Fortune Brands Home & Security Aktie

Greetings, and welcome to the Fortune Brands Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Curt Worthington, Vice President of Finance and Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations Third Quarter 2026 Earnings Call. Hopefully, everyone has had a chance to review our earnings release. The earnings release, earnings presentation and audio replay of this call can be found on the Investors section of our fbin.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for our reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

With me on the call today are Jesse Singh, our Chief Executive Officer; and Pete Clifford, our new Chief Financial Officer. Following our prepared remarks, we have allowed time to address questions.

With that, I will turn the call over to Jesse. Jesse?

Thank you, Curt, and good afternoon, everyone. I've now completed my first full quarter as CEO, and I'd like to thank the Fortune Brands team for their hard work through a period of significant change. Over the last 90 days, I've spent time with our customers and our teams digging into our execution challenges. While there is clearly work to do, what I've seen thus far has reinforced why I joined Fortune Brands.

We have exceptional core brands. Moen, House of Rohl, Therma-Tru, Larson, Master Lock and Yale are brands that consumers and pros know and trust with market positions built over decades that are extremely difficult to replicate. Because of our focus as a product-driven company, we have continued to maintain a strong portfolio of products, and each of our businesses has a robust downstream sales force and new product launches that are differentiated and well received by our customers. That is a strong foundation to build from.

I've also seen firsthand the level of engagement by the key decision-makers at our customers and channel partners. Our brands matter to their businesses and when we perform, they perform. Our customers have been clear about what they need from us: reliable service levels, closer collaboration, stronger marketing and accelerated product development. The good news is that achieving those expectations is within our control, and we have a path forward with customers and channel partners who are invested in the outcome.

I also see a clear opportunity to run each of our market-leading businesses better. Through our deep dives, we have identified growth, operational and portfolio actions that, as we execute them, will meaningfully improve our results.

Third quarter results, excluding tariff and tax benefits, were in line with our August outlook and mixed by business. In Water, our performance was impacted by our exposure to new construction, which softened further during the quarter. Outside of service challenges, our Outdoors & Security businesses have generally performed in line with the market.

In Outdoors, our Doors business continues to be resilient, and we expect Therma-Tru to benefit from the positive outcome of the recent antidumping case. While Therma-Tru continues to offset inflation through continuous improvement, margins have compressed, and we expect to take some pricing actions, balancing price and share. At Larson, higher aluminum and freight costs have driven significant commodity inflation, which has pressured our margins. We have actions underway to return to a more favorable price/cost position.

In Security, I'm encouraged by the traction of this year's new product launches, which continue to build momentum during the quarter. That momentum was partially offset by limited product availability in Yale as we prioritize service levels for our contracted business. As stated on our last earnings call, real long-term value creation will take time, and this will be a multiyear journey with milestones and progress along the way.

Over the coming quarters, we will continue to highlight key milestones and provide more specifics on our long-term strategy and growth profile. Today, I'll focus on where we are on this journey and how our recent actions will translate into our results in the future. Our back-to-business plan is designed to restore consistent performance and long-term shareholder value. A graphic describing the back-to-business plan has been included in our earnings presentation.

The plan is organized around 4 main pillars: establishing high-performing customer-focused business units, optimizing our portfolio across and within those business units, building a business-led sustainable growth engine and expanding margins while sustaining our growth investments. In our first pillar, we are unwinding much of the centralization of the last few years and realigning our functions to create more entrepreneurial business segments. We have had unnecessary complexity and inconsistency that has impacted our speed, our innovation and our ability to consistently deliver high-quality service to our customers.

Moving to a more focused organization will allow us to improve our execution and the productivity of our SG&A. By the end of this quarter, we will have completed the realignment of most of our salaried employees to be focused on specific business units. Earlier this year, roughly 40% of those employees were aligned to a specific business or a specific geography. By the end of this year, that number will be above 80%.

Key short-term milestone of these changes is to improve our service and responsiveness to our customers. Our supply chain team has brought back key people to help restore the institutional knowledge, systems know-how and product level expertise we lost during our headquarters consolidation. We are also rebuilding our sales and operations planning process and restoring safety stock to appropriate levels.

As we said last quarter, we expected some pressure on volumes and a higher cost to serve our customers in the near term as the team puts these actions into place. Service levels in the past quarter improved 10 percentage points with fill rates reaching the high 90s range entering Q4. While I am encouraged by this progress, our focus now is on consistently delivering those levels in a cost-effective manner.

We have also made changes to our leadership team to create greater focus and enable future growth. Dave Barry is now leading Moen as EVP and President, and Rachel Roberts has become Chief Commercial Officer for Moen. In our luxury portfolio, House of Rohl will continue to be led by Matt Zimmer, who now reports directly to me. We have also made changes across all of our businesses, including a new sales leader at Moen, a new General Manager for Doors and a strong executive added back to Security.

In addition, we recently announced the appointment of Peter DuBois as EVP and Chief Information Officer, bringing more than 25 years of technology and digital leadership experience. This morning, we also announced that Morgan Fox will be joining the organization as our Chief Legal Officer and Corporate Secretary. Morgan brings more than 20 years of legal experience, including 15 years in-house at publicly traded companies, including a recent role as GC of The AZEK Company.

Our second pillar is optimizing the portfolio across and within our business units, beginning with addressing underperforming businesses and geographies. On October 15, we announced that we had signed a purchase agreement to sell our Fiberon decking business for $160 million. This is a great outcome for Fortune Brands and for the Fiberon team. We expect the transaction to close before year-end, and we intend to utilize the proceeds to reduce net leverage and reinvest in the business.

We are also taking additional portfolio actions. We are restructuring our China business and will exit our commercial operations servicing the Chinese domestic market while maintaining manufacturing, R&D and sourcing functions that support our North American end markets. We expect this restructuring to be completed by the end of the third quarter of 2027.

We will also rationalize the EMEA operating footprint of a business within our Water segment, which is expected to be completed by the fourth quarter of 2027. We believe this action gives the business a more competitive cost structure and scalable capacity that can support expansion and profitable growth. We expect these portfolio actions to be earnings and margin accretive. On an annualized basis, these businesses generate a combined operating loss of approximately $50 million to $55 million on revenue of $320 million to $330 million. As we complete these actions, the business may experience some near-term headwinds through 2027, but we expect these initiatives to scale to a full run rate benefit by the end of next year.

Beyond these 3 actions, we will continue to optimize the portfolio for growth and profitability within our segments, including driving accretive growth from our connected businesses and addressing pockets in each business that are weighing on profitability and growth.

Our third pillar is building a business-led sustainable growth engine. This year, our focus is on stabilization. 2027 will be a rebuilding year in which we invest towards future growth. We are prioritizing the end markets and channels where we are underpenetrated, accelerating the development and launch of new products and improving our commercial sales and marketing performance. In general, across our company, we have a strong position in single-family new construction and are under-indexed in the more resilient R&R and commercial markets.

Our fourth pillar is expanding margins while sustaining our growth investments. Through our organizational realignment, we are on track to deliver an annualized run rate of $70 million in SG&A savings by the first quarter of 2027 and expect the recently announced portfolio actions to increasingly contribute as we move through the back half of 2027.

As a result, we expect the combined inflection to be fully visible in our results by Q4 2027. At the same time, we will focus on driving operational excellence across sourcing, product engineering, pricing and mix management. Each of these areas has the potential to deliver meaningful impact over the next 2 years. We have started executing our back-to-business plan and expect to see some benefits in the last quarter of 2027.

Near term, we expect our results to be pressured by our portfolio actions, our exposure to single-family new construction, a reduction in channel inventory and a lag effect of shelf space losses from 2025 in the first half of 2026. Water is a longer turnaround that could extend beyond next year. We expect the improvement cycle in our other businesses to be shorter. In Outdoors, we expect portfolio and product actions to drive margin improvement. In Security, as we lap the shelf resets and continue to improve service, we expect stronger results as we exit 2027.

As we look at the remainder of 2026, we see an incrementally weaker single-family new construction market, while repair and remodel demand at retail has been relatively stable but remains soft. As a new management team, we are taking a conservative approach to channel inventory in this period of uncertainty. We also plan to use our net tax benefit to fund additional portfolio and alignment actions in the fourth quarter. These are difficult but necessary decisions that will impact our near-term results, but put us in a better position heading into 2027.

Before I close, I want to welcome Pete Clifford, who we've recently appointed as Chief Financial Officer. Pete brings more than 30 years of financial leadership experience, including public company CFO and COO roles at AZEK and Cantel Medical. He is a disciplined operator and pragmatic leader who understands the day-to-day realities of running a manufacturing business. I worked with Pete at AZEK, and I'm excited to have him on the team.

I'd also like to thank Ashley George for her leadership as Interim Chief Financial Officer through a period of significant change. Ashley has returned to her role as Senior Vice President of Finance, supporting our Water businesses, where she will help drive our efforts to strengthen execution and improve profitability. Ashley, thank you.

We have exceptional brands. We have customers and channel partners who want to win with us, and we have a team that is engaged and moving with urgency. Our job now is to execute. It will take time, and our results over the next several quarters will reflect a company in the middle of that work. We expect the actions we have announced to date will deliver more than $120 million of annual benefit as we exit 2027. Our longer-term target is to exceed 20% underlying EBITDA margins while driving above-market growth. We intend to build a stronger, simpler and more customer-focused company, one that delivers sustainable growth, margin expansion and shareholder value.

With that, let me turn it over to Pete.

Thank you, Jesse. I'm honored to join the Fortune Brands team. As Jesse highlighted, we have well-recognized brands, great products, deep relationships with our channel partners, customers and pros, and we are building strong teams. As I look at the business, there are opportunities to improve our operational rigor, optimize our cost structure and bring a more disciplined approach to capital allocation. I'm excited about the opportunity and look forward to reengaging with many of you over the coming weeks and months.

As a reminder, my comments will focus on our results before charges and gains, unless otherwise noted, and comparisons will be made against the prior year. Similar to last quarter, our presentation provides a breakdown of the gross and net impact of tariff refunds on reported operating income and EPS for the third quarter and full year 2026.

During the third quarter, we recognized $29 million in gross tariff refunds. This amount includes the portion that was recognized as a reduction in inventory in the second quarter as well as incremental tariff refunds recognized in the third quarter related to Phase 3 of the CAPE process.

Net of variable compensation expense, this translated to $18 million of operating income and $0.14 of EPS in the quarter. For the full year, we expect net tariff refunds to contribute approximately $0.59 of EPS, which is reflected in our updated guidance. In addition, we also recognized a net tax benefit of $33 million or $0.28 per share related to an internal restructuring designed to streamline the legal entity structure of our European operations. The restructuring is intended to reduce future operating costs such as statutory reporting, legal, tax and treasury costs and is consistent with our efforts to simplify our organization.

Now turning to our consolidated results for the quarter. Total company sales were $1.1 billion, down 3.1%. The decline in sales was primarily driven by Water and Security, partially offset by Outdoors. Consolidated operating income for the quarter was $156 million, down 24.6% with margins of 14%, down 390 basis points. Third quarter EPS was $1.14. Operating income benefited by $18 million from net tariff refunds, while EPS benefited from both net tariff refunds of $0.14 and the net tax gain of $0.28 I just spoke about.

Our third quarter effective tax rate was essentially 0 compared with 25% in the prior year period, reflecting the legal entity restructuring impact I outlined earlier. Excluding these discrete items, our underlying effective tax rate for the third quarter was approximately 24.4%.

Turning to our segment results. Sales for Water were $584 million, down 5.5%. Excluding China, sales were down 4.3%. Sales were impacted by service levels and softer demand in retail. We also experienced further softening in new construction-related demand in wholesale during the month of September. These were partially offset by growth in e-commerce. Water's operating income was $103 million, down 31.8% with margins of 17.6%, down 680 basis points, which included a benefit of 135 basis points from net tariff refunds. The underlying margin decline was driven by unfavorable price/cost, volume deleverage and higher cost to serve our customers.

Within price/cost, we incurred additional expenses related to portfolio optimization and alignment actions. I would also point out that we did not fully realize the price necessary to offset inflation. We believe this weighed on margins several hundred basis points in the quarter. We view this as an execution gap and a key focus of the pricing and mix management work Jesse described.

In Outdoors, sales for the quarter were $347 million, up 0.8%. Excluding Fiberon, sales were up 3.4%, driven primarily by favorable year-over-year comps in channel inventory and higher price realization. This was offset by softer new construction-related demand in wholesale, mostly in Therma-Tru. Channel inventories were mostly flat in the quarter. However, we lapped the material destocking in 3Q '25. Outdoors operating income was $53 million, flat to last year, with operating margins of 15.3%, down 20 basis points. The margin decline reflects lower volumes and higher material and freight costs, which were partially offset by favorable mix.

In particular, we have seen significant margin compression in Larson as a result of the sharp run-up in aluminum prices earlier this year, which is flowing through our income statement during the second half of the year. We have not yet fully offset this headwind, and we expect to address it going forward.

Turning to Security. Sales for the quarter were $182 million, down 2.4%, reflecting declines in retail and e-commerce, largely due to service challenges. This was partially offset by growth in our commercial channel, which benefited from solid customer demand. Additionally, Yale benefited from continued traction with multifamily customers where we've seen increased penetration over the past year.

Security's operating income was $39 million, up 16.9% with operating margins of 21.3%, up 350 basis points. The net tariff refund contributed about 715 basis points to margin, which was offset by higher cost to serve as we continue to recover back to more traditional service levels. In addition, as part of our efforts to refocus our portfolio on our highest return opportunities, we recognized an inventory adjustment related to SKU rationalization during the quarter, which impacted margins by approximately 450 basis points.

Turning to the balance sheet and cash flow. Free cash flow for the quarter was $331 million compared to $177 million last year, primarily reflecting the tariff refund proceeds as well as lower capital expenditures. Year-to-date, free cash flow was $371 million. We ended the quarter with net debt of approximately $2.1 billion and net debt-to-EBITDA of 2.5x. We anticipate our net leverage will decline further by year-end due to the Fiberon divestiture.

Cash proceeds from tariff refunds totaled $117 million in the quarter, bringing collections to approximately $126 million year-to-date. We expect to collect the majority of the remaining balance before year-end, which is reflected in our full year free cash flow outlook. The actions that drove our third quarter tax rate are expected to result in a cash tax benefit of approximately $50 million in 4Q '26.

Before we get into our full year guidance, I wanted to provide some context on the operating environment we are seeing entering 4Q externally as well as internally. Externally, we see a more challenging environment in new construction than 90 days ago. Retail R&R is stable but still soft, and we do not anticipate lapping all of our expected share losses until the back half of 2027. Internally, I see a team moving forcefully to embrace the changes required to win.

As Jesse mentioned, we are now largely complete with realigning our teams to more customer-focused business units. We have acted quickly against structural cost issues and made important decisions to act on dilutive parts of the portfolio. We are also making incremental progress against improved service levels and making significant progress against our mission of building great teams.

The backdrop for our changes to 4Q and full year '26 guidance can be summarized in a couple of distinct buckets: First, businesses being exited and sold. We have top line and bottom line pressure in China and Fiberon. Second, the market. The market, particularly in home construction, is more challenged and customers are starting to communicate more conservatively.

Lastly, channel inventory. New leadership brings a very different philosophy on channel inventory behavior in an uncertain macro. We intend to be deliberate in helping our customers maintain reasonable inventory levels through year-end to derisk the first half of 2027.

A couple of additional points of clarification with regard to the fourth quarter forecast: One, you should think of the Water sales forecast as not only a rightsizing of the channel inventory given the macro, but also an unwinding of a rather large 1Q '26 load-in that we will comp against in 1Q '27. And second, we anticipate a similar amount of run rate expense in 4Q as 3Q as it relates to investments and accelerating portfolio optimization and alignment. For the fourth quarter, we expect net sales to be in the range of approximately $925 million to $995 million, and we expect EPS before charges and gains of $0.19 to $0.29.

Relative to our previous guidance, the sales step down comes from 3 items: The businesses we are exiting or selling approximately $20 million; the market, primarily single-family new construction, approximately $25 million; and channel inventory, approximately $55 million. On EPS, those 3 items account for roughly $0.08, $0.11 and $0.12, respectively. Separate from net sales reduction, we also expect to incur roughly $0.14 of portfolio optimization and alignment actions.

Finally, as a reminder, we will see approximately a $0.07 headwind to 4Q '26 EPS driven by the tariff refund impact on variable compensation. For the full year, we are expecting sales to be in the range of $4.205 billion to $4.275 billion with EPS of $3.20 to $3.30. In our earnings release, we provided a bridge of the changes on our full year EPS guidance.

As I've outlined here today, our 3Q and 4Q results include a lot of noise for things like Fiberon and China as well as onetime items for net tariff refunds, tax benefits and other portfolio and alignment actions. Underneath that noise, we believe the core business looks like a business with operating income margins in the mid-teens and EBITDA margins in the high teens. This is in line with what I expected when I took on this opportunity.

To be clear, that profile excludes the bulk of the $70 million in SG&A actions taken, the expected benefit of the Water EMEA footprint rationalization efforts and the price/cost recovery missed in 2026 due to our execution challenges on price realization, which I mentioned earlier. As we have articulated, the lag from the China commercial exit and the phasing of the Water EMEA footprint rationalization will likely make the first half of '27 more dilutive, and our turnaround will become more apparent in 4Q '27, by which point we will have fully exited China, completed the Water EMEA footprint rationalization and put a leaner, more efficient SG&A structure in place, delivering the more than $120 million of annual benefits Jesse outlined.

In addition, price/cost recovery should be more favorable, and we will have lapped some of the more challenging volume quarters. As Jesse mentioned, we are in the early stages of a multiyear improvement plan and our updated guidance for 2026 continues to reflect our ongoing efforts to stabilize our performance. We still have work to do to improve our execution, optimize our cost structure and realign our business. While these actions will take time, we are confident that with the right focus and investment, we can set the company up for a stronger future. As Jesse mentioned earlier, our target is to achieve EBITDA margins above 20%.

With that, I'll turn the call back to Curt.

Thanks, Pete. That concludes our prepared remarks. We will now begin the question-and-answer session. [Operator Instructions] Operator, can you open up the line?

[Operator Instructions] Our first question is from Keith Hughes with Truist Securities.

We do have a lot going on in the numbers here. I guess from a big picture perspective, can we talk about in the guidance you gave for the year, how much is core and noncore? And I've got an eye towards doing estimates for 2027.

Keith, this is Peter. I appreciate the question. Just to reinforce for clarity, we put in the press release and the prepared remarks, the elements of the step down for the full year guidance. To be clear, the pieces are the core business is stepping down EPS by $0.23 for the full year, and it's largely driven by the commentary we've given on channel inventory assumption has changed with revenue impacted by about $55 million. And then to a lesser degree, about $25 million worth of market, largely driven by new construction starts impact on our wholesale channel.

As far as noncore, i.e., kind of China and Fiberon, EPS is stepping down about $0.02, driven by a drop in revenue of approximately $20 million. And then we've got several discrete kind of onetime impacts. First discrete item is a tax benefit generated from the legal entity restructuring we were doing in the U.K., which has driven about $0.28 of favorability in the year. The second discrete item is tariff refunds have come in favorably in 3Q, adding about an additional $0.07 of favorability to the year. And then lastly, we're proactively using those onetime impacts to make some tough choices faster on the portfolio and alignment decisions that we need to make to position ourselves for a good 2027.

Yes. So Keith, just kind of high level. Pete dove into the details. The takeaway you should have is the underlying business that will remain in '27, we are lowering that guidance by $0.23 in the quarter. I'm sorry, across the back half of the year, it will manifest itself in the quarter.

Okay. I think I see. Let me ask one other question on one of the details you gave, Pete, about the $55 million channel inventory hit. Is this more a function of an overload, I guess, it would be in the first quarter of 2026? Or is this more a reaction to the market and adjusting to that in the upcoming, I guess, would be fourth quarter?

Yes, Keith, I think it's probably a balance of both. I think there was clearly a larger load-in in 1Q, where our reported growth was about 1%. When you balance that with the reported growth in the fourth quarter, you kind of get a blended growth rate that's more in line with the second and third quarter. And I just think given the macro of what we heard from customers in September, tone definitively turned more conservative. And with that, I just thought it was prudent that we needed to start thinking about the channel inventory a bit more conservatively in the remainder of the guide.

Yes. And you should think of it as there's a -- we're looking at our channel inventory. And you should think that as we end '26, we're trying to get closer to where we ended '24 relative to what we see as inventory in the channel. So it's -- we feel like having less inventory in the channel, especially given our service levels, probably is a natural outcome at this point in the cycle.

Our next question is from Ketan Mamtora with BMO Capital Markets.

Pete, when I look at the underlying EBIT margin in Water, excluding the tariff refund, can you just high level break it down for us in terms of how much is sort of unfavorable price cost versus kind of volume deleverage, elevated service costs, just the key buckets here.

Yes. I mean, again, I'm going to give you the answer of 6 weeks and 2 days in, Ketan. But I think largely on the margin dilution, about half is probably price cost right now, 25%, I would call out just lost leverage on our fixed manufacturing overhead. And then the remainder is, I'll call it, the premium service cost as we're having to put more overtime in and air freight to kind of serve customers in a stronger fashion. Those are some of the elements that I think I would kind of call out.

Understood. Okay. And then when do you expect to get sort of price/cost neutral in Water?

I think the original view was sometime in this quarter. But candidly, as I've been kind of digging in here in the first 6 weeks, I think largely, the portfolio has done a really good job of kind of measuring price realization. I think we bumped into a part of the business that hasn't been doing it perfectly. And I think it's helped us understand that we're not fully covering cost here in the third quarter. I think the reality is we probably won't fully cover. It will be closer in the fourth quarter. But I think it will be late 1Q before we really probably have incremental actions in place, maybe possibly the start of the second quarter where we're back to being fully covered from a price/cost perspective.

Yes. Just as Pete highlighted, and you know us well enough to know our intent is to be as transparent as possible. I think as we have gone through the year, our price realization is probably coming in under what we may have communicated on the previous couple of calls. And I think that's really an outcome of a SKU-by-SKU analysis to realize that in certain cases, we haven't fully executed or realized pricing.

And in this kind of a market, it's a blend of a lot of things. It's not just announced price, but it's also the way in which that is executed on the ground and also the way it's offset with any discounting or any kind of individual execution items. And so I think it's a recognized area where we see a tremendous opportunity to execute better in terms of how we go to market. That's one of the opportunities we have as we look to '27, on the execution side.

In addition, it's reasonable to expect given this inflationary environment in a few of our raw material components and with some of our freight that there's probably going to be some additional incremental action as we move through '27.

Our next question is from Phil Ng with Jefferies.

Well, Pete, welcome back. I appreciate all the insights you shared. A lot of numbers to unpack. So I just want to make sure I heard you correctly. It sounds like you're -- obviously, you're making big investments to improve the profitability and you're trying to jam through some restructuring.

Did I hear you correctly that the headwinds that you're seeing perhaps in the back half of this year is going to -- that's a good run rate in the first half of 2027, and you really don't see these net good guys and negatives turn positive first half until 3Q '27 and really, the big inflection is fourth quarter '27? I just want to make sure I understand some of those directional components.

Yes. I think first, the commentary in the prepared remarks was more to get myself grounded as well as the investment community on is there anything really different fundamentally about the business. And in my view, there really isn't. If you strip out the noise of China and you strip out the noise of Fiberon and the tax benefits and so some of the other discrete one-timers at its core business from an op profit perspective, it feels like it's in the 14% to 15% range with an EBITDA of 17% to 18%.

And again, that doesn't include any of the $70 million of structural cost initiatives that the team has been cranking away on. It doesn't include any of the cost -- price/cost recovery opportunity from '26, and it doesn't include the EMEA rationalization. So the business largely looks like what I expected when I took the opportunity and gets me excited about late next year when we finally have lapped the China exit, we've lapped the EMEA rationalization, and we've got in place that structural cost is fully in the run rate. It gives me confidence that we've set the tone internally that we think this is a 20% plus EBITDA business.

Okay. Helpful. And Jesse, I guess you've done your tour, you spoke to a lot of your customers. At least it sounds like feedback, big picture is constructive. But I guess in terms of these commercial actions and new product innovation and whatnot, is your expectation we're really not going to see much of it until exiting '27? I just want to help us kind of think through some of the puts and takes and appreciate the turnaround in water is going to take longer.

Yes. I -- first, let's -- high level, depending on how you look at the business, we've got 2 businesses outside of water that are operating, I would say, in a reasonably normal cadence that will benefit from some increased focus on growth. So if you think about our doors business, we're starting to launch new products. We're starting to accelerate new products. That takes time to get in the market. I would expect that we would see some benefit from that as we exit or as we kind of get into the back half, probably into the fourth quarter of '27.

By the way, that business is doing a good job as we speak of offsetting its single-family new construction exposure with just better blocking and tackling on the sales side. And then as you look at our security business, there's a few kind of shelf losses that will lap in the first quarter. So without being specific, hopefully, we'll start to see some of the benefits of the new product we've launched similarly as we move into the back half of the year.

And I think specifically on the water business and on our Moen business, but also Moen and House of Rohl, we have been launching new products over the last 6 months or so. Those are starting to come into the market. And as those come into the market, depending on the segment, they start having a benefit. And so you'll start to see some of the benefit of those new products plus better execution. I think you'll start to see some of the benefits of that once again, as we move through the back half of 2027.

And once again, I think there's just a lag, right? If you think about the different segments we play in, there's a natural lag of activity. And again, I'll just leave you with one thing. This is not all about shelf space or anything like that, although that's a part of it. A lot of it has to do with just our own execution. Our business in Moen and House of Rohl can do better with our current footprint. We've got great position at retailers. We've got a great position at wholesale, and we've got a great position online. We can execute better with the hand we've been given. And so that is our intent in addition to expanding the market with launching new products.

Our next question is from Michael Rehaut with Melius.

Great to have the old gang back. Looking forward to working with you both, Jesse and Pete. So good to hear your voices. First, I just wanted to zoom out a little bit and think about the back-to-business plan aside from kind of the portfolio restructuring, when you think about the core changes to the business itself that you're going to endeavor this year and I guess, multiyear, but let's say, particularly over the next 12 months, how should we think about that starting to impact the core profitability and needle moving?

Because one thing that I was a little surprised to hear perhaps was that you won't be lapping the share losses until the back half of next year. And I'm just wondering, as you think about executing the plan on kind of the fundamental blocking and tackling of the business, if you wouldn't expect some of that to yield results maybe over the next 2 or 3 quarters? Or is that just being too optimistic relative to the -- how the business works itself?

Yes. I think that there is -- there's a natural lag. So the results we're experiencing now and the last quarter are really an outcome of what happened a year ago and including profitability, including execution, including some of our supply chain challenges, although some of that happened earlier this year.

And I think similarly on the growth side, we believe that the market can and will expand, and we believe we can help that happen. But this is one where there's just a lag on the growth side. I think where you'll start to see the benefit of the blocking and tackling, so to speak, in the short term is as we put more of a focus on these core businesses and as we get into some of the profitability of each and every SKU, you can start to see as we optimize, deal with some unprofitable SKUs, you could start to see those actions start occurring really over the next 2 quarters.

The challenge is there's just a lag on that activity actually hitting the P&L. So it's not that we're not in the middle of starting to execute the actions on the, call it, the profitability and operational excellence side. It's just that there's a lag. You can identify a series of unprofitable SKUs. You can decide what to do with them, but it might take you 2 or 3 months, 4 months, 5 months to really have that materialize in the market. And depending on where it is, it might even take 9, 10 months. And I think it's similar on pricing and some of these other things we're talking about.

I'd just add, Mike to it. I think as a general statement, just from where we're starting from, I think the security and door side, we have opportunities to move a little bit faster or maybe some of the longer pull is on the water side.

Right. Right. No, I appreciate that, Pete, thanks for those comments, Jesse. I guess maybe a second question on this idea. When you look at Water specifically, I'm just kind of wondering from your examination of the business, what were kind of the core reasons for the share losses?

Was it service or maybe the sales organization, there was some disruption obviously talked about there with the corporate headquarter moves, or any other elements that you felt contributed to those share losses? And to your point about doing the work now and there's a lag to showing up is part of that just to the extent you're able to gain some shelf space back or some share back, you're really not going to see that until '28 because '27 is more baked.

Yes. On your first question, and unfortunately, I'm a football fan, so I'm going to sound a little bit like a coach after a game. I mean when you have a situation where you take a step back in the market, it's usually not one thing, right? It's a bit of all of the above. We've got a great market. We've got a great position. We matter in the market, and we've got very loyal customers up and down the supply chain. But every once in a while, you don't execute right, and that leads to a negative outcome.

And I'll reiterate, as we look at our future, we don't view this as a zero-sum game. We just see opportunity either where we're already playing or where we have the right to play. That doesn't mean it's necessarily negative to somebody else, where we can execute better and grow and expand our profitability. So we believe that we'll see some of the benefits of that.

Obviously, if I'm talking about a year lag, there's some stuff that we've launched in the market that's doing well. And there's additional stuff that we're going to launch. And there's also some other levers we can pull as we move forward. But this is really just about market expansion and doing what's right for our customers, and we'll win our fair share.

Our next question is from Susan Maklari with Goldman Sachs.

Welcome back, Pete.

Thanks, Susan.

I want to go back to the conversation around new products. Can you talk a bit more about how you're thinking of innovation across the entire business? You mentioned some of the efforts in Moen and House of Rohl. Is that where a lot of that is concentrated? And then I guess, what does the new product development mean in terms of your ability to grow the revenues, either across the segments or on a consolidated basis? What level of revenue growth are you tying to that 20-ish percent EBITDA margin?

Yes. On the EBITDA margin comment, I think there's a bit of an extrapolation of what we see as an opportunity with the actions we've already announced, additional actions that we have in the hopper and being able to size the business appropriately in a number of different areas. And as you look at that, I wouldn't say our target of -- or our interim target of 20% EBITDA is really predicated on anything more than just our own internal actions and execution based on what we see as the opportunity ahead of us. And so that's not necessarily predicated on any specific growth rate. And forgive me, Susan, I just forgot your second -- the second part of your question.

I was just asking about product development in general. Do you see that as being more focused in a certain area of the business?

Yes. So I think one of the biggest changes, so when you talk about focused business units, we had our product development structured at a corporate level and at a functional level. And what that means is to give you a little bit of the challenge sometimes in getting things through the system, if you're in our security business and you want to launch a new product, there wasn't a dedicated new product team to your business. You would have to work through a matrix someone different on the scoping of the product, someone different on the costing, someone different on the execution of it.

So for us, realigning the new product development team to each business and in many cases, the subsegment of the business allows less resources to deliver more efficient and faster new product growth. Your question on the segment is we see opportunity in each of our businesses to really have accretive or accretive growth really coming from our new products.

And House of Rohl, as you mentioned, is a terrific luxury portfolio. It's been performing better than the rest of our water business. But that business candidly didn't have a general manager for a year. right? And so our acceleration now with new leadership in place over the last 4 months really sets us up to kind of push the new product focus there much harder.

Okay. That's very helpful. And then maybe a question for Pete. As you think about the cash generation of the business and the leverage and the initiatives that you've outlined, can you talk a bit about what is the optimal leverage for the company and how you think about priorities for capital allocation?

Yes. I think the first goal here is to get below 2.5x leverage, which we expect to do this quarter. I think long term, kind of the goalpost probably ought to remain sort of 2 to 2.5x to keep our balance sheet strong enough to give us some flexibility. On week 6, day 2, I'm not sure I can fully align yet with everybody on the capital allocation priorities.

But what I would say is I think we've got to improve our execution where ROIC is clearly the best investing in ourselves first. So I think we've got to prove that discipline to ourselves that should be the #1 priority is investing internally in our growth and margin expansion opportunities. Again, maintaining a strong balance sheet leverage profile and then any excess, I think, in the near term is clearly going to go towards share repurchases.

Our next question is from Mike Dahl with RBC Capital Markets.

I wanted to talk more about some of the portfolio actions. So obviously, the Fiberon divestiture we knew about and then the China exit and EMEA restructure are incremental. You kind of highlighted the collective numbers, but those are on 3 different time lines. So I was wondering, can you get a little more granular on which contributes what?

And then since it sounds like these will be included in part of your ongoing earnings until the exits are complete, can you give us a better sense of, okay, what does it take to exit the China commercial business in terms of either like investments or severance dynamics or other kind of charges or cash impacts and same thing on the EMEA restructure. And these kind of seem like 3 of the easiest low-hanging fruits. So just taking a step back, just give us a sense of post this, any other portfolio actions we should be thinking about?

Yes. I'll kind of answer it at a high level and then maybe let Pete take some of the execution. Obviously, on a transaction, once that transaction executes, the benefit will become visible. And so we're not going to parse it out specifically right now. I would expect on our next call that we'll be able to give clarity and start to report on an ongoing basis in a way that gives you more clarity there.

In terms of what's it going to take to kind of execute the EMEA and the China exit, Pete, I don't know if you have any commentary just in terms of you've been diving in just on some of the moving parts and why it takes 6 months.

Yes. I mean, look, we had the announcement earlier this week with our teams. So that part is complete. We will work with our customers that we have over there. I think the bulk of the teams will probably transition through the late first and second quarter. And I would expect the third quarter to be a much more skeletonized kind of crew serving the last of customer requirements. And I think the goal would be to be completely ramped down very early in the fourth quarter.

Yes. And then on the factory reset and operations reset there, it's just really important that we continue to service customers as we kind of scale down and scale up. So that will really be driven by customer service. And so you should think of any time you're impacting an operation, you want to make sure that you do a good job, both not only with the people, but also with your customers.

And then I think, Mike, obviously, the first quarter, you're going to immediately see the lift on the quality of earnings of Fiberon being out. But as well, I think we will look to with our '27 results, report Water ex China, like we've historically at times done here to give people a better understanding and view of what the water business looks like without China.

Yes. One additional point. The EMEA action will benefit the Water P&L.

Okay. And just second quick question. You talked about using the tax benefit to reinvest in some tougher decisions around optimization and alignment. You were already making some of those investments. Can you just be a little more specific about what is kind of incremental to what you had previously already been doing and had discussed last quarter?

Yes. I think I could give you an example here in the third quarter, Mike, in our connected business, we had inventory base of about $8 million of product that was aged and a little bit older technology. And the decision was where do we prioritize our sales team's time? Do we try and sell an older platform and delay a new product launch? Or do we write off the product, get people focused and excited on the new technology and new product launch. And obviously, in this case, we chose to write off that inventory and get the teams focused on what's important and what's the future.

Our next question is from Sam Reid with Wells Fargo.

You talked a little bit about getting closer to price/cost neutrality as we move into, let's call it, mid- 2027, I believe. Can we talk through the market appetite for pricing? And I'm thinking specifically in water, but also in Larson, where there's been some commodity headwinds with aluminum and then also just Therma-Tru?

Yes. Look, obviously, we're not going to get into specifics just at a very high level, when we're looking at pricing actions, there's really 2 sides to it, right? So one is the actual kind of announcement in the marketplace and that dialogue, call it, list price or however you want to have it. And then the other one is kind of the manifestation or the execution. There's actually 3 components like how effectively do you execute it.

And then the third element is the gross to net kind of back-end discounting, what's the right way to promote products, et cetera. I think in general, in all of our markets, we're not sitting here saying maybe with the exception of kind of opening price point and maybe a bit in our new construction area. We're not sitting in a situation where we are shopping for pennies or our consumers are shopping for pennies, right? And so I think it's really important that we just price our products appropriately in the bands that we play in. And we play in a lot of tiers across our product line, entry-level, mid-price point, premium products. It's just really important that we price right within those tiers. And once again, we view opportunity in each of our businesses to be able to take additional actions in each of those 3 areas that I mentioned related to price.

Really helpful. And maybe just circling back on to your bridge. The bridge math for Q4 was very helpful. I'd love to drill down a little bit on perhaps some of the portfolio optimization and alignment actions. Can you -- that $0.14 headwind, could you just maybe decompose exactly what's embedded in that just in greater detail? Would just love some additional context as we're flowing that through our model and perhaps how to think about that impact continuing into 2027.

Yes. I mean, obviously, it's largely going to be nonrecurring. So that example I gave you of the $8 million is the biggest piece of the 3Q opportunity set. Candidly, the fourth quarter is a little bit of a placeholder for a guy who is on week 6, day # 2. But we do suspect that there'll be more there to again accelerate maybe some decisions that were tabled for the last year or 2 to try and get a jump start on where we want to be in the future.

Yes. And you should once again think of these are onetime in nature because they involve, as Pete pointed out, with some outdated Yale locks to just -- they involve -- it involved the decision to stop selling them and therefore, take a write-down on what was there. And so it's those kinds of decisions that we believe are wise to make moving forward to make sure that we've got the cleanest business we can have relative to both growth and profitability moving forward.

All right. With that, thanks again for joining us this evening. I know we have a number of follow-up calls, and we look forward to seeing many of you at upcoming conferences. And with that, have a great evening. Thank you so much.

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.

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I think the way -- so if you -- and the question, by the way, for those that may not hear it is, is there a review process on the portfolio beyond Fiberon? I would say at a macro level, if you look at our portfolio between our 3 kind of core pillars and then our 2, what I've defined as adjacencies, which is our 2 interconnect businesses, we feel really good about that in general. Now within each of those, are there areas where we might need to deinvest, put on hold, deal with an operational issue or deal with a geographic issue or optimize? We'll absolutely look at that. But not at a corporate level.

I guess maybe pivoting to the $70 million savings -- cost savings program that you guys have in progress. I guess any color as to like where the most meaningful savings are coming from? And does the broader simplification work suggest the opportunity could ultimately be larger than just the $70 million that you guys are calling out? And I guess just helping investors think about sort of the potential around that?

Yes. I'm happy to start and Jesse add color. I think if you just start and look outside in, the peer data and the benchmarking data would indicate there's a bigger opportunity than the $70 million. I think we have to be thoughtful around how we do that, when we do that, how we sequence it with investments that need to be made to get the business set up for success in '27. But I think about the effort broadly as when we changed our structure, we created, I'd say, over time, an outsized corporate piece and outsized centers supporting the business that both need to be taken down. One, the corporate -- reduce the corporate expense, and this isn't all people cost, right? There's indirect spend. We have 2 buildings as soon as Jesse started. We looked at our headcount. We're going to go down to one building, right? There's opportunity to reduce footprint, get indirect SG&A out.

And then I think of it as moving the people who are in these centers back closer to the business. The one we talked about earlier that we executed last quarter was our marketing and our insights organization. And as we did that, there are actually efficiencies that come out of it because you can align the resources more closely to what individual businesses need and they're not in a center trying to fulfill everyone's needs. And so I think that's the genesis behind the $70 million, and we'll continue to work through it, but I just think of it as reducing that corporate structure to some extent.

I think longer term, we -- I think we recognize that our SG&A as a percent of sales over a period of time has creeped up meaningfully. And you could argue what are the causes. We obviously spun a business out. There's all sorts of ways you could look at it. I think that over the long term, and you're going to ask what's the timetable on a long term? But as we move through '27 into '28, I think as we realign things, which might take some incremental investment, I think as we start to move through when the realignment is done and we've settled into our new business operating model that we should definitely see SG&A leverage. I think part of my long-term view of our equation is that we should be able to operate in a more efficient way and an ongoingly efficient way from an SG&A standpoint.

Helpful. Okay. And I guess moving over to inflation and maybe price/cost and this might dovetail to one of the earlier questions around pricing. I mean, you guys increased the guide a little bit for the increased commodity costs. I think it was like a $10 million lift. You called out the metals being the primary driver. I guess given the service disruptions, how confident are you in Fortune Brands pricing power to really offset sort of these rising inputs if inflation continues to accelerate as you look out into '27 and '28?

Yes. Yes, I'm happy to talk about '26 price/cost dynamics, if it's helpful. I'd say in general, it's probably too early to start talking about '27 at this point. We'll continue to focus on talking about our '26 execution, and we'll come back probably a little bit later and talk about '27.

And I guess like on '26, the pricing in the back half is probably tracking in line even though with the service disruptions. I guess how would you frame sort of the conversation around that?

Yes. If I look at '26 dynamics, pricing at low single digits, and that's pretty consistent all year. And then as you look at the combination of tariffs and inflation, that price/cost equation turns to favorable in Q4, and that's primarily driven by the year-over-year comp on tariffs being favorable by the time we get to Q4.

And that's part -- as you think about the guide, one of the questions we've had from people that you still have a bit of a margin step-up in Q4 that looks unusual based on your typical seasonality. There's 200 basis points of favorable price/cost. The price is in the market, the cost is on the balance sheet, right? There's really good line of sight to that. Some of the cost-out activities start to accelerate as you get to the fourth quarter, and then we're making some investments to offset that.

And so the top line, it's not top line driven, we're not betting on a market recovery or a big volume lift in the fourth quarter. It's purely what we're seeing in the market from a price standpoint, what's on the balance sheet, offset by some investments.

I guess maybe longer term in Water, I mean that business has historically been super strong margins, right? It's like points to mid-20% EBIT margins. Has the long-term margin in that business changed in your mind as you invest in things like as you accelerate product innovation or do the top of the funnel marketing that you called out or your supply chain? Or is it still really that level of profitability for that business longer term?

Yes. I think step one, as we think about profitability, we've got to look at profitability of the enterprise. And as we talked about, as I just mentioned earlier, I think that we should have an opportunity to get better SG&A leverage across the enterprise, which should allow us to reinvest and we'll get that leverage even with reinvestment over the long term. But that should give us an opportunity to continue to invest in the businesses.

And then specific to Water, so I think that's the kind of the macro theme independent. I don't know that we're going to be specifics on what's going to happen in each business unit. I think Water is a really good business where we have a differentiated product, and we just view it as a good market. And so what's the right balance of what our margin structure should be given both our premium portfolio and our Moen portfolio? I think we'll communicate that more as we kind of go through the cycle.

But -- so I would say we're ready to communicate a bit at the macro. I think we've got to give a better indication in the future of just that blended mix. But there are actions we can take that are really independent of the market. Think about improving our operational execution that we think will be beneficial to that margin equation. I mean, not just the short term, not just lapping the service issues and all that, that's certainly part of it. Think about the inefficiency we've incurred. Those are all positive things. But there's also some tweaks we can make. There's parts of our portfolio that are -- I mean, we make a lot of products in there. There's parts of the portfolio that are remarkably unprofitable that we have an opportunity to address.

And I think what I'd add maybe just to contextualize the very near-term margins, like what you saw in the quarter for Water, there's 380 basis points of price/cost unfavorability and 200 basis points of incremental cost to serve, right? So kind of a 580 basis points, almost 600 basis point headwind. Price/cost will start to ease as we move into the first part of next year through the fourth quarter of this year. We would expect cost to serve as well, as I talked about, as we ramp up that process starts to ease. But then you get to the discussion that Jesse laid out is what's the right kind of medium- to long-term margin based on our growth ambitions and our level of investment.

That's helpful. And again, this question was sort of answered earlier. But I guess to be curious as to like, it sounds like you view the security business and the outdoor business as being core part of those 3 pillars, I think you mentioned. I guess what makes those business core in your view to Fortune as we look to just kind of understand the strategy of kind of having those as parts of, I guess, core for lack of a better term?

Yes. I think your question is really around what is Fortune and what constitutes what the company is? And obviously, over a 20-year, a multi-decade period, I just ran into someone on the way in and who I chatted with briefly and he said, "Well, I guess I should chat with you about golf balls." So I'm like, yes, that was a different iteration of Fortune. I kind of -- it wouldn't be bad right now, but it still wouldn't fix my golf game. But anyway, the -- but I think our focus right now is each of these business has opportunities to be meaningfully better. And part of that is this mix between corporate and business. The other part of it is each business has a good opportunity. Tweaks -- there will be tweaks within the businesses, but each of the businesses have really good right to play opportunities.

And I think we need to get the business back to consistent positive footing and expansion in each of the areas that we play in. I think down the road, I think there -- the kind of the corporate strategy of how all these fit together, I think, is one that we can articulate in more detail in the past. I'm not going to -- I think the strategy we've had -- I'm sorry, detail in the future, I think the strategy we've had in the past is fine for now. Our focus right now is just execution and getting the businesses back to where they should be at a business level. And then I think we can have a long-term discussion about how they fit together.

Any more questions in the room? I guess my last one then on capital allocation. I mean this is a little bit more near term, but I guess, how quickly can you get sort of -- you talked about the near-term target being below 2.5x. How quickly can you get there? And then once you reach that level, like how should we think about your view on capital allocation going forward? Is it any different in the past than in historical Fortune Brands? So any...

Dave, do you want to take the timing?

Yes. I mean from a capital allocation framework, maybe just to step back for a second, we will focus first on incremental free cash flow generation. We'll make the organic investments in the business that we've been talking about, whether it's execution, product development, brand. Therefore, there'll be less focus of M&A investment in the near term. I'd say the balance will be share repurchases balanced with getting to that net leverage target. So the 2.5x is the near-term target we've talked about. We should be approaching that and achieving that by the end of '26. And then we'll continue to evaluate where we go from 2.5x, right? Over long term, it's probably something lower than that. But I think from a near-term perspective, we should be there by year-end.

And then to your -- what's different on the capital allocation. So if you go backwards, we invested a fair amount on acquisitions. I think for at least the near term, we -- as I've highlighted multiple times, we like the 3 pillars plus the 2 adjacencies that we're in. If there were specific bolt-ons that would make those businesses better, we might consider it. But I think in general, our focus is going to be deploying capital against growth opportunities. And I'm not guiding specifically, but obviously, software is -- and the impact of technology is an asset. So maybe there's a little bit more capital there, not meaningful, but incrementally more there. We don't spend a lot. We're not a capital-intensive business. We don't plan on becoming one. We've got plenty of assets.

But if there's growth opportunities where we can organically invest, terrific, we'll do that. And then tuck-in acquisitions. And then the rest is it would be appropriate to return that back to the shareholders in an accretive way. But obviously, if there's organic, you can get a great investment on organic and very selectively inorganic prior to that. And I don't -- I'm not used to having a dividend, but it's part of our allocation to shareholders and -- but we need to also make sure that we do things like buybacks to be additive to that.

I think the one thing I'd build, just to remind people that it's not a very capital-intensive business, right? So we're in a normal state, 3-ish percent of net sales for CapEx, about 1% of maintenance to balance for growth, cost out, product development and then some capacity. But as we look across our network, we're pretty well capacitized to capitalize on any volume upside that comes.

Really helpful. So I guess last call on questions in the room before we wrap up. All right. Awesome. Well, I really appreciate the Fortune Brands team being here, Jesse, David, Ashley. This was great and super helpful. Yes. Thank you.

Thanks. Collin, really appreciate it. Thanks for the time.

Greetings, and welcome to the Fortune Brands Innovations Second Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Curt Worthington, Vice President, Finance, and Investor Relations. Thank you. You may begin.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations Second Quarter 2026 Earnings Call. Hopefully, everyone has had a chance to review our earnings release. The earnings release, earnings presentation, and audio replay of this call can be found on the Investors section of our fbin.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share, or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for our reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

With me on the call today are Jesse Singh, our new Chief Executive Officer; Dave Barry, our Chief Operating Officer; and Ashley George, our Interim Chief Financial Officer. Following our prepared remarks, we have allowed time to address questions. With that, I will turn the call over to Jesse. Jesse?

Thank you, Curt, and good afternoon, everyone. I'm honored and energized to join Fortune Brands Innovations as Chief Executive Officer. Many thanks to the Board for its confidence and to Dave and the leadership team for the decisive actions they've taken over the past 2 quarters. I'd also like to thank the Fortune Brands team for their hard work through a period of change.

I have been here a month and what I've seen so far has made me even more excited about the long-term opportunity to accelerate growth and expand margins. We have truly exceptional brands, talented people, and decades of strong customer relationships, and our results over the last few years have lagged our potential. We have great core businesses, including Moen, Therma-Tru, and Master Lock.

We also have 2 relevant adjacencies that have become core to the company in our Moen Flo and our Yale connected locks business. We believe we have clear opportunities to expand our position and grow the market in each of these opportunities. We must continue to invest and expand in our core while nurturing our adjacencies. We also have very good people who want to do the right thing, but we, as management, have created conflicting priorities for our team members. Too much of our focus went to internal and corporate distractions and not enough to our customers. Our customers should be the center of everything we do.

Our intent is to get back to basics, better service, better products and a simpler, more customer-focused organization. Ultimately, this should lead to a more efficient organization with better execution. As part of this, we must address underperformance in parts of our core. Our water business, for example, has a strong position in the market but has lagged recently. This is driven by several factors, including service and supply chain challenges. We see opportunities in each of our businesses to improve the customer experience and to drive more focused innovation. Our doors business has an opportunity to drive incremental material conversion to our more resilient products. Our security business has an opportunity to expand into additional categories, and we see opportunity for secular growth in our connected businesses.

We are developing plans to address our gaps and realize these opportunities. These plans may require incremental investments and resources to improve our service levels and to accelerate our new product development. We believe these actions will yield better long-term opportunity, growth, and profitability. As part of our increased focus on the business, we intend to streamline our corporate cost structure and shift more resources to our customer-facing businesses. There is real work underway, starting with the previously announced $70 million cost program and a detailed review of the portfolio to better align our resources with our core brands. We will continue to evaluate additional actions as needed to create a higher-performing business.

By the end of the year, we intend to have the business realigned against these priorities. We will lay out more specifics on our plans over the next quarter or 2, and you should expect to see progress against them during 2027. For the third quarter and the balance of the year, we are assuming a similar operating environment and commercial performance to what Dave and Ashley outlined last quarter. Our updated 2026 guidance is an acknowledgment that we may need to make investments in the company to enhance execution and drive long-term value creation and growth.

While it will take time, I am confident that we can build a stronger company that will deliver improved results and shareholder value. We are taking the steps to ensure long-term growth and margin expansion. With that, let me turn it over to Dave.

Thanks, Jesse, and welcome. I'm looking forward to working together to improve execution and operational discipline in the company. As Jesse laid out his near-term priorities, my focus today is the specific actions to help us realize these objectives. As Jesse noted, we are investing more aggressively in the near term to enhance execution and service, supported in part by the anticipated net tariff refund we recognized in the second quarter.

On our last call, we laid out our near-term priorities to improve performance and committed to taking decisive actions to achieve those priorities. On today's call, I'll provide an update on the actions we've taken as well as share additional color on the specific steps that are underway. These are aligned to the priorities Jesse described, execution, including improving the customer experience and accelerating new product development, cost structure, and portfolio.

Starting with execution. There are still areas of underperformance that are impacting results, and we will continue to invest in improving our execution while working to streamline our business. For example, last quarter, I described our efforts to reinvigorate our new product pipeline. These efforts remain underway, and we continue to build momentum into 2027. I'll point to 2 recent launches as indicators of our progress, Moen's SwivelControl faucet and Master Lock's Elite pad lock. The recently launched SwivelControl kitchen faucet is engineered to lock in place, providing better directional control, hands-free operation, and automatic redocking. In conjunction with this rollout, we also launched a Retrofit Wand that allows existing Moen faucets to be equipped with a SwivelControl feature. We are excited about these new introductions and initial response from consumers and our channel partners has been positive.

On the security side, the Master Lock Elite padlock brings meaningful innovation to consumers and pros, including improved security features and enhanced materials. The lock attributes address the #1 concern of consumers, vulnerability to forced entry. The product so far is exceeding our sales expectations, and we believe it will continue to gain placement across channels through the balance of the year. As I also noted last quarter, our sales and operations planning process has not kept pace with the needs of the business and our customers, which has contributed to service gaps. While we work to implement sustainable fixes, we are spending incrementally to ensure service targets are met. This performance is felt most acutely in water as our service challenges and related investments impacted top and bottom line results in the quarter. While we are making progress in improving our capabilities, we are not where we need to be, and we are prioritizing investments in our operations to improve service levels and accelerate new product development.

On the first quarter call, I spoke about optimizing our cost structure to enhance our business unit-led organization and simplifying our structure. During the quarter, we began the process of moving our brand, marketing, and advertising teams back into the business units. Over the past several years, we have centralized these capabilities, which created distance from our business unit teams, resulting in unnecessary cost and slowed execution. Bringing these functions back into the BUs puts brand and commercial decisions closer to the customer, removes layers, and accelerates decision-making.

In addition, work is underway to reduce corporate costs, and we have confidence in achieving the previously discussed annualized run rate savings target of approximately $70 million by the first quarter of 2027, with $15 million landing in 2026. Further, we are actively exploring all aspects of our cost structure, and we anticipate ongoing efforts to better align our structure to business results. Lastly, we also highlighted the portfolio as an area of opportunity and our strategic review of Fiberon is underway, following through on the commitment we made last quarter to allocate capital and resources to our highest return opportunities. This is a deliberate step to concentrate investment and management attention on our core brands where we have a clear right to win. We continue to evaluate select portions of our portfolio to drive additional improvements.

Turning to the market. Within repair and remodel, we are seeing resilience in certain areas, particularly in luxury categories where the projects are less discretionary, even as consumers remain cautious overall. We continue to expect the R&R end market to be down low single digits for the year. Within single-family new construction, the spring selling season was relatively soft. As we discussed last quarter, our guidance does not contemplate a recovery in single-family new construction in 2026. We still expect this end market to be down mid-single digits for the year.

Looking at input costs, inflation continues to accelerate, especially oil, derivatives, and freight. We are monitoring the geopolitical backdrop, including potential outcomes that could ease energy and freight pressure and reduce input cost volatility. Given the uncertainty, our guidance does not assume any relief in commodity inflation before year-end. Additionally, we recognized a benefit from tariff refunds in the quarter. We have called out the net tariff benefit in our consolidated and segment financial results to allow investors to focus on the underlying performance of the business. We expect to use this benefit to invest in our business, including to support service, accelerate new product development, and increase brand awareness with consumers.

Looking ahead, IEPA and expiring Section 122 tariffs have been replaced in kind by a combination of Section 232 and Section 301 tariffs. So our overall ongoing tariff exposure remains largely unchanged. With that, I will now turn the call over to Ashley.

Thank you, Dave. As a reminder, my comments will focus on results before charges and gains, unless otherwise noted, and comparisons will be made against the prior year. Before I cover consolidated and segment results, I want to walk through the tariff refunds that we recognized in the quarter and the impact these had on our reported results. Our presentation provides a breakdown of the gross and net impact of anticipated tariff refunds on reported operating income and EPS for the second quarter and full year 2026.

During the second quarter, we recognized $122 million in gross tariff refunds. Of this amount, $104 million was recognized as reduction in cost of goods during the second quarter. Net of directly attributable variable compensation expense, this translated to $81 million of operating income, 700 basis points of operating margin and $0.52 of EPS in the quarter. The remaining $18 million of gross refunds was recognized as a reduction in inventory, which will flow through our P&L in the second half. We expect this to be fully offset by the remaining portion of the directly attributable variable compensation expense. Given the uncertainty regarding the amount and timing of any additional tariff refunds, we are not forecasting an incremental net benefit in the second half. As the situation evolves, we will update our guidance accordingly.

In the second quarter, we had a cash inflow of $9 million from tariff refunds. And through July 31, we have collected approximately $56 million of gross proceeds. Although we do not have specific guidance on the timing of the remaining refunds, we expect to receive the majority before year-end 2026. Now turning to our consolidated results for the quarter. Total company sales were $1.2 billion, down 4%. The decline in sales was primarily driven by our Water segment, partially offset by areas of growth in Outdoors & Security. Consolidated operating income for the quarter was $236 million, up 18.4%, with margin of 20.4%, up 390 basis points. Second quarter EPS was $1.35. Both operating income and EPS benefited from anticipated net tariff refunds. Excluding this benefit, our second quarter results were in line with expectations.

Turning to our segment results. Sales for Water were $605 million, down 6.5%. Excluding China, sales were down 5.4%. Sales were impacted by service level challenges, the carryover of discrete share losses from the first half of 2025, and softness in new construction-related demand in our wholesale channel. These were partially offset by continued growth in the e-commerce channel. Waters operating income was $179 million, up 7.9% with margin of 29.5%, up 390 basis points. Operating income reflects a $66 million benefit from anticipated net tariff refunds, equating to 1,090 basis points of margin. Excluding this benefit, the underlying margin decline was driven by unfavorable price/cost, volume deleverage, and higher cost to serve our customers.

In Outdoors, sales for the quarter were $365 million, down 3.8%. Excluding Fiberon, sales were down 1.5%, driven by softer new construction-related demand in the wholesale channel, partially offset by growth in retail and positive year-over-year pricing. In addition, Larson performed well as the NIO reset continued to gain momentum. Outdoor operating income was $56 million, up 14.2%, with operating margin of 15.2%, up 240 basis points, reflecting the inclusion of $5 million of anticipated net tariff refunds and improved operating performance. This was partially offset by lower volume and higher tariff, commodity, and freight costs, particularly for Larson. Anticipated net tariff refunds benefited operating margin by 130 basis points in the quarter.

Turning to Security. Sales for the quarter were $184 million, up 3.8%, with growth in the commercial, retail, and e-commerce channels. As we highlighted last quarter, we launched a number of new products across Yale and Master Lock, along with the Master Lock retail packaging refresh during the second quarter. Early feedback has been positive, and we estimate that new products contributed almost 200 basis points to sales growth in the quarter. We expect these initiatives to continue to benefit the back half of the year. Securities operating income was $50 million, up 88.2% with operating margin of 26.8%, up 1,200 basis points, reflecting the inclusion of $19 million of anticipated net tariff refunds and improved operating performance, partially offset by higher tariff, commodity, and freight costs. Anticipated net tariff refunds benefited operating margin by 1,030 basis points in the quarter.

Turning to the balance sheet and cash flow. Free cash flow for the quarter was $179 million compared to $119 million last year, primarily reflecting a reduction in inventory during the second quarter. We ended the quarter with net debt of approximately $2.3 billion and net debt-to-EBITDA of 2.7x. We are working to reduce leverage below 2.5x through a reduction in debt levels funded through free cash flow generation. On capital allocation, our overarching goal is to maximize free cash flow. From that, we are prioritizing reinvestment in the business to reinvigorate our product pipeline, enhance execution, and ultimately drive growth, after which we will look to return capital to our shareholders. As we focus on improving our performance, we plan to prioritize organic investment over M&A while balancing our share repurchases with achieving our near-term leverage target of 2.5x.

Turning to guidance. Our operating environment and commercial performance are largely consistent with what we outlined on our last call. As a result, our net sales guidance of down low-single digits is unchanged. However, we now expect to be slightly below the mid-point of that range as the previously mentioned execution challenges will continue to weigh on volumes and limit the improvement we originally expected in the second half. We are updating our full year EPS guidance to a range of $3.22 to $3.52, which includes a benefit of $0.52 from anticipated net tariff refunds. If you exclude this benefit, it implies full year EPS of $2.70 to $3, reflecting the investments we expect to make to improve service levels, accelerate new product development, and enhance execution, coupled with slightly lower sales growth.

Our full year free cash flow guidance incorporates net cash proceeds of $56 million from the tariff refunds received to-date, partially offset by the reduction in our forecasted operating income in the second half of the year. For the second half, we expect a modest improvement in net sales relative to the first half, but still down year-over-year, driven by more favorable retail comps in water and new product launches in security. On a year-over-year basis, we expect price/cost to be unfavorable in the third quarter and favorable in the fourth quarter. At the mid-point of our guidance range, we expect second half margins to be up approximately 100 basis points versus the first half. Looking at the third quarter, we expect net sales to be down between 1% and 2% and EPS to be between $0.72 and $0.76, which assumes operating margin between 12.5% and 13%.

As Jesse and Dave shared, we still have work to do to improve our execution, optimize our cost structure and realign our business. While these actions will take time, we are confident that with the right focus and investment, we can set the company up for a stronger future. With that, I'll turn the call back to Curt.

Thanks, Ashley. That concludes our prepared remarks. We will now begin the question-and-answer session. Since there may be a number of you who would like to ask a question, we will ask that you limit your initial question to 2 and then re-enter the queue to ask additional questions. Operator, can you open up the line? Thank you.

[Operator Instructions] And our first question will come from Keith Hughes with Truist Securities.

Jesse, a question for you. You've been at the company for about a month now. If you could just talk about after your months there, what do you think the biggest opportunities are at Fortune Brands and flip side, what's some of the biggest challenges you face?

I came into the role assuming that this business had long-term sustainable growth potential and margin potential capacity. I'd tell you coming in, after the first month, if anything, I'm even more optimistic about that long-term opportunity. If you think about the strength that we have established over the years, we've got a diverse portfolio. We play in 3 really good markets. We've already made the investments necessary in our adjacency in the connected space. I've been pleasantly surprised with the talent that we have. I've been impressed that despite a bit of change in the organization, including at the top, the team over the last few months, has really been focused on building out new product pipelines.

The brands continue to be really relevant in the market. And I think one of the other things that, as you know from my previous company, you look for is, is there a growth opportunity that can come from expanding from where you are, whether that be some kind of a material conversion or really expanding the market into other categories. And really, I've been pleasantly surprised in the early discussions across all of our businesses, those kinds of opportunities exist.

Obviously, in a business like Therma-Tru, there's more material conversion opportunity. In Connected Home, there continues to be opportunity where that market is just growing. And in our core Water business, there also continues to be opportunity to really expand the pie. In terms of some of the challenges, I think we touched upon them on the call. We need to get back to making sure that we deliver a really good service level to our core. There's been good progress there. We're going to have to continue down that journey.

I also think we've just been way too complex, and I highlighted that in my comments on the call. We've had a complex organization that the team has had to work through. I think as we simplify that and bring the discussion down to how do we continue to grow and execute in each of these important businesses, I think we'll start seeing the results.

Okay. Great. One other question. I was interested in Dave's comments of you're moving the marketing and advertising, et cetera, back into the field, if you will, which is great news. How long will you take? Will you able to get that done by the end of the year, I guess, is really the question?

Yes. Look, we've taken -- and I'm glad you pointed out Dave's comments. I think Dave did a terrific job in the short time that he had to start to move back in that direction. I think we're looking at ways to align the business to really give our -- align the overall structure to really give our businesses a chance to aggressively execute. I would expect that we'll continue to refine that, and we'll make really good progress in the months to come. And we would expect to be in a really good position by the end of the year.

And Keith, I would add, if you think about it, we talked about it last quarter, fundamentally, it's about getting these resources of ours closer to the business, to increase execution and efficiency and really become more customer-focused. And as Jesse called out, we have great people who are in roles now. We have critical talent. It's really getting those people set up for success and getting our business set up for success by putting them in the right spot in the organization. And so that work is underway with pace right now.

And our next question will come from Matthew Bouley with Barclays.

So just one on sort of the -- maybe how you're thinking about the cost outlook here. So if I'm hearing everything correctly, you sort of had this, I guess, fortuitous opportunity to take these tariff refunds and you needed to be reinvesting and you're using that to reinvest here. And it sounds like maybe there's some front-loading. But at the same time, you see kind of a longer-term opportunity to really streamline the corporate structure of the business. So my question is basically timing and magnitude there. How should we think about what needs to be reinvested into the business? And then at what point could we really begin to see the sort of fruits of those efforts? And how do you think about that ongoing cost structure of the business?

Yes. Look, I really appreciate the question, and it is certainly the right question for the long term. I would say it's too early to give you a cadence of that combination of reallocating resources and what's the overall ramifications. I think with our current guidance, there's an acknowledgment that, that balancing act may require some investment before the costs are fully realigned. Without being too specific, we'd be hopeful that we could make progress against that balance sometime during 2027. I think for the long term, I think that there's certainly opportunity to increase resourcing in the business while we are driving SG&A efficiency.

And Matt, maybe I'd add the areas where we're investing, we would have addressed those areas regardless of the tariff refund. They're core to protecting the business, the revenue and the future of the business. With Jesse on board, we're using it's an opportunity to be more aggressive and accelerate those investments here in the near term, so that we set ourselves up for success in 2027.

Got you. Okay. Yes. No, got you loud and clear and appreciated that a lot of this is still kind of to be determined. So then maybe second one, just kind of jumping down into the model and the numbers on the Water business. Appreciating there's a lot of moving pieces with the tariff refund there in terms of the margin. Obviously, we saw your peer report last week. Maybe you can kind of break out sort of underlying market performance in the Water industry, how volumes and price are tracking and sort of within the guide, how you're expecting all of that, both top line and the margin cadence in the second half to play out?

Let me maybe jump in with some of our numbers and drivers for Water in the quarter, and then I'll have Dave add some color. If you look at this business, clearly not performing where we want it to, sales down 5.4% in the quarter, excluding China, that is price up low-single digits, volume down high-single digits. So I think about drivers in the quarter, I think about it as 2 primary drivers, both driving about half of that net sales decline. The first one is the carryover from discrete share loss in the first half of last year that we've talked about. And then the second driver were the service challenges in the quarter that we talked about.

There are some other puts and takes, but I think about those as the 2 primary drivers for Q2. Probably worth saying as well that our luxury segment continues to outperform. Our House of Rohl sales performance was better than the Moen business in the quarter. Let me flip to operating margin, and then we can add some color. But from a margin standpoint, if you take out the impact of tariff refunds and do the math, you get operating margin down 700 basis points versus prior year. Three big drivers. About half of that is coming from price cost that was as we expected in the quarter. You've got another roughly 200 basis points coming from some of the service challenges, incremental costs that we incurred to serve our customers in the quarter. And then the remaining really comes from volume deleverage. So if you back out the service challenge impact of 200 basis points in the quarter, you get to something that was in line with our expectations coming out of Q1.

And I think that's a critical point, Matt, if we step back and just look at the Water business, commercially largely performing in line with our expectations a quarter ago. As Ashley alluded to, the top line was impacted, call it, 2.5 percentage points from a sales -- on the sales line from service and inability to fulfill the demand where that's one of the areas we're focused on investing. We will continue to spend on premium freight. We'll continue to spend in our DCs. We will look at sourcing even it's from a higher cost supplier that can be more delivery focused and get our products more consistently.

And then looking at the margin, what really was different was that premium cost to serve from a quarter ago. And so we'll continue to spend there. That will be investments through the second half. As we look forward, if you think about where Water margins could go from here, right? There are -- there's still pretty significant price cost headwinds in the third quarter. They start to ease a bit from the 380 basis points, but they're still significant. That starts to turn more favorable in the fourth quarter. And then as we sustainably solve our demand planning and service challenges, that can become a tailwind as you move into 2027. So I do think the next couple of quarters probably represent more of a trough for water margins and then you start to see them build back as we move into next year.

And we'll go next to Susan Maklari with Goldman Sachs.

My first question is, at a higher level, can you help us bridge the revised earnings guide of $2.70 to $3 relative to the prior guide of $3 to $3.30. Can you just kind of walk through the puts and takes there that we should be thinking about?

Yes. Just at a high level -- and I'll let Dave provide a bit more color. At a high level, from a commercial standpoint, as Ashley highlighted, the business is operating similar to what was discussed on the last quarter. I think there's really 2 components to the adjustment. I think number one is there's an acknowledgment that if -- that incremental expense would provide incrementally better service, which we think is the right thing for our customers. I think the second component is we are starting the journey of accelerating certain investments that we believe will start to put the business back on a growth trajectory.

And the most obvious one is I highlighted that we have a pretty good and accelerating portfolio of potentially new products. We see terrific opportunity. And I'll give a Security example. We launched a more premium lock recently. It's doing well. We see opportunity to continue to expand that portfolio and other products like that. So we want to find ways to accelerate that, those types of products. And I think similarly, we see really good material conversion opportunity in our Doors business. We want to make sure that we take the steps to accelerate those types of products. And then there'll be some incremental additional investments on -- related to growth.

And I would add just to put some numbers behind it, too, if you think about the $0.30 drop in EPS at the midpoint, I think of it as $0.20 or so of investment that Jesse outlined and then, call it, $0.10 or so of volume, but really volume directly attributable to service constraints. And so another good example where we're having some strong success is with Yale in multi-family, we're choosing to really prioritize that volume at the expense of maybe running an incremental promotion that might overwhelm some of our service. So it's really continuing to focus in on where can we serve, where are we winning, how do we prioritize that volume, and dialing back some of the extra things here in the near term while we get everything more sustainable going forward.

Okay. That's very helpful color. And then maybe turning to the various priorities that you outlined, the execution, investing in service, optimizing the cost structure, reviewing the portfolio. Can you give us some sense of which of those we should expect to come through in the near term, maybe within the next couple of quarters, the next year versus are there some of those that will be a bit longer in their nature and take more time to work through and come through to the results?

At a high level, and I'll ask Dave to comment. I think there's activities in each of the areas you talked about and think of it as customer experience, an improvement on our execution, and that includes realignment of the organization, new product growth, and an increase of investment in our core. If you just take that at a high level of what you just laid out, we're taking action on all of those things right now. We would hope to see results -- we would hope to see progress, I should say, from those actions during -- as we move through 2027. Obviously, growth tends to be a longer cycle activity, especially new product growth. So that may take a bit longer. But certainly, as we look to streamline our execution, improve our service, simplify our organization, all of those sorts of things, you're going to start to see the benefit of that as we move early into '27.

Yes. And as we said in the prepared remarks, we're on track for delivering the $70 million cost out separate from the investments that we're making in the near term to continue to improve the performance of the business. And to Jesse's point on new products, I think we talked about this last quarter as we're rebuilding that pipeline and trying to pull things through faster. But that could be a 2-, 3-, 4-quarter lag because by the time you launch a product, you get placement, the shelf resets, it can take that long. So I think new products may be more impactful as you move into the second half of next year, even though we're starting to see some wins now, but should have the cost -- the initial wave of cost out behind us in the first quarter.

And we'll hear next from Mike Dahl with RBC Capital Markets.

So I also wanted to follow up on kind of the investment dynamic just to make sure we have a clear picture of it. You've outlined a couple of things kind of high level in terms of [ outlooks ]. It sounds like a lot of this is in Water, but then there's some new product-oriented dynamics. Can you just give us a little bit more of a detailed kind of bridge on or quantification of where these investments are sitting in terms of both, I guess, by category or by segment, just to help us understand that second half dynamic a little bit more.

Yes. I contextualize it a bit, Mike, based on performance. And Outdoors & Security largely performing as expected through those businesses, and I the opportunity there is to invest to accelerate that performance. So you'll see new product investment going into Outdoors & Security. You'll see commercialization investment in both of those businesses to accelerate the new products that we've launched. And then we have a Master Lock brand campaign that's performing really well. So we'll continue to invest behind that. On the Water side, it's the biggest piece of our business. It's the piece that is performing probably below expectations at the moment. So the bulk of the investment will be directed towards Water, especially on the service side as we look to continue to spend to service our customers.

Yes. And let me just -- let me put a little bit of a context. I realize we're talking about service and just to put a little bit of a context on how we arrived at some of these service issues. I mean, we've -- we made some systems changes and some organizational changes. And for the right reasons, we also made some supply chain changes as our supply chain was under stress during the initial and multiple rounds of tariffs. And so the outcome of that is we created some disruption in our supply chain and therefore, some disruption in our service.

So a lot of what we're talking about is getting back to a stable supply chain, getting back to stable S&OP processes, going back to our core systems that we were using and getting back to what we would consider a baseline of performance. So what we're talking about here is it's not a unique and unknown problem to solve. We're just -- we're bringing the organization back to stability after a year of some changes.

Yes. That's helpful detail. And maybe just a clarification and then a second question. Just on the supply chain dynamic. I know you guys were working hard and aggressively to move costs out of China. So is that effectively like some of that backfired and now that you know the better way -- a more -- we think maybe a more stable way of the land in terms of new tariff dynamics, there's some reshifting in some of the global supply chain.

Then my real follow-up question was a lot of the discussion on investment sounds very kind of OpEx-oriented. What's your view on your physical capacity footprint, Jesse? And any early thoughts on kind of puts and takes as you think about CapEx going forward?

Yes. Just initially, we've got plenty of capacity in our facilities. And we have the capability. This is not as capital-intensive a business as you and I have discussed in the past. And so I feel pretty good, and I'll let Dave comment just on our capital footprint. Look, there might be some capitalization on either R&D or on systems investments. But in terms of hard assets, there's always a little bit of incremental here and there, but we're in a pretty good spot. And then maybe to answer your question on the supply chain, there's some good decisions being made, but sometimes in the execution on the pitch and patch, the organization that's receiving the supply may not have been ready for the volume.

And so we're going to make sure we take a look at what's the right supply chain footprint to have, what's the right way to manage that. And we might be a little bit more cautious than we were in the past to make sure that as we execute any changes, and there's always some changes that we do it in a way that is probably a bit more methodical. And in the short term, that may lead to slightly higher costs in the moment, but it might be the right thing for our customers and the right thing for long-term growth.

And I think from the -- on the capacity point, Mike, so if you think about our CapEx, we talked about this in the past, we're roughly 1% of sales maintenance CapEx and the balance for growth, new products, and cost out. And if you look at the guide, the CapEx guide, $110 million to $125 million, lower than it's been in years past, but I think we had some more capacity investments in years past and now feel like we're well-positioned to absorb incremental volume in the future years.

And our next question will come from John Lovallo with UBS.

The third quarter operating margin of 12.5% to 13%, that's inclusive of the $18 million [ good guy ] in inventory that's coming through COGS in the quarter, correct? And if so, I mean, how should we sort of think about margin pressure across segments?

Yes. Let me start. In Q3, it does include the incremental refund coming off the balance sheet, but important to note that will be offset with the directly attributable variable comp and some of that will hit in Q3 and Q4. But that will essentially offset that net benefit in the second half. Q3 margins, if you think about it sequentially off of Q2, I would think about some favorability coming from price cost as that starts to improve sequentially in Q3, although we don't see the year-on-year improvement until Q4. But then that is offset by both volume leverage and SG&A from the investments to drive execution we've been talking about. So net down sequentially, price cost up investments -- price cost favorable investments unfavorable.

And the only thing I'd add to that, prior year, there was a benefit from variable comp unwind, and it was pretty sizable in the quarter last year, it's about $25 million or 270 basis points. So we're comping that benefit from last year. Otherwise, I agree with what Ashley said. Price cost, it's a little bit better. Sequentially, it still unfavorable and then you have some volume deleverage on the margin.

Okay. Got you. Okay. So then all right, then if we think about that, SG&A in the quarter, I mean, dollars were up like 4% year-over-year, I think, on like a 4% decline in revenue. And I think as a percentage of sales, SG&A was up like 230 basis points. I thought that there may have been some incentive comp in that, but it appears like there may not have been. So what sort of drove that outside of a little bit of deleverage?

No, there is incentive comp. And I was talking third quarter, John. Last year's prior third quarter, second quarter, you have the tariff-related directly attributable incentive comp in SG&A.

Okay. So it did hit in the second quarter?

Correct, John.

Yes.

And we'll go next to Phil Ng with Jefferies.

In your past wall, I would say you were super collaborative with the channel. So what's the early feedback? What are you hearing from your channel partners? Are there areas where perhaps you may realign who you work with, particularly on the plumbing side where you're oversupplied, undersupplied, areas where you think you could fill a void perhaps where you're underpenetrated like e-com? Just give us an early read in terms of what you're hearing and opportunities on the channel side of things.

Yes. I appreciate the question, Phil. What I would say is just in aggregate across the board, coming into this role, I've been very pleased that we've got brands that matter and brands that are relevant to each of our channel partners. So that's a good place to start. I think if you look in each of our businesses, there's opportunity for us in all channels. And there's certainly some channels where I would say we are underpenetrated, where I think there'll be an opportunity with better execution and correct products where we'll have a chance to see -- we'll just have more opportunity and more of a chance to have growth in some of those segments.

And once again, it's going to vary by each part of our portfolio. But I think it's safe to say -- yes, look, I'll give you a macro without being too specific. I think in a couple of our businesses, be it Water or Doors, we're probably -- we've got a great position with new construction, single-family new construction, which I think is always for the long term, going to be a good segment. But in general, we -- in both those businesses, we are under-indexed in the R&R-oriented side of the business. And obviously, R&R has been more stable and is complex. It's broad, it's multiple channels, multiple customer sets. There'll be an opportunity for both those businesses to continue to expand into that part of the housing sector.

Okay. That's helpful. Perhaps a question for Ashley. In the press release, you guys provided some color in terms of Outdoor sales and how that would look like without pipeline. Not going too deep, any color when we think about how that portfolio could look like over time with some of the cost-out actions in that same format with or without some of those dynamics, how should we think about the opportunity for that margin profile opportunity for Outdoors going forward?

Yes. So this is Dave. Maybe I'll take this at a high level. But it's hard to get into details when we're in an active strategic review of the business. But I'd say what we have in our Doors business, we feel really good about the strength that we have within Therma-Tru. It's a material conversion story that still hasn't fully played out. As Jesse referenced, Doors are probably 55% converted right now away from wood and steel. So we see really secular growth opportunities in Therma-Tru, and we are the leader there in that space.

And then Larson, the reset that happened at our retail partner continues to go really well, and we continue to work through that product portfolio. And so we see Larson growing POS, growing share, and performing really well. And I think it's a good example of what we can do when we get it right around new product and commercialization with a strong partner. And so like happy with the Doors business, and we'll continue to move with pace on the strategic review of Fiberon.

And moving next to Trevor Allinson with Wolfe Research.

First one on the kind of the overall portfolio and going back to the Fiberon strategic review. What's kind of the time line for completion there? And then as we think about the portfolio more generally, how should we think about other parts of that business or other parts of your business overall? Could there be other companies that you look at as maybe not being core for you guys moving forward?

Trevor, I'll take Fiberon and let Jesse comment on the portfolio. I'll say we've retained advisers, and I'm pleased with the progress we're making against identifying the appropriate outcome, which for us, looking to maximize value for our shareholders and also set the business up for success with our customers and our employees. And so I can't commit to a time line on the call, but we're moving with pace and pleased with where we are. And Jeffrey?

Yes. Just on the overall portfolio, I would think of it maybe in pockets at a more granular level, which we want to make sure we're in a really good position to win and continue to expand. And so against that, we'll take a look at certain product lines, certain kind of subsegments, potentially within our aggregate portfolio to see if there's opportunity there. But in general, if you look at effectively the 3 core pillars plus the adjacent pillar with our interconnected business that I just talked about, we feel really good about each of those pillars and our ability to win and expand in each of those pillars, but there might be tweaks that occur within those pillars to optimize. It's still early, and we'll keep you updated on that.

Okay. I appreciate all that color. And then second one would be on your inflation expectations across the business in 2026, specifically in Water, just given the move in copper and zinc prices year-to-date. How should we think about the inflation across those businesses and across the entire year? And then perhaps also some commentary on exit rate inflation.

Yes, I'll start. If we look at inflation for the year, pretty consistent with what we've talked about full year previously. So we've got about $100 million year-on-year increase in tariffs hitting the P&L in year. Now remember, most of -- a larger portion of that hit in the first half. And then we are increasing our commodity estimate from $80 million incremental to $90 million incremental. So a $10 million increase in commodity and freight inflation driven across brass, copper, aluminum, and freight.

I think as we look at where we are in year, our commodities tend to be pretty locked based on the timing of when they hit the P&L. But as we assess 2027 and sort of where we're coming out of this year, I think we're in the early planning phases, so probably too early to comment on any specific numbers. But the way the cadence usually works is it gives us time as we get in the planning process to look and assess those commodity increases against our pricing in the market. So we'll do that holistically as part of our '27 planning.

And our next question will come from Stephen Kim with Evercore ISI.

My first question relates to the incremental investments. If my math is right, it seems like you're talking about, call it, $45 million to $50 million or whatever of incremental investments this year. I think you said about 2/3, 1/3 of that's going to be due to addressing service issues and hopefully getting some volume from that, about the other 2/3 would be from initiatives like new products. And so first question is, where do these investments hit the P&L? And then secondly, can you give us an understanding as to how you're going to boost near-term product launch productivity through incremental investments? Is this basically just marketing expense? Is this going to be some sort of increased incentives of some kind? Just give us a sense for how that -- how those dollars are going to be allocated.

Yes. I'm happy to start on that. And Steve, just I think clarify a bit. So on the investment side, what we talked about was roughly $0.20 of EPS, so call it, $30 million or so. I'd say predominantly hit through OpEx, mostly in SG&A as we move through the balance of the year, maybe a bit in COGS if we move some of the sourcing around that we're looking at. So I think that's how you should think about it flowing through the P&L.

And then on the new product side, a few things we can do there, right? Commercialization, as you touched on, is one of them. And just as we launch products, making sure we're supporting them in the marketplace. But then also there's opportunity to invest -- co-invest with some suppliers to develop technologies faster. And I think it's -- we may have touched on it on the last call, but one areas of opportunity broadly for new products to bring them to market faster is to work more closely with our sophisticated supply base to do that.

And so we lean in there and then really just incremental resources where the team needs them to pull projects in faster. And so it's the focus we've talked about now for a couple of quarters to get this new product development engine going, and we're pleased with initial results, but we know we have a lot of work left ahead of us.

Got you. Okay. That's helpful. And then when you talk about -- or you've talked about service a number of times, obviously. And it seemed like I think you had indicated that, that was something which was the main difference from your expectations in your Water performance, if I heard Ashley right, on the operating margin bridge. I was curious if you could sort of talk a little bit more about specifically what the issue is there?

It sounds to me like it's not a suboptimal geographic supply chain from an earlier question. It seems like it maybe is more a systems or a software issue that, I guess, you've arrived at a solution on. Can you just give us a little bit of color there? And then also, you called this out, I think, is sort of the main delta from your expectations in Water. And I'm curious is -- was there some sort of discrete event that hit this particular quarter? Because I know that service levels is something that you were focused on 3, 6 months ago as well. And so I would have expected that you would have expected something in 2Q already. So if you could just provide some color there.

I'll start and let Dave chime in. In terms of discrete, think of it as expedited freight and cost of expediting product in order to make sure that we sustain delivery to our channel partners. And so we're working our way through that. There might be some additional expedited freight. And, yes, we've got a number of SKUs across a number of different product categories. There's different reasons for that. In some cases, it was an outcome of a change of a source of supply where the receiving supply couldn't ramp up fast enough. In other cases, it was, as I described earlier and as you highlighted, some systemic issues, right?

So without getting into too much detail, the organization has gone through a lot of change in the last 6 to 12 months, in particular. And as part of that change, we made some alterations to the systems we use to conduct our S&OP. And in effect, the new process and new systems did not deliver the required levels of inventory to be able to service our customers. It's -- I hate to say it, but it's that simple. I could give you a positive spin, but those of you that know me know I'm not going to do that. It's just we had a few misses. And so we're resetting back to the old process that allowed us to consistently deliver for years, and we're kind of going back to what we were doing earlier.

Once again, the intent was positive, the blend of systems and organizational changes. The intent was to have higher service at lower inventory, and that just didn't work out. And so we're addressing that issue.

And this now concludes our question-and-answer session. I would like to turn the floor back over to Jesse Singh for closing comments.

Thank you all for engaging with us tonight. We are really excited about the opportunity that's ahead of us. As I mentioned earlier in the call, we are confident that we've got a terrific opportunity here to start to accelerate this business. It will require some additional investment, as we've talked about. And I'm confident that we've got the right team here to continue to progress this. And what we talked about today is the first step in that direction. So with that, look forward to chatting with many of you in subsequent events. Thanks, and have a great evening.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Greetings, and welcome to the Fortune Brands Innovations First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I would now like to turn the conference over to Curt Worthington, Vice President, Finance and Investor Relations. Thank you. You may begin.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations First Quarter 2026 Earnings Call. Hopefully, everyone has had a chance to review our earnings release. The earnings release, earnings presentation and audio replay of this call can be found on the Investors section of our fbin.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC.

The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified.

Please visit our website for our reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. With me on the call today are Susan Kilsby, Chairwoman of the Board; Dave Barry, our Interim Chief Executive Officer; and Ashley George, our Interim Chief Financial Officer. Following our prepared remarks, we have allowed time to address questions. I will now turn the call over to Susan, who will make a few comments on leadership and strategy. Susan?

Thanks, Curt. Before we begin, I'd like to take a few moments on behalf of the Board to address the recent leadership and governance changes. Our Board values direct constructive engagement with our shareholders. Over the last few months, we have engaged extensively with shareholders to gather their feedback on the CEO succession process, ensuring the Board is well informed on this important decision.

As you are aware, we have reopened the search for Fortune Brands permanent CEO. We are focused on identifying a leader with proven ability to instill focus and drive execution, particularly across global supply chains and complex routes to market. Just as importantly, we are seeking a leader who can build on Fortune Brands' proud legacy rooted in its iconic brands, history of innovation and strong customer relationships. Ideally, this leader will have a strong knowledge of the building products industry with a proven track record of driving leadership accountability and delivering sustainable sales and margin growth over time. We are very pleased with the high-quality candidates we have seen in the process as we move with pace to select the next CEO.

The Board is excited to have Dave Barry serve as the company's interim CEO. Dave is an experienced, thoughtful and decisive leader with more than a decade of experience at Fortune Brands, including prior service as CFO and most recently as President of Security and Connected Products. Dave is intimately familiar with our strategic priorities, our business and our investor expectations. He has the full support of the Board to act decisively, drive meaningful progress in underlying business performance and ensure Fortune Brands continues to build momentum while the search for a permanent CEO is underway.

I would also like to welcome Ashley George as Interim CFO. Ashley brings nearly a decade of experience with Fortune Brands and has extensive knowledge of the company's financial operations, supply chain and commercial functions and has a strong understanding of our systems, processes and commercial drivers.

At this important moment for the company, strong and steady leadership is critical, and Dave and Ashley are well positioned to provide that stability. I also want to recognize our Fortune Brands associates. The Board recognizes that the company is in a period of meaningful change, and we sincerely appreciate your commitment and the pride you take in delivering on our strategic priorities.

Turning to the Board of Directors. I would like to welcome Ed Garden, who joined the Board in March. Ed's extensive investment and financial expertise, coupled with his significant public company Board experience, brings a valuable perspective. We are looking forward to continuing our collaboration with Ed as we take action to improve our performance, enhance transparency and drive shareholder value.

As part of our normal succession process, we are also conducting a comprehensive director search as we have 2 longer-tenured directors who we expect to retire prior to our 2027 Annual Meeting. In closing, I want to reiterate the Board's confidence in Fortune Brands strategy, its people and importantly, the strength of our brands. We have put in place experienced, decisive interim leadership who know this business intimately and are empowered to act. The Board is actively partnering with Dave and the entire leadership team, and we are confident that the steps we are taking today will serve our shareholders, our customers and our employees well. We look forward to sharing more on our progress in the months ahead.

With that, let me turn it over to Dave.

Thanks, Susan, and good afternoon, everyone. Thank you for joining our call. I'll start by sharing my initial observations and priorities as interim CEO and then briefly discuss our current market outlook. I'll conclude with a preview of our updated 2026 guidance and a recap of our consolidated results for the quarter. Ashley will then cover our segment financial results and updated guidance in more detail.

First, I would like to share that I am energized and humbled to step into the interim CEO role and lead our talented teams. While we have a lot of work ahead, we have clear direction and objectives backed by strong internal and external alignment. The support I've received gives me confidence in our collective ability to deliver. I'm also extremely proud of all of our associates who have remained focused in the face of recent leadership transitions and have responded to a volatile market backdrop to serve our customers, drive performance and make progress against our strategic priorities.

I want to be clear, this leadership team has the Board's full mandate and alignment to act decisively now. We have strong brands and a solid strategic foundation, but our recent execution and current level of profitability is not where it needs to be. Our immediate near-term priorities are centered around increasing our operational rigor and discipline, optimizing our structure to drive efficiencies and focusing our resources on the highest return opportunities.

We expect that accomplishing these goals will allow us to accelerate sales growth, strengthen margins and improve cash generation. Turning to Slide 5. Before I dive deeper into my priorities as Interim CEO, I want to share a few of my early observations on the company since assuming the role and how these are shaping our near-term focus. When I think about what differentiates Fortune Brands relative to our competitors, 2 things immediately come to mind: our leading brands and our talented workforce. Starting with our brands. Our flagship water brand, Moen, is a category leader built on decades of innovation, reliability and trust with both consumers and pros. We have continued to build upon that foundation and enhance the brand positioning with our new brand campaign, must be a Moen, which just launched in April. It is the first major branding campaign for Moen since 2018 and reflects our commitment to focus our investments behind our leading brands.

This campaign is expected to reinforce Moen's positioning in the market and allow us to win a larger share of wallet with younger consumers by focusing advertisements where we see increasing engagement. Early feedback on impressions and earned media shows the campaign is off to a great start. In our Outdoor segment, our Therma-Tru brand is backed by 60 years of innovation and performance and is the #1 fiberglass entry door among builders.

Today, the brand is known for its durability, energy efficiency and lasting style. I'm proud to share that our Therma-Tru Veris Modern Grain entryway system recently won a most valuable product award from the National Association of Homebuilders. And in our Security segment, Master Lock is the clear category leader, ranking #1 in both awareness and purchase intent with consumers. The Master Lock brand also scores over 90% in durability, quality and trust. This reputation for reliability and performance has built strong awareness and credibility with Pro customers, driving consistent preference and repeat usage.

We see significant untapped potential in the Master Lock brand, and I am excited about the momentum we are building, including the launch of our innovative Master Lock Elite Padlock in April and the growing enthusiasm behind our Master it brand campaign. We are committed to investing behind this iconic brand in a way that reflects its true potential.

Now let's talk about the strength of our people. We are making meaningful progress in coming together as a cohesive unified team in Deerfield. While the move of our headquarters did result in the loss of some valued team members, the move also allowed us to attract a number of talented individuals with deep industry expertise and fresh perspectives.

Combining the caliber of our new talent with our experienced legacy teams, we are creating a stronger organization with a powerful foundation that balances new thinking with institutional knowledge. As we continue to work through our transformation and bring our teams together, we are creating an environment that fosters greater collaboration, faster decision-making and more effective sharing of best practices across the organization.

I believe our long-term strategy is sound. We will be able to leverage our enduring strength to reinvigorate profitable growth. That leads us to our immediate near-term priority to improve performance, which fall into 3 key areas: First, increase our operational rigor and discipline; second, optimize our structure to drive efficiencies; and third, focus our resources on the highest return opportunities.

Starting with our operational rigor and discipline. Recently, we have fallen behind on 2 fronts that are critical to our success, the pace and quality of new product development and our ability to consistently serve our customers at a high level. Our team has recognized these challenges and has taken definitive steps to improve. We are reinvigorating our new product development pipeline with a clear focus on accelerating speed to market and delivering features that align with evolving consumer and Pro preferences.

By sharpening our new product development around what matters most and delivering it to our customers faster, we expect to strengthen our value proposition with channel partners and drive incremental market share. While we are at the early stages of rebuilding momentum, we already have some recent wins that are worth highlighting. In Outdoors, Therma-Tru recently launched a new line of 3.5 inch shaker-style fiberglass entry doors. These new products are targeted at the fastest-growing portion of the entry door market, and we are already seeing momentum with first quarter sales for this product coming in at approximately 125% of our plan.

Just as impressive, we were able to go from concept to design to production in only 9 months, essentially cutting our historical commercialization time line in half. In Security, we launched the Yale Pro 2 product line in February, adding a suite of products engineered for multifamily facilities, providing a fully integrated smart access experience. Backed by the shortest lead time in the industry, Pro 2 ensures faster deployment so property managers can upgrade access control solutions without delay.

Turning to our customer service levels. Our sales and operations planning processes have not been as consistent or as responsive as needed to keep pace with the changing market conditions, which has contributed to inventory imbalances and service challenges in certain areas of the business. We have made this a priority and are moving quickly to implement a more robust sales, inventory and operations planning process that will improve agility, streamline working capital and enhance service to our customers.

Turning to optimizing our structure. We are taking action to flex our cost base down in the face of continued challenging market dynamics while also balancing capacity to capture growth when market conditions improve. This will happen in 2 key areas: operating costs and SG&A. On the operating cost side, we are evaluating our footprint and overall capacity utilization across our network.

In recent years, we have made targeted investments to increase capacity and improve efficiency. But in light of the market environment, we have an opportunity to scale our assets more effectively and optimize our fixed costs in the process. Within SG&A, we are actively reducing duplicative costs that have occurred as part of our recent transformation. At the same time, we're taking action to ensure that our shared functions are as cost effective as possible while still supporting the scale and best practice sharing that is critical to our future success.

We believe these actions will allow us to flex our operating costs more effectively and streamline our SG&A, which better enables our goal of being a BU-led organization supported by lean COEs. Based on the additional work we have done, we are increasing the annualized run rate of our cost savings estimates from the $35 million that we discussed last quarter to $70 million, and we now expect to capture $15 million of these savings in 2026. The $70 million annualized run rate savings represents over 150 basis points of annual margin improvement before any strategic reinvestment, and we are actively looking for additional opportunities throughout the business. That brings us to the third priority, focusing resources on our highest return opportunities.

While the overall Fortune Brands long-term strategy is sound, we recognize some parts of the business have not met our expectations. Our teams are undertaking a comprehensive review of those targeted areas to determine the best path forward, focusing on growth profile, strategic positioning, capital requirements and overall value creation potential. This work does not happen in isolation. It is directly enabled by the execution improvements and cost structure discipline we discussed earlier. By driving greater operational efficiency and removing unnecessary costs from the business, we expect to free up the resources and organizational bandwidth needed to invest behind our strongest brands.

Regardless of the external environment, we will be positioned to deploy capital with precision, supporting the areas of highest potential and ensuring our brands have the investment they need to compete, win and scale.

Turning to Slide 6. Macro headwinds and inflation have intensified, which have impacted consumer confidence and housing affordability. This is driving increased market uncertainty, especially for single-family new construction and has resulted in an uncertain start to the spring selling season. In addition, the increase in inflation is causing raw material and commodity prices to rise with the biggest impact to us being in aluminum, copper and freight.

The cost reduction efforts that I just spoke about, coupled with additional commercial and operational levers are expected to offset the higher input costs that we are seeing. Despite these near-term pressures, our view of the long-term fundamentals remain unchanged. The U.S. housing market continues to be underbuilt, home equity levels remain elevated and repair and remodel demand is supported by an aging housing stock. These factors, combined with the strength of our brands and our advantaged market positions continue to give us confidence in our ability to drive above-market growth over time.

Now turning to our consolidated results. In the first quarter, total company sales were $1 billion, down 2%. Excluding the impact of China, sales were down 1%, driven by lower volume, which was partially offset by price. Our first quarter results reflect a U.S. housing market that continues to remain soft.

While we continue to make progress in our retail and e-commerce channels, this was offset by weak new construction activity, which weighed on our wholesale channel. Consolidated operating income was $112 million, down 18%, largely due to lower sales volume, higher raw material and freight costs and the flow-through of peak tariff rates from the third quarter of 2025. As a result, operating margin decreased 200 basis points to 11.1%. Earnings per share were in line with our expectations at $0.53, down 20%, primarily due to the decline in operating income. Before I turn the call over to Ashley, I would like to spend a moment discussing the update to our 2026 guidance, which incorporates a measured reset for the remainder of the year in light of the increased market uncertainty.

First and most notably, we are reducing sales for the full year to be in line with our market outlook. While outperforming our end markets and driving share gains through the cycle remain core elements of our strategy, we believe we must address the near-term action items that I outlined earlier to accelerate our level of outperformance over time.

Next, we are incorporating the impact of higher commodity and freight costs into our outlook while also taking decisive commercial and operational actions across the P&L to offset these cost headwinds, including the $15 million of 2026 cost savings that I highlighted. Ashley will discuss the changes to our 2026 outlook in more detail later in the call. With that, I will now turn the call over to Ashley.

Thank you, Dave. As a reminder, my comments will focus on results before charges and gains, unless otherwise noted, and comparisons will be made against the prior year. I'll start on Slide 8 with first quarter results for Water. Sales for the quarter were flat at $564 million. Excluding China, sales increased 2%. The increase was driven by sales growth in both Moen and House of Rohl with pricing offsetting lower volume. In the quarter, Moen returned to sales growth in the retail and e-commerce channels, partially offset by declines in wholesale, which was impacted by weaker new construction-related demand.

We also benefited from momentum in House of Rohl, which we expect to continue given its positioning with higher-income consumers. Channel inventories in Water were stable in the quarter, but lapped a large inventory drawdown in first quarter 2025. Water's operating income was $106 million, down 6%. Operating margin was 18.8%, down 120 basis points, primarily due to lower overall volume and higher tariff and freight costs, which were partially offset by price realization.

Turning to Outdoors. Sales for the quarter were $294 million, down 3%, driven largely by Fiberon, partially offset by strong demand in Therma-Tru. Channel inventories remained at historically low levels and were a modest headwind in the quarter as customer seasonal builds were below prior year, most notably with LARSON. Outdoors operating income was $22 million, down 31%. Operating margin was 7.4%, a decrease of 300 basis points. These results reflect the impact of lower volume, higher tariff costs and higher commodity costs, particularly for LARSON.

In Security, sales for the quarter were $153 million, down 6%, reflecting volume declines, partially offset by price. The commercial channel experienced sales growth in the quarter, which was offset by weaker demand in retail and e-commerce. From a timing standpoint, we have a number of new product launches in Yale and Master Lock as well as a full retail packaging refresh for Master Lock that have occurred or will be occurring in the second quarter, and we expect those to benefit the remainder of the year.

Channel inventories in Security declined low single digits as channel partners managed working capital in the quarter. Security operating income was $22 million, down 7%. Operating margin was 14.2%, flat on a percentage basis. The decline in operating income was a result of lower volume and higher tariff costs, partially offset by price realization.

Turning to the next slide. Free cash flow for the quarter was negative $140 million compared to negative $113 million last year. As expected, the first quarter is our lowest cash flow quarter given seasonal inventory builds ahead of the spring construction season and the timing of interest payments. We remain focused on reducing our working capital levels as part of a multiyear initiative to optimize our inventory position across the business.

We expect these actions will have a positive impact on inventory levels and working capital in the coming quarters. We ended the quarter with net debt of approximately $2.5 billion and a net debt-to-EBITDA ratio of 2.9x. We remain focused on reducing net leverage to under 2.5x in the near term. We also maintained strong liquidity with over $900 million available, including approximately $695 million of undrawn revolver capacity.

Further reinforcing the strength of our balance sheet, both Fitch and Moody's affirmed our BBB credit rating during the first quarter. We returned $75 million to shareholders through the combination of share repurchases and our quarterly dividend payout. Overall, we believe our balance sheet provides flexibility to execute our strategy, support disciplined capital deployment and continue investing in long-term growth.

Turning to our outlook for the remainder of 2026. As Dave mentioned, we have reduced sales for the full year to be in line with our market outlook. In addition, we have updated our guidance and assumptions to include the impact of higher commodity and freight costs as well as the commercial and operational actions we are taking to offset these costs.

Beginning with our updated sales and EPS guidance for the year, we now expect full year net sales to be down low single digits and full year EPS is now expected to be in the range of $3 to $3.30. Our updated sales and EPS guidance assumes operating margin of 13.5% to 14.5%. We are also reducing assumptions around our full year free cash flow to reflect our revised guidance.

Finally, I would note that our updated guidance includes $15 million of 2026 cost savings, which are part of the $70 million annualized run rate target that Dave referenced earlier, and our teams continue to look for more. Commodity pressures remain elevated, particularly in aluminum and copper alongside continued volatility in freight costs. At the same time, recent changes to IEPA, Section 122 and Section 232 tariffs are expected to have a roughly neutral impact compared to our original guidance. We originally expected the combination of these headwinds to be approximately $140 million and now see them closer to $180 million.

Taking a closer look at the impact from tariffs, the carryover effect of peak tariff rates from the second half of 2025 is expected to result in a price/cost headwind in the first half of 2026. As year-over-year tariff-related comparisons normalize in the second half, we expect price/cost to be favorable, including the increase in commodity and freight costs. We are leveraging our revenue management, sourcing and productivity capabilities to mitigate these pressures and maintain a disciplined approach to cost management.

As a result, we expect second half margins to be up approximately 300 basis points compared to first half. While we do not formally provide quarterly guidance, I want to offer a few points to help frame the cadence of the year. Based on our updated full year outlook, we expect sales to be weighted close to 50% between the first half and second half, consistent with our historical performance.

For EPS, we expect the first half of the year to be in the low 40% range and the second half of the year to be in the high 50% range, primarily due to a more favorable price/cost relationship in the second half of the year and the $15 million of 2026 cost savings. In closing, we remain confident in our ability to navigate the current environment through disciplined execution while continuing to invest in our strategic priorities and position the business to deliver long-term value for our shareholders. With that, I'll turn the call back to Curt.

Thanks, Ashley. That concludes our prepared remarks. We will now begin the question-and-answer session. there. [Operator Instructions] Operator, can you open up the line for questions? Thank you.

[Operator Instructions] And your first question will be from Susan Maklari at Goldman Sachs.

Dave and Ashley, congrats on the new positions.

Thank you.

My first question is, Dave, as you come back -- as you get into the CEO role and you sort of have looked across the different segments of the business, can you talk about what you're finding in there, where you're sort of seeing relative opportunities and what your priorities are as you sort of think across Fortune and the current slate of businesses?

Yes, Sue, happy to touch on that. And I think I'd start by reiterating our foundation of the business is stable. Our brands are healthy, and our strategy is sound. And I actually feel really good about the engagement and focus of our associates.

So I think we're coming from a good place on all that front. but we recognize our performance needs to improve. And so we've been working very closely with the Board on these efforts and really focusing on growth and profitability levers that are within our control.

And so in the prepared remarks, I touched on things like increasing our operational rigor and discipline. This really to me is refocusing on our core growth. NPD is a piece of that, commercialization excellence, both online and offline is a piece of that.

Fixing our sales and operations planning process, really get best-in-class in service and inventory levels is a piece of that. And so renewed focus, I think, just on the rigor and discipline in those areas that will help drive performance over time.

And as I talk about optimizing structure, to me, this is really about margin management and something that this company, fortune has been really good at through the cycle over time. I think we've gotten away from that a bit recently.

But it's getting back to regardless of what's happening in the external environment, how are we controlling costs? How are we getting to the right asset base? How are we improving margins over time regardless of the macro.

And then the final point around focusing resources on the highest returning opportunities. This to me is prioritization and focus around our investments and where are we going to put those next dollars to drive the most value over time and how do we continue to simplify and focus on our biggest brands and our best brands.

I guess I'd close by saying we didn't get to this position overnight, and we're not going to get out of it overnight either. as you all know, we have been driving a lot of transformation in the business. And along our way, we've lost some of that key execution fundamentals that's required to be successful. So since moving into this role and partnering with Ashley, we've identified root causes. We're driving actions to correct. So I think what's encouraging is all these problems are fixable and the work is underway to get after it.

Okay. That's great color. And then maybe just following up on that. As you do think about the portfolio, can you talk about where you're seeing opportunities to perhaps really kind of drive that growth or hone in on things? And is there anything within the portfolio that is perhaps not core and may be -- require more change down the road?

Yes. I'm happy to talk about the positive momentum areas. And I'd say as I've touched on, really a lot of near-term focus right now, but a passion point of mind, especially coming out of the prior role is to do a better job of leveraging our customer and channel strength to sell our full portfolio of brands together.

And this is not something that Fortune has really focused on in the past for various reasons. But I really believe it's an untapped revenue opportunity, and we're in the early stages of developing the strategy, but I can share a few proof points where it started to pay off. So one area, leveraging our strength and share position with single-family builders at Moen and Therma-Tru to win door hardware and connected locks, really sell that full portfolio into builders.

And I'd share that with Yale, we recently won a portion of business with a top 10 homebuilder. It's our first win in that space. The team has learned a lot going through that bid process, and we'll continue to refine our approach. But it gave us confidence that, hey, we can win here and we can sell this portfolio and leverage these deep relationships that we have.

Another area of focus that's starting to show some early results is our partnership with the Pro arms of our big retailers and really being focused on selling our brands at Pro-focused events that is helping us reach a different part of the market that otherwise we didn't play in or have access to.

And then the final example I give here is we recently had the first ever really Fortune Brands Wide strategy sessions with 2 major e-commerce platforms. And they both came away incredibly excited about the cross-brand bundling opportunities that we have and what we can do together to really enhance the digital shelf.

And so we see all these opportunities is where the power of this portfolio starts to drive incremental value, and it's not something that we've really tackled before. So I'm excited to spearhead this initiative going forward.

Next question will be from Mike Dahl at RBC Capital Markets.

Dave, Ashley, clearly, a lot of moving pieces, both with the macro and within Fortune Brands. I appreciate some of the high-level color you just gave on kind of first half, second half. Can you walk us through that full year cadence for the guide in a little bit more detail, especially since there's a step-up in margins assumed in the second half? And maybe help us understand on a segment level basis, how that plays out?

Yes, Mike, it's Dave. And I'll start and give some context and then Ashley get into some of the detail. But just contextually, if I step back as we assessed, I think our recent performance trajectory coupled with the external environment, we view this as a measured reset of guidance where simply we've taken our sales performance, our overperformance out and now expect in the guide to grow in line with market.

Clearly, our ambition is to beat the market over time, but just being realistic about where we are today and the identified issues we have to work through, we thought this was the prudent path. I'd say on the top line, importantly, this guidance doesn't rely on the second half ramp in the market.

So anything that might have been in there, it has been removed from that as well. And on the margin side, and Ashley can give some color, simply, the step-up first half to second half is an improving price/cost dynamic that we have line of sight to, given our inventory positions and the price we have in market, coupled with the cost reduction outlines that -- cost reduction efforts that I've outlined that will start to ramp across the second half. So it's really those 2 things driving margin. And I'll let Ashley provide some color on the cadence.

Sure. Mike, maybe let me start with 2 points on the full year, and then I'll talk a little bit about the phasing. The first point I'd make is in as simple as terms, I think about the change as being driven by roughly 2.5 to 3 points of sales out at the midpoint.

So that gets us to sales performance roughly in line with the market at down low single digits. The second point I'll make on full year is just the incremental in-year inflation. So the $40 million we talked about in the prepared comments, that is offset in the guide by commercial and operational levers across the P&L, which does include the $15 million of in-year cost out we talked about.

From a phasing perspective, we do expect net sales to be down low single digits, both first half and second half aligned with market, although I will add that we do expect to see some slight improvement in that year-over-year growth rate from first half to second half.

As we said, revenue expected to be split 50-50 first half, second half. That is consistent with what we've seen in the last 3 years historically. Worth maybe reiterating a point Dave made, I think, that uplift I talked about from first half to second half is mostly due to improved volumes from favorable year-on-year comps and midyear initiatives.

It does not rely on any inflection in the market in the second half. We talked about OI margin, margins improving about 300 basis points first half to second half. That is price/cost relationship, primarily just timing of tariffs from Q3, second half last year hitting majority in the first half this year.

And then again, full year EPS split low 40% in the first half, high 50% in the second half. I'd add, we do expect a slight sequential improvement throughout the year there as well. From a segment standpoint, I'd say it's probably best to apply similar logic down to each of the 3 segments. So all 3 down about 2.5 to 3 points in revenue and then similar margin profile across the year from first half to second half.

Yes. And Mike, maybe I'll put a finer point on the second quarter, given the first half -- second half trends we shared -- we see the second quarter ramping seasonally, but still seeing the impact of weaker new construction and some of our near-term performance challenges.

So at the midpoint of the guide, it implied second quarter sales down in that mid-single-digit range. We do see sequential margin improvement, though, probably in the range of 200 to 250 basis points first quarter to second quarter. This is the normal seasonal volume uptick. It's a minor improvement in price cost.

But as Ashley said, we expect price cost to still be negative as we move through the year. I do think importantly, though, to reiterate, as we move through the year and get to the fourth quarter, we expect actually to drive year-over-year operating margin improvement because we've comped the price/cost headwind fully, and we've comped some of the share challenges from the past year and then the initiatives that we have underway will start to deliver.

Okay. I appreciate the very thorough response there. And just as my follow-up question, maybe specifically drilling down on the cost saves, and it's good to hear kind of the doubling of the cost saves.

From a realization standpoint, can you just talk through -- it still seems like it's going to take some time to get those actions into the P&L. Can you walk through kind of why the prolonged timing and if there's any opportunity to accelerate any parts of those?

Yes. So what I'd share, I'd expect to have the full annualized $70 million realized by the first quarter of '27. So it will start to ramp. We're doing the work now. It will start to ramp across the second half of the year.

I would frame it as opportunities across the P&L. So it's not just SG&A focused. So we know there's opportunity in SG&A. There's opportunity in our manufacturing base to better align variable and fixed costs with our level of demand.

I think there's opportunity through our trade spend and gross to net spend to be more efficient with promotions. And so the team is just taking a sharper view of where we're spending, where we need to get leaner, where we need to get more efficient. I'd also say we're not cutting muscle, and we're preserving investments to drive the performance change that we've outlined, but this is really about complexity reduction, improving speed, reducing duplicative costs and aligning the cost base to our current levels of volume.

Next question will be from John Lovello at UBS.

Maybe the first question, I'll start with Susan, if I can. There's obviously been a lot of changes at the top, and they're still kind of in the works. I'm curious if you could sort of elaborate on the new Board dynamics as they stand today.

There's been a couple of notable changes there. Why you think this positions the company more favorably? And then what you're looking for in the 2 new directors that you're currently seeking?

Sure. Thank you. Well, since Ed Garden joined the Board in March, we've had a very constructive engagement with him. He's been very actively involved both at the Board level and also with the management team, getting to know them and learning about the business.

He brings a thoughtful value creation perspective. He's asking him all the right questions around performance, capital allocation, execution. He's integrated extremely well with the Board. The dialogue has been collaborative.

There's many more things we agree on than we disagree on. We're all focused on driving the best outcomes for the company and for the shareholders. And we're all focused on strengthening performance enhancing accountability and unlocking value of Fortune Brands.

So I look very much forward to continuing the partnership. On the new Board members that you've asked about, we're looking for -- we're losing 2 long-tenured Board members who have deep Board experience, deep experience with Fortune Brands and are wise, I would say.

And so what I'm looking for and what we are looking for are Board members who can add that deep perspective, financial expertise, CEO expertise and certainly building products expertise. So we are in that process right now as we continue to evaluate candidates for the Board.

Yes. And John, I would build on that a bit, Susan, and we came out of a Board meeting earlier this week. and can say that the Board is highly engaged and collaborative and really been a great thought partner for me and for the leadership team as we navigate this interim period, knowing that we need to make progress on our priorities.

I'd also add, really enjoyed getting to know Ed and working with him and his team. They bring a great deal of experience and a fresh perspective about what we can do better to drive value creation. And so we're all aligned to work together to do that.

Got it. Okay. That's helpful. And then I wanted to dig into just kind of the share dynamics in the water segment. I think the water segment to you guys ex China was up about 1.5% year-over-year.

Your closest peer was up, I think, 7% year-over-year in local currency. I mean what would you sort of attribute the difference there to? And how are you guys addressing this?

Yes, happy to touch on that, John. So first, as you kind of alluded to, we do have 2 different businesses, and you called out the China mix. I'd also highlight the single-family new construction mix that we had, which is probably a 200 to 300 basis point headwind in the quarter given where starts and completions were last year that we're now feeling in the business.

But that said, we need to improve our performance. And I think the gap from the business mix to our peers' performance is really driven by our focus in retail and e-commerce and our need to drive better share recovery through those channels. And while I outlined some of the initiatives that are underway, we're not -- it's not broad-based enough to drive meaningful performance improvement, but this is where we're focused in the near term.

Next question will be from Trevor Allinson from Wolfe Research.

I want to follow up on your views on pricing here. I think previously, the communication was that your pricing was fully in place to cover tariffs. You've got some moving parts now on tariffs and also some other inflationary pressures.

So are you taking incremental price here? And maybe just to quantify, what are you expecting in terms of pricing tailwinds for the full year across your business?

Trevor, I'll start and then let Ashley provide some color. If I take a step back, this business has faced a lot of inflation like others in our space, tariffs and others. And we led with the gross price last year, additional gross price this year. my view of it, I think we've had overreliance on gross price, and it's cost us some share position, especially when you couple it with our lack of kind of meaningful new product innovations.

We have to get back to executing the playbook that is using all levers at our disposal to offset inflation. And so in addition to price, we need to continue to negotiate with suppliers, continue to push on incremental continuous improvement, drive cost out of the business. And then where possible and where elasticities permit, take price.

A couple of examples, I think, that you'll see as we move through the second half of the year, House of Roll continues to perform well and those higher-end consumers continue to show inelastic price demand. And so there's opportunity to push some price there.

There's opportunity in our Outdoors business where inflation has been especially acute, especially in aluminum with LARSON that we look at pushing some price. And then in our security business, especially on the commercial B2B side, which is actually now our largest channel in that security business, there's opportunity to take price again because you're dealing with more inelastic demand.

So I think you could expect our pricing for the balance of the year to be more surgical and in areas where we believe we'll have much higher realization, but then get back to working the full playbook to offset inflation as it comes. And I'll let Ashley provide some additional color.

Trevor, let me -- yes, let me just add a little bit from a P&L perspective and put some numbers around what Dave was saying. So first thing I'll say is on a full year basis, we are offsetting inflation with price on a dollar basis, but we do expect some margin dilution in the short term.

I'd say we're not recovering fully in every quarter, just timing disconnects between tariffs hitting the P&L and price taken last year. But to your question on price for the full year, we do expect price to be up mid-single digits.

And I see it's fairly consistent at that level, both across the quarters sequentially as well as each of the segments. It might be helpful just to talk phasing a little bit. I know we touched on it earlier, but first half price/cost headwind we talked about mostly tariffs, those higher peak rates coming off from last year, second half tailwind, although I want to clarify, most of that tailwind does come in Q4 when the comps on tariffs ease.

It's worth distinguishing too between timing of inflation on the P&L, right? We have that tariff impact almost all being felt in the first half, whereas the inflation, both commodities and freight is about 1/3 in the first half and 2/3 in the second half.

So we're going to continue to action against all of our productivity initiatives, identify cost actions, which that $15 million is included, again, more weighted to fourth quarter. So going back to Dave's earlier point, we really start to see operating margin year-on-year improvement not until fourth quarter and we get through some of those dynamics.

The other thing, Trevor, I'd just add, just to be clear, the guidance assumes that the current tariff environment persists for the full year. So that any 122s are ultimately replaced by 301s in kind. And so there's no kind of tariff benefit coming in the back half of the year from a change in environment.

Okay. That was extremely helpful. And then the second question is on the lower margin outlook for the year. You just walked through a lot of the moving parts on some of the inflationary impacts in the first half, second half dynamics.

But you also -- in your prepared remarks, you called out a couple of new branding campaigns as well. So are you guys as part of that lower margin guidance also assuming some additional brand spend and investment back into the business here more so than you were previously anticipating?

Yes. I'd say consistent levels, we will look to accelerate as we drive operational improvement, but we're preserving the levels and not reducing them even though the volume is coming down. So I think about the margin impact from the reduced guide really being the flow-through from volume and then us offsetting the incremental inflationary headwinds, but really preserving those investments in branding and product development where we need to accelerate.

Next question is from Michael Rehaut at JPMorgan.

First, I just wanted to better understand the -- some of the tariff dynamics. I believe you said that if I heard it right, the net impact of the changes this past year was to actually increase your exposure.

I think that's in a little bit of contrast to some of the other building product companies that we cover. So I just want to understand if I heard that right and what the drivers are and if there's any points of distinction that maybe is creating this incremental headwind versus some other companies seeing a little bit of a net favorable impact?

Yes. Let me -- you might be confusing, Mike, the tariff versus the total inflation. And so let me take that, and I can break it down simply. So total inflation, inclusive of tariffs now $180 million. Our prior guide was $140 million. In both of those guides, the tariff piece is $100 million. And so the net of all the change in tariffs between the 122 and the 232s and IEPA is effectively 0. So there's no incremental tariff exposure. The change in total inflation is driven by commodities and freight.

Okay. And so then just to clarify then the difference between it being a net neutral versus versus other companies maybe seeing a little bit of a positive.

Just kind of curious in terms of maybe what were the drivers of that. Before I cut off, I'll also throw out my second question. I just don't want to cut off, but it's more for Susan around the CEO search process.

I was just kind of curious if there's any way to kind of give us a sense of how far along the company is. She mentioned -- Susan, you mentioned that you've seen a lot of encouraging high-quality candidates. If this is something that we should expect 3Q, 4Q of 2027, if there's any type of framework we could be thinking about there?

Yes. On the tariff piece, I think a couple of things. So one, as I mentioned, we're assuming current regime, current environment persists through the rest of the year.

We also had some incremental headwind from the 232s, I'd say not a material amount, but it offset some of the benefits from IEPA, but I think that's probably the 2 main things around tariffs, just to clarify. The last piece there, I would say, important to note, we continue to progress with diversifying our supply chain out of China.

By the end of this year, we'll be high single-digit sourced COGS from China with plans to be approaching 5% by the second half of '27. So really good progress by the team to reduce our China sourced exposure and pleased with progress on that front. And I'll turn it to Susan to talk about the search.

Sure. Thanks, Dave. On the CEO search, unfortunately, I can't -- I'm not providing exact timing of the search right now, but I can assure you this is the top priority of the Board, and we expect the process to continue to move with pace. Importantly, though, we're focused on making sure we identify the right candidate and the right person for the job. So -- but again, moving with pace and focus.

Next question will be from Stephen Kim at Evercore ISI.

Appreciate all the color so far. I guess I just wanted to understand your new guidance, the reduction in the sales guide, is that primarily volume? Or is there a pricing offset in the net reduction of a couple of hundred basis points?

Steve, yes, you're accurate. It is a volume reduction, no change in our pricing plans for the year.

And so with respect to that, I know that you talked about the net impact of commodities plus tariffs, you were just talking about a modest increase. Is there expectation that you are ready to increase price? Is there a certain chain of events you're waiting for? Or should we regard this as really just conservatism? Or is there something that makes you think that this isn't really an environment to get price?

Yes. And Steve, as I touched on a little bit ago, I think there's opportunity for surgical price in areas where there's more inelastic demand, house of roll, some pieces of security. But I do go back to it, we've leaned on gross price a lot. I think it's really working our full playbook across the entire P&L all the levers that are available to offset inflation and really focus on how do we get our unit volume share back in the positive growth direction.

Yes. You did mention that Dave. I guess where I was going with it is that I know that you -- in that environment, you've also talked about a reduction of costs and a focus on that. Maybe a better way to ask the question is, is there an opportunity here for you to address corporate level costs that could be taken out of the business? Is there a range of corporate expense, for example, that we might be thinking about for 2026 and a trajectory as we go through the year?

Yes. I think about it, Steve, as we look at the cost reduction efforts, I think about SG&A in total. corporates being a piece of that SG&A, but we look at SG&A in total and where do we need to take the cost out. And that's where the focus is right now. And some of that may show up in corporate, it likely will.

Some of it will show up elsewhere in the business units, but it's really how do we get our structure to continue to be BU business unit led, supported by lean COEs. And I think there are areas where we haven't gone far enough yet to get to the desired outcome.

Next question will be from Phil Ng of Jefferies.

Dave, you talked about the desire to kind of improve service levels. Is that a function of you have to invest more head count? Is that just more focus, realigning incentive comp? And I think an earlier question, you talked about perhaps ceding some share or more to be done on water, particularly on the e-tail and the retail side of things. What exactly fell off and what you could actually improve on that side of the things to kind of restore share in that market?

Yes, I'll take both of those, Phil. Thanks. On the sales and operations planning question around service levels and inventory, the team has dug into it. It's really around process gaps, and we just weren't running a best-in-class process we actually have the team in place.

The investment has been made in the team. We have the tools in place. It's just putting the best-in-class process in place and following that rigorously. And so we've started down that path. It will take some time because these things are monthly cycles that you go through and you're working through the businesses, starting with water and going from there.

But it's really about process discipline and focus. And so which to me, gives me confidence we can get this thing fixed and sorted. And I think you've seen us in the past be able to drive inventory off the balance sheet when needed to do so, be able to serve our customers at high levels.

So I think we can get back there. On the retail e-tail focus, I think it's a combination of a few things. So one, I touched a lot on new product development. We have to get better with our pace. We have to get better with our insights.

And we have to get better using our entire supply base to do both of those things, get to market faster with better products that resonate with consumer and Pro. And on the e-tail side, the commercialization is a big opportunity, right? Do we have the right product display pages? Do we have the right content? Are we bundling effectively? Are we bringing e-commerce-specific SKUs effectively and really meeting that consumer where they are.

So I think it's -- again, it sounds like a lot of blocking and tackling, but it's things that we have done well in the past, and we'll continue to do well going forward as we get the team and the focus back in these areas.

Okay. On the security side of things, can you tease out how sellout trends looked in the quarter and progress? Because I think there was an element of destock that was weighing on the business. And when we kind of look at through the year. I believe you have some new products in working through some life cycle phase down. How should we think about the momentum in that business?

Yes. Happy to touch on that. So if you think about the down 6% in Security, I'd say it's partial inventory reductions coming out of the fourth quarter into the first quarter. And then a bit lower POS in retail and e-commerce. I attribute some of this to timing of those new product launches as they've moved from the first quarter into the second quarter.

Some of that investment to launch moved with it. So that's why the margin performance was in a pretty good spot. As I look forward, excited about the momentum we're building in Security. We have great brands there with Master Lock, SentrySafe and Yale.

You'll see new products coming with pace across all of those brands as we move into the second half. And we're launching a new commercialization of the entire Master Lock brand and shelf, which is going to make it much easier for consumers and pros to shop that category and get the security that they need. So excited about that momentum, and we'll see that continue to build as we get through the year.

Next question is from Matthew Bouley at Barclays.

You have Elizabeth Langan on for Matt today. Just to start off, I think kind of similar to what you were speaking about with the channel on security. I was wondering if you could touch on that maybe in both outdoors and water, kind of what you're seeing? I know you mentioned that LARSON has seen lower inventory levels. If you could give any other commentary or details around that?

Yes, happy to. I'll start with outdoors because I think it's probably the most counter to what we would expect at this time of the year. I'd actually start with saying we saw growth in Therma-Tru, which was really nice to see. And that's despite the new construction headwinds and despite a very limited channel inventory build ahead of the spring season. And so inventory light in our Therma-Tru business.

And then in LARSON, we saw positive POS in the quarter, but we're lapping some pretty big load-ins of new products from last year as we reset the aisle at Lowe's. And we did not see that same level of inventory build. So it actually -- while sales were slightly down in LARSON, we had positive POS.

So in the outdoors business, we are winning share in doors and channel inventories remain lower than expected at this time of the year given the seasonal nature of things. In water, I'd say pretty similar. There has not been significant restocking in water across any of the channels. I think it's really a function of the demand environment and our customers not leaning into what is an uncertain spring season.

Okay. And then I did have another question on fuel surcharges. Are you able to speak to your ability to maybe offset some of the freight impact that you're seeing? And if you could quantify, I think, of the incremental $40 million, how much of that is coming from freight versus inflated commodities?

Yes. I think of the incremental $40 million, we're probably 1/4 or so coming from freight. And our guidance assumes that these elevated oil rates persist through the balance of the year given the geopolitical conflicts.

Freight surcharges are a lever we look at. It's interesting our customers tend to find them more cumbersome to implement. And so they prefer gross price increases, and that's where it's back to if we want to focus on driving volume and unit share, we need to use all the levers available to offset the inflation and not just price.

This concludes our question-and-answer session for today. I will now turn the call back over to Dave Barry.

Thank you. And I just want to thank everyone for your time today and just reiterate that we're taking decisive actions to strengthen our execution, optimize our structure and focus our resources on our highest returning opportunities. And we believe these steps, combined with the strength of our brands and our people will position us to drive improved performance over time. So we appreciate your continued support and look forward to updating you on our progress next quarter. Thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have yourselves a good evening.

Good afternoon, everyone. My name is Shamali, and I will be your conference operator today. Welcome to the Fortune Brands Fourth Quarter 2025 Earnings Conference Call.

[Operator Instructions]

At this time, I will turn the call over to Curt Worthington, Vice President of Finance and Investor Relations. Curt, please go ahead.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations Fourth Quarter and Full Year 2025 Earnings Call. Hopefully, everyone has had a chance to review our earnings release. The earnings release and the audio replay of this call can be found on the Investors section of our fbin.com website. Beginning this quarter, we are also including an earnings presentation, which is also available on our website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook, and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC.

The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for our reconciliations for these non-GAAP financial measures to the most directly comparable GAAP financial measures.

With me on the call today are Susan Kilsby, our Board Chair; Nick Fink, our Chief Executive Officer; and Jon Baksht, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address questions.

I will now turn the call over to Susan.

Good afternoon, everyone. Before Nick and Jon outlined our financial results and 2026 outlook, I want to briefly address the leadership transition announcement we made earlier today. Nick has been an outstanding leader of this company since he became CEO in 2020. Under Nick's leadership, the company has made numerous advancements that have truly benefited all of our stakeholders. In addition, Nick has led a team that has navigated an uncertain market environment with agility and poise. We wish Nick all the best in his new role.

Succession planning is something we talk about at the Board on an ongoing basis. The Board approached this transition through a defined, deliberate and well-structured succession process, one that's centered around ensuring a smooth leadership transition that protects continuity, while also positioning Fortune Brands for optimal performance and long-term value creation. As part of this process, we are extremely fortunate and excited to appoint Amit Banati as our new Chief Executive Officer, which will be effective in May. Amit has been on the Board of Fortune Brands for nearly 6 years. most recently as Chair of the Audit Committee. He has worked closely with the management team and knows the company and this market extremely well, and I believe he is an exceptional choice to lead Fortune Brands in this next phase. Amit will remain on the board as we move forward.

There will be a short period between Nick's departure and on its official start date in May. During this interim period, I will manage the responsibilities of the CEO's office. I will work closely with Nick, Amit and the leadership team to ensure a seamless transition as we continue to drive the business forward. I have been a member of the Fortune Brands Board of Directors since 2015 and serving as nonexecutive chair for the last 5 years. I am intimately familiar with our strategy and our team have confidence in our ability to create long-term value. And I believe that we have a deep bench of talented professionals who are aligned around our strategic priorities.

With that, Nick, I'll turn it back to you to cover our earnings.

Thanks, Susan, and good afternoon to everyone. Thank you for joining our call. I want to start by providing additional context regarding our results and guidance and be fully transparent about the headwinds we faced in 2025 and are facing in 2026. Our industry saw significant volume deleverage, high single digits, which created intense pressure on profitability, particularly in the fourth quarter.

In response, we have initiated a comprehensive profitability reset. In 2025, we reduced our headquarters workforce by around 10% and captured $60 million in continuous improvement savings. We've already identified initiatives to optimize our operating footprint and cost structure in 2026 and which will lead to an estimated annualized run rate operating income savings of $35 million by year-end. This $35 million is not included in the 2026 guide. And the team is working on a broader cost reduction program for 2027 and 2028, which will be communicated over the next couple of quarters.

But let me be very clear. We are not satisfied with our profitability today. The entire team is doing the work to identify further opportunities to structurally improve our company's performance and return the business to the level of profitability that we expect. That includes a comprehensive review of our cost structure to identify efficiencies to drive shareholder value over time. At the same time, while we remain in early stages, we are seeing progress on our growth strategies based on the deliberate actions we took in 2025, including strengthening our commercial execution and aligning our structure.

Based on our point-of-sale data, we estimate that, excluding China, outperformed the market for our products by approximately 130 basis points for the full year and approximately 300 basis points in the fourth quarter. That demonstrates an improvement in performance over the course of 2025 and as our focused efforts showed results. The company remains steadfast in its long-term mindset. Fortune Brands succeeds because of its people and our ability to serve our customers with leading innovative brands and we will continue to invest in our people, systems and brand building.

We are committed to ensuring that we are operating with discipline today, while positioning the business to win for years to come, particularly when markets return to growth. Before I turn to the full year and fourth quarter highlights, I wanted to speak to the announcement around our upcoming CEO transition. I deeply appreciated Susan's comments at the start of the call. Thank you, Susan, for your kind words. After much reflection, I have decided to pursue another professional opportunity outside of Fortune Brands. This opportunity comes at a natural transition point for both me and the company, and I'm excited for what's ahead, both in my journey and for Fortune Brands.

In recent years, we have embarked on a significant multiyear transformation building on Fortune Brands distinctive strength in brands, innovation and complex channels while making changes necessary to position the business for sustained outperformance and future growth. This transformation has boosted collaboration and agility and is already driving results.

We've built exceptional teams of experienced leaders backed by committed and high-quality workforce. I am very proud of what we have accomplished together. Now the journey moves into a stage focused on disciplined action and ongoing execution through a thorough and well structured succession process, the Board concluded that Amit Banati is the ideal choice to be my successor, and I agree. Amit has deep experience as both a commercial leader and a financial leader at some of the world's leading branded companies, including as CFO of Kenview, and Vice Chairman and CFO of Kelanova. Amit has a proven ability to drive results and will bring strategic clarity, operational rigor and a brand and customer-first mentality. I know he is looking forward to meeting our associates, customers and shareholders in the coming months as he transitions into his new role.

I am very proud to welcome Amit to the executive team. Turning now to our 2025 full year and Q4 highlights. Jon will provide details, but let me provide a few highlights. In addition to demand headwinds, we were also impacted by tariffs in 2025. In response, we leveraged our newly aligned global supply chain team to offset a substantial portion of our tariff exposure through strategic sourcing actions and adjustments to our logistics and transportation networks.

For the remaining tariff-related impact, we utilized advanced analytics, data science and deep customer and consumer insights to execute targeted and disciplined pricing actions across our portfolio. These capabilities would not have been available to us prior to our headquarters transformation. Notably, we undertook most of our incremental tariff pricing actions early in 2025, earlier than many competitors. This helped maintain pricing integrity as market conditions evolved and strengthened our customer relationships as we were recognized for our early action and transparency. This also set us up to return to normalized pricing for most parts of our portfolio in 2026, which should further enhance our competitive position. These combined efforts allowed us to fully mitigate the dollar impact of tariffs in 2025, consistent with our previous commitments.

We are confident in our ability to sustain that mitigation flexibility in 2026, including through selectively promoting and strategically driving volume, while continuing to support sustainable share gains over the cycle. We also took action this past year to further strengthen our core brands. In Water, we maintained our strong share with builders and resigned with some of our largest customers. Our Powerhouse Luxury Platform delivered as we increasingly leveraged our cohesive and unique portfolio of designer-focused brands in the House of roll. We took important steps to reposition our e-commerce channel, particularly in Water, addressing the executional issues that emerged in late 2024.

Building momentum through the year and entering 2026 with an improved foundation for sustainable growth. To be clear, we are continuing to take concrete actions to further improve our performance in this channel. In outdoors, at Therma-Tru, we continued to experience lower seasonal channel inventory builds in the fourth quarter as wholesale customers reduced orders in response to weaker external data points. However, our position in fiber loss stores is strengthened by our North American manufacturing and new countervailing duties on Chinese imports, enhancing our competitiveness.

At Larson, our strategic, and I'll reset, drove share gains reflecting our ability to deploy our brand building and channel management capabilities across the organization. While Decking faced a challenging demand environment, our performance in the quarter did not meet our expectations. As we enter 2026, the team is laser-focused on making structural improvements to restore momentum, maximize value and best position our Fiberon brand. At Master Lock and Sentry Safe, our brand campaigns and retail merchandising initiatives continue to resonate with consumers. Yale continued to see positive results from the introduction of our new Yale Smart Lock with Matter, a product which saw a sequential growth of over 50% in the fourth quarter.

Finally, Yale signed 12 new product integration partnerships in 2025, which we expect to fuel growth in 2026 and beyond. Overall, security exited the year with improved momentum and a stronger foundation for growth in 2026. Our digital portfolio continues to represent an important growth platform for the company and we are confident in its ability to differentiate us long term. Notably, for Flo, we launched our new subscription model, entered into a number of new partnerships with national insurance providers and drove additional growth in e-commerce and wholesale. Going forward, we intend to continue expanding partnerships and increasing adoption across our channels, and we are confident in our ability to drive long-term value in this space.

Finally, we are already observing the positive impact of our new structure, including upskilled talent, effective tariff mitigation strategies, enhanced data analytics and RGM driving strategic pricing across products and channels. Our new branding campaigns such as those from Master Lock and LARSON utilized our newly aligned best-in-class marketing capabilities. In addition, we can now more easily leverage our portfolio across channels. For instance, our success of the Yales Locks in multifamily markets has created opportunities for Flo, and the Security segment is beginning to pursue prospects in single-family new construction through doors. We expect to see further opportunities for both growth and margin improvement over time as the benefit of our newly aligned organizational structure continues to scale. While we strengthened our core and growth platforms in 2025 admits an adverse market environment, there is still more being done. We have identified a number of additional initiatives across the company focused on increasing profitability, operational efficiency and footprint optimization.

Turning to the market backdrop, repair and remodel spending and single-family new construction tapered through the fourth quarter and early data points for 2026 suggest that near-term demand remains uncertain. The fundamentals of U.S. housing remains strong with aging housing high levels of home equity and gradual improvement in affordability. We believe we are well positioned in the market to capitalize on the upside opportunities when they arrive.

Importantly, our categories uniquely benefit from being smaller ticket brand-driven investments where consumers continue to prioritize quality, reliability and innovation, even in more value-conscious environments. That said, we acknowledge that macroeconomic uncertainty continues. Consumer confidence is still low, and it is unclear when a full recovery of our markets will occur. Our outlook for 2026 does not include a near-term demand inflection or a recovery from current levels.

In closing, we are taking proactive steps, including a comprehensive review to find efficiencies to drive shareholder value. Despite anticipating continued near-term macroeconomic uncertainty, we remain confident in our strategy and our team's ability to deliver.

With that, I will now turn the call over to Jon.

Thank you, Nick. As a reminder, my comments will focus on results before charges and gained unless otherwise noted, and comparisons will be made against the prior year. I'll start with our full year results. For the full year, total company sales were $4.5 billion, down 3%, excluding the impact of China, sales were down 1%. The decline in sales was primarily due to lower volumes across our segments, reflecting the challenging market environment throughout 2025, and as the macro uncertainty negatively impacted consumer sentiment as well as the market demand for our products. This is partially offset by higher price realizations, including strategic adjustments to mitigate tariff-related costs. .

As we have highlighted previously, we employed a disciplined approach to pricing and implemented the majority of our price actions in early 2025. Excluding China, our point of sale was roughly flat compared to the market for our products, which we estimate declined by low single digits for the year. Importantly, our exposure to the Chinese market has continued to decrease. In 2025, China made up less than 5% of our total revenue compared to approximately 10% of total revenue in 2021.

Consolidated operating income was $699 million, down 10% and operating margin was 15.7%, down 120 basis points, largely due to lower sales volume and the impact of higher manufacturing costs, including tariff costs. The tariff impact was mitigated by continued productivity gains across the segments as we leverage our global supply chain team to execute strategic sourcing actions and adjustments to our logistics and transportation networks. As a reminder, we covered tariff costs on a dollar-for-dollar basis with strategic pricing actions, but that did impact margins by roughly 20 basis points.

Operating income also reflects roughly flat SG&A which benefited from $56 million in reductions to incentive compensation. Earnings per share were $3.61, down 12%. Now turning to fourth quarter results. Total company sales were $1.1 billion, down 2%. Excluding the impact of China, sales were flat. Our fourth quarter results reflect a market that softened more than expected in Water and Outdoors, primarily due to wholesalers responding to weaker construction data in the quarter and strategically choosing not to build inventories ahead of the spring building season.

Overall, price realization increased mid-single digits offset by a mid-single-digit decline in volume driven largely by overall market conditions. Importantly, excluding China, we estimate our point-of-sale outperformed the market for our products across all our segments, and we delivered point-of-sale growth. We continue to see double-digit declines in the Chinese market. We are taking action in China to significantly reduce costs and reposition our business in that market.

Consolidated operating income was $158 million, down 13%, largely due to lower sales volumes and the mix impact in our more profitable products and channels. Strategic and targeted investments in brand and marketing was offset by lower incentive compensation. As a result, operating margin decreased 170 basis points to 14.7%. Adjusted earnings per share were $0.86, down 12% due to the decline in operating income.

Turning to our segment results. Beginning with Water, sales were $617 million for the quarter, down 4%, excluding China, our point-of-sale increased low single digits compared against an end market for our products, which we estimate was down low single digits. Within wholesale, we saw significant pressure as customers took a cautious stance on replenishing inventory levels ahead of the spring building season. Our House of ROHL luxury portfolio delivered another strong quarter of low double-digit net sales growth, benefiting from resilient higher end demand and continued success with designers and trade partners.

Flo experienced double-digit growth with strong performance in e-commerce and wholesale. [ Loan ] was down low single digits mainly due to wholesalers closely managing their inventory levels ahead of the spring building season. We gained share with national and regional builders with 16 net builders gained in the quarter and 67 net builders gained for the year. In e-commerce, we continue to see recovery following the actions we took earlier in the year with improving trends through the fourth quarter and positive momentum exiting 2025. [ Mon ] improved its Black Friday and Cyber Monday e-commerce results with sales for those key online shopping milestones up double digits compared to the prior year.

The main negative impact on revenue was China which experienced a significant decline in part due to a pause in government subsidies for certain housing products and the well-publicized financial challenges of the country's largest builder. Excluding China, our sales were down 1% and driven by volume declines, mostly in wholesale, partially offset by price. Water's operating income was $141 million, down 8%. Operating margin was 22.8%, down 90 basis points, primarily due to lower overall volume and higher investment in sales and marketing and e-commerce, which helped drive both sequential and year-over-year growth in the channel.

For the full year, Water sales were $2.4 billion, down 5%, and operating margin was 23.3%, down 20 basis points. Similar to the quarter, China was the largest driver of the decline in both sales and operating margin. Turning to Outdoors. Sales for the quarter were $295 million, down 3%, driven largely by modest volume declines, partially offset by price. We estimate the market for our Outdoors products declined low single digits during the quarter. However, we believe our point-of-sale exceeded the market by low single digits. Our point-of-sale performance was particularly strong relative to the market at LARSON, reflecting the benefit of our in-aisle reset this year.

Therma-Tru's results largely reflected the soft wholesale demand environment and a lower inventory build as the sequential uplift in orders during October and November tapered off in December. However, we estimate that Therma-Tru's point-of-sale performance was slightly above its market. Fiberon on point-of-sale was more challenging with softness in retail and wholesale. Since the end of 2025, we also lost Fiberon business with a key retailer that are actively pursuing new share gains with wholesale customers.

Outdoor operating income was $42 million, down 24% with operating margin of 14.2%, a decrease of 400 basis points. These results reflect the impact of lower volume, product mix and higher manufacturing costs. For the full year, Outdoor sales were $1.3 billion, down 2%, and operating margin was 13.3%, down 280 basis points. Our margins were impacted by lower sales unit volume material cost inflation, including tariff costs, partially offset by manufacturing efficiencies. As Nick noted, we're not satisfied with our Outdoor margins, and we believe that the initiatives we're pursuing will primarily impact this segment with the objective of returning our outdoors margin profile back to 2024 levels or better.

In Security, sales for the quarter were $166 million, up 6% and due to a combination of slightly higher volume as well as pricing actions taken in response to tariffs supported by brand investments and improved execution. Point-of-sale results were positive versus the market for our security products that we estimate was slightly negative. Importantly, we gained traction across our retail, e-commerce and digital channels and sales are up in every major category globally.

Yale generated double-digit growth, with particular strength in e-commerce. Security operating income was $22 million, up 52%. Operating margin was 13.4%, up 410 basis points. Through strong execution, we were able to improve manufacturing costs. In addition, the prior year results were negatively impacted by a third-party software outage, which impacted our distribution center. Operating margin improvement was partially offset by mix and slightly higher nondiscretionary costs. For the full year, security sales were $693 million, flat versus the prior year on lower sales volumes, partially offset by price.

Sales were up in each of our main categories in the U.S. Operating margin was 15.1%, down 100 basis points, primarily due to lower sales unit volume, material cost inflation, including tariff costs, partially offset by manufacturing efficiencies. Turning to the next slide. Our balance sheet and cash flow profile continue to be a source of strength. We finished the year with net debt of approximately $2.3 billion, resulting in net debt to EBITDA of approximately 2.6x. While this is slightly above our expectations, we remain committed to reducing leverage to below 2.5x in the near term.

We have ample liquidity of $1.1 billion, including cash on hand and over $860 million of undrawn capacity under our revolving credit facility at year-end. Further, as we announced last month, we successfully extended our existing $1.25 billion senior unsecured revolving credit facility for an additional 5-year term. Our full year CapEx was $112 million, and our free cash flow generation for the full year was $367 million, representing cash conversion of over 120%. In the fourth quarter, we repurchased $10 million of shares, and for the full year, we repurchased $248 million of shares.

Overall, we believe our balance sheet provides the flexibility to execute our strategy, support disciplined capital deployment and continue investing in the long-term growth and transformation of Fortune Brands. We are also taking deliberate actions to reduce our working capital levels with a particular focus on a multiyear initiative to optimize our inventory position across the organization. Turning now to our outlook for full year 2026.

Our guidance takes into account the continued uncertainty around the timing and pace of improvement in our end markets and does not include a second half inflection. We do, however, contemplate a relatively modest market recovery from first quarter levels through the balance of the year. For 2026, we assume global market declines of low single digits reflecting continued headwinds in the early part of the year followed by modest improvements as conditions stabilize.

Within that, we assume the U.S. market for our products declined low single digits, driven primarily by repair and remodel activity, with new construction contributing later in the year. For U.S. repair and remodel, which comprises most of our portfolio, our assumptions contemplated a decline of low single digits reflecting deferred project activity, aging housing stock and gradual improvement in consumer confidence. For U.S. single-family new construction, we assume a decline of mid-single digits reflecting continued near-term uncertainty and a more modest recovery profile relative to longer-term fundamentals while also taking into consideration that the vast majority of our products are installed later in the construction process.

Finally, for China, our guidance assumes market contraction of low double digits, consistent with current conditions and our expectations for demand trends in that market. For 2026, we expect net sales growth of approximately flat to 2%, reflecting our view of the macro environment as well as our expectation for continued market outperformance across our portfolio and the full year impact of tariff-related pricing actions taken last year. We expect operating income margin of approximately 14.5% to 15.5%, supported by share gains and pricing discipline, offset by higher manufacturing costs driven by tariffs and inflation including commodity inflation, offset by productivity initiatives.

Our guidance assumes that tariffs continue at current rates through 2026. Our guidance also assumes a more normalized level of incentive compensation additional systems investments and incremental strategic brand spend. Together, these account for over $80 million of incremental SG&A relative to 2025. On an earnings per share basis, we expect EPS of approximately $3.35 to $3.65, consistent with past practices, any share repurchases beyond equity compensation dilution are not included in our guidance, nor is the annualized run rate operating income savings of $35 million.

Lastly, to put our EPS guidance range in perspective relative to our market outlook for 2026, we would have the opportunity to exceed the high end of our range if the market were flat instead of down low single digits. From a quarterly phasing standpoint, our year-end 2025 balance sheet includes the impact of tariffs, as well as lower volume-related absorption incurred during the second half of 2025. Those tariff costs and under absorption of manufacturing capacity will flow into our income statement during the first half of 2026.

Additionally, the reduced incentive compensation this past year was weighted to the back half of 2025, which will impact the comparability during the second half of 2026. We expect to generate free cash flow of approximately $400 million to $450 million in 2026, supported by our operating performance and continued progress on working capital initiatives. Our free cash flow guidance assumes capital expenditures of approximately $110 million to $140 million and cash restructuring costs of approximately $25 million.

Our capital mix is roughly 50% weighted towards growth or return-generating initiatives. One item to note, to drive increased transparency into our cost structure as we report SG&A in 2026 we expect to see a reclassification of over $100 million from SG&A to cost of goods sold. This is largely related to customer freight that is activity-driven. It is only a reclassification and will not impact company or segment margins.

Before concluding my remarks, I want to put our 2026 guidance into the proper context. As Nick mentioned, the market backdrop has been challenging, and there remains uncertainty on the timing and pace of recovery. We are not satisfied with our margins, have identified initiatives we are actioning and we'll continue to identify opportunities to drive shareholder value.

In summary, we are navigating the current environment. And while the improved sales performance relative to the market in the back half of the year demonstrates the resilience of Fortune Brands portfolio, we are not standing still. We have a strong portfolio of brands that reflect the effectiveness of our advantaged capabilities. We continue to take actions to improve efficiency, while investing in the innovations and capabilities that support sustainable long-term growth. As we close out 2025 and look ahead to 2026, I'm confident in our ability to execute at a high level, supported by our strong balance sheet, disciplined cost structure and the strategic actions we have outlined today. With that, I'll now turn the call back to Nick for final thoughts.

Before we wrap up this call, I want to express my gratitude to all of our stakeholders. Serving as CEO of Fortune Brands has truly been an honor, and I appreciate all of you with whom I've had the privilege of working both internally and externally over the past 6 years as CEO and 11 years with the company. I have absolute confidence in our strategy, the leadership team's capabilities and the incredible future that I believe lies ahead. Together, we've built a solid foundation achieved real progress and set a clear path forward. Thank you for your partnership and dedication to this great company. I am confident that the company is in great hands with Amit and in a position to deliver significant lasting value for its stakeholders. I am excited for the value that he will help create.

Curt, back to you.

Thanks, Nick. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question.

[Operator Instructions]

I will now turn the call back over to the operator to begin the question-and-answer session. Operator, can you open the line for questions?

[Operator Instructions]

Our first question comes from the line of John Lovallo with UBS.

Jon, I guess the first one would be the consolidated sales outlook is flat to up 2%. What's driving the expected 70 basis point year-over-year decline at the midpoint in margin? I mean -- I know you talked about tariffs, input cost inflation, but offset by some productivity. So could you help us just kind of unpack that a bit. .

Yes, sure. If you look at some of the cost environment that we're facing, there is -- I mentioned on the prepared remarks, as we start rolling over some of the tariff impact and under absorption from our balance sheet into the P&L into the first half of the year, you are going to see some margin compression as it does take a quarter or 2 depending on the category that you're looking at on our P&L of where that flows through. And so as we roll those increased tariff costs and you're going to start seeing that. And as we talked about on the last call and just to reemphasize here, we saw in 2025, last time we talked about $80 million of tariff impacted the actuals came in closer to the low 60s.

So we were able to mitigate some of those tariff impacts. But on a full year basis going into 2026, last call, we were talking about $200 million. From a mitigated basis, we were able to bring those tariff costs down. And so on a mitigated basis, we're looking at about $151 million of tariff impacts in 2026, so an increase of just over $100 million year-over-year.

But now as you break into that a bit further, we are looking at different efficiencies. Nick touched about some of the continuous improvement that we have. So the broader balance is, we do have some manufacturing inflation, including commodity inflation, offsetting that with continuous improvement. So net-net, that's -- those are some of the impacts of that margin compression that you are seeing.

And John, this is Nick. I'd just add, as we said in the prepared remarks, we've also identified certain operational efficiency initiatives, and we are going to continue to identify more of those. We've referenced some that we're certain as to the ability to deliver les certain as to the time. So we didn't bake it into our guide, but that will be part of our initiatives to drive the margins back up to a level that we feel is acceptable.

And then my follow-up would be for Susan. Susan, Amit has been on the board for 5 years and clearly has a strong history of working with brand-focused companies, but he doesn't have any CEO experience or really building products experience outside of being on the board. So I'm just curious what makes him the best candidate in your eyes? And what was the timeline that you had to work with to make this decision.

Thank you, John, for the question. As you -- let me talk -- address timeline first. As you can imagine, we -- the Board goes through a succession evaluation process on an ongoing basis. And we have looked at a number of different candidates over a reasonable amount of time. And Amit was obviously a candidate as we were reviewing our succession opportunities. He has -- Amit has a very strong -- while he doesn't have building products expertise. He has a very strong background in consumer-branded products.

He is a proven leader who has a deep commercial and financial experience, and he's worked with a lot of different branded consumer-branded companies developing and delivering profitable growth and executing enterprise-wide business transformation. And as you know, we have been going through quite a robust transformation with Nick in the lead, and we have -- we believe Amit is the right person to continue that transformation.

Our next question comes from the line of Phil Ng with Jefferies.

Well, Nick, thanks for the partnership, really enjoyed working with you and good luck with your future endeavor.

Thanks Phil, I really appreciate it.

Kind of kick things off, perhaps maybe a question for Jon. The macro is still certainly very murky at best, not easy to ask to forecast. How did you approach your market growth assumptions? And then you're still assuming outgrowth versus the broader market, how much line of sight do you have for that outgrowth as well?

I'll start philosophically with a couple of comments, and then Jon can work us through how we build this model. I'd just start by reiterating, I think, what we all know, which is we really do believe in the fundamentals of this marketplace. And for all the reasons why I won't repeat that you're very familiar with the demographics, the equity that is on the home, aging housing stock, et cetera. But as we both our model, and it's very helpful to have Jon's perspective coming into the company. We kept in mind that for the last couple of years, we've all been waiting for a recovery that hasn't materialized.

And ultimately, we decided as we built the model that we wanted to model a year for 2026 that essentially looks like 2025 without an inflection and without an improvement. And we'll call an improvement when we see it. But if we weren't seeing the inflection and we wanted to build a model and a plan that reflected what the current trends were that we've seen all through and frankly, even before that. And both something that's realistic and achievable for the company. And as we said in the prepared remarks, we're not satisfied with where the profitability is.

We're pleased with the market outperformance and the momentum that, that is gaining. But we're not satisfied with the profitability and we didn't want to depend on the market recovery to drive that. We're going to depend on initiatives. And so that was a little bit of the philosophy that went into approaching this year.

Yes. And Phil, to build on that, too. As you know, and you've known me from my prior roles as well, one of the things coming in early last year was trying to understand what our market drivers were. I think we have a unique set of market that's not one comp you can look to externally to say this is what drives all of our different segments, all of our different brands. And so there is a correlation model that we have here at the company that given the market uncertainty last year, probably need some refinement.

And it's not -- as you've seen over the course of the last couple of quarters, we have -- the market outlook we've missed, and we want to get better at that. And our market outlook projections and the historical correlations yes, there's been some uncertainty and yes, there's been some tariffs impacts that were affecting things. But we're looking to tighten that up and really get the right data points that -- and the correlations refined so that we understand and can better project what that market outlook into the future will be as best as anybody can.

And so looking at 2026 specifically, what we saw in Q4 since the last time we were on a quarterly call, Q4 did decelerate in terms of what we were expecting, and you can see that in our results. And as we looked at some of the pullback in the market activity, as Nick said, we wanted to be very measured in how we looked at 2026. And really look at the current market environment from Q4 going into Q1 and really taking that forward and not projecting a large inflection by the back part of the year.

Could that prove to be conservative, perhaps. But from what -- the way that we're approaching it is we are trying to be measured in terms of looking at the current market environment and using the best data points we have available and external and internal data points of what the market will look like for our various segments.

My next question is on Outdoors. Margins obviously came down pretty hard. Perhaps some of that's destock. And you called out further margin compression when we look out to 2026. Help us understand what are some of the drivers there? And I think you're calling for a path for recovery, hopefully, back to 2024 levels. That's a big step up, right? What are some of the things that you need to happen for that to materialize. You called out some share loss in Fiberon as well. Is that core to what you've done because that business has been a little choppy. So just kind of help us think through the margin compression and the path to getting back to 2024 levels? .

Sure. So to start, what we saw in Q4, just very specifically, we were expecting -- and I think we talked about it on the call and even some follow-up meetings after the call. we were expecting some channel inventory building going into the back part of the year and wholesale specifically. We had seen a drawdown in the prior year, and we were thinking that we were going to see some more normalized levels. And frankly, we saw that at the beginning part of the quarter.

But then by the end of the quarter, we really saw that drop off quite a bit. And so with that softness, that did bring down if you look at our broader scale just from an overall leveraging standpoint and broader scale, it did impact our margins. And there was also a very large mix element that contributed to that -- the margin piece. And so in terms of particularly between the channels and also between the products, there was a mix element that impacted the margins.

And when we start looking at next year, 2026, I should say, and what the impacts and the opportunities are. We did have some losses at Fiberon with a key customer there that we need to build back up. And we're looking at different initiatives in terms of optimizing our footprint and cost structure there. We mentioned the $35 million of annualized OI cost-saving improvements that we think will benefit the Outdoor segment, primarily.

But from that standpoint, it will take a bit of time to get that executed. And so I think we're optimistic that once we execute some of these actions, we're going to see some material margin improvement back to '24 levels. which implies 17% plus. So there's initiatives that we have underway to really get that going again.

Our next question comes from the line of Matthew Bouley with Barclays.

So maybe on the Water guide, both the top line and margins. So on the revenue side, I think you said 0% to 2% is the guide. So my question is on that if price is kind of running at this mid-single-digit rate right now for the whole company, I mean, is the assumption that volumes actually are down in Water? And is there anything on the share side that is driving that? And then with the margin side of it, what are you expecting on raw materials? So if copper stayed at current levels, how would that impact your margin expectation for the year?

Why don't I start at with just the topline and Jon can take us through the margin piece. But Water we are we seeing nice and improved market outperformance, which is giving us confidence and the momentum. As we said in the prepared remarks, we saw really nice share gains in brick-and-mortar, really nice share gains with our builder customers, improved performance in e-commerce we've called that out, but we think there's still some room to go there. So again, nice recovery, but a lot of opportunity as we continue to build momentum.

And so against that, we also took pretty modest pricing for 2026 in the segment to get on the moment side of the business, House of ROHL is different and a whole lot less price sensitive. But on the Mon pretty modest price increases because as Jon described, we've gotten so much of the tariff mitigation work done and sorted in 2025. And so we think we're very well positioned to continue building the momentum. And then relative to the competitive set, leverage, it should be some pricing advantage to continue to drive that outperformance.

And then in terms of -- just to build on that in terms of some of the margin impact from commodities, we are -- for the company, we're looking at roughly $40 million of impact for commodity inflation from our cost of goods sold. I would say about just under half of that is in the Water segment. There's just impacts across different commodities, but probably brass probably or the most substantial one. So there is an impact from that. .

Okay. Got it. Secondly, the cost program of the savings of $35 million. I think I heard you say it's not included in the guide. So but you'd be at run rate by the end of '26. So I mean, just is there a time line around these actions and when they might begin to impact the income statement even if you're not including this in guidance? .

Yes, there's -- it's -- there's still some execution that needs to be done and that we've got a few moving pieces there. So no exact timeline we're trying to execute it as quickly as possible because clearly, we'd like to get those savings we feel absolutely confident it will occur by the end of the year, and it is an annualized run rate savings. And so it won't be the full $35 million. Going into 2026, you'll get -- sorry, going to 2017, it will be the full run rate savings. But we are trying to execute it as quickly as possible. It won't necessarily be right away, but we're working on it. .

Nick, best of luck in your next role.

Our next question comes from the line of Stephen Kim with Evercore ISI.

My first question, I guess, relates to the change. I think Nick, you described the timing as being somewhat natural. It comes at a natural time, I think, for you and the company. I was curious if you could elaborate a little bit more on what you meant by that? And what -- specifically, I was curious if we should expect any kind of assessment of the product portfolio or other personnel changes in the business segments this year?

Yes. Well, why don't I start with the first part, Stephen. I'll give you some perspective. I don't want to speak too much for others, but I'll certainly share my perspective on that question. And just let me start with the timing. The company has been on quite a transformational journey really since 2022 when we announced the divestiture or the spin of our Cabinets business, it was 40% of revenues, if you recall at the time. And that was really Phase 1 of what's been 3 phases of transformation.

So Phase 1 risk portfolio. Phase 2 was our operating model and Phase 3 was really the refining of that operating model and then getting our footprint to match our strategy, which we've now completed, and we're really starting to see the momentum of the connection of people coming together and some organic ideas that are happening in the business. And now we turn to a time that I'm actually quite excited about, but we're now building momentum behind execution.

We called out some execution issues in 2024. We rectified those, you can see the momentum building. And so I actually feel very confident now about where the company is heading, what we've achieved and the direction that is set and the team that we have, by the way, I think some of the most talented people I've ever had the pleasure of working with. And so this is an opportunity that came away, I wasn't necessarily expecting it, but something that was quite intriguing to me and I have given a lot of thought.

And that cross section of really that opportunity coming at a time where I think we've completed a lot of that heavy lift and the teams in place and executing well is what I meant by -- it felt quite natural. And then I don't want to speak for our board, but I do feel that there's a lot of continuity and a great candidate like Amit not only has great enterprise experience, has great commercial experience, having led business units for well over a decade inside of large multinationals and a real belief in this team, the talent and the strategy behind this company.

Maybe I'll just add a few words to that because we have had the opportunity to have Amit sitting in the boardroom for the last 5 years, and you've had the last couple of years as Chair of the Audit Committee, he's been intimately involved in with the leadership team, with the business and understands it well. And I think he's given his background and his experience and his deep knowledge on execution and enterprise-wide business transformation. We feel like at this time, he's the right person, and is truly an exceptional candidate to take us forward from here. Really, Nick has done an extraordinary job bringing us all to this point. But I think that Amit's presence. And as we move on from here is really a very -- an exceptional opportunity for the company and for Amit.

So shall I take from your comments that we should not expect any major personnel changes in the business segment, leadership or a reassessment of the product portfolio?

There is nothing planned at this time.

Our next question comes from the line of Michael Rehaut with JPMorgan.

Nick, best of luck to you in the future, and Amit, I look forward to working with you. I wanted to start off with first question on the digital portfolio and the aspirations there. I was wondering if you could kind of just review -- I'm sorry if I missed it, what sales, were you able to generate, as you closed out 2025? And how you're thinking about that portfolio growth over the next couple of years given the ongoing efforts that you're making with insurance companies and other facets of the digital portfolio in terms of lock in, lock out and the security side, et cetera?

Yes, I'll give you some thoughts, Jon, may have some perspectives, so with your question, Mike. We finished the year where we expected to finish the year for the digital portfolio. So we're very pleased with that performance, notwithstanding had been in the marketplace. It did what we believe that we do. And so happy there. And then within that, we saw Flo growth in excess of 50% for the year. So still very powerful momentum behind the Flo business. And we really just kicked off our subscription service, which is our leak protection service, which is now up and running. And we believe, based on our market research, that could be a real unlock for Flo because what we're finding is while the value prop is enormous, there is a buy-in cost when you're installing the device and having to pay for the installation that for some consumers, it's still a hurdle.

But when we offer it as a subscription, the insurance savings are actually a net gain for that consumer right off the bat. And so it's just getting into market now, but we think not just direct-to-consumer but also working with our insurance partners to make it just -- we're offering this to you, and it's a net gain in your pocket. -- from the minute you install it is potentially a very big unlock for that business. And so that's good.

And then we saw some really nice recovery on Yale, particularly towards the end of the year, and we've launched that Smart Lock with Meta, which also performed very strongly. And so we're feeling good about the portfolio and the momentum still on track with where we believe it should go. And the final piece you off was the connected lockout tagout where a lot of progress was made in getting the product set right and getting some, let's say, test bed customer setup for '26 and there's some really interesting stuff in the pipeline. So that portfolio still looks very exciting to us.

And Mike, one thing just to add in terms of our presentation of our financials. We talked about last quarter that we were looking at really providing more transparency and really tightening up our -- the way that we report. So it's more consistent and from quarter-to-quarter and transparent. And I think you'll -- hopefully, you've seen that a bit this quarter. We've got a new investor deck out there. We walked through the segment financials. Expect to see that on a consistent basis going forward.

One note though, we don't have a page on connected because we do split connected between both Water and Security depending on the products. And we continue to look at how we disclose for that segment. And you might have noted, we didn't guide to it this year. It's not because it's not growing, and it's not because we're not happy with this performance, but it's still less than 10% of our portfolio. It's an exciting part of the portfolio. But as we look at our reporting for that, look for that in the Water segment for Flo and connected products there, look for it in the Security segment for the Yale connected lock, lockout tagout. And so we'll continue to provide updates.

But since it is a smaller segment for us and still growing, it is a bit more volatile quarter-to-quarter. And so we are -- we'll continue to keep you abreast of it, but it's -- we'll probably look at it in a slightly different way and also open to feedback as we meet with yourself and investors following up this quarter.

I understand in terms of the approach there. I guess, secondly, and I apologize if some of this was touched on earlier in the call, but just wanted to understand, particularly for Outdoors and Water, the margin decline in '26 versus '25 despite roughly flat or flat to slightly up sales. And I wanted to understand how much of that is due to perhaps a timing of mitigation of tariffs, in particular, I'm thinking about maybe the first half of '26, you're still in the hole and maybe you're just getting to breakeven in the back half. And so that's kind of one of the bigger drivers there or if there's anything else I'm missing? And maybe more broadly, how that kind of parlays into how we should think about first half versus second half during the upcoming year.

Yes, sure. Happy to hit on all those points. So there are several factors flowing through here. And so you're right, there is some declines in both of those 2 segments. The Outdoors more so than Water. And I touched on that earlier in terms of -- we did have some loss at Fiberon there. And that's probably going to be -- have a more of an outsized impact on that segment in terms of how that impacted margins for our projections for 2026. But I would say across the portfolio, particularly Water and Outdoors, the dynamics I hit on earlier on the call in terms of our operating costs, what I said in the prepared remarks, the tariff impact is flowing into the P&L.

Really, you're starting to see that in the next couple of quarters, and that will have an impact on margins and also with the lower volume. So we underabsorbed in Q4, and you'll see with the volume declines that we're looking at into both Water and Outdoors next year. that is also going to have an impact on some margin compression. The other piece, and you're right to think about the phasing in terms of the first half of the year. The only other point that I would make is I touched on also in the prepared remarks is around SG&A. We did have a benefit of $56 million of incentive compensation that was in the '25 comps due to our underperformance to plan.

As we reset that plan, that was -- that did have an outsized impact in terms of our accrual in Q3 and then also Q4. And so that will -- so yes, you're right about the phasing for the first half in terms of the tariffs and kind of our manufacturing absorption impact in the first half, but then in the second half, those costs for that incentive compensation reset do hit the business units. And so that is also -- as that gets rebuilt, will impact the comps into the back part of the year.

And we have reached the end of the question-and-answer session. And therefore, I'll turn it back over to management for any closing remarks.

Thank you, everyone, for joining our call.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Good afternoon, everyone. My name is Stacy, and I will be your conference operator today. Welcome to the Fortune Brands Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

At this time, I'll turn the call over to Curt Worthington, VP of Finance and Investor Relations. Curt, please go ahead.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations Third Quarter Earnings Call. Hopefully, everyone has had a chance to review the earnings release. The earnings release and the audio replay of this call can be found on the Investors section of our fbin.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC.

The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for our reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

With me on the call today are Nick Fink, our Chief Executive Officer; and Jon Baksht, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions.

I will now turn the call over to Nick. Nick?

Thanks, Curt, and good afternoon to everyone. Thank you for joining our call.

In the third quarter, Fortune Brands Innovations had solid sales performance and outperformed our end market, demonstrating the power of our brands and our people. Our sales in the third quarter were roughly flat versus the same quarter of 2024. And when excluding China, increased 1%. From a point-of-sale perspective, excluding China, we estimate that we outperformed the market by almost 200 basis points, with a low single-digit point-of-sale growth.

While consumer sentiment and housing activity are still facing near-term pressures, our team is focused on execution and advanced several key strategic initiatives. Our balance sheet remains very healthy as we continue to generate strong free cash flow and continue investing behind our core growth initiatives. We remain focused on our strategies while leveraging our Fortune Brands advantage capabilities to continue to position the company for sustained above-market growth. We believe we are well positioned to continue outperforming our end market for the remainder of 2025 and into 2026.

On today's call, I will start by sharing an update on our transformation and provide some examples of how it is advancing our strategy and delivering results. Next, I will provide a perspective on the macroeconomic environment and why I believe our portfolio balances stability with exceptional growth opportunities. I will then close with an overview of our performance before turning the call over to Jon for a detailed discussion of our financial results, updates to our guidance for the remainder of 2025 and some thoughts on our emerging expectations for 2026.

The third quarter marked a major milestone in our company's evolution. We welcomed more than 500 associates into our new campus headquarters in the Chicago land area and achieved our hiring commitments 2 years earlier than planned. The quality of our new hires has been exceptional. They have joined numerous top-performing associates from within the organization who are either local or elected to relocate, creating a powerhouse team. This combination provides an optimal mix of continuity and new perspectives.

While our headquarters consolidation is first and foremost about accelerated growth, it has also allowed us to take a very critical look at our capabilities, talent and investments to drive increased efficiency across the organization. Our state-of-the-art campus is perfectly suited for our business unit-led organizational design, which is supported by dedicated centers of excellence. Our footprint now mirrors our strategy, and we're already seeing increased collaboration and elevated execution, which is starting to show in our results.

As I've said previously, this was the third of 3 phases of our transformation into a tightly aligned operating company. With most of this transition successfully behind us, I'm excited to see how we continue to accelerate performance in 2026 and beyond. Throughout this transformation, we've maintained a consistent overarching strategy. Our brand strength, focus on innovation and expertise in channel management create a compelling value proposition and drives our performance. Our execution of this strategy leverages Fortune Brands Advantage capabilities, which are category management, business simplification, global supply chain excellence and digital transformation. These strengths enable us to rapidly adapt to shifting markets, increase market share and deliver innovation at scale. Our alignment into an execution-focused operating company is allowing us to better leverage strengths across our organization with tangible results this quarter.

Using advanced analytics, data science and deep insights into customers and consumers, we are able to implement precise strategies for pricing, promotions and product assortment. This precision allows us to maintain a careful balance between margin protection, price stability and demand responsiveness and facilitates sustainable share growth over the long term, even amidst a dynamic external environment. We continue to expect to fully offset the anticipated in-year dollar impact of tariffs in 2025 and the anticipated annualized dollar impact in 2026 through a combination of supply chain actions, cost-out opportunities, and strategic pricing actions.

Fortune Brands has consistently acted as the price leader in our categories and our high integrity, transparent and collaborative approach to tariff pricing was consistent with that history of leadership. As a result, our tariff-related pricing was relatively modest, and absent any new significant tariffs, is now largely in the market.

While some of our competitors are still taking significant additional tariff pricing, our work for 2025 tariff pricing is essentially complete and has been for some time. That positions us well to focus on execution, strengthen channel relationships and preserve pricing integrity while allowing us to capture additional share. We intend to opportunistically look for areas to now promote and drive volume.

Now turning to the external environment. The macro environment remains uneven, with consumer sentiment cautious and housing activity showing mixed signals. However, our demand profile is stable, and we see green shoots heading into 2026. As we enter the final quarter of 2025, the U.S. housing market continues to show signs of stabilization following a period of elevated mortgage rates and constrained affordability.

While overall home sales remain subdued, recent rate cuts by the Federal Reserve have helped ease borrowing costs with a 30-year fixed mortgage rate dipping to its lowest level in a year and almost a full point below where they were at the start of 2025. This has sparked renewed buyer interest and a surge of refinancing activity, suggesting that pent-up demand may begin to unlock as affordability improves. Home inventory levels are also rising, particularly in the South and West, giving buyers more options and helping shift the market toward a more balanced state.

Prior business, which is primarily focused on repair and remodel, the mid- to longer-term outlook remains encouraging. In the near term, R&R is below trend even when normalizing for the post-COVID period. However, we believe R&R is poised to rebound in the not-too-distant future, driven by aging housing stock and deferred maintenance projects as well as a consumer base, which is increasingly interested in renovating their homes. For example, a recent survey indicated that 84% of homeowners plan to renovate a part of their home in the next 12 months. Record levels of tappable homeowner equity, together with lower rates means that homeowners are in a strong position to finance improvements through equity extraction tools like HELOCs and cash out refinancing.

Recent data shows that homeowners are utilizing home equity lending methods at the highest rates since 2022 with momentum building. Across our channels and segments, we compete in smaller ticket categories where consumers look to trusted brands and innovation to deliver value. Even in the trade down environment, our brands were made the preferred choice by pros and consumers because they combine quality, style, innovation and reliability at accessible price points.

Our single-family new construction, which comprises roughly 1/4 of our total sales has faced headwinds from elevated rates and cautious builder sentiment, it remains a long-term driver of growth, supported by a shortage of existing homes. As interest rates continue to trend downward and consumer confidence stabilizes, we anticipate a recovery in single-family activity, which we expect will provide additional growth across our portfolio. Our products are well positioned to benefit from the torque of new construction growth with manageable downside risk.

Our products are not affected by homebuilders reducing square footage for affordability since efficient design changes do not significantly change the number of faucets, valves or entry doors within a home. In fact, many of our products can contribute to improved housing affordability because they are easy to install, durable, and can even help save money through reduced insurance premiums and utility costs. It is also important to note that the vast majority of our products are installed later in the construction process, which results in lower variability since completions serve as a moderating factor compared to the more volatile starts.

Finally, our relationships with builders positions us as the incumbent brand preferred by both professionals and homeowners when these homes eventually engage in repair and remodel activity. Overall, we believe our balanced portfolio provides stability while also offering attractive growth potential, which comes with new construction. With our advantaged footprint and brand strength, we are confident in our ability to continue outperforming our end market and are poised for accelerated growth.

Turning to our third quarter performance. Sales were roughly flat at $1.1 billion, and excluding the impact of China, we're up 1%. Our margins were 17.9% and earnings per share were $1.09. Turning to our segment highlights. Our Water segment delivered another quarter of market outperformance. Sales were $619 million, down 3% versus third quarter of 2024. Excluding China, net sales were roughly flat. Importantly, our point-of-sale results, excluding China, were up low single digits versus a market, which we estimate was slightly down.

In Moen, we executed the strategic and targeted promotional activity that we called out during our second quarter call, driving momentum and strong sell-through with key partners. We increased our share with all 3 of our largest retail partners during the quarter, and Moen continues to be recognized as the most trusted brand of faucets. Our brand strength with both consumers and the pro is increasingly evident. Our innovative products continue to win external accolades including Moen's recent inclusion on Time Magazine's Best Inventions of 2025 list.

In wholesale, demand remained resilient. Importantly, our relationships with key builders remain very strong, as we not only resigned a number of our key national builders, but also converted others to the Moen brand, resulting in further share gains. We are well positioned with builders due to Moen's exceptionally strong value proposition and our superior service capabilities and we expect to continue to take additional share in this category.

The House of Rohl portfolio saw significant sales growth over the third quarter of 2024, and delivered low double-digit point-of-sale growth, significantly outpacing the broader market. Our luxury consumer remains strong and continues to prioritize Craftsmanship and design. Our brands are strategically positioned to capitalize on sustained demand and the work we have done to build our luxury brands portfolio is yielding positive results. We expect this to continue to serve as a growth platform through the rest of 2025 and beyond.

Turning to e-commerce. This channel has rebounded since our reset earlier in the year. We are seeing the benefits of our updated go-to-market approach, coupled with the refreshed talent and expertise in our team. We generated sequential improvement within e-commerce sales in the third quarter. There is still room for further improvement, and we see upside momentum heading into fourth quarter of 2025 and into 2026.

In digital water, Flow continues to exhibit very strong growth. We recently launched the initial trial of the leak protection service, our new recurring revenue model subscription service. While it is too early to share any results, interest in a Flow subscription is very strong, and we expect this to be a meaningful unlock in both the consumer and insurance channels. We believe Connected Water will serve as a growth engine for years to come, given its differentiated value proposition and potential to significantly decrease one of the largest drivers around housing affordability, insurance costs.

In outdoors, we continue to execute well in the softer market environment. Sales were $345 million, roughly flat versus third quarter of 2024. We estimate that our segment point-of-sale outperformed our end market by over 300 basis points, with market outperformance across our brands.

In LARSON, the rollout of our retail aisle reset helped drive double-digit sales growth in the third quarter. Our new approach to innovating and marketing storm doors drove a strong consumer response including point of sale, which was up high single digits versus a roughly flat market. This initiative also received external recognition. Earlier this month, Lowe's named LARSON, its 2025 Vendor Partner of the Year for the Lowe's Millwork division. This is a significant honor and a proof point of the underlying investment thesis in LARSON and the ability of Fortune Brands to drive value through its disciplined and returns-focused capital allocation strategy.

Therma-Tru strongly outperformed its category with point-of-sale share gains in both wholesale and retail. Although net sales decreased in the third quarter, this was primarily due to the absence of the usual fall inventory build. However, strong customer orders in early October suggest that this decline has not continued into the fourth quarter. In Q3, a significant milestone was reached in the American fiberglass door coalitions case against Chinese fiberglass door panel imports. The court has put in place preliminary countervailing subsidy duties ranging from 50% to 900% on Chinese fiberglass door panel imports. The U.S. government continues its investigation and a final decision is expected in Q1 of 2026. We expect to see the benefit of this government action in addition to tariffs as Chinese inventory in the market is consumed.

Fiberon performed well in the third quarter. In September, we recorded the highest monthly sellout for the year. Fiberon saw sales growth in the third quarter versus last year in both retail and wholesale, with strong point-of-sale outperformance in wholesale. Our outdoor brands benefit from their vertically integrated U.S. manufacturing presence, giving them an advantage over import reliant competitors. We expect to see the benefits of our North American footprint to become more apparent in 2026.

Turning now to security. Our security segment also made progress in the third quarter. Sales were $186 million, up 5%, building off of many of the initiatives we have highlighted last quarter with further momentum expected in the coming quarters. The Master Lock and SentrySafe brand campaigns continue to build upon our industry-leading awareness and drive consumer engagement. During the quarter, we secured several new retail placements in a variety of outlets, and across multiple price points as competitive products are proving to be inferior alternatives to our iconic and trusted brands. We expect to see the benefit of these retail wins in the fourth quarter and into 2026.

Finally, the recent Prime Day exceeded our expectations, and we have gained share in the growing e-commerce channel throughout 2025. As we look toward the end of the year and 2026, we are confident that we will see growth due to our focus on strategic execution. Digital security solutions are also gaining traction and we see a robust pipeline of opportunities for both residential and commercial applications. Recently, our Yale Assure Lock 2 received accolades, including being named Best Smart Lock by CNET and the Spruce. The launch of the Yale Smart Lock with Matter designed for Google Home is also delivering encouraging early results.

Turning now to our full digital portfolio. Our digital portfolio continues to scale, and we're making strong progress. We now have over 5 million registered users across our digital platforms with strong momentum in new device activations. For digital overall, we have full conviction in the strength of our product portfolio and its ability to deliver differentiated, sustained growth over the long term. With respect to Flow, we continue to add and expand partnerships with insurance companies and the data shared regarding the product's effectiveness for both homeowners and insurers continues to affirm its significant impact.

For Yale, we won several new retail placements and have a significant number of partnerships, which we are starting to scale more broadly. Across our digital businesses, we are increasingly leveraging our well-established advantaged channel relationships with builders, retailers and wholesalers to drive new opportunities. The fundamentals of our digital strategy are sound, and we remain confident in the potential of this growth platform. We are on track to approach $300 million in annualized sales by the end of 2025 with continued growth into 2026.

To recap, the third quarter was another strong demonstration of Fortune Brands ability to execute with discipline, respond with agility and deliver above-market performance. Our teams are advancing our transformation, strengthening our brands and investing in platforms that create new avenues for growth.

Looking forward to the fourth quarter of 2025, we expect to deliver year-over-year sales growth and market outperformance and expect to see the continued benefits of the initiatives that we have detailed in the call. Throughout the recent periods of external uncertainty and market disruption, we have remained focused on what we can control, driving our most strategic investments continuing to support our leading brands and strategically reshaping our business to be leaner, stronger and more agile. These moments of challenge have been opportunities for us to optimize our structure sharpen our priorities and position ourselves for accelerated growth when conditions improve. Today, we stand not only resilient but designed for performance and built for the future.

I will now turn the call over to Jon.

Thank you, Nick. Before I begin, I want to thank those who participated in our recent investor perception study. Your insights will inform our Investor Relations practices, and we are actively working to implement improvements. As part of this effort, we are reviewing how we consistently present period comparisons, certain performance indicators and growth narrative, particularly in areas like digital innovation and other key portions of our portfolio. We'll look to incorporate these enhancements beginning next quarter. As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year, unless otherwise noted.

In the third quarter, we again delivered solid results against a soft market backdrop. We delivered sales of $1.1 billion, roughly flat year-over-year. Our results reflect lower volumes compared to last year which were partially offset by strategic pricing actions implemented earlier this year. Sales were up 1%, excluding the impact of the China business. Consolidated operating income was $206 million, down 5% compared to last year, largely due to lower volumes and higher cost of goods, partially offset by pricing, lower incentive compensation and disciplined cost management. Operating margin declined 80 basis points to 17.9% due to lower volumes and product mix in outdoors and security. EPS was $1.09.

Turning to our segments, beginning with Water. Sales were $619 million, down 3%, reflecting lower volume, partially offset by price. Excluding China, our sales were roughly flat on a year-over-year basis, reflecting low single-digit POS growth offset by lower inventory build compared to prior year and modest inventory destocking in Canada. Water's operating income was $151 million, down $5 million compared to last year. Operating margin was 24.4%, down 20 basis points compared to last year, reflecting our efforts to strategically balance price realizations and operating costs. We continue to expect full year water margins to be in the range of 23% to 24%.

Turning to outdoors. Sales were $345 million, roughly flat compared to last year, with pricing offsetting lower volumes. Sales benefited from the momentum from the LARSON perfect aisle reset and continued share gains of Fiberon. Point-of-sale increased low single digits versus a market that was down low single digits. This is partially offset by lower seasonal channel inventory builds in Therma-Tru in the third quarter as wholesale customers reduced orders in response to weaker external data points. We are encouraged that orders have increased entering the fourth quarter and are trending higher year-over-year.

Outdoor's operating income was $53 million down $8 million compared to last year, with operating margin of 15.5%, a decrease of 250 basis points from the third quarter of 2024. These results reflect the impact of lower volumes higher material costs and product mix, partially offset by price. We expect to maintain margins at similar levels in the fourth quarter. And for the full year, we expect segment margins in the 13% to 14% range.

In Security, sales were $186 million, up 5%, with price offsetting lower volumes with strong growth in e-commerce and the commercial business. Our Master It, brand campaign for Master Lock is resonating, driving a double-digit increase in brand engagement and contributing to improved sell-through. Security operating income was $33 million, down $1 million year-over-year. Operating margin was 17.8%, down 150 basis points versus third quarter 2024, largely due to product mix as well as increased investments in product development during the quarter, consistent with our strategy to invest in future growth throughout the cycle. For the full year, we expect margins in the 15.5% to 16.5% range.

Turning to the balance sheet. We are managing our capital structure with the objective of balancing our cost of capital, returns and overall flexibility. We ended the quarter with cash of $224 million. Net debt stood at $2.4 billion with net debt-to-EBITDA leverage of 2.7x, consistent with our deleveraging objective. We remain on track to end the year with net debt to EBITDA at the upper end of our previous guidance range of 2.2x to 2.5x. Free cash flow in the quarter was $177 million. We now expect full year free cash flow of $400 million to $420 million, reflecting reduced operating income, higher working capital levels and higher cash restructuring charges compared to last year.

Additionally, our headquarters transition continues to progress ahead of our original timetable. As a result, during the quarter, we updated the range for total restructuring costs related to the headquarter transition to $100 million to $120 million. The increase relative to our previous range reflects the faster completion of the transition with higher estimates for severance, accelerated depreciation, lease termination costs and other refinements. We remain opportunistic with our capital allocation, balancing shareholder returns with investments to drive growth and M&A opportunities that align with our strategy.

Before turning to our outlook, I'll provide an update on our tariff exposure. As Nick mentioned, we are still on track to fully offset the anticipated impact of tariffs, both in 2025 and on an annualized basis in 2026. Implemented changes in tariff rates and rules since our last call have only had a de minimis impact to our unmitigated tariff exposure, but the overall tariff environment has contributed to a more cautious consumer and margin pressures. As a reminder, we have worked to get our spend from China down significantly and expect to be around 10% of cost of goods sold by the end of the year. Our predominantly North American supply chain remains a differentiated competitive advantage.

Turning now to our outlook. We are pleased with our year-to-date performance amidst the dynamic macro environment. As today's press release details, we are narrowing our EPS guidance and anticipate finishing the year near the low end of our prior range reflecting the impact of mix and lower volumes within an uncertain end market. The full details of our updated guidance can be found in our press release.

As we look beyond 2025, we are actively planning for a variety of scenarios. While it is impossible to predict the exact timing of a demand inflection, we continue to believe it is a matter of when, not if, and when the demand inflects. We believe we are uniquely positioned for above-market growth.

While we will not be providing guidance assumptions for 2026 at this point, we are able to share some initial thoughts. Our base planning assumptions center around a flat market overall. Importantly, we believe we are well positioned for our sales to outperform this market estimate based on the meaningful opportunities for which we have line of sight. Through our transformation, we are continuing to identify efficiencies and continuous improvement opportunities throughout our business and remain confident in our ability to drive value even in a dynamic market environment.

In summary, our third quarter results once again demonstrate the resilience of Fortune Brands portfolio, the strength of our brands and the effectiveness of our advantaged capabilities. We are laser-focused on executing our strategy while investing in the innovations and capabilities that will fuel our long-term growth.

I'm confident in our ability to continue executing at a high level as we close out 2025 and look ahead to 2026.

I will now pass the call back to Curt to open the call for questions.

Thanks, Jon. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I will ask that you limit your initial questions to 2 and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session.

[Operator Instructions] First question comes from Susan Maklari with Goldman Sachs.

My first question is on the pricing strategy. Nick, thank you for all the comments on that and the approach that you've taken there this year. I guess given that, can you talk a bit about how the outcomes have come together? Have they been in line with what you have expected as you approach the pricing? And how you're thinking about this going forward?

Sure, Sue. I'd be happy to. Look, as we said, I think, on our prior calls and you've tracked us for a long time, as you know, from prior inflationary periods, we maintain a very disciplined approach to pricing. And so as we think about it, our goal is, as category leader, to lead where we have to lead but do it in a clear, transparent and incremental way. And if we feel like if we do it and we do it well and we do it early, then we can do it in small increments. And if you recall, 2021 through that inflationary period, we were also taking kind of single, mid-single-digit pricing because we were doing it early and we were covering our cost.

Now I will say before I touch further on pricing, I mean, we do a lot before we get to pricing. We work our supply chain really hard. We've pursued a lot of cost-out initiatives. And then what we're not able to mitigate through that, we turn to pricing. And in the case of 2025 with the tariffs, we did that very early on. And we said consistently since that time that between all of those actions, we will cover off on tax. We've covered off on tariffs. And we do. I've read reports that we're "behind" in our second round. There is no second round. We did it early, as I said, in the beginning of the year, we got it done. It's behind us.

And really, what we're doing now is we're focusing our enhanced data capabilities and actually looking at places that we can lean into the market and drive volume. Where are those opportunities to promote, understand the elasticities. If we have further CI, we're going to hunt for more of those opportunities, and we think that's what is driving a lot of the share gain that we're seeing. And so I'd say we've been consistent on it through this tariff period, but we've been insistent -- consistent on it through '21, through the inflationary period in '17. And what we find is sometimes it takes a while for others to follow. And that may mean that, that causes a headwind for us for a quarter or 2, and that's fine. We're playing a long game, and we're playing to gain share over the long run, and we'll do it in the highest integrity way for ourselves and our customers. And I think that's exactly what's playing out now.

Okay. That's great color. And maybe building on that, one of the things that Fortune has historically done really well is outperforming the market and gaining share in periods of weakness. And it certainly sounds like from your comments that is coming through again. But I think something that differentiates you today is this investment that you do have in data, right, a lot more information and nuances of understanding things. How is that helping you to better target those share gains and perhaps even better sustain and further grow the business even as things normalize and we eventually return to market growth.

Yes. Look, it's a great question. It's a very exciting part of our strategy. I'll say, as you know, we've been on this broader digital journey now for a little more than half a decade. And I'd say the greatest thing about that, whether it's product, whether it is digital initiatives that are customer-facing or internally facing, the whole team is digitally fluent at this point.

I'm not going to say we're digital natives, but we can get around the table and we can discuss digital innovations and understand them. And that's allowed us to move very quickly, particularly as some of these AI tools have become available. And so I think specific to your question around something like pricing, I mean, I remember several years ago, when we first invested to build our pricing analytics, and I think they were best-in-class at the time. Today, I say that is pretty antiquated compared to what we have today, which is, a, much more precise and, b, much faster moving, where we can really get insights on a SKU-by-SKU level, and some of the new leadership that we have here with our headquarters transformation has brought in just world-class talent.

And so we're getting sharper and foster all of the time. That's on the pricing side. We're also able to do things like customer and consumer insights literally in hours, whereas it may have taken us weeks. So once you understand exactly where your customer is, where your consumer is, what their shopping behaviors are, what their switching behaviors are and how to target them, it makes us a much more fierce machine.

Now for all of that said, I think we're just at the early innings of doing this. We've got some great people and some great capabilities in place. We're seeing some unbelievable talent as we continue to hire up as part of our transition and transformation to the new headquarters, but I think it's early innings for what you'll see us do with these capabilities.

The next question, Michael Rehaut with JPMorgan.

First, I wanted to hit -- and I'm sorry if I missed this in the prepared remarks, but just to get a dial in a little bit more in terms of what was driving the 100 basis point decline in segment margin guidance for Outdoor and Security, particularly as we're kind of sitting here at the end of the third quarter, kind of curious what's changed in the last 90 days to drive that type of decline? And if the third quarter margins in either segments in part reflected maybe some of that change in outlook or performance?

Sure, Mike. I'm happy to try to take it at the highest level, and then Jon can round it out if you'd like some more detail. In Outdoors, a very simple story. By the way, we saw great performance out of that segment, particularly at the point-of-sale level. What we did not see was the usual seasonal inventory build that you see at this time of year in preparation for the next building season. I've seen this happen once before where we don't see that build, and that tends to be pretty margin-rich product relative to the rest of the portfolio.

So in Outdoors, it was pretty much just a mix inside of that inventory build, not particularly concerned about it because that inventory will have to be built to serve that market at some point. And I mentioned it will be at some point next year.

And in Security, I'd say it's a variation on that theme. We saw a strong commercial performance, but we did see some backing off from our B2B business. And yet, we maintained our R&D investment at a higher level than prior, and we maintained marketing investment at a higher level than prior particularly with our new Master campaign, which is doing really, really well, and notwithstanding a bit of a mix shift there, we did not want to pull back on those investments.

Jon, if you want to add anything?

Maybe just to -- maybe put some numbers around it for you on the inventory piece for Outdoors, Mike. If you look at last year, the seasonal inventory builds, typically, we do see low double-digit increases in that channel inventory in Q3. This year, it actually went the other way, and we saw low double-digit declines. And so to Nick's point, that's something that we'll have to reverse. And so it is a bit of a Q3 dynamic. As we go into Q4, not sure if that's going to reverse then or into next year. But like we mentioned in the prepared remarks, October has seen some signs of -- early signs of that reversal. And so we're encouraged that, that is on the comm.

Okay. I appreciate that. Maybe I'll follow up a little later on that as well.

Secondly, I wanted to take a step back or shift the question to digital. Nick, I believe you said that you're on track to hit the $300 million annualized rate -- run rate by the end of this year. I wanted to get a, sense kind of 2 parts here. One, tried to dimensionalize those sales between plumbing and security, number one. And secondly, I know you've thrown out, I think, I want to say by 2030, but I could be wrong there, the $1 billion sales goal. Really would love though to try and understand how to think about the growth in the business. I'm not asking necessarily for guidance, but just directionally or degree of magnitude, how to think about growth in 2026, '27 off of -- I guess, if you did $300 million, maybe that would be growth technically, but how to think about that annualized run rate, let's say, going forward?

All right. I'll just start by kind of giving couple of things to wrap your head around and then say some stuff about some of what you're looking for. So on the first part, yes, we're approaching that $300 million annualized, which is what we were hoping to see at this point. And also, I think on the prior call, we said expect it to end this year around $250 million. We're actually tracking a bit ahead of that. So really satisfied with the way that business continues to develop. Very, very strong growth on the Flow side, continue to be extremely excited about the opportunities there. And we just very, very recently launched our subscription service, which is the leak protection service, which we think takes a huge barrier to growth away because even though the value prop of Flow is very clear to us, very clear to insurers, there's still a price barrier for a lot of people.

And the researcher that we said though says they're absolutely happy to pay a monthly subscription, particularly if the insurance savings is even greater than that subscription, right? It's just a win-win-win, a win for us, a win for the insurer, a win for the consumer. And so very excited that, that has now launched, and we'll be back to you as we start to see the data of how that's performing.

On the security side, it's -- we're seeing some nice things. I referenced some of the Yale progress in my prepared remarks, but I think there's more opportunity to come as we cycle in some of the new products, some of which we've developed with Google and some of the big partnerships that we have signed up, which will roll into 2026. One further thing I'll say, and then Jon may give some more color. I think those of you who participated in our recent feedback survey, and it was very helpful. And we understand that people want more dimension around this.

And I think over time, we've tried to share anything that we could that is verifiable, repeatable and auditable, like those are our standards for sharing numbers. I understand there's desire for more. And so we're going to come back at the beginning part of the year with, I think, just a clear set of metrics that we're going to be reporting to regularly for the digital business, just if you bear with us, hopefully. And we're taking feedback as to what people are looking for and to the extent we can share, we will.

Yes. Absolutely, Mike. And just to build on the disclosure for next year, it's -- when you start looking at 2030 metrics, it's always harder to build the road map to those. And as we build out the framework for reporting, we do want to provide something that is more tangible in the near term that you can look at. And what I would say to your question around the split between security and outdoors, we don't disclose that at the moment, just given the relative size in our overall portfolio, they're both rapidly growing. And so that piece -- and I'd also give you just some broad guidance that neither of them is outsized in the portfolio. There's a good balance between both security and water within that connected build. But we'll provide a broader framework going into next quarter that will be a bit easier to follow going forward.

So just to sum it up, because that was the last part of your question, trending ahead of the $250 million that we gave last quarter, very happy about that. Approaching the $300 million annualized, very happy about that and absolutely convicted about the $1 billion by 2030.

The next question, Philip Ng with Jefferies.

Yes, great to hear about how you're -- you've done -- you've pushed through your pricing raise for plumbing on the water side, right? It sounds like your peers, Nick, are playing a little catch-up. Does that put you in a position to play offense? Any color on how you're performing by end markets, retail channels? Any early read on like placement by any of these markets that we should think about for 2026?

Sure. Let me take the second part first, and then we'll come back to playing offense because it is helpful for just crystal clear. We're very happy with the Water results. I'll just start there. If I look at the opportunities, build there, we're gaining share, very pleased. Retail gained share across all 3 majors, we're very pleased. As we said on the last call, we saw opportunity to improve our performance in e-commerce. We have a new team in place. We're executing with, I'd say, significantly upgraded capabilities, uncovering a lot of opportunities. Happy with the progress, but room to improve. Expect to see that improvement as we come through this year and into next year.

As I think about then offense, the answer is, absolutely. As we work hard, very hard, in fact, to continue to mitigate the impact of tariffs. We're still working with supply chain. We're still working on cost efficiencies. We're going to look to redeploy that where we can to meet the consumer where they are and promote as we can. And so it's not signaling anything dramatic. But with a lot of this effort behind us, we see opportunity to then really sharpen the pencil.

And one piece that Nick didn't mention in there, but mentioned in the prepared remarks is House of Rohl. And that continues to see really outsized growth really across the distribution. What we're seeing is a lot of strength with the luxury consumer. And within our -- you name the metric between volume, price, we're seeing some very good indicators in the luxury segment.

Yes, absolutely.

Yes. I mean the margin has been stellar. Then Jon, you gave us a little hint that 2026 in terms of the end markets, but you're expecting to outgrow. I want to be great if you could quantify how much, but more importantly, can you flag some of the areas where you think you've had some wins that give you confidence that perhaps you could grow a little faster than the market? And then any directional help how we should think about margins as well?

Yes. It's still premature to start quantifying things, Phil. We're just working through the 2026 plan right now. We do have some visibility into the market environment, which is where I guided that this year, which has been a slightly down environment, we are looking next year to be largely flat. And so while it's that's -- the market backdrop hasn't seen a significant turn. We are seeing a bit of some constructiveness in the market to keep it flat. We do feel comfortable that we're going to outperform the market. And you can just look at this quarter's results. I think through our largest business unit, Nick just went through a lot of the wins that we're seeing in the marketplace in Q3 and what we're seeing in the early parts of Q4, and we expect those to continue into next year.

And if you go across each of our business units, there's individual pieces that provide that confidence. Starting with Water, I think Nick just covered off on those. If you go through outdoors, we've talked about LARSON perfect aisle. Really, we've seen some good turnarounds at Fiberon in terms of some of our productivity and efficiency there. Therma-Tru, we talked about some of the lack of seasonal inventory builds, which that will start to rebound. In addition to that, we've also mentioned some of the antidumping tariffs that have been coming into the market in that particular segment, which we also think will be a nice tailwind for us.

In Security, we've continued to invest going into next year. So we've got some good momentum around our Master It campaign that we feel will continue. The new rollout of our connected products and the Yale Google Smart locks, I think, are going to be a nice tailwind for us as well. And then you just layer on the connected business and watch the growth we're seeing in Flow and our Connected products. So a lot to be excited about going into next year to drive that outperformance.

The next question, Mike Dahl with RBC Capital Markets.

I just want to start with kind of a clarifying question around the tariff dynamic. Obviously, still some moving pieces since you last gave your guidance between kind of copper and maybe some refinement around 232's and now the most recent news about reduced China exposure. And Nick, I wasn't sure if your comment referred to the 2025 impacts being de minimis, but maybe can you just clarify that, talk about kind of on an annualized basis as all tariffs as currently announced and maybe inclusive of this reduction in China tariffs, what that gross impact is for you?

Yes. I'll just make a quick comment and turn it to Jon. But I'd just say on the de minimis, we're not processing in that the 10% yet. That's very late-breaking, and we want to do some work on that. So we're talking about all the other changes as we work through it. And then there's some sector-specific challenges, too, that we see. You've referenced some of them that we're going to have to be laser-focused on. I think with respect to the late-breaking news on the 10%, firstly, we want to see it actually get inked and then we will do our work around that to see where there's opportunity.

Jon, do you want to give some more color.

Yes, happy to give some color. So I think on the last call, I gave some dimensions around the tariff impact, $80 million in 2025 and $260 million on an annualized basis in 2026. So since that -- since the call, we've seen the reciprocal tariffs come down quite a bit and really across many of the jurisdictions. And so currently, and frankly, even with some preliminary views of the 10% reduction on China that was announced this morning, we see that the $80 million for this year is likely baked in. But on an annualized basis for next year, we're more in the low $200 million range, more in the low $200 million area, I would say.

So the tariff impact has come down. And as you mentioned copper, copper was introduced since the last earnings call, but inclusive of my comments on the low 200s, that includes copper, which really has been de minimis for us. I think our estimate for the overall copper impact across our business is around $3 million. So not much of an impact at all. And again, we are focused on mitigating these tariffs through a variety of actions. So supply chain actions, which we continue.

We are estimating that our -- that around 10% of our COGS will be China-based by year-end. So we've been taking a lot of actions there, cost-out opportunities that both Nick and I have mentioned throughout the call and then the strategic pricing actions, which is the third item. But really, it's a combination of those 3 that have helped us work that down. And we feel we've done a lot of work on these numbers, and we feel very comfortable on where we stand.

Yes, that's very helpful and good to hear. And if I just shift gears to a little more near term, you talked about a lot of the dynamics already, but I wanted to drill down on Water margins for 4Q, just given the commentary around now looking to pick your points on promotions and where to lean in on volume. Your guide still implies kind of a wide range of outcomes for the fourth quarter. So can you help us kind of ballpark what that fourth quarter margin impact? And also maybe specifically like within that range of kind of the Water guide, how you're leaning on top line as well when you think about 4Q specifically?

Sure. I'm happy to start off. From a margin decline standpoint, we did guide to the full year for Water. Our margins haven't -- our margin guidance from quarter-to-quarter has not changed. So we maintain our 23% to 24% operating margin in that business unit. And so if you play that out, that still implies close to 23% or around 23% margin for that business unit in the fourth quarter, which would still be a nice increase or at least a modest increase from Q4 of last year.

And I would tell you that just from a sequential basis, there -- if you think about the margin decline, it's really just a matter of mix and spend. And we've mentioned some of the spend that we've been doing from promotional activity. I think there's -- that's probably one area that might change. And then the mix within our products and our channels -- we're seeing a little bit of movement there as well.

The next question, John Lovallo with UBS.

Maybe just to follow up on Mike's question there. I mean I think you gave -- just gave the Water margin directionally, and I think you gave the Outdoor being similar in the fourth quarter to the third quarter. But I guess the question is, we're about 10 months into the year, and it feels like the overall ranges here are still pretty wide. Curious what could kind of swing things directionally here within the next couple of months in such a wide range? And maybe if you could just give us a little bit more color by segment on where you're kind of leaning as we stand today?

Yes. John, this is Nick. I'll start with just a couple of conceptual things, and Jon will fill in some color. Just firstly, I would say the way we think about margins, we play it for the year, not for the quarter, right? We're trying to run the business over the longer term. And so we're not going to move around investments quarter-to-quarter to just try to hit a margin number.

We're building this thing for the longer run. And so that's -- [indiscernible] of the variability has come from some of the inventory and channel movements that we've seen this year, where as Jon referenced, like we didn't see a seasonal inventory build in a high mix part of the business that will come down the road. But that does have some impact on margin. And then just the third comment on margins generally is I'd say we'd look to the full year guidance on it. And then with respect to the tariff pricing, I think it's important to note, like we're -- our goal is to cover off tariffs dollar for dollar, and then we will work back any margin that we need to work back over time, leveraging our CI initiatives and our supply chain initiatives.

Yes. And I think just to quantify it a little bit, if you look at our full year guide, which Q4 is always an interesting one because we do a full year guide, and it's really just 1 quarter. So you can back into our Q4 margin guidance. And if you look at what that is for both Outdoors -- we covered Water. So my comment is on Outdoor & Security. You can really -- you can see that our Q4 margin implied in each of those guides is higher than the full year guidance so we are increasing our margin in both Outdoors & Security as we go into the back half of the year.

We talked about a lot of the dynamics in Outdoors in terms of the channel inventory. And I would say that if there's another factor kind of weighing on Outdoors, there is a mix element to it as we look at our product mix. It weighed on us a bit in Q3, and that trend is -- it looks like it's going to be something that we face in Q4 as well. And then in security, I would say probably similar commentary. I think there is a mix element to it in terms of the timing of our promotional spend and when we're going to see some of that sales pull through. And one of the other elements on security that maybe we haven't touched on, on the call is there is a bit of -- as we change some of the -- start selling through some of our new technology and some of the new hardware, the mix of some of the old hardware that we're also selling is at a lower price point is probably playing a little bit of a part in Q4 as well.

Okay. Got you. And then, Nick, maybe just from a higher-level strategic angle here. I mean there's obviously been a number of pretty meaningful changes at Fortune recently with leadership, corporate headquarters, et cetera. And it seems like a lot of this is behind you at this point, maybe you can kind of refocus on the core business. So my question is, how comfortable are you with the current categories and brands? Are there any that maybe don't quite fit in quite as well as you thought prior? Or are there any areas that you would look to add to? I mean how are you kind of looking at the portfolio overall?

Yes. I'll just start with where you started, which was referencing that transformation. And I would say, as I said earlier, we kind of feel like we're at the end of Phase 3 of 3 of really coming down to a very tightly run operating company. And that first big portfolio move in '22 with cabinets and then moved to an operating company model, business unit led, refined that. I think some lessons learned, frankly, of things we could have done better. So made some structural and management changes at the start of this year, kind of I call that Phase 3 of 3 and went to a footprint that matched our strategy with the headquarters move, which we've now moved over 500 people into, and we're off and running.

And so we're actually really excited to have that behind us and really just go into '26 focused on execution and some of the incredible talent that we have here. Just a couple of other things I'll say. In addition to the talent story, this is all about driving growth, right? It's all about being tighter, leaner, leaner together and driving growth. It is also unlocking some efficiencies, right? When you just have less duplication and you're together and you can move faster, you're going to be more efficient, and we're seeing that.

And then just a final thought, as I said before, is in what is still a challenging economic backdrop, because we've gone through this, we're still in the rehiring phase, and we have our hand firmly on that throttle, and we will throttle it as appropriate to not overhire in what is still a challenging economy. And so that's given us a lot of flexibility with our SG&A, sort of having to go what we're seeing others do in the marketplace and actually let people go. And so that's a really good backdrop. So good question around the portfolio.

I mean we are always looking at both our own portfolio and evaluating what are the most productive and fit to strategy parts. We will continue to do that. That's part of our duty to our shareholders as well as looking outside, but we will remain extremely disciplined, which is to say we look for good businesses, we look for businesses where we can add value, and we will only do it at prices that we believe are compelling where we can drive return. And so there's some interesting things out there that could help us move the strategy along even faster, but it would have to meet that criteria.

The next question, Trevor Allinson with Wolfe Research.

I wanted to follow up on your comments about a flat market in 2026. I appreciate it's early, but we're seeing the homebuilders continue to slow starts pretty aggressively here, which will impact you guys on a lag. So considering that's well less than half of your business. Is the assumption that you all see repair and remodel growth next year and that will offset a declining new res market or how do you think about growth or declines in each of those markets getting you to a flat overall market?

Yes, I'll just give some high-level comments and Jon can jump in. First, just as a reminder for the builder side of the business, which is about 1/4 of our business. We are much more tied to the midpoint between starts and completions, and they aren't typically one for one. What you'll see it starts to move up and down. The completions are much, much more steady, and that's much closer to the number that we see come through our business because, again, the builders can throttle the starts number up and down.

And then we are seeing recovery in the R&R line. I think -- I'd like it to be a whole lot stronger, but I was just looking at some data points across retail and e-commerce. And actually, the market has been flat for us on a dollar basis for 10 straight weeks, which I hate to say that it's exciting, but relative to the last 2, 3 years, that's actually pretty decent. And so you are seeing some firming. And then, of course, we're seeing things like the home equity extraction activity, applications for HELOCs, things like that, like I think up 80%, I read in the last report. So some green shoots there. And then we do have our growth initiatives in things like digital and luxury, which will provide us a tailwind to overdrive versus that market.

Yes. And I think just to add on that, if you look at what we've seen in some of those markets kind of year-to-date and how that might play into next year, in repair and remodel, this is our biggest segment. If you look at the beginning of the year, we were looking at that being a bit -- that was still a bit down and a little bit of a drag, although we have seen that turn in the back half of the year, and we expect some of that to continue to next year. So as I look at a flat overall market, we're looking at probably low single-digit increase in repair and remodel with still some challenges in single-family new construction, that probably down low single digits. So those will offset each other. And then that will play out through our portfolio.

So I'd just add, this isn't our '26 guide. We're trying to give our perspective to be helpful. If things improve, we'll invest accordingly. But if things deteriorate, as I said earlier, we've got our hand very firmly on that SG&A throttle, particularly with some roles yet to fill. And so we're going to navigate this very, very tightly.

Right. Yes. I appreciate that. And the color is extremely helpful. And then one of your competitors in Water is out with a large announced price increase early next year. I just want to make sure I'm hearing your commentary correctly regarding price. Is it your expectation at this time that offsets to tariffs moving forward are going to be through avenues other than pricing, and it's not currently your expectation to push pricing in early 2026 to cover tariffs specifically? And then if you could, can you just tell us what Water pricing was up on a year-over-year basis in 3Q?

Yes. I'll start. I don't know if we've broken that out, but I'll start on just how we're thinking about it. So as we said, our pricing on a dollar-for-dollar and on a margin basis, a dollar-for-dollar basis, we believe we've covered off on the tariffs as we know them today. That said, as I said earlier, like the philosophy of this company as a category leader is to be extremely disciplined in pricing. So we will take pricing. We will take it on a regular basis, and we'll take it in hopefully small increments. So that's our strategy. And that's what we did here, we had mid-single-digit pricing across the portfolio to cover off on tariffs.

If you go back to '21, where we saw massive inflation, you had pretty modest pricing. Why? Because we took it early. We did it consistently. And as long as we continue to flex that muscle and we do it highly strategically focused where the market can accept that pricing and less so where the market cannot leveraging some of these digital capabilities we built, then we should be in a very good position. And we really believe in doing that, and we really believe in maintaining pricing integrity across our channels, best for all of our customers. And so that's what I would expect to see from us as we move from here into '26. But what I don't believe you will see at this point, absent any new tariff news to the negative is any type of catch-up pricing. As I said, I want to be crystal clear about that. There is no second round for us. We're done.

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