Fortune Brands Innovations, Inc. (FBIN) has delivered a strong performance in the second quarter of 2024, showcasing its ability to navigate the dynamic market environment and capitalize on strategic initiatives. The company reported annual net income of $404.5 million, annual revenue of $4.626 billion, annual operating cash flow of $1.055 billion, and annual free cash flow of $799.3 million.

In the second quarter of 2024, the company reported net sales of $1.24 billion, up 6.6% from the same period last year. Earnings per share came in at $1.16, an 8% increase over the prior year quarter. This performance was driven by the company's focus on its core businesses, accelerated growth in its digital portfolio, and continued operational excellence.

Business Overview

Fortune Brands Innovations is a leading innovation company focused on creating smarter, safer, and more beautiful homes. The company operates in three main segments: Water Innovations, Outdoors, and Security.

The Water Innovations segment includes the company's Moen and House of Rohl brands, which are known for their high-quality faucets, showerheads, and other plumbing products. The Outdoors segment encompasses the company's Therma-Tru and Fiberon brands, which offer a range of exterior doors, decking, and other outdoor living products. The Security segment includes the Master Lock and Yale brands, which provide a variety of security solutions, from padlocks to smart home access systems.

Navigating the Dynamic Market Environment

The company's performance in the second quarter reflects its ability to navigate the uneven market conditions. While the U.S. single-family new construction market remained a tailwind, with starts up 17% and completions up 1% in the first half of 2024, the repair and remodel (R&R) market has stabilized but remains below prior year levels. Additionally, the Chinese market for the company's products continued to be weaker than expected, with sales down more than 35% in the second quarter.

Despite these challenges, Fortune Brands Innovations delivered solid sales and strong margin results. The company's focus on its core businesses, such as Moen North America and the Outdoors segment, as well as its accelerated growth in digital initiatives, helped offset the weaker performance in China.

Accelerating Digital Transformation

One of the key highlights of the quarter was the company's progress in its digital transformation. The company's digital portfolio, which includes the Flo by Moen smart water monitoring and shutoff system, as well as connected products in the Security segment, saw significant milestones during the quarter.

The company announced several key partnerships with insurance companies, including a nationwide agreement with Farmers Insurance to provide Flo devices to their policyholders. These partnerships not only drive revenue growth but also demonstrate the value proposition of the company's connected products in mitigating water damage risks and reducing insurance costs for homeowners.

Additionally, the company announced a strategic partnership with Value Hybrid, a leading software startup focused on connected lockout tagout solutions. This partnership will accelerate the company's ability to bring innovative connected safety solutions to the market, further strengthening its position in the commercial security space.

The company's digital initiatives are expected to contribute over 150 basis points of organic sales growth in the second half of 2024, with the potential to accelerate further in 2025 as these partnerships and new product introductions continue to ramp up. The company sees a path to well over $1 billion in digital sales by 2030, with a focus on driving recurring revenue and data monetization opportunities.

Segment Performance

Water Innovations

The Water Innovations segment delivered 7% sales growth in the second quarter, with organic sales down 5%. Excluding China, organic sales were up low single-digits, led by Moen North America, which saw mid-single-digit point-of-sale growth. The company's luxury brands, such as House of Rohl, also performed well, with point-of-sale roughly flat year-over-year in a market that was down mid-single-digits.

The segment's operating income increased by 7%, and operating margin improved by 10 basis points to 23.3%. The company expects continued sequential margin improvement in the Water Innovations segment through the second half of 2024.

Outdoors

The Outdoors segment reported a 4% increase in sales, driven by growth in both doors and decking. Door sales were up mid-single-digits, supported by higher volumes at Therma-Tru, while decking sales were up low single-digits. The segment's operating income increased by 3%, and operating margin was 16.3%, down 10 basis points.

The company expects Outdoors' second-half operating margins to average around 15.5%, with sequential improvement as favorable production costs flow through the P&L.

Security

The Security segment saw a 12% increase in sales, with organic sales down 7%, reflecting soft point-of-sale performance, particularly in retail and e-commerce. However, the company noted that point-of-sale trends improved in late June and early July, giving them confidence in the full-year outlook.

Segment operating income was $36 million, up 36%, and operating margin was 18.9%, an increase of 330 basis points. The company's organic operating margins were greater than 21%, with over 500 basis points of improvement year-over-year, driven by continuous improvement initiatives.

Financials

Fortune Brands Innovations maintains a strong financial position, with cash of $352.6 million and net debt of $2.5 billion as of June 29, 2024. The company's net debt-to-EBITDA leverage is 2.6 times and is on track to achieve its target net leverage ratio of around 2.25 times by the end of 2024.

For the full year 2024, the company now expects global market for its products to be down 3% to down 1%, with the U.S. market down 1% to flat. Within this market forecast, the company expects U.S. R&R to be down 4% to down 3%, U.S. single-family new construction to be up 8% to 10%, and the China market for its products to be down 20% to down 15%.

Based on this market outlook, the company now expects full-year Fortune Brands sales to increase 2.5% to 4.5%, with organic sales down 2% to flat. The company also expects full-year operating margins to be between 17% and 17.5%, the midpoint of which is 125 basis points above the full year 2023.

Conclusion

Fortune Brands Innovations has delivered a strong performance in the second quarter of 2024, demonstrating its ability to navigate the dynamic market environment and capitalize on strategic initiatives. The company's focus on its core businesses, accelerated growth in its digital portfolio, and continued operational excellence have positioned it well for future success. With a strong financial position, the company is poised to continue its growth trajectory and create value for its shareholders.