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Fortune Brands Innovations, Inc. (FBIN)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 delivered $1.110B revenue (+7% YoY), GAAP EPS $0.76 (+13% YoY) and EPS before charges/gains $0.83 (+20% YoY); operating margin expanded 200 bps to 15.1% before charges/gains as execution outweighed organic volume pressure .
  • Segment mix: Water +5% sales (organic −7%) with 100 bps margin improvement; Outdoors +9% sales with 680 bps margin expansion; Security +9% sales (organic −8%) with 170 bps non-GAAP margin improvement .
  • Full‑year 2024 guidance reaffirmed: net sales +3.5% to +5.5% (organic −1% to +1%), operating margin before charges/gains 16.5%–17.5%, EPS before charges/gains $4.20–$4.40, FCF ≈$520M .
  • Q2 set‑up: management guided net sales growth ≈10% and operating margin 16.5%–17%, noting 25–50 bps start‑up inefficiencies from two new Water facilities (headwind only near term) .
  • Wall Street consensus (S&P Global) for Q1 2024 EPS/revenue was unavailable due to data access limits; we cannot confirm an external beat/miss (SPGI daily limit exceeded).

What Went Well and What Went Wrong

What Went Well

  • Margin execution and non‑GAAP EPS growth: Operating margin before charges/gains rose to 15.1% (+200 bps YoY) and EPS before charges/gains increased 20% YoY to $0.83, reflecting “strong execution” and benefits from transformative actions .
  • Outdoors inflection: Segment sales +9% with operating margin up 680 bps; Doors grew low double digits on single‑family new‑construction tailwinds, and Fiberon wholesale sell‑through “significantly outpaced the market” (POS >20% growth) .
  • Connected products momentum: ~200,000 device activations in Q1; +15,000 new Flo users, and retail/e‑commerce POS for Flo grew 85% YoY as the connected group of ~200 engineers hit milestones ahead of schedule .

What Went Wrong

  • Organic top‑line softness: Organic company net sales −3% despite reported growth (+7%), with Security and Water pressured by select customer destocking and softer retail/e‑commerce POS .
  • Seasonal cash flow: Free cash flow was −$135.9M and cash from operations −$71.3M in Q1 given typical seasonality; leverage stood at 2.9x net debt/EBITDA .
  • China remained a headwind: Water China sales declined mid‑single digits organically as consumers transitioned away from speculative new construction toward R&R, delaying recovery .

Financial Results

Total Company – Quarterly Comparison (oldest → newest)

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$1,261.2 $1,161.3 $1,109.6
Diluted EPS (GAAP) ($)$1.07 $0.64 $0.76
EPS Before Charges/Gains ($)$1.19 $0.95 $0.83
Operating Margin (GAAP, %)15.6% 11.5% 14.0%
Operating Margin Before Charges/Gains (%)17.4% 15.8% 15.1%

Segment Performance – Net Sales and Margins

Segment MetricQ3 2023Q4 2023Q1 2024
Water Innovations Net Sales ($mm)$688.0 $663.0 $625.3
Water Operating Margin (GAAP, %)23.9% 21.1% 22.6%
Water Operating Margin Before Charges/Gains (%)24.2% 21.8% 22.6%
Outdoors Net Sales ($mm)$366.4 $309.2 $315.0
Outdoors Operating Margin (GAAP, %)14.2% 2.4% 10.9%
Outdoors Operating Margin Before Charges/Gains (%)14.8% 13.9% 12.0%
Security Net Sales ($mm)$206.8 $189.1 $169.3
Security Operating Margin (GAAP, %)8.2% 13.0% 11.3%
Security Operating Margin Before Charges/Gains (%)16.8% 17.2% 15.7%

KPIs and Balance Sheet

KPIQ3 2023Q4 2023Q1 2024
Device Activations (#)——~200,000
New Flo Users (#)——~15,000
Flo Retail & e‑Commerce POS YoY Growth (%)——85%
Free Cash Flow ($mm)$269 ~$140 $(135.9)
Cash from Operations ($mm)——$(71.3)
Net Debt ($mm)~$2,375.9 (end Q3) $2,303.7 (end Q4) $2,685.0 (as of 3/30/24)
Net Debt/EBITDA (x)2.6x (end Q3) 2.5x (end Q4) 2.9x (as of 3/30/24)
Share Repurchases ($mm)$30 in Q3; $150 YTD $20 in Q4; $150 FY $100 in Q1; $125 YTD (as of 4/30/24)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total Net Sales GrowthFY 2024+3.5% to +5.5% +3.5% to +5.5% Maintained
Organic Net SalesFY 2024−1% to +1% −1% to +1% Maintained
Op Margin Before Charges/GainsFY 202416.5%–17.5% 16.5%–17.5% Maintained
EPS Before Charges/Gains ($)FY 2024$4.20–$4.40 $4.20–$4.40 Maintained
Cash from Operations ($mm)FY 2024~$720 ~$720 Maintained
Free Cash Flow ($mm)FY 2024~$520 ~$520 Maintained
Water Net Sales GrowthFY 2024+3% to +5% (organic −2% to 0%) +3% to +5% (organic −2% to 0%) Maintained
Water Op Margin (Pre C/G)FY 202424%–24.5% 24%–24.5% Maintained
Outdoors Net Sales GrowthFY 2024+1% to +3% +1% to +3% Maintained
Outdoors Op Margin (Pre C/G)FY 202413.5%–14.5% 13.5%–14.5% Maintained
Security Net Sales GrowthFY 2024+10% to +12% (organic 0% to +2%) +10% to +12% (organic 0% to +2%) Maintained
Security Op Margin (Pre C/G)FY 202415.5%–16.5% 15.5%–16.5% Maintained
Corporate Expense ($mm)FY 2024$140–$145 $140–$145 Maintained
Interest Expense ($mm)FY 2024$118–$120 $118–$120 Maintained
Other Inc/(Exp) ($mm)FY 2024~+$5 ~+$5 Maintained
Tax Rate (%)FY 202423.25%–23.5% 23.25%–23.5% Maintained
Share Count (mm)FY 2024~127 ~127 Maintained
Net Sales GrowthQ2 2024—≈+10% New quarterly outlook
Operating MarginQ2 2024—16.5%–17% (Water start‑up headwind 25–50 bps) New quarterly outlook

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023, Q4 2023)Current Period (Q1 2024)Trend
Connected products (smart water, locks)Annualized connected/digital run‑rate ≈$250M; integration of Yale/August progressing; >4M activations ~200k device activations in Q1; +15k new Flo users; connected group hitting milestones ahead of schedule; Flo retail/e‑commerce POS +85% YoY Accelerating
Outdoors (Doors & Decking)Decking wholesale POS up mid‑single digits; Doors impacted by lagged new‑construction starts, expected to tailwind in 2024 Doors low double‑digit growth; Fiberon wholesale sell‑through significantly outpaced market; segment margin +680 bps Improving
Water segment margins/capacityWater margins ~23%–24%; targeted capacity additions planned (Moen West Coast DC; House of Rohl UK facility) Water margin 22.6% (+100 bps YoY); start‑up inefficiencies 25–50 bps near term; sequential margin improvement expected through 2H Stable to improving post start‑up
China consumer & channel mixChina soft; emerging R&R channels (showroom/home decorator/e‑commerce) grew despite weak new construction China sales declined mid‑single digits; business pivoting to R&R with strong Tier 1/2 city presence Transitioning
Supply chain/logistics & macroCategory management, sourcing, and inventory reduction drove cash; monitoring rates & affordability Inventory built to buffer Red Sea/Panama Canal disruptions; retail/e‑commerce POS remains negative YoY but sequentially seasonal Managing through disruptions
Price/costLow single‑digit price contribution; net deflation <1% of COGS given offsets Net price positive in 2024; ~1% net deflation of COGS; base metals inflation likely felt late 4Q24/1Q25 due to supply chain lag Favorable spread maintained

Management Commentary

  • “Our first quarter sales and margin results came in above our expectations as our teams executed our strategy of growing the core and accelerating in connected products” — CEO Nicholas Fink .
  • “We saw powerful proof‑points of our compelling investment thesis and are increasingly seeing the benefit of the transformative actions we took over the past few years” — CEO Nicholas Fink .
  • “For the second quarter, we expect net sales growth of around 10%, with operating margins between 16.5% and 17%… we remain confident in our ability to hit our previously communicated full year 2024 guidance” — CFO David Barry .
  • “Our connected water business was particularly strong… retail and e‑commerce POS performance for Flo grew by 85% versus the first quarter of 2023” — CEO Nicholas Fink .
  • “We expect our Water segment to continue to execute on our commitment to deliver above‑market sales performance… pricing actions to hold up” — CEO Nicholas Fink .

Q&A Highlights

  • Destocking and channel dynamics: Security organic −8% due to select customer destocking; roughly half of Q1 decline driven by destocking, bringing POS closer to mid‑single‑digit declines .
  • Water margins and start‑ups: Water on track for 24%–24.5% FY margin; expect 25–50 bps margin headwind in Q2 from ramping new facilities, then sequential improvement through the back half .
  • POS cadence: Retail/e‑commerce POS remained negative YoY but improved sequentially week‑over‑week; single‑family new‑construction channels showed growth with better input trends in April .
  • Inventory & logistics: Built extra inventory buffers against Red Sea/Panama Canal disruptions; aim to protect service levels even at the expense of near‑term capital/expense .
  • Price/cost and estimates: Net price positive in 2024; net deflation ~1% of COGS, with base metals inflation lagging into late year/early 2025 given contractual structures .

Estimates Context

  • S&P Global consensus estimates for Q1 2024 EPS and revenue were unavailable due to access limits (SPGI daily request limit exceeded); therefore, we cannot quantify beat/miss vs Wall Street in this recap. Management indicated results were “above our expectations,” but guidance was reaffirmed given choppy demand into April .
  • Forward quarters: Company guided Q2 revenue growth ≈+10% and operating margin 16.5%–17%, and reaffirmed FY EPS before charges/gains $4.20–$4.40; analysts may adjust intra‑quarter margin trajectory for Water (start‑up costs) and Outdoors (volume leverage) and connected products growth assumptions .

Key Takeaways for Investors

  • Execution outweighing volume: Margin expansion (GAAP +130 bps, non‑GAAP +200 bps YoY) and EPS before charges/gains growth (+20% YoY) highlight effective cost/productivity and mix management amid soft organic volumes .
  • Outdoors turning: Doors benefitting from single‑family new‑construction completions; Fiberon wholesale momentum and 680 bps margin expansion support improving earnings quality .
  • Connected tailwinds: Rapid adoption of smart water products (Flo) and aligned connected engineering organization are building a durable growth vector; watch subsequent quarters for attachment rates (e.g., SpringWell cross‑sell) .
  • Near‑term watch items: Q2 margin headwind (Water start‑up 25–50 bps) is transitory; destocking largely behind Security, though broader consumer softness persists in retail/e‑commerce POS .
  • Cash and capital allocation: Seasonal FCF headwind in Q1 expected; reaffirmed ~100% cash conversion for FY 2024 and continued opportunistic buybacks under robust authorization (note share repurchases: $100M in Q1) .
  • China optionality: Continued R&R pivot in Tier 1/2 geographies provides longer‑term optionality; expect uneven near‑term macro .
  • Trading lens: Reaffirmed FY guidance and Q2 outlook provide visibility; near‑term stock narrative likely driven by connected momentum, Outdoors margins, and Water margin progression post facility start‑ups .

Notes: All figures are as reported; margins refer to operating margins. Non‑GAAP items are “before charges/gains” as defined by the company.