Mike: full year cadence for the guide in a little bit more detail, especially since there's, you know, the step up in margins assumed in the second half and maybe help us understand on a segment level basis how that plays out.
Dave Barry: Yeah, 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, you know, I think our recent performance trajectory is, 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 a prudent path. I'd say on the top line, importantly, this guidance doesn't rely on a second half ramp in the market. So then, you know, anything that might have been in there, it's 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 efforts that I've outlined in that will start to ramp across the second half. So it's really those two things driving margin. And I'll let Ashley provide some color on the cadence.
Ashley: Sure. Hi, Mike. Maybe let me start with two points on the full year, and then I'll talk a little bit about the phasing. The first point I make is, you know, in as simple as terms, I think about the change as being driven by roughly two and a half to three 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 markets. 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. You know, as we said, revenue expected to be split 50-50, first half, second half. That is consistent with what we've seen the last three 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 mid-year 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. You know, 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 three segments, so all three down about two and a half to three points in revenue, and then similar margin profile across the year from first half to second half.
Dave Barry: Yeah, 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 impacts 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.
Robert: Okay, thank you. I appreciate the very thorough response there.
Mike: I think 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, you know, 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?
Dave Barry: Yeah, so I'd share it. 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'll 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 focus, 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. 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. You know, 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.
Robert: Okay, great. Thank you.
Operator: Next question will be from John Lovello at UBS.
Operator: Please go ahead.
John Lovello: Hi, guys. Thank you for taking my questions as well. You know, 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, you know, kind of in the works. I'm curious if you could sort of elaborate on, you know, 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 two new directors that you're currently seeking?
Susan: 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 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 that 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 two 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're 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.
Dave Barry: Yeah, and John, I would build on that a bit from Susan. We came out of a board meeting earlier this week and can say that the board is highly engaged and collaborative and has really been a great thought partner for 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, I 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. So we're all aligned to work together to do that.
John Lovello: 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 for 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. What would you sort of attribute the difference there to, and how are you guys addressing this?
Dave Barry: Yeah, happy to touch on that, John. So First, as you kind of alluded to, we do have two 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. 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, it's not broad-based enough to drive meaningful performance improvement, but this is where we're focused in the near term.
Robert: Understood. Thank you, guys.
Operator: Yep. Next question will be. from Trevor Allison. Please go ahead from Wolf Research.
Trevor Allison: Good evening. Thank you for taking my questions. 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 tailwind for the full year across your business?
Dave Barry: Yeah, hey Trevor, I'll start and then let Ashley provide some color. You know, if I take a step back, this business has faced a lot of inflation, like others in our space, tariffs and others. And, you know, we led with the gross price last year, additional gross price this year, You know, my view of it, I think we've had over-reliance on gross price, and it's cost us some share positions, 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, you know, 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 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 can 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.
Ashley: Hi, Trevor. 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'd say 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, you know, 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. You know, 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 one-third in the first half and two-thirds in the second half. So we're going to continue to action against all of our productivity initiatives, identify cost actions with 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.
Dave Barry: Trevor, I 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 tariff benefit coming in the back half of the year from a change in environment.
Trevor Allison: Okay, thank you for all that color. 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?
Dave Barry: Yeah, I'd say at 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.
Robert: Appreciate all the color and good luck moving forward. Thanks, Robert.
Operator: Thank you. Next question is from Michael Rehart at JP Morgan. Please go ahead.
Michael Rehart: Thanks. Good afternoon, everyone. Thanks for taking my questions. First, I just wanted to better understand 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, you know, points of distinction that maybe, you know, is creating this incremental headwind versus some other companies seeing a little bit of a net favorable impact.
Dave Barry: Yeah, let me... Well, you might be confusing like the tariff versus the total inflation. 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 122s and the 232s in IEPA is effectively zero. So there's no incremental tariff exposure. the change in total inflation is driven by commodities and freight.
Robert: Okay.
Michael Rehart: And so then, um, just to clarify then the difference between it being maybe net neutral versus, um, versus other companies, maybe seeing a little bit of positive, just kind of curious in terms of maybe what were the, the, the drivers of that. Um, before I get cut off, I'll also throw out my second question. Uh, I just don't want to get cut off, but, Um, 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, uh, the company is, you know, she mentioned Susan, you mentioned that you've seen a lot of encouraging high quality candidates. Uh, if this is something that, you know, we should expect, um, you know, three Q four Q, uh, 2027, if there's any type of, uh, uh, framework we could, uh, be thinking about there.
Dave Barry: Yeah, on the tariffs piece, Mike, I think a couple 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 two 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 source exposure and pleased with progress on that front. I'll turn it to Susan to talk about the search.
Susan: Sure. Thanks, Dave. On the CEO search, unfortunately, I'm not providing exact timing here. 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. But again, moving with pace and focus.
Robert: Great. Thank you.
Operator: Thank you. Next question will be from Stephen Kim at Evercore ISI.
Operator: Please go ahead.
Stephen Kim: Thanks very much, guys. Appreciate all the color here 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?
Ashley: Hi, Steve. Yeah, you're accurate. It is a volume reduction, no change in our pricing plans for the year.
Stephen Kim: And so with respect to that, I know that you've 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 that 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?
Dave Barry: 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 role, 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.
Stephen Kim: Yes, you did mention that. Thanks, 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?
Dave Barry: Yeah, 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 costs 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 there are areas where we haven't gone far enough yet to get to the desired outcome.
Robert: Great. Well, best of luck with that, guys. Thank you.
Operator: Thanks. Next question will be from Phil Ng at Jefferies.
Operator: Please go ahead.
Phil Ng: Hey, guys. Thanks for squeezing me in. Dave, you talked about, you know, the desire to kind of improve service levels. Is that a function of you have to invest more headcount? Is that just more focus, relining incentive comp? And I think earlier a question you talked about perhaps seeding some share or work more to be done on water, particularly on the e-tail and the retail side of things. What exactly, you know, fell off and what you could actually improve on that set of things to kind of restore share in that market.
Dave Barry: Yeah, I'll take both of those, Phil. Thanks. You know, 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 they're monthly cycles that you go through and you're working through the businesses you know 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. One, I touch a lot on new product development. We have to get better with our pace. We have to get better with our insights. 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. On the e-tail side, commercialization is a big opportunity. 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've done well in the past and will continue to do well going forward as we get the team and the focus back in these areas. Okay.
Phil Ng: On the security side of things, can you tease out, you know, how sell-out trends looked in the quarter and progressed? Because I think there was an element of D-stock that was weighing on the business. And when we kind of look out through the year, I believe you have some new products in, you know, working through some lifecycle phase down. How should we think about the momentum in that business?
Dave Barry: Yeah, happy to touch on that. So if you think about the downtrend, 6% in security, I 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, Sentry Safe, 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 I'm excited about that momentum, and we'll see that continue to build as we get through the year.
Robert: Okay. Appreciate the color. Thank you so much.
Operator: Next question is for Matthew Boulay at Barclays. Please go ahead.
Matthew Boulay: Hi. You have Elizabeth laying it on for Matt today. Thank you guys for taking the question. Just to start off, I think I'll go 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.
Dave Barry: Yeah, 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 ThermaTru, which was really nice to see. And that's despite the new construction headwinds and despite the a very limited channel inventory build ahead of the spring season. And so inventory, light in our ThermaTru 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 indoors, And channel inventories remain lower than expected at this time of 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. And I think it's really a function of the demand environment and our customers not leaning into what is an uncertain spring season.
Matthew Boulay: Okay, thank you. And then, oh, 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?
Dave Barry: Yeah, I think the incremental $40 were probably a quarter 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
Operator: Thank you very much.
Operator: Thank you. This concludes our question and answer session for today. I will now turn the call back over to Dave Barry.
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.
Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your 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.
