Fortune Brands Q3 2026 Earnings Call Transcript

Fortune Brands (NYSE:FBIN) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

View the webcast at https://edge.media-server.com/mmc/p/eg64jgn2/

Summary

Fortune Brands reported third-quarter 2026 sales of $1.1 billion, a 3.1% decline, with operating income down 24.6% to $156 million.

The company is executing a ‘Back to Business’ plan focusing on decentralizing operations into customer-focused units, optimizing its portfolio, and expanding margins while sustaining growth investments.

Fortune Brands announced the sale of its Fiberon decking business for $160 million and is restructuring its China operations, exiting the commercial market while maintaining manufacturing support functions.

The company expects to deliver $70 million in SG&A savings by early 2027, with additional benefits from portfolio actions contributing to $120 million annual savings by the end of 2027.

The company revised its full-year guidance, anticipating sales between $4.205 billion to $4.275 billion and EPS of $3.20 to $3.30, citing channel inventory adjustments, weaker new construction market, and portfolio optimization costs.

Management emphasized the need for improved execution in pricing and cost management, aiming for price-cost neutrality by late Q1 2027.

The appointment of Pete Clifford as CFO and other leadership changes are expected to enhance operational focus and execution capabilities.

Full Transcript

OPERATOR

Greetings, and welcome to the Fortune Brands third quarter 2026 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star-zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Kurt Worthington, Vice President of Finance and Investor Relations.

Please go ahead.

Kurt Worthington (Vice President of Finance and Investor Relations)

Good afternoon, everyone, and welcome to the Fortune Brands 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 Singh (Chief Executive Officer)

Thank you, Kurt, 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 tariffs 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 and 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 anti-dumping 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 multi-year 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 four 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%.

A 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 Airey 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 to $55 million on revenue of $320 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 three 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. The 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 two years. We have started executing our Back to Business plan and expect to see some benefits in last quarter of 2026. 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 and 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 recently appointed as Chief Financial Officer. Pete brings more than 30 years of financial leadership experience, including public company CFO and COO roles at The AZEK Company 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 The AZEK Company, 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 today 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.

Pete Clifford (Chief Financial Officer)

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 am excited about the opportunity and look forward to re-engaging 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 Three 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 zero 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 Outdoor, 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 3Q25. 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 2.5 times. 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 4Q26. 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 de-risk 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 right-sizing of the channel inventory given the macro, but also an unwinding of a rather large 1Q26 load-in that we will comp against in 1Q27; and second, we anticipate a similar amount of run-rate expense in 4Q as 3Q as it relates to investments in 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 three 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 three 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 4Q26 EPS driven by the tariff refund impact on variable compensation. For the full year, we are expecting sales to be in the range of $4,205,000,000 to $4,275,000,000 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 one-time 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 1Q27 more dilutive, and our turnaround will become more apparent in 4Q27, 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 multi-year 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 Kurt.

Kurt Worthington (Vice President of Finance and Investor Relations)

Thanks, Pete. 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 questions to two and then re-enter the queue to ask additional questions. Operator, can you open up the line?

OPERATOR

Thank you. We’ll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you.

Our first question is from Keith Hughes with Truist Securities.

Keith Hughes (Equity Analyst at Truist Securities)

Thank you. 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 non-core? And I’ve got an eye towards doing estimates for 2027.

Pete Clifford (Chief Financial Officer)

Hey, Keith, this is Peter. 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 non-core, that is 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, one-time impacts. First discrete item is a tax benefit generated from the legal entity restructuring we were doing in the UK, which is driving about $0.28 of favorability in the year. The second discrete item is tax 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 one-time 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.

Jesse Singh (Chief Executive Officer)

Yeah, so, Keith, just kind of high level, you know, 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. You know, it’ll manifest itself in the quarter.

Keith Hughes (Equity Analyst at Truist Securities)

Okay, I think I see. Thank you. Let me ask one other question. On one of the details you gave, Pete, about the $65 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 it’ll be fourth quarter?

Pete Clifford (Chief Financial Officer)

Yeah. Keith, I think it’s probably a balance of both. I think there was clearly a larger load in and one 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.

And you should think of it as, 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, 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.

Keith Hughes (Equity Analyst at Truist Securities)

Okay, I’ll pass on to others. Thank you.

OPERATOR

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

Keetan Mamtora (Analyst at BMO Capital Markets)

Good afternoon. Thank you, 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 unfavorable price-cost versus volume deleverage, elevated service cost—just the key buckets here?

Pete Clifford (Chief Financial Officer)

Yeah. I mean, again, I’m going to give you the answer of six weeks and two days in, Keetan, but I think largely, on the margin dilution, about half is probably price-cost right now. Twenty-five percent I would call it 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 serve customers in a stronger fashion. Those are some of the elements that I think I would call out.

Keetan Mamtora (Analyst at BMO Capital Markets)

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

Pete Clifford (Chief Financial Officer)

You know, I think the original view was sometime in this quarter. But candidly, as I’ve been kind of digging in here in the first six weeks, I think largely the portfolio has done a really good job of measuring price realization. I think we bumped into a part of business that hasn’t been doing it perfectly. 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’ll be closer in the fourth quarter—but I think it’ll 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?

Jesse Singh (Chief Executive Officer)

Yeah, just, you know, 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, 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 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.

Keetan Mamtora (Analyst at BMO Capital Markets)

That’s a helpful perspective. Thanks, Jesse. I’ll jump back.

OPERATOR

Our next question is from Phil Ng with Jefferies.

Phil Ng (Analyst at Jefferies)

Well, Pete, welcome back. 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 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—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 perhaps until 3Q27, and really the big inflection is 4Q27?

Just want to make sure I understand some of those directional components. 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? And just want to help us kind of think through some of the puts and takes and, you know, appreciating the turnaround in Water is going to take longer.

Pete Clifford (Chief Financial Officer)

Yeah, 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 some of the other discrete one-timers, at its core business from a non-prof 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’s been cranking away on. It doesn’t include any of the 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 and we’ve lapped the EMEA rationalization and we’ve got in place that structural cost 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.

Jesse Singh (Chief Executive Officer)

Yeah, I, you know, first, high level, depending on how you look at the business, we’ve got two 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 kind of get into the back half, probably into 4Q27.

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 six 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 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 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.

Phil Ng (Analyst at Jefferies)

Okay, really good color. Thank you so much.

OPERATOR

Our next question is from Michael Rahat with Melleus.

Michael Rahat (Analyst at Melleus)

Thanks. Good afternoon and great to have the old gang back. Looking forward to working with you both, Jesse and Pete. So good to hear your voices.

Jesse Singh (Chief Executive Officer)

Nice to hear you.

Michael Rahat (Analyst at Melleus)

First, I just wanted to zoom out a little bit and think about the back-to-business plan. Aside from 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 multi-year, 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 the fundamental blocking and tackling of the business, if you wouldn’t expect some of that to yield results maybe over the next two or three quarters, or is that just being too optimistic relative to how the business works itself?

Jesse Singh (Chief Executive Officer)

Yeah, I think that 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, 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, you know, we believe that the market can and will expand and we believe we can help that happen. But, you know, 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, you know, the profitability of each and every SKU, you can start to see as we optimize, deal with, you know, some unprofitable SKUs, you can start to see those actions start occurring really over the next two 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, you know, 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, you know, it might take you two or three months, four months, five months to really have that materialize in the market. And depending on where it is, it might even take nine, 10 months.

And I think it’s similar on pricing and some of these other things we’re talking about.

Pete Clifford (Chief Financial Officer)

I’d just add one to it. I think as a general statement, just from where we’re starting from, I think the security indoor side, we have opportunities to move a little bit faster or maybe some of the longer pole is on the water side.

Mike (Analyst)

Right, right. I appreciate that, Pete, and 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, you know, service or, and, or, you know, maybe the sales organization? There was some disruption, obviously talked about there with the corporate headquarter moves or any other elements that you felt, you know, contributed to those share losses.

And you know, to your point about doing the work now and there’s a lag to showing up is part of that. Just, you know, 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.

Jesse Singh (Chief Executive Officer)

Yeah. 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.

Mike (Analyst)

Great. Thanks guys.

OPERATOR

Thanks, Mike. Now our next question is from Susan McLaury with Goldman Sachs.

Susan McLaury (Analyst at Goldman Sachs)

Thank you. Good afternoon everyone and welcome back, Pete. So, I want to go back to the conversation around new products. Can you talk a bit more about how you are 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 20ish percent EBITDA margin?

Pete Clifford (Chief Financial Officer)

Yeah, on the EBITDA margin comment, I think there’s a bit of an extrapolation of what we see as an opportunity with 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 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.

So that’s not necessarily predicated on any specific growth rate. And forgive me, Susan, I just forgot the second part of your question.

Susan McLaury (Analyst at Goldman Sachs)

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

Jesse Singh (Chief Executive Officer)

Yeah. So I think one of the biggest changes. So when you talk about focus business units, we had our product development structured at a corporate level and at a functional level. And what that means is, you know, to give you a little bit of the, you know, 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 sub-segment 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 growth really coming from our new products. 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. Our acceleration now with new leadership in place over the last four months, really sets us up to kind of push the new product focus there much harder.

Susan McLaury (Analyst at Goldman Sachs)

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?

Pete Clifford (Chief Financial Officer)

Yeah, I think the first goal here is to get below two and a half times leverage, which we expect to do this quarter. I think long term, kind of the goal post probably ought to remain sort of two to two and a half times to keep our balance sheet strong enough to give us some flexibility on week six, day two. 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 number one 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.

Susan McLaury (Analyst at Goldman Sachs)

Okay, thanks for the commentary. Good luck with the quarter.

OPERATOR

Great, thanks, Susan. Our next question is from Mike Dahl with RBC Capital Markets.

Mike Dahl (Analyst at RBC Capital Markets)

Hi, thanks for taking my question. And Pete, welcome back. 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 three different timelines. 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 seemed like three 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?

Jesse Singh (Chief Executive Officer)

Yeah, 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, you know, the benefit will, you know, 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 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 six months.

Pete Clifford (Chief Financial Officer)

Yeah, I mean, look, we had the announcement earlier this week with our team, so that part is complete. You know, we will work with our customers that we have over there. I think, you know, 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.

Yeah. And then on the factory reset, you know, an operations reset there, it’s just really important that, you know, we continue to service customers as, you know, we kind of scale down and scale up. So, you know, that will really be driven by customer service. And so you should think of, you know, anytime you’re impacting an operation, you want to make sure that, you know, 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. Yeah. One additional point. The EMEA action will benefit the Water P&L.

Mike Dahl (Analyst at RBC Capital Markets)

Right. Okay, just second, quick question. You know, 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?

Pete Clifford (Chief Financial Officer)

Yeah, I think I could give you an example here. In the third quarter, Mike, in our connected business, you know, we had an inventory base of about $8 million, a product that was aged in a little bit older technology. And, you know, 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.

OPERATOR

Our next question is from Sam Reed with Wells Fargo.

Sam Reed (Analyst at Wells Fargo)

Thanks so much, everyone. You know, you talked a little bit about getting closer to, you know, price-cost neutrality as we move into, you know, let’s call it mid-ish 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.

Jesse Singh (Chief Executive Officer)

Yeah, 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 two sides to it. 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 the manifestation or the execution. There’s actually three components: how effectively do you execute it? And then the third element is the gross-to-net back-end discounting — what’s the right way to promote products, etc. I think in general in all of our markets we’re not sitting here saying — maybe with the exception 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. 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 three areas that I mentioned related to price.

Sam Reed (Analyst at Wells Fargo)

Really helpful. And maybe just circling back onto 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 — that 14 cent headwind. Could you just maybe decompose exactly what’s embedded in that just in greater detail? Would love some additional context as we’re flowing that through our model and perhaps how to think about that impact continuing into 2027?

Pete Clifford (Chief Financial Officer)

Yeah, I mean obviously it’s largely going to be non-recurring. 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’s on week six, day number two. But we do suspect that there’ll be more there to, again, accelerate maybe some decisions that were tabled for the last year or two to try and get a jump start on where we want to be in the future.

Yeah, and you should once again think of these as one-time in nature because they involve, as we pointed out, some outdated, aged lots — they involved a 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, you know, we’ve got the cleanest business we can have relative to, you know, both growth and profitability. Moving forward.

All right. With

Kurt Worthington (Vice President of Finance and Investor Relations)

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.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.