want to emphasize it again. Because of the supply chain dynamic over the last couple of years, we have not yet fully streamlined our extended supply chain. It just really wasn't an environment where you could do that. You had to take the supply you could get. And we are very effective at that. But it really wasn't an ideal environment for you to streamline an extended supply chain. So that -- there's a lot of work still to be done there. There are parts of the business that were built that way. We've built the stock business to be more streamlined right out of the gate. But there's a tremendous opportunity to continue to make gains and efficiency out of our extended supply base. So those two areas are key. And then there's growth opportunity. As I highlighted a couple of channels, 1 that I didn't that I'll bring up is e-comm. We're a player in e-comm. We have a nice business that's sold digitally. But there's a lot more runway for us as consumers migrate more in this category. It's not a huge category of e-comm today, but it's an area that's under indexed for us. And I always look at places where we know we can execute but we're under indexed as a great way for us to grow.

That's actually a good one. You touched on a little bit. We've got a couple of people asking about this one. When you think about the strategic transformation you talked about, you mentioned the annual value stream mapping. But if you thought about it and kind of where we are in that process, you mentioned runway, how much -- where would you say we are in it? And how much runway do we have left?

*Yes. I'm a baseball fan. So I'll use that analogy. It's a common one, but I'd say we're in the middle innings. We've established the culture. People understand it. People are executing on it. But now it's really becoming part of what we do every day. And so I'd say middle innings, but we may also be in -- I think there's a lot of opportunities. So maybe there's going to be extra innings in this game, I don't know, but that's how I would characterize it. And as Andi highlighted, too, is that the better you get at this thing, that the curve goes upward. It's not a linear set of opportunities that present themselves. As you get better and better, those improvements come at a more exponential rate than what you've seen from our results so far.

Great. One of the ones that people are asking about too is the comment on the first half versus the back half of 2023. And I know we're not giving obviously updated outlook or anything here today. But any additional color on why we think the first half is going to be a little bit worse in the back half, and anything you want to add?

Do you want to take that, Andi?

Yes, sure. I mean I think what it's all about is the backlog, right? It's slowing right now, partly due to cyclicality with the holidays, but then also due to the interest rates in market and the uncertainty. So our year-on-year beginning backlog will be down. So that's where we really see that Q1 being more challenged than the rest of the year. Second quarter will most likely still be impacted by the interest rates and inflation, and then we hope to see some steadiness and potentially some recovery in the fourth quarter.

And I think if you look at our business, it's 1/3 new construction, 2/3 repair and remodel. On the new construction side, the starts have dropped significantly over the last several months. And that's a leading indicator for the number of houses we're going to put cabinets in. Builders have been steady in completions over the last several months. But we start seeing that coming down as well. So at a certain point, our ability to grow in this market is limited by the starts and then that is going to start effect. I mean it's a normal behavior for the builders here that still have a backlog that want to reduce that backlog, they're just artificially lowering their starts and -- so we'll have to wait for them to increase starts again. I mean, historically, it's not the worst, it's ever happened. It's just a big variance from what it has been. And so -- and I go back to -- there'll be a cycle. I don't know yet how long that will last. We'll have more clarity on that most likely in our first quarter -- the fourth quarter earnings call that we do in the first quarter. But the -- coming out of that cycle, the demand is still there or the gap in housing is still there. It's probably going to get worse, frankly. And so at some point, the builders are going to have to -- or going to want to get back to the pace that they've been on. So at some point, that will kick back in. We just have to wait and see what the timing of that change is.

Okay. That's good. Kind of moving away from next year. We've got enough questions we'll get back to that maybe, but this is a little bit longer-term one. We talked about some of the trends, and I think Gay mentioned it in her portion of the Q&A. How do we stay ahead of trends? The question here is, what are you thinking about staying on trend and what consumers want? So how are we thinking about that going forward?

Yes. I think what you've heard a lot today is about the operational -- the transformation that we've doing with the company, which in some ways, it probably sounds internally focused. There is -- as we talked about with the line to grow, there's a lot of external focus. And Navi really told you some of the bread crumbs, if you will, of how we get more externally focused using digital tools and data. You kind of have to get your house in order first, and we're well on our way there. Our attention then quickly turns to where does the market -- where is it growing? And how do we participate in that and that becomes our next area of focus as we get through all the work that we've been doing and that we need to finish here. So to me, it's -- we -- because we cover the market so broadly, we're able to see those trends, and we've been acting on them. But that's going to become more and more of our focus. And as Gay highlighted and I highlighted too with the line to grow, it's really understanding what those customers want to be able to deliver to them, but then take that to the next step, which is using data, using understanding from all the digital tools that we're putting in place to really thrive and find those continued pockets of growth and deliver those. And a lot of that has to do with the staff. We have a great team that designs kitchens like you see in these slides, to stay current on that so we can shift with those various trends in the market.

I was going to add to that. Just as Dave mentioned, we have an amazing team, to me, very creative folks that have amazing showroom and design center and they stay up with recent designs, [ GTV ], do-it-yourself and they keep well ahead of those market trends.

Great. Let me ask a little bit on the $100 million savings that you mentioned in your presentation and you go back to the financials. You talked about it, is that cumulative savings? And what's all included in there as far as how cumulative is that? And then is that margin target dependent on that $100 million that you mentioned?

So well, let me just clarify a few things. So it excludes our normal $40 million of annual savings from CI. So the $100 million is proactive actions we're taking now to specifically address the headwinds in 2023. So it isn't really margin related. It's focused on true costs, whether it's capacity reduction, shift reduction, headcount reduction where it's appropriate without losing capability and a lot of other contract negotiations, those sorts of initiatives. So I would say it's true cost focused.

Good. Thanks for the clarification. And then as far as the -- you've got a lot coming in here with the spin, the corporate expenses, the additional costs related to the business, can you help people kind of understand that. It seems like some people want that on pack.

Yes, it is a bit confusing, especially when you look at the Form 10. So in the Form 10, you'll see -- prior to this year, you'll see in a historical accounting type allocation. A lot of those allocation, it's higher because it essentially includes duplicative costs. For example, there is the management team of MasterBrand already in MasterBrand and then there's allocation of Fortune's management team, which, of course, will go away once the spin happens. Then when you look at 2022, there will be that allocation plus there will be all the onetime spin costs. So again, it's a little confusing when you look at it from a pure accounting Form 10, 10-K perspective. Going forward, as you'll see, which was in the Form 10, 2022, ongoing spin costs are estimated to be about $30 million. So generally, in the future, you can look at spin cost of being about 100 basis points of net sales. In 2023, there will be probably mid- to high single digits of additional spin costs, onetime spend costs as we continue to stand on our own. But after that, we plan to be around that 100 basis points of spin costs -- excuse me, stand-alone costs.

Okay. Helpful. And then just kind of a quick follow-on to that one, CapEx as well, expectations.

So CapEx expectations for 2023, again, no higher than 1.3x depreciation. It will be highly focused we're -- in the last 2 years, when you saw on those charts, those were highly focused on our platform, making it flexible and focused on our footprint. In 2023, it's highly focused on our digital capabilities, and our consumer experience. So there will be a change in focus on our CapEx, but it will still be relatively modest, below 1.3x depreciation. And after that, it will depend, right? It will depend on growth. It will depend on other initiatives that may come about in the market.

Kind of stepping away from some of the financials. Dave, maybe this one is directed at you. How do you think about the long-term opportunity in the direct-to-consumer sales? Is this something we'd want to put a significant investment in and for a brand?

Yes, it's -- I think there's certainly opportunity for it. And we've -- we are spending time learning about it. It is a different way of selling, and it's a different way of operating. But we do experiment with that. As I highlighted earlier, we are in the e-commerce channel with all the large -- as you would expect, all the large leaders in that channel. And we're learning a lot about fulfillment there and how to connect with the consumer through existing e-channel -- e-commerce channels. And I think eventually, that gives us the opportunity to do more of that. But again, it comes back to prioritization and focus. You want to be good. Going direct to a consumer, you really -- you want to make a good first impression. You don't want to get out there and all of a sudden because you get that instant feedback, I think John Lee was talking about this in his presentation, you get that instant feedback and the reviews. And then -- and if you haven't done a great job with it, it almost hurts you more than doing nothing. So it really does take a focused effort. We've done some learning with it, but we're not there yet to the point where we feel that it's a viable place to go. But we -- of course, as we get better at it, we're going to go after it and as an opportunity.

Good. Kind of going back to a financial question for you, Andi. A couple of people asked specifically about going into next year, assumptions around and data as well on the pricing front as we go into the market, what are we thinking from that from a financial perspective about the ability to maintain it and what's in our assumptions. And then also for the long-term targets and then Dave, maybe more related on the commercial side or your thoughts?

Well, I'll start with how we think about it commercially. First and foremost, there has not been a significant deflation yet in our supply chain side of things. Materials are still costing more freight and logistics are still costing more. So while the obvious trend when markets slow down, is for commodities to start coming down, we haven't seen a material change there yet. I'm sure we will. Our approach to price is, particularly in this kind of environment, is to really approach the customer, what are they trying to accomplish and steer the conversation differently to say we can deliver for you what you're looking for at a lower cost to you, but it's not a price discussion. And that's the beauty of our product continuum and our delivery capability and in a lot of ways, our channel is that we can have these conversations to say, if you're aiming for this price point, we have a product set that fits that and accomplishes what you're trying to accomplish without talking about the actual price of what you've been buying. Now that being said, as commodities do come down, there will be market pressure to change the list price on things, and we'll work through that as we go. We've gotten a lot better at pricing over the past couple of years, and I think you heard Navi talking about how we're trying to bring that data into our systems in a way that we get quicker insights. But I think we wouldn't have been able to accomplish what we have over the past couple of years if we hadn't gotten a lot better at pricing. So we're more nimble than we were on pricing before, which I think will help us in the coming environment. But also that nimbleness is how we approach the customers that we're dealing with on that very topic in terms of what we're offering them. I don't know if you have anything.

Yes, I would just add one point, which I think really helps us, and it's really due to this transformation was the adjustments we've made in the business that we can -- if the market does flex us across the product line, the margin profitability is still favorable in all those products and channels now where it used to be a little bit more weighted to made-to-order products versus stock. Now we have profitability across the channel. So we're able to react a little bit faster. We've also become much more strategic in our pricing such that rather than just dropping the price like someone might do, we have components of pricing, whether that's fuel surcharges or other things. Well, fuel appeal surcharge will come down effectively reduce the price when fuel comes down. So it comes down with our cost. So that helps us in maintaining that profitability.

Good follow-on, and there's just one question came about promotional activity. Any changes you could see in that related?

No. We use promotion activity to test and learn. And I think the key to promoting is using promotion determine is this a demand problem or a price problem. And so we are judicious about using -- obviously, if you've been out into cabinet dealers and in home centers, you see that those channels often use discounting. But if you use this counting to understand, does it change the dynamic of demand or not, you're going to make the right decision about what you do with that promotion. So that's how I look at promotion. Is it you experiment with it to understand do we have a price problem or is it just a demand problem? And it's a demand problem, it really -- dropping price with promotion doesn't help anybody. It really just sits there on the shelf and still doesn't sell. So that's how we look at it and that's how we've been approaching it this fall is using it as a tool to do that.

Okay. Good. And actually, 1 question relates to what we had presented for our market expectations versus FBI, and what helps us get to our high single-digit guide as opposed to what FBI going to put out mid-single? What's the difference in the markets now are different with the 2 different companies. So maybe help people understand that.

Sure. A number of folks have asked me this during some of the breaks. We're a larger ticket item. So we're going to have more amplitude in our cycle than the remaining part of Fortune Brands innovation. It's a bigger purchase. So when times are tight, it's a bigger decision to make that purchase decision. I go back to, again, putting in front of the consumer exactly what fits their need, hopefully, at a price point that convinces them it's the time to do it. And so while we will have bigger amplitude in our cycle than other building products companies that are more -- that are less discretionary, I think we're built well to handle that within our part of the industry because we are able to -- once that consumer walks in the door, we're putting things in front of them that are getting them to yes as opposed to other parts of the market that may not have that same ability.

Yes. Now everyone here is asking about, when you look at the leverage target, and you talked about specifically on the balance sheet. We mentioned the interest in staying investment-grade rating, what's the range that should -- people should think about? I suppose what will be initially coming out with our to EBITDA?

So at close, we plan to be around 2.3x.

Range, is there any range that we think we want to operate in? Any clarity there or...

I think we want to be at 2x to 2.5x. But of course, if M&A comes about strategic M&A, we'll take exception.

Yes. I mean I think we have a path, certainly, within the near term to stay inside of 2x to 3x depending on how the market performs over the next year. And then prior to doing any M&A, we want to make sure we're comfortable that the balance sheet is in good shape for a long period of time to make those decisions. But there's also M&A. I don't know if you're going to get a question on this, but I'll answer for you anyway. The -- we have not done M&A in this business during my tenure here, obviously had in the past. M&A is a muscle that you have to practice with and work. And I think mix team at Fortune Brands has done a phenomenal job with it. But we haven't done it in a while, and you really -- you don't want to go into that kind of mode without being ready for it and practicing. And so I think you see, as we look at potentially moving down the road towards M&A, which is a thing that I think is a great part about spinning is that we're freed up to do that. We're going to be doing smaller bolt-on type things first, things that add to our capabilities in a meaningful way, but aren't transformational because really, it's high-risk, high-return way of using your capital. I think there's a lot of great things that you can do with it. I've done that for my whole career, but I think you really have to be practiced at it so that you're effective and not creating more complexity, you're actually additive and not just creating more of a mess.

That was perfect timing because that actually was the next question.

That was not planned. I assumed it was coming.

There is no -- it's perfect though. I think another one came in about industry structure, so maybe try and hit that one here. As far as we would look at ourselves now compared to maybe other public competitors or the others out there right now, anything you want to point to as far as the difference between our platform, the platform of other competitors? Anything specific you want to point to?

Yes. I mean I think it starts with what I talked about from a market leadership standpoint, we have the most comprehensive channel coverage and the most comprehensive product portfolio to cover that channel. And those are great, but it's how you execute on that, that matters. And again, I don't work at our competitors, obviously. So -- but I think we treat our tools and our culture as the most critical thing that we do, and it's embedded in our culture. And when you have that, you have this flywheel that starts spinning and great things happen when that flywheel keeps spinning. And so that's what we spend our time focusing on. And that, combined with our market-leading position in channel and product is really drives that opportunity for growth, both on the top line and the bottom line because you're just consistent with every stakeholder that you're dealing with. You're consistent with your customers, your associates love working there and you deliver great returns for shareholders. So to me, that model works really well, and it's not easy to do. You have to -- the transformation like this, you have to have the fortitude to get through the challenges of building that kind of culture. And that's why a lot of -- there are a lot of companies out there that say that they use these tools. I'm sure all of you as investors hear these tools quite a bit. Dig in underneath and see how well they're really using them. Is it part of their culture, and that's the differentiator here. And then you can use it for things like what Navi was talking about, what's are groundbreaking for us and our industry, where we're not really a digital industry. We have the opportunity in the head space to do that because we've improved the business in so many other places.

Quite time left for two questions. I think these are two good ones to finish on is, where -- how would you say -- I think we've already covered it a bit. How would you say things are different between the company and maybe the industry this time versus the last downturn?

Yes. So certainly, the housing dynamic is different. So the overall housing market looks very different today in terms of overbuilt versus underbuilt. We'll start there. But specific to the cabinet industry, there was not the scale player like us back at that point. And there wasn't a scale player that had the flexibility and the nimbleness in the operating model like us back then. So there may have been companies that had certain aspects of it, but there wasn't that complete full product portfolio with a very flexible and agile operating system behind it in the last downturn. And so going into this, we're well prepared for it. It's almost -- I don't -- it's not -- you don't sit here preparing for the worst all the time. But I mean, we know that we're in a market that has this kind of cycle. And so everything we do is built around. How do we help ourselves and our customers through that cycle. And we really didn't -- we didn't operate that way before nor did anybody else. And so I think based on this a lot more -- there's a lot better fundamentals for housing in general going into the cycle, and we're better built for it. So I think it's just going to be a different outcome.

Sounds good. All right. And then this one, I don't know. This is definitely directed at you, Dave. As a new CEO of a stand-alone public company, the question is, just how do you spend your bucket your time?

Yes. So fortunately, I've had a little practice at this. And I've got a few years to have a few things that weren't on my place. But look, I think to me, it's the CEO sets the tone for culture. That's -- I'm the culture cheerleader in this company. That's what that really is what I do. And hopefully, you can see I love this stuff. So internally, I spent a ton of time just driving that culture and helping everybody understand how it works. And then I like to translate that for our customers. So I'd say even split between culture tier leader internally and then expounding on that to our customers externally about how great this is in. And the great part about it is we're not perfect, and I'm always willing to listen to what we're not perfect at. And I think what our customers start realizing is that when they tell me about things and maybe not perfect debt, we go fix it. So I love those interactions because we've gotten to a relationship standpoint as customer and supplier where they're willing to share that in a constructive way and we help them fix that. And then -- so then the last piece, of course, is I have to now interact with all of you on a regular basis. So I will add that to my list, and I'm excited to do that and continue to tell us -- tell you about what we're working on and how we're doing that. So that's I'd say I've divide it up that way.

Perfect. All right. Thanks for that. Thanks, everybody, for the questions. Obviously, if there's ones going forward, please reach out to me. Happy to answer them. And with that, I'll go ahead and leave it for you to some closing remarks today.

Well, thank you all for coming today as we introduced MasterBrand to you. We're really excited about the road ahead, and we're going to join you for a reception in the lobby right after this. So again, thanks for your time and attention. Really appreciate you being here, and we look forward to chatting with you more.