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

Good afternoon, everyone. Thank you for attending the Deutsche Bank Industrial Conference. I'm excited to have Fortune Brands management team here. Jesse Singh, the CEO; Dave Barry, the COO; and Ashley George, the Interim CFO, with us today. So I guess I'll just jump right in. And if there are questions in the room, please feel free to raise your hand, and we'll start peppering those in as well.

So I guess just starting a lot of news at Fortune over the past couple of months. Jesse, you had your first earnings call with Fortune Brands. I guess I just want to start on the strategic refocusing here. You called out the organization had become too internally focused. There's some corporate complexity that kind of pulled attention away from customers. I guess what are the most important structural behavioral changes you guys are looking to make to sort of reorient Fortune Brands around service, product innovation, customer responsiveness?

Yes. Thanks for the question. And thanks for having me here. As you pointed out, it's been about 6 weeks that I've been on the job. I came into the role very excited about the opportunity of having really, really strong brands that have really good potential. And coming in, it's pretty obvious that, that opportunity exists in a pretty meaningful way for the long term in particular. I think as you pointed out, I highlighted a few things on the earnings call. I think number one, we've had a lot of change in the organization. We've obviously had some turnover in management, starting at the top. We had some activity at a Board level. But we also made some changes relative to how we're organized and our headquarters consolidation. And all that's led to a lot of internal discussions in the company and a focus on, perhaps at times the wrong things for the right reasons, which is how we operate. And I think we're trying to refocus the company back to just our great brands and our great customers and really being focused externally. And as part of that, we can better align our organization to operate in a way that's more focused on the customer and more focused on enabling our businesses to deliver against our customers, deliver it in a more profitable way and also do it in a more streamlined and responsive way.

That's helpful. I guess just the product innovation came up a few times on the earnings call. Can you just touch a little bit about sort of where you guys were in product innovation, sort of the guideline or the hope of where you're going to get that to and sort of the pathway to get there?

Yes. I think first, we've got to be oriented on the right customers and the right customer segments. And we've got a lot of opportunity. There's areas where we've got good penetration. There's areas where we're underpenetrated. And product development is pretty straightforward or innovation can be pretty straightforward, which is you need the right pipeline of opportunities. You need to understand where you have the right to win. You need to understand your internal capabilities and then you need to make sure that you have the right processes to deliver against it. Coming in, we've -- over the last couple of years, we've probably under-indexed in terms of new product launches. I think with Dave at the helm over the last almost 6 months, we've been really focused on making sure that we restart our pipelines. I think in each of our businesses, we've got a pretty good list of potential new products and things that are in flight. I think if you look objectively, I would say that there's opportunities to really speed up how fast we bring products to market. And then when we bring new products to market, just really making sure that we do it in the right way in the most impactful way. So I think coming in, as you look at, obviously, innovation is in our name, there's a lot of opportunity for that. I think part of the realignment against businesses is just making sure that we launch more products that are relevant to our customers and do it in a bigger way.

It's a great pivot to my next question just around the commentary around decentralizing your capabilities. I guess as you move the brand marketing and advertising resources back into the business units, I guess what changes do you expect your customers or channel partners to actually feel? And I guess how quickly -- how quick of a process is doing something like that?

Well, first, as you pointed out, we've taken steps to realign against -- realign -- we've actually moved marketing back into the businesses. We had gone through phase where we thought a more centralized organization in marketing would be -- give us more scale and leverage. I think what we found in that centralization is we made it more complex. We became a bit slower, and we were less responsive to the opportunities. And so as we've realigned that back in the business, it should give us an opportunity to just be more responsive and execute in each of our businesses in a bigger way. And I think it's going to be similar. We already talked about the new product side of things. I think it will be similar in terms of our ability to execute on new products. And I'll just give you a tangible example. Like why do I think it's going to be faster? We've got a terrific Yale Locks business, right? It's an interconnected lock business. It's one of our smaller businesses, but I think it's got good potential. To get some of the products through development would have required 5 separate organizations to be involved in just moving a new product through the organization. These are 5 separate functions within R&D. Then you add to that, you would have had a separate marketing function, you've got a separate supply chain function. You may have had a separate PR function. You may have had a separate digital function. So you think about the complexity of trying to execute a new product launch, that consolidation back towards and aligned against the businesses should really give us a lot of speed. So the outcome to a customer should be better responsiveness, better service and better engagement, especially from the channel side for more growth.

That's helpful. I guess on the time line to do a lot of these things, I think on the call, you mentioned by year-end, you expect the businesses to be realigning against new priorities. I guess what are 2 or 3 milestones investors should be watching for, for that service levels, new product launches, cost savings, like to gauge whether the reset is working and on track for that time line?

Yes. I would say we're early days in terms of specifics. And I know it can be frustrating. We all want tangible things we can point to that are quantifiable. I would say from a -- if you think about what we talked about on the earnings call, some specifics, I think number one, when you think about our service levels, as we talked about, and I know you may have a question later on, on that. But as you think about our service levels, they're not been -- they're not -- they have not been to the level that they should be. We are making changes to our -- in particular, on our Water business to some of our processes to make sure that we get back to the service levels that our customers expect and deserve. We would expect a lot of those changes. We would expect a lot of our service levels to come back to normal by the end of the year. And then we should continue to see improvement beyond that as we move into next year. Now we're incurring some premium airfreight to get there. We may have some incremental inventory that we need to carry to deliver that. That will probably -- hopefully, the airfreight won't carry into next year, but we may have some excess inventory that we need to carry as we work our way to improving the process. I think we've talked about cost down in the organization. I think Dave, at the last earnings call -- last 2 earnings calls has talked about a $70 million cost takeout. We should expect all of that to be effectively done by the end of the year. And in terms of the impact to the business from a cost and margin standpoint, we're balancing, realigning, taking some costs out, but yet reinvesting in our businesses for the long term. When that balance works out so that the net of that is accretive margins, I think, remains to be seen. And we'll -- as soon as we get a better sense of that, we'll talk about it. But right now, you should think that in parallel, we're trimming some costs and expanding others as part of that realignment. Dave, I don't know if you have any other comments on top of that?

And I guess just maybe diving a little bit into that. I mean on the updated EPS guide applied roughly $0.30 of pressure, I think, from all the actions that you guys are doing, $0.20 from the investments, $0.10 from that service level constraint. I guess how should the investment community look at it as like temporary catch-up spending versus maybe a more permanent step change because of like all the product innovation you're investing in or something like that?

Yes. I'll start on that one, Collin. I think just first characterize the commercial environment, the operating environment, they're very consistent from last quarter when we reset guidance. And what we're trying to give us some room for, one, is just around our execution on the service side. So the $0.10 of volume that we called out is really our inability to go chase new business while we're having trouble fulfilling our existing business with our customers. And so we're pulling back on some areas that we probably would've lean into in the second half until we can get our service right. The $0.20, I think of it in 3 buckets, and I can talk a bit in more detail about each 3. So one is service-related investments. The second, I'd say, new product development and commercialization associated with that. And the third, some upper funnel brand building and marketing behind some of our new campaigns. On the service investment, what we're really trying to do is service our customers at their expectations while we're rebuilding our sales and operations process underneath. So as we went through headquarters transition, the team that we had left sooner than expected, and we had to rebuild that team. And at the same time, we're rebuilding the process back to where it was when it was working prior. To compound things, we turned on a new system for Moen to plan that wasn't working. So we had a new team, a new system. We're in the process of unwinding that system, getting the team up to speed and bringing some talent back that we let go to help accelerate that. So think of it as rebuilding the process underneath while investing on top of that on airfreight, on distribution costs like overtime, looking at some different supplier configurations that maybe higher cost, but better service for a period of time just to make sure we're delivering on our customer commitments. I would expect as we move into early next year that a lot of that overlaid investment starts to tail off as the underlying process comes up and is more mature. But as you know, these things, they take a few cycles to run through, especially when you're talking about a complex long lead time supply chain. New product development, commercialization, Jesse touched on that. How do we get the right things to market faster? How do we work with our suppliers to pull things off the shelf, get them to market faster? And then how are we commercializing them with excellence once they're on the shelf to pull them through. And then the final bucket on the marketing piece, we launched the Moen, a new Moen marketing campaign for the first time in a handful of years last quarter. Master Lock has a new campaign that we launched last year that's performing. And so how are we continuing to seed that upper funnel investment to drive awareness? I'd say both of those, it's probably a near-term acceleration of investment that then either gets to a steady state or even pares back some as the organization starts to mature and the process starts to work a little bit better. Underneath these investments, though, we're pulling costs out of the business, and Jesse alluded to that as well. And where we have excess corporate costs, where we have resources that aren't aligned as closely with the business as they need to be, we're working on some of those structure items in the near term.

That's really helpful color. And I guess just following up maybe on the upper funnel investments. I guess, is there particular businesses that you feel like require more attention than others? Or is it going to be pretty proportional to like the size of each business now? I guess how should we think about sort of where you think maybe you underinvested in either product innovation or marketing?

My view, it's relatively proportional to the size of the business. I mentioned we have new campaigns in Moen and Master Lock. I think there's more we can do with Yale, and there's more we can do with Therma-Tru and Larson. It might look a little bit different than upper funnel investment, but still investment to drive the brand, but relatively proportional.

Okay. And I guess pivoting maybe to the service and you alluded to some of the operational side of things. And you talked about this a bit on the call. But I guess when you're talking about reverting processes that have historically worked better, what exactly has to be reset? And like how long does it take to be reset? And then sort of what gives you confidence that those service levels can return to baseline with maybe not creating the excess inventory for a long period of time?

Yes. I'm glad you mentioned inventory because we've taken constraints off of inventory for the near term while we work on service. So you can expect our inventory to be a bit higher in the near term. We do believe there's a medium- to long-term benefit in inventory, but we need the process to work before we can get after that. We know how to do this. I mean, actually, I've been in the business a long time. Jesse has been in businesses where this works. It is a -- all the way from demand planning through to delivering to the customer, it's rebuilding that process with the right talent. Some of it new, some of it we've had in the past that we're bringing back that we lost through the headquarters transition. But we've executed on this in the past. So it's something that is very fixable, and we know how to do it. It's just having it because the supply chain is 6 to 8 weeks, if not longer, in some cases. And so you have to get the right forecasting inputs. You have to send the right signals to the supplier. You have to look at the right data and then pull all the way through the DCs to the customer. And so at each step along that process, there were breakdowns that we're fixing. I don't know if you've got anything here?

Yes. And as I mentioned earlier, and I think Dave's touched upon it, I think we'll be in a different place as we move through the end of the year. And I think part of what we're recognizing is we want to be a really good -- we want to make sure that we're a high-quality, high-service company, which we have been for many, many years. And we've had a short-term variance against that. We'll get it back, but we're going to be thoughtful about not overpromoting or doing something that's going to create excess stress on the system, and we're doing this for the long term. We're not here to try to ship a bunch of product out in one quarter or the other to try to hit a number. We're going to do what's right for the long-term health of the business and for the long-term health of our customers. And I think that's an important overlay here, which is part of why you've seen a bit of the variation on the guidance and all that. We just want to make sure that this is a fantastic business that's got enormous upside in multiple market segments. I mean there's a lot of spaces where we have the right to compete in, and we want to make sure that we're doing things in a really thoughtful, measured way that leads to long-term value creation.

So, I guess following up really quickly on the right to win. I mean, is there a segment particularly whether that be channel or end market specific where you think that's been underpenetrated at Fortune going -- recently in the recent past?

Look, I wouldn't be a growth person if I didn't think there were multiple areas of underpenetration. I would say that if you just look at numerically, if you look at the -- if you look, for example, at the Moen business and the Therma-Tru business, we've had a really good business tied to single-family new construction. That's a great business to be in always. It happens to be a business that's under pressure right now. So the general theme I would give on the company is that we need to be -- we need to continue to expand in repair and remodel, which tends to be a larger, more complex, more fragmented part of the market. And within there, there's a number of subsegments where we think that we have the right brand, we have the right products and the right -- we have the right to play to use your -- to use your question. And so we're going to be very selective about targeting some of those areas where we believe, in general, the R&R, we're underpenetrated. We'll be select on targeting some of those areas and investing against that in all of our businesses.

Great color. And I guess going back to the S&OP system really quickly. You mentioned kind of reverting and turning off like a new piece. Is there going to be like an additional layer of investments maybe in the future as you sort of modernize that process? Is there a next level that you guys need to be taking? And I guess like what's the timing? Like how does that sort of play out in the future?

Yes. I mean, I think my view, not a material investment, right? It's really getting back to the basics. We have functioning ERP systems where a lot of this work takes place and just getting people trained up and understanding how the business works in those systems is really important. I think where we've got into some trouble as you try to make these overlays on top of the core systems and use what appeared to be newer, better tools and it didn't work, right? The implementations didn't work. And so trying to unwind some of that. I also think it's interesting with AI, I think all of these systems implementations look different in the future than they have. And that world is changing rapidly. So you don't want to start down a path of a significant implementation knowing it could look very different, even 6 to 9 to 12 months from now.

Are there any questions in the room sort of around the investments or anything like that?

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I think, the concept of reinvestment is to make the business stronger, to make our customers stronger and to create more value. In my generic view of business, lowering price is not creating more value. It's just -- it's a transactional move. I also fundamentally believe that we're in a market where people choose the right product for what they need. And you've got to have value in what you sell. But we sell faucet -- what's our -- like $10,000. Like we've got faucets in the multiple thousands of dollars, and we have faucets that might be $100, right? And in each case, we've got to deliver the right value there. I'm not a big, let's -- let's make a deal sort of a person. So I'm not going to say that there's not going to be appropriate actions along the way. But I think fundamentally, when we're building this business, it's really about investing for value creation for both ourselves and our customers.