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Fortune Brands Innovations, Inc. (FBIN)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 2024 delivered “solid sales and strong margin results”: revenue $1.24B (+7% YoY; organic -3%), GAAP EPS $1.06 (+33% YoY), and EPS before charges/gains $1.16 (+8% YoY); operating margin expanded to 16.1% GAAP and 17.4% before charges/gains (+40 bps YoY) .
  • Segments: Water +7% reported (-5% organic) with 23.3% operating margin before charges/gains; Outdoors +4% with 16.3% margin before charges/gains; Security +12% reported (-7% organic) with 18.9% margin before charges/gains and sharp YoY improvement .
  • FY24 guidance updated: sales growth trimmed (2.5–4.5% from 3.5–5.5%), China weaker (-20% to -15%), but EPS before charges/gains range narrowed to $4.25–$4.35 (midpoint maintained) and margin before charges/gains lifted to 17.0–17.5% (from 16.5–17.5%) .
  • Digital catalysts: 200k device activations in Q2; ~20k new Flo users; retail/e-commerce PoS for Flo +130%; digital expected to add >150 bps to organic growth in H2’24 and accelerate into 2025; new partnerships with Farmers Insurance, other insurers, California Water Efficiency Partnership, and ADT .
  • Strong cash and deleveraging: Q2 operating cash flow $261.5M; FCF $222.7M; net debt/EBITDA 2.6x; $55M Q2 buybacks ($190M YTD) .

What Went Well and What Went Wrong

What Went Well

  • Margin execution: company operating margin before charges/gains rose to 17.4% (+40 bps YoY), with notable strength in Security (18.9%, +330 bps YoY); CEO credited organizational realignment and transformation actions for “strong operating margins” .
  • Digital momentum and strategic wins: management cited “significant accelerants” with insurers (e.g., Farmers), municipalities (California Water Efficiency Partnership), and ADT; digital to add >150 bps to H2 organic growth; vision for >$1B digital sales by 2030 .
  • Outdoors sequential improvement: Q2 Outdoors operating margins improved sequentially by “over 420 bps,” supported by stronger production cost flow-through and retail wins (Therma-Tru, Fiberon) .

Management quotes:

  • “We also delivered strong operating margins, which are a tangible result of our organizational realignment and the other transformational actions we have taken over the past few years.” — CEO Nicholas Fink .
  • “Our digital business is now expected to add over 150 basis points of organic sales growth to the second half of 2024… We see a path for well over $1 billion in digital sales by 2030.” — CEO Nicholas Fink .

What Went Wrong

  • Organic sales declines: total organic -3%; Water organic -5% (China down >35%); Security organic -7% on retail/e-commerce softness; management highlighted caution on the consumer and China weakness .
  • Guidance trimmed for sales and cash: FY24 net sales growth reduced to 2.5–4.5% (from 3.5–5.5%), CFO reduced cash from operations to ~$700M (from ~$720M) and FCF to ~$500M (from ~$520M) .
  • Cost line pressure continues in GAAP: Q2 SG&A +14% YoY; interest expense +17% YoY in Q2, though overall price-cost remains favorable and productivity expected to aid H2 margins per CFO .

Financial Results

Company-level performance (chronological: Q4’23 → Q1’24 → Q2’24)

MetricQ4 2023Q1 2024Q2 2024
Revenue ($USD Millions)$1,161 $1,109.6 $1,240.0
YoY Revenue Growth+3% +7% +7%
GAAP Operating Margin11.5% 14.0% 16.1%
Operating Margin Before Charges/Gains15.8% 15.1% 17.4%
GAAP EPS$0.64 $0.76 $1.06
EPS Before Charges/Gains (Non-GAAP)$0.95 $0.83 $1.16
Consensus Revenue (S&P Global)NA (unavailable)NA (unavailable)NA (unavailable)
Consensus EPS (S&P Global)NA (unavailable)NA (unavailable)NA (unavailable)

Segment performance – Q2 2024

SegmentNet Sales ($M)Reported ChangeOrganic ChangeOperating MarginOperating Margin Before Charges/Gains
Water Innovations$660 +7% -5% 22.9% 23.3%
Outdoors$389 +4% +4% 13.3% 16.3%
Security$191 +12% -7% 18.0% 18.9%

Segment performance – Q1 2024 (for context)

SegmentNet Sales ($M)Reported ChangeOrganic ChangeOperating MarginOperating Margin Before Charges/Gains
Water Innovations$625 +5% -7% 22.6% 22.6%
Outdoors$315 +9% +9% 10.9% 12.0%
Security$169 +9% -8% 11.3% 15.7%

KPIs and balance sheet/cash flow

KPIQ2 2024
Device activations (Q2)~200,000 devices
Flo new users (Q2)~20,000 users added
Flo retail/e-comm PoS growth (Q2)+130%
Digital contribution to H2 organic growth>150 bps expected
Operating Cash Flow (quarter)$261.5M
Free Cash Flow (quarter)$222.7M
Net Debt$2.55B
Net Debt / EBITDA (before charges/gains)2.6x
Cash$352.6M
Share Repurchases$55M in Q2; $190M YTD

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Global marketFY 2024-3% to flat -3% to -1% Lowered
U.S. marketFY 2024-2% to flat -1% to flat Slightly better
U.S. R&RFY 2024-4% to -2% -4% to -3% Lowered
U.S. Single-Family New ConstructionFY 2024+5% to +7% +8% to +10% Raised
China marketFY 2024-9% to -7% -20% to -15% Lowered materially
Net sales (Total Co.)FY 2024+3.5% to +5.5% +2.5% to +4.5% Lowered
Net sales (organic)FY 2024-1% to +1% -2% to flat Lowered
Operating margin before charges/gainsFY 202416.5% to 17.5% 17.0% to 17.5% Raised floor
EPS before charges/gainsFY 2024$4.20 to $4.40 $4.25 to $4.35 Narrowed around midpoint
Cash from operationsFY 2024~ $720M ~ $700M Lowered
Free cash flowFY 2024~ $520M ~ $500M Lowered
Water – net salesFY 2024+3% to +5% +2.5% to +4.5% Lowered
Water – organic net salesFY 2024-2% to 0% -4% to -2% Lowered
Water – OM before charges/gainsFY 202424% to 24.5% ~24% Slightly lowered range
Outdoors – net salesFY 2024+1% to +3% +2% to +4% Raised
Outdoors – OM before charges/gainsFY 202413.5% to 14.5% 14.5% to 15.5% Raised
Security – net salesFY 2024+10% to +12% +5% to +7% Lowered
Security – organic net salesFY 20240% to +2% -3% to -1% Lowered
Security – OM before charges/gainsFY 202415.5% to 16.5% 15.5% to 16.5% Maintained
Corporate expenseFY 2024$140–$145M $143–$148M Slightly higher
Interest expenseFY 2024$118–$120M $122–$124M Higher
Tax rateFY 202423.25%–23.5% 23.25%–23.5% Unchanged
Share countFY 2024~127M ~126M Lower

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’23 and Q1’24)Current Period (Q2’24)Trend
Digital/connected products2024 guidance prioritized “accelerating connected products” ; Q1’24 strategy focused on “growing the core and accelerating in connected products” .200k device activations; ~20k new Flo users; Flo retail/e-comm PoS +130%; insurer/municipality wins; >150 bps H2 organic lift; ADT partnership; vision >$1B by 2030 .Accelerating
Supply chain/cost/productivity2023 margin preservation despite inventory actions ; Q1 highlighted higher production volumes and CI initiatives .Favorable production costs flowing through H2; tight cost control until broad-based volume recovery; price-cost favorable FY .Improving margin visibility
Macro and consumer2024 outlook: U.S. market -2% to 0%; R&R down; SFNC +5–7% .U.S. SFNC raised to +8–10% (starts up HSD, completions LSD); cautious consumer; China weaker; R&R stabilized but below prior year .Mixed: SFNC up, China down
Product performanceQ4/Q1: Water aided by Emtek; Security aided by Yale/August; Outdoors margin reset .Moen North America POS mid-single-digit growth; Outdoors mid-single-digit growth; Security retail/e-comm soft but improving POS; strong Security margins .Core brands resilient
Regional trends2024: China -9% to -7% .China -20% to -15% FY; Water China down >35% in Q2; replatforming underway .Deteriorating China
Pricing/tariffsNoted dynamic environment in 2023 .Annual price cadence; <20% China material spend now vs >50% in 2017; dual-sourcing, resilient supply chain for potential tariff changes .Better positioned vs prior cycles

Management Commentary

  • Strategic priorities: “Focusing on the core and accelerating digital” driving above-market growth and margin expansion; digital partnerships (insurers, municipalities, ADT) are “significant milestones” toward broader adoption and recurring revenue opportunities .
  • Moen and builders: “Our core Moen business continues to outperform the market… strong relationships with the largest production national homebuilders” supporting SFNC tailwinds .
  • Outdoors: Sequential margin improvement (>420 bps) and retail wins (Therma-Tru, Fiberon) underpin confidence in H2 margin trajectory .
  • Security: Transformation toward connected/commercial; digital security now ~20% of segment sales (vs 2% in 2022), with a pathway to >40% .

Notable quotes

  • “We saw approximately 200,000 device activations in the second quarter… digital business continues to accelerate.” — CEO Nicholas Fink .
  • “Our digital business is now expected to add over 150 basis points of organic sales growth to the second half of 2024.” — CEO Nicholas Fink .
  • “We remain on track to achieve our target net leverage ratio of around 2.25x by year-end.” — CFO David Barry .

Q&A Highlights

  • Digital ramp and economics: Management quantified H2 digital contribution (>150 bps; closer to ~200 bps in Q4) and stated connected products and direct-selling agreements are margin accretive, supporting H2 margin expansion .
  • Phasing and margins: CFO guided Q3 sales down ~2.5% and Q4 up ~3% (with ~200 bps connected); Q4 operating margin ~18.5% vs ~17.5% in Q3, driven by connected mix, completions tailwind, and awarded equipment sets .
  • Security margins: Strong organic margin improvement; period-to-period volatility possible due to reinvestment in Yale/August and Master Lock to drive profitable growth .
  • SFNC confidence: H1 starts +17% vs completions +1%; lag supports H2 demand for FBIN’s products; SFNC raised to +8–10% .
  • China outlook and exposure: China has shrunk from ~$500M in 2021 to ~$250M expected in 2024; remains profitable at mid–high single-digit margins; less material to portfolio .
  • Pricing and tariffs: Annual price-taking cadence; <20% China material spend now vs >50% in 2017; dual-sourced components mitigate potential tariff impacts .

Estimates Context

  • S&P Global (Capital IQ) consensus estimates for Q2 2024 were unavailable at the time of analysis due to an SPGI request limit, so we do not present consensus comparisons or beat/miss designations in this recap [SPGI request limit error].
  • Management described Q2 as “solid sales and strong margin results,” with FY24 EPS before charges/gains midpoint maintained and operating margin range improved, implying potential estimate stability on EPS but modest downward adjustments to sales and cash flow due to a weaker China and conservative consumer posture .

Key Takeaways for Investors

  • Execution on margins remains the core story: company-level operating margin before charges/gains rose to 17.4% in Q2, with visibility to ~18%+ in Q4 on connected mix and productivity flow-through (particularly in Outdoors and Water) .
  • Digital is becoming a material growth and margin lever: insurer, municipality and ADT partnerships plus accelerating device activations and PoS set up >150 bps H2 organic contribution and a multi-year runway toward >$1B sales by 2030 .
  • Mix of tailwinds and headwinds: Raised SFNC (+8–10%) and strong Moen NA/Outdoors vs. sustained China weakness (-20% to -15% FY) and still-soft retail/e-comm in Security (improving POS late Q2/early Q3) .
  • Cash discipline intact despite trimmed sales/cash guidance: Q2 FCF of $222.7M, buybacks of $55M in Q2 ($190M YTD), leverage at 2.6x with target ~2.25x by year-end .
  • Watch Q3-to-Q4 phasing: management set expectations for softer Q3 and stronger Q4 (digital ramp, builder completions, equipment set timing), with Q4 operating margin guided ~18.5% .
  • Tariff/commodity/freight risks mitigated better than prior cycles: <20% China material spend and dual-sourcing reduce exposure versus 2017 levels; price/cost to remain favorable for FY24 .
  • Medium-term thesis: category leadership (Moen, Therma-Tru, Master Lock, Yale/August), connected product shift, and productivity underpin above-market growth, expanding margins, and cash generation through the cycle .
Sources: Q2 2024 8-K earnings press release and exhibits **[1519751_0000950170-24-086506_fbin-20240725.htm:0]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:0]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:1]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:7]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:8]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:9]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:10]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:11]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:12]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:13]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:14]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:15]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:16]** **[1519751_0000950170-24-086506_fbin-ex99_1.htm:17]**; Q2 2024 earnings call transcript **[1519751_FBIN_3394364_0]**–**[1519751_FBIN_3394364_20]**; Q1 2024 8-K press release **[1519751_0001193125-24-125053_d818574dex991.htm:0]** **[1519751_0001193125-24-125053_d818574dex991.htm:1]** **[1519751_0001193125-24-125053_d818574dex991.htm:5]** **[1519751_0001193125-24-125053_d818574dex991.htm:9]** **[1519751_0001193125-24-125053_d818574dex991.htm:10]**; Q4 2023 8-K press release **[1519751_0001157523-24-000132_a53889076ex99_1.htm:1]**–**[1519751_0001157523-24-000132_a53889076ex99_1.htm:3]**.  
Note on estimates: S&P Global consensus was unavailable due to request limit at the time of analysis; hence, no consensus comparisons are presented.```