Thanks for joining us. I'm Tim Wojs. I cover building products here at Baird, and we're delighted to have Fortune Brands join us again this year at our Global Industrial Conference. Fortune has leading positions in water, outdoor, and security markets, and their brands include Moen, Therma-Tru, and Master Lock. From the company up on stage here, we have CEO Jesse Singh, we have CFO Pete Clifford, and then we've got Curt Worthington and Scott Einberger from IR in the audience. I'm turning it over to Jesse. He's going to go through a couple of prepared remarks, and then we'll...
Great.
The floor is yours.
I think I can advance slides.
There we go.
Just around four months now, and Pete is seven weeks and two days. We are relatively new in the roles. Just a couple of comments on background on myself. I was previously CEO of AZEK. We sold to James Hardie, who is presenting at this conference. I was on the bench, not necessarily looking to take another role, and through some dialogue, was compelled with this particular opportunity. Really what drove it was what you could see from the outside, a business that had characteristics of an underperforming business with three really strong pillars, which are represented here. A very, very strong water franchise. We define it as water, which is House of Rohl, which is a luxury set of plumbing and hardware, and Moen, which is one of the most recognized and entrenched brands in faucets and decorative hardware.
An outdoors business, which is now, with the divestiture of Fiberon, going to be a doors business, which has material conversion aspects to it. We are still in a cycle where we are converting from inferior materials, in particular in the Therma-Tru business, into replacements that are more durable and, in some cases, fire-resistant. A security business, which is driven by Master Lock and Yale, which, once again, are two really strong brands. Yale being a connected lock business, and then Master Lock just having enormous strengths both in commercial businesses, think factories, lockout/tagout, and also in the residential markets. Geographically, we are primarily U.S., and we are exposed, give or take, a little less than a third to single family new construction.
As part of the new management team coming in, we announced on our last earnings call last week a back-to-business plan. We can get into that more specifically. I am sure Tim will ask questions. We had gone through a cycle of being more oriented towards a bigger corporate structure from a historical focus on individual businesses back to business. A key part of that is realigning our business back to the individual businesses, so putting the vast majority of the resources in the company oriented on each of the businesses, optimizing portfolio, and I will give you a couple of examples of what we have done there, both across our businesses, but within the businesses, and then really getting at specific growth and margin expansion initiatives.
What we did announce is either the closure or divestiture of approximately $320 million-$330 million of sales that were generating $50 million-$55 million of operating loss. It is a mix of selling a business, shutting a business down in China, and then shutting a factory down that was causing significant loss. Just very high level, that is the plan, and I will turn it over to Tim.
Great. Thank you for that, Jesse. If you have any questions, you can raise your hand or you can email session1@rwbaird.com. Maybe just to start, I mean, you guys have both been with the company for, what, four months, and we are on seven weeks and two days, if I am counting right. I guess what kind of drew you to Fortune, and I guess what is your kind of initial assessment of some of the strengths and some of the things that you guys need to put a lot more time into?
Yeah, I will throw it over to Pete, having been the new guy here.
Yeah. Look, I think the cookie dough is there. There are really great products and great brands. To me, that is always the starting point. Look, I like the fact that there is a little bit of a turnaround from an execution perspective. That is one of my strengths throughout my career and a chance to work with Jesse again. I think we were good for customers, we were good for shareholders, we were good for employees at AZEK. So, really excited about it.
Yeah, as I mentioned in some of the prepared remarks, there is a lot of opportunity here, not just based on the brands, but based on what we see from an operations standpoint. Coming in, I was optimistic that we had strong customer relationships, good products, and recognizing that there is opportunity for improved execution. I think four months in, all of that has been validated, and we are starting to see some progress. I think one of the things that for me is heartening is how fast we have been able to go from a functionalized company down to a division-focused company again. One of the risks of that is culturally, were people attached to this kind of corporate structure? I think what we found is that people actually want to be a part of a business and attack that. So that has been a pleasant surprise.
Okay. Okay, good. When you just kind of step back, what was if you just kind of think through how we got here, was it just the strategy wasn't right? Was it just the focus got lost? What were the two or three things that you think kind of got us to this point?
In every situation, you want your businesses to grow faster, to expand. We had historically been a house of brands. We had sold off historically Titleist and a few other, Jim Beam, a few other brands. So we had been constructed that way. I think the intent was to accelerate growth by taking a broader functionalized approach, center of excellence approach, and to drive growth by bringing all of those resources to a central headquarters operation here in the north side of Chicago. I think that's extremely difficult when you have individual businesses that have different supply chains, different customer sets, and people dispersed in a number of different locations. So I think that combination of trying to do the right thing, but kind of going against the grain of what the company historically had done, I think was challenging.
We're bringing the company back to what it did historically, but we're also trying to layer in a more aggressive, customer-focused approach.
Okay. As you like kind of decentralize the organization, does that come with a higher cost base, a lower cost base? How do you think about those costs kind of flowing back into the P&L?
Yeah, I think as you think about reducing the corporate structure, bringing it back into the business, we had identified and we've talked about a $70 million cost out. We're actually, by letting the businesses operate in a more efficient way, we believe it's actually more cost-effective.
Okay. Because you're basically, it's just a lot less complexity to go through the organization.
Absolutely.
There's a cost to that.
If someone wanted to develop a new product, you would have to go through the process of effectively working with multiple functions that were corporate functions, as opposed to having an R&D person in the room with a business leader deciding priorities and executing.
Okay. Okay. I mean, you've already started to make some changes. You talked about, I mean, you're selling Fiberon, and then the last call you talked about kind of winding down the commercial ops in China and doing some restructuring in Europe. Can you just talk about the process of how you kind of went about assessing that? Like, what were some of the key drivers behind that? We'll go from there.
On the Fiberon situation, I wasn't involved. At a high level, it's a business that was dilutive and had a growth profile that maybe was, or a situation that was maybe better off with another partner. As you think about China, it's one where we had a good business there. It's extremely difficult to compete. As our sales declined, profitability went negative, and we just determined it was too difficult a process. On the announcement in the U.K. with a factory closure, it was, candidly, it was very obvious, right? It was a business, it was a factory where every dollar we shipped, we shipped $0.50 of our own income with it. I think you should think of that first layer of actions we took were the obvious corporate visibility actions.
The team prior to me getting here had already gone down that path, so I think they did a really nice job. I think the next layer of portfolio discussions really have to do with within each product line, within each category, we see opportunities where there's pockets of too many SKUs, negative profit, some SKUs being negative. As we get our analytics deeper into there, we're going to find not at the same scale and level, but portfolio opportunities to either accelerate growth or increase profitability. That activity continues.
Okay. Okay. When you think about kind of the commercial organization just getting too centralized and having to kind of reinvest in the business, like if you walk through each business, how far are you in kind of rebuilding some of those, whether it's marketing or-
Yeah.
-salespeople or the R&D function? What is the progress today look like in each of the businesses?
Yeah. On the R&D, we had, in essence, kept most of it, almost all of it intact. That has been a relatively straightforward process to just realigning that by business. On the marketing side, and this was one of the major gaps, I think. We took marketing out of each of these individual businesses and centralized it. That created a pretty significant lost connection. We have pushed that back in, and I think we have retained some of the key talent, and there will be an opportunity to continue to add to that talent. I think as you- And then supply chain, similarly, we have pushed that back into the business. If you look at some of those major areas, I think as you go business by business, our doors business, for the most part, has stayed intact throughout all of that.
So, call it we are 80% of the way there. I think our security business, we have brought back some key leaders and key supply chain folks actually in all of our businesses, and so call it 70% of the way there. We need to continue to not necessarily add in terms of cost, but add key leaders. In our water business, I think House of Rohl is very much intact. We think there is an ability to accelerate that growth with some key adds there. Then our Moen business is one where we need to probably upgrade our supply chain there. R&D is very much intact, and we need to add to the marketing there. Sales actually has stayed intact for the most part. There are some areas where we are continuing to augment based on where we think we are under-penetrated.
Okay. Pete, just like if you, thinking about kind of like systems and data and those types of things, what is kind of your initial assessment there, and what are some of the opportunities that you see kind of in front of you?
Yeah. I mean, first I would say it is actually far more rational from an ERP perspective. I am coming from backgrounds where literally there were a litany of ERPs, so I can at least count on two hands how many ERPs we have within the portfolio, which is refreshing for a change. But I would say the thing that has impressed me the most on the finance side is the team is way ahead of most of the businesses that I have been in from an AI perspective.
I just give the example, we have not had great product management kind of data, and literally within less than a week, we have been using Claude and some other tools to get well beyond sort of net standard margins, which do not make a lot of sense in a hyperinflationary period, and they do not have things like freight costs out on them and other things.
We have done some really cool things really, really quickly to get data in front of people to start making decisions with data instead of opinions and emotions. So, been impressed so far. I think the other thing, just on a recruiting perspective, is the change of not having an edict any longer of jobs have to sit in Chicago has made the recruiting process meaningfully easier with a lot broader lens to look at the talent in the marketplace.
Okay. I guess, like, where are you kind of in building out, Jesse, just kind of like the executive team, and like where do you still. Like, it sounds like water still needs a little bit of management there.
Yeah, I mean, we have announced some changes in all of our businesses. The interim CEO, Dave Barry, who is terrific, came up through the water organization, had been CFO of the company, but actually grew up at a company called Huber, which is a terrific building products company. So, really good background. He is now the president of Moen. We had added a very strong resource for the House of Rohl. I would say, and we had good management in the doors and security business. I think, in general, we have made a few announcements on, yeah, obviously Pete is a key add. But as you look underneath it, I would say that we have got some great people, and there are gaps. Probably less upgrade, more just making sure that we have the right resources focused on the right opportunities at the right level.
I would say that next level down, work in process, but I would expect, it's a continuous stream of announcements, so I would expect that, for the most part, that's going to be completed in the next three to six months-
Okay.
-in terms of getting the right team to help us accelerate growth and drive margin to the next level.
Okay.
By the way, it's not like the current team isn't doing anything, right?
Yeah.
We are continuing down that path.
When you think about your customer base, what is their response been to everything? Because I mean, I would imagine that they want you to succeed too.
Yeah.
Anything you can tell us about what some of the customer response has been to some of the things you are doing?
Well, in general, I think all of our customers want good service, good new products, empathetic sales coverage, good marketing, and a really strong supplier, right? One of the nice things coming into this job is we are a very important supplier to every one of our customer segments. So even in segments where, as I talked about on the call, we took a step back a couple years ago, 18 months ago, in every one of those areas, they want us to succeed. I think a lot of what we are doing makes sense to them. I think our step up in service has been noticed. But they want to continue to work with us to make sure that we have a healthy relationship tactically, but also over the next few years. So, really strong reception and strong dialogue, but these things take time, right?
We've got to, in some cases, accelerate things, in other cases, earn back some trust.
Okay. If we take some of the pieces that you've given us, I mean, you have the $70 million of cost savings, just the restructuring actions you're taking in Europe, China, with Fiberon, that's going to save you, call it another $50 million, $55 million. So that's $120 million, $125 million of cost savings. How much of that do you think needs to be reinvested in the business versus you guys can realize in better margins?
Well, first, you should think of it as, you can tell between how Pete and I talk about things, we still think there's a lot of room to optimize, right? So we haven't deployed Lean. There's opportunities in the factory. There's opportunities with supply. There's opportunities with portfolio. So we're going to keep getting after costs in a way that actually helps customer service. So we're not stopping with what we've talked about. But you should think of it as there is some reinvestment we will make. It's tens of millions, it's not hundreds of millions. So, we're not going to, over a long period, over the cycle you're talking about, we will need to make some incremental investments as we build out the teams. But it's going to be meaningfully less than what we've announced.
Okay. And really, in terms of like the mile markers, I know there's going to be some noise with winding down these operations and things like that. I mean, really, we should be looking at about this time next year, and that's really where the proof point is going to come?
Yeah. I mean, largely, you are going to get the Fiberon dilution out of the business in the first quarter. Then really, we believe that we have been building inventory in Europe currently. That will continue for at least the first quarter to position us to be out of that facility in the third quarter. Then similarly in China, it is going to be a little bit tougher to call the exact ramp down of revenue, but we do believe that we will be largely out of that business commercially by the end of the third quarter. So that is really when you will start to get the fourth quarter of 2027 is kind of all in on that $55 million in terms of run rate, plus the carryover of the $70 million of cost actions. Again, I would position the $70 million as a starting point.
There is still more opportunities to get leaner and reinvest in the areas that are most important. Then it does not include as well the price cost that we missed on here in 2026.
Yeah. On that point, like on price cost, it does not sound. I mean, obviously you have inflation and there has been tariffs running through the business and things. It sounds like more, you might be going after more just getting the right realization versus necessarily going out and putting in a bunch of price. Can you just talk about that process or kind of what got missed there?
Yeah. Look, I think it was purely execution. Yeah, there was a little bit of not watching gross-to-nets in certain categories than others. I just do not think we fully pushed the price increase that we intended. So, those are things that we can fix in 2027. As a CFO, you rarely hear somebody say, "I do not want you to go take a price increase immediately tomorrow," when you hear that news. But the reality is, I think, if I had done that, we probably would have peanut buttered it across the business, and I think that is entirely the wrong answer. We had to use the information that we are pulling together now, real time, to understand where we make money, where we do not make money, and just be far more strategic in our pricing. So, that is why we have kind of set out a lot.
I think it's more of a second quarter kind of action for us in certain businesses, just to make sure that we got the realization that we expect.
Okay. Maybe just on the market, you do have some new construction exposure-
Yeah.
-water, maybe R&R. How would you kind of assess the end markets as you kind of exit this year and go into 2027?
Yeah. First, single family new construction, and you're going to hear it from multiple people here. I think as you moved through September into October, related to probably the bond rate spike a bit, and some of the sentiment around that, you did definitely see a slowdown in that part of the market. I think as we look at 2027, it's hard to assess things. But right now, we would not assume anything positive on a year-over-year basis. We would assume there's still risk of some potential additional slowdown. Now, obviously, there's a lot of macroeconomic noise and a lot of movement day to day. But in that market, we were kind of poised in the first calendar quarter of this year to see some positive things as there was stability. Instability leads to that market continuing to be under pressure. On the R&R side, it really is interesting.
Modest weakness, but still a fair amount of activity going on. I would say there are variations by sector, and to some extent by size of remodel job. In our particular case, it is going to mean that pure R&R, more luxury is going to do better. Transactional R&R or whole kitchen or bathroom remodels might be a little bit more under pressure. Flattish to slightly down.
Okay.
I think, as we mentioned on the call, look, I think there is a little bit of a philosophy shift on just kind of channel inventory. I think given where the macros are at, especially on wholesale, there is a definite change in wanting to sort of de-risk 2027, and being a lot more prudent with expectations and trying to actually manage the channel tighter, as we exit the year. I think we have kind of said more or less, we hoped to end 2026 probably about 10%-15% down on the channel inventory from 2025, and about 5% down from 2024, which is probably a better proxy, with our lead times now kind of recovering.
Okay. On House of Rohl, that is a business that has been built up through some M&A. You have got really good brands there, luxury, but the company has not really talked about it in the past. I mean, what are you doing there to kind of reinvigorate that part of the story? Because it is a pretty meaningful part of the water business.
Yeah. Just high level, multiple faucet brands, Victoria + Albert bathtubs, Shaws sinks, and Emtek hardware. These are designer, more premium repair and remodel, designer-driven, more premium repair and remodel segments. I think for us, the good news is we have got channel presence. That business has done reasonably well. It has been accretive to the other parts of the water growth. It has not taken a step back. There is some basic operational stuff that we have an opportunity to do. It fits Lean very well. We have had supply issues. In general, across the whole company, we have restrained our growth in 2026 because of our ability to supply the demand we had. That was certainly a business that went through that. I think just it starts with better execution. We did not have a general manager in that business for a year.
The general manager started the same day I did. I think just putting the right focus on it now reports directly into me as opposed to being kind of buried in a bureaucracy. I would just put it under execution, and there is some terrific opportunities there.
Okay. I mean, when you kind of tie it all together, I know the last five or six quarters has been kind of rough, but it does not sound like anything would structurally prevent you guys from getting back to like where this business was from a profitability perspective a couple years ago. Is that reasonable?
Yeah. I mean, if you look at our comments on the last earnings call, I think, if you back into where we were historically over the last, maybe even last year, call it 20% EBITDA, I said as the kind of the interim objective, we should get back to that. I did not give a timetable, but if you look at the underlying capability of this business, it should be higher than 20%. Just if you look at structurally where we are, our position, the mix that we have, and some of the excess costs. For example, over a four-year, five-year period, our SG&A as a percent to sales has gone up 300 plus basis points. These are all kind of obvious things that we need to execute against in addition to the actions we announced.
But if you back into the actions we announced, plus some additional logical moves, it kind of gets you to that 20% range sometime in the 2028-ish timeframe.
Okay. Then maybe last one, Pete, what's the pathway on the deleveraging? What are kind of some of the pieces there to kind of get the business back to under 2x from where it is today?
Yeah. Step one here, we just got to 2.5x. We'll continue to make progress in the fourth quarter as we get the proceeds from the Fiberon sale. I think largely as we get into 2027, the improvements in EBITDA are going to be a bigger factor than necessarily paying down a lot more debt to get us back closer to two.
Okay. Okay, great. Please join me in thanking the Fortune team for being here today.
Thanks so much.
They will be available for a breakout session in the room over here to the left. Thanks.
Thank you.