Good afternoon. My name is Sachi and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would like to turn the call over to Leigh Avsec, Vice President of Investor Relations and Corporate Affairs. You may begin the conference call.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations' second quarter earnings call. Hopefully, everyone has had a chance to review the earnings release. The earnings release and the audio replay of this call can be found on the Investors section of our fbin.com website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for reconciliations. With me on the call today are Nick Fink, our Chief Executive Officer; and Dave Barry, our Chief Financial Officer. Following our prepared remarks, we have a lot of time to address some questions. I will now turn the call over to Nick.

Thanks, Leigh, and thank you to everyone for joining us today. On this call, I will walk through the highlights of our second quarter performance, give some color on the drivers of this performance, including progress on our digital strategy and offer some thoughts on the macro environment. I'll then turn the call over to Dave for a discussion of our financial results, including our updated full year 2024 guidance. Our teams continue to execute at a high level amidst the dynamic and uneven market and delivered solid sales and strong margin results in the second quarter. Our digital products portfolio saw some exciting wins this past quarter and we are seeing accelerating growth in this key market, which I will detail shortly. The benefit of our organizational realignment continues to generate real results as evidenced by our market beating sales and margin performance this quarter. These actions all support our position as a growth-focused company, powered by secular tailwinds, underpinned by leading brands, innovation and channel management, and fueled by our Fortune Brands Advantage capabilities. Turning to our second quarter performance. Our teams delivered solid top line and strong bottom line results with areas of organic growth in our core North American market. Net sales of $1.2 billion were up 7% or organic sales were $1.1 billion, down 3% versus the second quarter of 2023. Excluding China, which was impacted by lower sales as the Chinese consumer remained very cautious. Our organic sales growth was positive in the second quarter, including low single-digit growth in our Outdoors segment and Moen North America. Looking to the remainder of 2024. We expect continued outperformance in our Moen North America and Outdoors business as well as accelerated growth in our digital portfolio. Our operating income increased 9% and our operating margin was 40 basis points higher than the second quarter of 2023, bringing our year-to-date operating margin improvement to 110 basis points. Our sales and margin performance generated earnings per share of $1.16 in the second quarter, an 8% increase over the second quarter of 2023. Turning first to our digital portfolio. We saw approximately 200,000 device activations in the second quarter, and the overall digital business continues to accelerate. In the second quarter alone, we added around 20,000 users of our Flo Smart Water Monitor and Shutoff, and retail and e-commerce point-of-sale performance far exceeded our expectations as the consumer increasingly gains awareness of this powerful product. Perhaps even more importantly, during the second quarter, we achieved several significant milestones across our digital portfolio, which will accelerate our overall strategy. Our digital business is now expected to add over 150 basis points of organic sales growth to the second half of 2024, which we expect to accelerate in 2025, as the newly established partnerships continue to ramp and awareness increases. We see a path for well over $1 billion in digital sales by 2030. We're also evolving our revenue opportunities towards data monetization and recurring revenue, which will provide incremental growth and further margin expansion opportunities as we continue to scale. First, we announced key partnerships with several large insurance companies this quarter, including entering into a nationwide agreement with Farmers Insurance to provide Flo Smart Water Monitor and Shutoff devices to their customers. Under this agreement, Moen is providing Farmers policyholders a bundled product and installation solution supported by dedicated infrastructure, which will allow policyholders to save money on their premiums. This agreement will be especially impactful in states like California, where farmers and other insurers are now requiring a significant number of new and renewing policyholders to equip their homes with an in-line leak detection system. After this new requirement went into effect, Farmers sought out a partner to create a seamless customer experience for the purchase, installation and support of an In-Line Water Monitor and Shutoff device. Moen won this precedent-setting opportunity because of our exceptional product, ability to deliver last mile installation at a national scale and our brand's reputation for quality, service and innovation. Importantly, we were also selected as the Partner of Choice because of our ability to scale our supply chain as this opportunity grows, and we are already preparing for rapidly accelerating growth. In addition to Farmers Insurance, this past quarter alone, we have signed three other agreements with insurance companies where the providers will promote the use of our Flo in connection with sizable policy rate reductions for their policyholders. Our pipeline of insurance discussions is robust, and we expect further progress throughout the year. In June, we also announced an agreement with the California Water Efficiency Partnership, which will help us raise awareness of Flo directly with municipalities and residents across California and will facilitate government rebates of our Flo devices. As water scarcity becomes a major concern in California and beyond, we expect this partnership will help accelerate both sales and awareness of Flo and serve as a template for other similar partnerships across the United States. In addition to the added expected revenue and exposure to our products, these agreements are important because they prove we can help enable the insurance industry to mitigate risks and issue cost-effective policies as they face a crisis of rising costs. In doing so, we can also help their customers save money and avoid disruption by preventing catastrophic water damage. And of course, these partnerships benefit our communities and environment by reducing wasted water and energy. Finally, enacting agreements like the one with Farmers Insurance or California Water Efficiency Partnership requires us to quickly and effectively work across our full organization from our sales and marketing teams to our connected products group to our supply chain and digital teams. These agreements are yet more proof points of how Fortune Brands Innovations' new organizational structure is enabling us to capture opportunities at an accelerated rate. In addition to our agreements centered on smart water leak detection, we also recently announced a minority investment and strategic partnership with Value Hybrid, a leading software startup focused on the delivery of connected lockout tagout solutions. This partnership will expedite Master Lock's ability to bring to market new and innovative products in the emerging field of connected lockout tagout and expand our leadership position in commercial safety solutions. Connected lockout tagout is a significant and attractive opportunity for Fortune Brands. Given our highly recognized Master Lock brand, large installed base and lockout tagout expertise, we are very well positioned to convert mechanical lockout tagout systems to connected lockout tagout solutions and grow the addressable market. We estimate that the global addressable market for connected lockout tagout is around $3 billion as keeping associates safe is an increasing key priority for manufacturers and regulatory agencies across the globe. And finally, we are excited to announce that we recently entered into a new partnership with ADT. Under this agreement, the Yale Assure Lock 2 collection will be the preferred smart lock for ADT customers across the country. The lock collection will be compatible with the ADT security platform, including the ADT+ app, within which ADT will launch a new feature called Trusted Neighbor. This innovation allows customers to seamlessly grant trusted individuals secure and temporary access to their homes through either scheduled access or in the case of events by leveraging capabilities of connected home devices, including Yale Smart Locks. Once again, this agreement is a great example of the potential of our connected product portfolio as we are increasingly exploring new channels and distribution partners to accelerate growth. These are just some of the many examples of how our digital portfolio is expanding, and I am encouraged and excited by our unique right to win in this exceptionally high-growth space. While we cannot predict the exact timing or trajectory of our digital products, we believe periods of exponential growth will be preceded by key milestones like the ones we saw this past quarter. These milestones are significant, not just for the revenue that they are expected to bring in, but also because they represent key foundational steps in our journey toward widespread adoption of our products. Our results this quarter and the exciting developments that we are seeing give me full confidence in Fortune Brands Innovations' ability to deliver growth and sustain value creation through the cycle, and we remain committed to achieving our long-term goals. Turning now to some additional thoughts on the current housing market and the market for our products. On a macro level, favorable long-term housing fundamentals remain in place with the need for housing remaining strong. Home prices largely holding steady and equity levels remaining high. Importantly, inflation appears to be easing and the likelihood that the Fed will lower interest rates in the coming months is increasing. However, we are aware of offsetting factors in the very near term, including consumer confidence and continued affordability challenges. We expect many of these macro trends will inflect positively soon, and until we see tangible evidence of improvement, we will continue to manage the business tightly. Looking at our products specifically, we believe that we are well positioned. We have strong brands in categories where brands and innovation matter. Most of our brands do not play in opening price points, which tend to be more sensitive to pricing pressures. And finally, we are strong with the Pro, and Pro-led projects have held up better than DIY. Turning to new construction, single-family new construction remains strong and large production builders remain optimally positioned to continue to be able to address the need for housing. And we are a trusted partner to a very significant number of these homebuilders. This quarter, we continued to see encouraging growth in our products, which serve the single-family new construction channel, including Moen and Therma-Tru. We expect this tailwind to remain through 2024, as builders complete their starts. Turning to R&R. Consistent with what we anticipated, the R&R market has stabilized, but at a level still below the prior year, and we expect the R&R market to remain dynamic throughout 2024. However, there are some positive leading indicators in the R&R space. Google search results show that search terms around home renovations are once again up versus a year ago, indicating the continued interest in our products with particularly high increases in searches around connected home products. Existing home sales, while not a major driver of our R&R sales, are expected to improve versus the continued softness we have seen year-to-date. Finally, as interest rates ease, HELOC loans may be increasingly utilized as they enable consumers to leverage high equity levels to make significant upgrades to their homes. The market in China continues to remain challenged. As a reminder, the impact is isolated and independent from the rest of the portfolio, and the China business provides attractive optionality for growth and innovation. We continue to replatform the business and will be well prepared for R&R-led growth once the market recovers. We believe that our brands and products are well-positioned to outperform, including in the current dynamic and uneven macro environment. We saw examples of growth in many core and new product areas, and we will take advantage of the current period to further align our business behind those areas with higher growth opportunities, including investing in a key set of strategic priorities while also continuing to optimize our business to be even more agile and efficient. Turning now to our individual business results. Starting with Water Innovations, this segment delivered 7% sales growth versus the prior year quarter, with organic sales down 5%, while generating 10 basis points of operating margin improvement. Excluding China, our Water segment saw excellent performance in an uneven market with organic sales up low single-digits, led by Moen North America. Our core Moen business continues to outperform the market and take share, particularly in our wholesale business. Recent consumer brand metrics data indicate that we continue to be the highest-rated brand for both quality and innovation. Our point-of-sale from Moen North America saw impressive mid-single-digit growth with all channels showing growth, outperforming a larger market for our products, which we believe was down low single-digits. Our strong relationships with the largest production national homebuilders are expected to be a tailwind for the Moen business throughout the remainder of 2024 and beyond. Our US luxury business again performed well as the luxury consumer remains more resilient. Our House of Rohl brand is number one with designers in awareness and consideration, and brand perception data indicates that we also lead our peers for luxury, trust and innovation. Our point-of-sale for our House of Rohl business was roughly flat year-over-year versus a market which we believe was down mid-single-digits. We are now one year into our acquisition of Emtek and the work to integrate the brand into our comprehensive and complementary luxury portfolio, including showrooms is progressing very well. As I mentioned earlier, Flo by Moen continues to gain traction with insurance companies, municipalities and consumers. While the new insurance and municipality partnerships are beginning to ramp up, our retail and e-commerce point-of-sale accelerated 130% in the second quarter, highlighting the continued adoption by consumers. We expect sales of our connected water business to accelerate through the back half of 2024. Finally, China sales were down more than 35% this quarter as the Chinese consumer remains cautious. Our team in China has done an excellent job managing costs and margins. Looking to the remainder of 2024, we expect our Water segment to continue to execute on our commitment to deliver above-market sales performance by focusing on those parts of the market with the greatest potential for growth. We plan to continue to make thoughtful investments in our key priorities, including branding and digital initiatives. We remain very excited about our water business, particularly the opportunities we see to capture growth in digital, luxury, and water filtration. Turning to Outdoors. We had a strong second quarter with 4% sales growth and operating margins that improved sequentially over 420 basis points. We continue to focus on leveraging our expertise and investing behind our core categories and in those areas which we expect will offer the most attractive growth opportunities. The Outdoors business has exposure to many key secular growth tailwinds including material conversion in our fiberglass and composite decking businesses. Outdoor Living and even luxury as we increasingly integrate our solar innovations technology and our Emtek products into Outdoors. Outdoor brands delivered mid-single-digit sales growth as tailwinds from new construction and recent retail wins continued to drive sales. Therma-Tru continues to see the benefit of the increase in starts and completions, which began last year and Larson is seeing nice performance as we begin to see the benefits of new innovation. Decking sales were up low single-digits in the quarter, and once again, our Fiberon business is a great proof point of the power of our strong wholesale channel relationships. Like our leading Therma-Tru business, our Fiberon business has a strong conversion story backed up by strength with the Pro and the Fortune Brands expertise in multichannel distribution. We are seeing encouraging brand metrics, especially with the Pro and continue to be excited by the ability of this product to harness the powerful secular tailwinds of material conversion, sustainability and outdoor living. Finally, turning to our Security business. Our Security segment grew sales by 12% in the quarter and was down high single-digits on an organic basis, primarily due to continuing softness of consumers in retail and e-commerce. Encouragingly, we saw improving point-of-sale as the quarter progressed. The segment also saw 330 basis points of operating margin improvement, inclusive of the technology investments in the Yale and August residential smart lock brands. As the work we did around continuous improvement and supply chain continues to pay off. Our Master Lock brand is incredibly strong, and we believe our recent organizational redesign will allow us to further strengthen this powerhouse brand. Finally, our Master Lock's Security business is now around one-third industrial and commercial, and we have developed a niche in the critical and growing remote access portable security space across the globe. We are proud of how our business is helping companies around the world to protect their people and their assets. As we accelerate our leadership in connected industrial security for our lockout tagout investments, we expect this portion of the business to see future outsized growth. Over the past few years, we have evolved from mechanical-only products into innovative and growth-oriented businesses, with a much more strategic portfolio. We will reinvest the efficiencies gained from our recent optimization of the business to leverage strong secular trends like digital products and safety. As a result of our new aligned structure, we have substantially improved the segment's supply chain and sourcing capabilities, accelerated our branding work, and have made significant progress in building our digital security portfolio. A year into the acquisition of Yale and August, we are delighted with these accelerants to our business. In addition to being great assets, which we acquired at a very attractive price, we continue to be impressed by the strength of their teams in key areas, including digital. We are utilizing their skills and knowledge throughout the business and their expertise is being deployed across our portfolio as we continue to accelerate our digital strategies. In 2022, our digital security sales comprised just 2% of the segment's sales. This past quarter, they represented close to 20% of security sales, and we see a pathway to over 40% of this segment's sales coming from digital products as we continue to convert mechanical products to digital products and explore new-to-world technology in our spaces. As we turn to the second half of 2024, we remain fully confident in Fortune Brands' ability to deliver above-market growth, drive margin improvement and continue the acceleration of our digital portfolio. Looking at our end markets, US single-family new construction and luxury continue to be tailwinds. R&R has firmed, though not yet improving year-over-year, and China is weaker than expected as the push to complete homes has ended and the Chinese consumer remains cautious. We continue to lead through the current environment well while still investing in critical priorities like our digital strategy and our brands and innovations. To recap, in the second quarter, we executed our priorities of focusing on the core and accelerating digital products and delivered impressive organic growth in our core Moen North America and Outdoors businesses. In doing so, we delivered solid sales and strong margin results. We will continue to strategically manage the business in light of the uneven market backdrop and we'll focus on those areas where we have the greatest potential for above-market growth while continuing to make margin improvements. By taking decisive actions now, I believe we will be best positioned for accelerated growth when external market conditions improve. I will now turn the call over to Dave.

Thanks, Nick. As a reminder, my comments will focus on income before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year, unless otherwise noted. Let me start with our second quarter results. As Nick highlighted, our teams delivered solid sales and strong margin results amidst the dynamic external environment. We remain well prepared for any macro environment and are positioned for future growth as we focus on our core and accelerate digital while continuing to generate cash and make key strategic investments. In the second quarter, sales were $1.2 billion, up 7% and down 3% excluding acquisitions. Organic sales, excluding China, grew 1%. Consolidated operating income was $216 million, up 9%. Total company operating margin improved 40 basis points to 17.4% and earnings per share were $1.16, an 8% increase versus last year. Our second quarter sales performance was driven by US POS growth in Water and Outdoors as well as digital products, offset by POS declines in security and China softness. Let me provide more color on our segment results. Beginning with Water Innovations, sales were $660 million, up $43 million or 7% and down 5%, excluding the impact of acquisitions. Excluding China, organic sales were up low single-digits. Importantly, our organic sales results reflect mid-single-digit Moen North America POS growth. China sales declined more than 35% as the Chinese consumer remained cautious. As a reminder, our results this quarter also reflect the impact of lapping last year's project completions. We continue to replatform the business toward an increasingly R&R led market, so that we are prepared for growth when the market recovers. Water Innovations operating income was $153 million, an increase of 7%. Operating margin was 23.3%, an increase of 10 basis points, and we expect to continue to make sequential margin improvement through the second half of 2024. Turning to Outdoors. Sales were $389 million, up 4%, driven by growth in both doors and decking. Door sales increased mid-single-digits. Sales were supported by higher volumes at Therma-Tru, driven by the increase in single-family new construction and recent retail placement wins. Decking sales were up low single-digits, driven by continued strength in wholesale and partially offset by anticipated declines in retail. Our results this quarter reflect our ongoing strategic approach of focusing on those core categories in which we expect to have the best opportunities to achieve long-term above-market growth and profitability. Outdoors segment operating income was $63 million, up 3%. Segment operating margin was 16.3%, down 10 basis points. We expect Outdoor's second half operating margins to average around 15.5% and improved sequentially, as favorable production costs hung up in inventory will flow through the P&L. In Security, our second quarter sales increased 12%. Organic sales decreased 7%, reflecting soft POS particularly in retail and e-commerce. Our POS trends improved in late June and early July, giving us confidence in our full year outlook. We continue to see momentum in the categories we have identified as having higher growth potential such as Master Lock commercial and our digital Master Lock and Yale products. Segment operating income was $36 million, up 36% and segment operating margin was 18.9%, an increase of 330 basis points. Our organic operating margins were greater than 21% with over 500 basis points of improvement over last year, driven by continuous improvement initiatives. As we have discussed previously, we think our Security segment is a great example of the power of our Fortune Brands advantage capabilities and we expect great things from this business. Turning to the balance sheet. Our balance sheet remains solid with cash of $353 million, net debt of $2.5 billion and our net debt-to-EBITDA leverage is 2.6 times. We remain on track to achieve our target net leverage ratio of around 2.25 times by year-end. We have $1 billion available under our revolver. In the second quarter, we returned $85 million to shareholders via a combination of share repurchases and dividends, including $55 million of share repurchases. As of today, we have repurchased $190 million of shares this year. Our second quarter free cash flow was $223 million, exceeding our expectations. To summarize the quarter, we delivered solid sales and strong margin results and are on the path of delivering our full year commitments to grow sales above market, expand our margins and generate cash. We are pleased with our first half performance while being aware of the dynamic macro environment. And as you saw in our earnings release, we have updated our full year guidance to reflect our current view of market conditions, including a stronger US single-family new construction market and strength in our digital businesses, offset by a weaker market in China. Importantly, we are narrowing the range around our prior EPS midpoint as growth in our core businesses, acceleration of our digital products and margin delivery gives us confidence in our ability to deliver these results. For the remainder of 2024, we now expect the global market for our products to be down 3% to down 1%, with the US market down 1% to flat. Within this market forecast, we expect US R&R down 4% to down 3%. US single-family new construction to be up between 8% and 10%, with starts up high single-digits and completions up low single-digits. And the China market for our products to be down 20% to down 15%. Within this backdrop, we now expect full year Fortune Brands sales to increase 2.5% to 4.5% and organic sales to be down 2% to flat. This revised figure reflects continued strength in our core North American businesses, including Moen and Therma-Tru, strengthening our luxury business, the benefit of our SpringWell acquisition and an accelerating digital business offset by China. We now expect our full year operating margins to be between 17% and 17.5%, the midpoint of which is 125 basis points above full year 2023. We are confident in our ability to hit our margin guidance and have good line of sight to a number of productivity initiatives, which will benefit our margins across the second half, particularly in our Outdoors and Water segments. Our commodity costs are largely set with relatively small exposure to freight volatility and we expect to remain price cost favorable for the full year. Based on our revised guidance, looking to the second half of the year, we expect slightly positive sales growth with operating margins of around 18%. As a reminder, we closed on our Yale, August and Emtek acquisition in June of last year and the performance of those brands will be included in our second half organic results. To sum up, our teams delivered a first half of the year ahead of plan and will remain focused on the execution of our key priorities. I am increasingly excited about the opportunities ahead of us as our business transformation continues to accelerate.

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

Thank you. The first question is from Susan Maklari of Goldman Sachs. Please go ahead.

Thank you. Good afternoon, everyone.

Hey, Sue. How are you?

Good, Nick. The stat that you gave on the digital initiatives is very impressive, so I'd like to start there. Perhaps, can you quantify the impact of those partnerships that you mentioned over time? How do you think about the opportunity relative to the business today and the ramp that you look for as you target that over $1 billion of revenue by 2030? And then maybe within there, can you also talk about any implications for margins, both in the near term as these sales start to come through? And then over time?

Yes, absolutely. Let me break it down a bit and provide some perspective on that, and then Dave can share some of the numbers. Starting with our entire digital portfolio, which encompasses water and security. The Flo ecosystem connected to Flo security, along with Master Lock's connected lockout tagout, presents exciting opportunities in commercial security. There's also Yale and August with their connected access solutions. To answer your question directly, we believe the opportunity exceeds $1 billion by 2030. We've already seen a significant impact, anticipating 150 basis points of growth for the Fortune Brands portfolio in the second half of the year alone. We have been working on this for a while to build momentum, and we're now observing material impacts on total company growth, especially in this rapidly compounding space. Focusing on the partnership, particularly the Flo by Moen opportunity, we can identify three key routes to market. The first is the direct-to-consumer approach driven by consumers' recognition of the issues we solve. The second is insurance, where we recognize over $15 billion in potential water damage that could be nearly eliminated annually in the United States. Lastly, there's the municipal channel, where we are aware of significant water loss and expenses related to treating and distributing that water, particularly in terms of carbon impact. Retail growth is expected to be steady as consumer awareness increases. In the last quarter, point-of-sale saw a rise of 130%, indicating stronger consumer interest. We are actively collaborating with insurers to enhance the accessibility of our products. This quarter marked a significant milestone, as it was the first time a major insurer began mandating our product across a large segment of their portfolio, seeking a partner capable of providing a best-in-class product, nationwide installation, backend support, and a rapid supply chain. I am tremendously proud of our organization for rapidly pulling all of this together, showcasing the alignment we've achieved across Fortune Brands. The third pillar involves the CalWEP agreement, which allows us to leverage government rebates to simplify access for consumers in municipalities, positioning it as a potential national model moving forward. Putting all this together, we’re excited about the great growth and the significant milestones that we believe will drive an inflection in the growth of this portfolio. Before passing it to Dave for details on margins and numbers, I want to highlight the connected lockout tagout collaboration we established with Value Hybrid. This opportunity is crucial for enhancing safety in manufacturing facilities worldwide and represents a substantial market potential. We possess the leading product and software platform and aim to facilitate the transition from mechanical to connected solutions. It's been a strategically significant quarter for us in driving this portfolio, and now I'll let Dave continue.

Yes. Thanks, Nick. Sue, I think the market has been looking for material proof points that the strategy is working and now we have a handful of them that are material. So I think you can sense our excitement, it's early days of the ramp of each of these opportunities, but still meaningful to our overall growth in the second half. As Nick mentioned, the 150 basis points of growth across the second half, it's probably skewed a bit more towards the fourth quarter, closer to 200 basis points of growth in the fourth quarter. And then each of these agreements and partnerships are margin accretive. I mean as we've talked about in the past, our connected product portfolio is margin accretive relative to the mechanical portfolio and then the nature of these agreements many of which are direct selling opportunities are margin accretive relative to the base portfolio. And that's a bit of what's driving some of the incremental margin coming through in the second half as these opportunities ramp. We'll continue to invest in the flywheel of the connected products business and also be able to have nice leverage from these opportunities.

Okay. That's great color. Thank you both. And then maybe shifting a little bit more to the near term and thinking about the back half. The back half guide seems to imply some relative conservatism perhaps or a bit more conservatism. And that seems in contrast to the second quarter results and the commentary that you gave. Can you talk a bit about how you're thinking of the health of the consumer? What's making you a little bit more cautious on the third and the fourth quarter outlook there? And does it vary by price point or by product category? Just any details that you can offer on that?

Sure. I'll just give some high-level perspectives and I'm sure Dave will add some color. Look, I think it is still wise to be cautious about the consumer. I think you're seeing that across industries. I mean, there's been choppiness not just in our industry, but in others. Interestingly, it is a little bit a tale of two cities. We see choppiness in some areas. As we said, we've seen retail kind of steady out, not yet quite recover, but seem to have found a baseline at least for our business. But with, I would say, we're sort of where we thought we would be, not quite where we hoped is the way I think about it. And so we're sort of in line with what we had forecast maybe a bit weak certainly on the China front, but better on the single-family new construction front. But with that, I think it still is wise to be cautious, particularly as we go through the third quarter and await for this ramp up in the connected products I was talking about. That said, I do think that the consumer is very sensitive from a confidence perspective to news around inflation and rates. And I do think as that improves, we do see proof points that they were done very quickly as they did in the beginning of the year to that kind of news and information. And so to me, I would look for that to start to see a bit of an inflection around the recovery.

And, Sue, let me provide some context regarding the second half, as some of the timing might differ from your typical expectations while these opportunities ramp up, and there are some comparison dynamics to consider. In the second half, I anticipate third-quarter sales to decline by about 2.5%, followed by fourth-quarter sales growth of 3%, with approximately 200 basis points attributed to connected products. The third quarter appears to be similar to the second quarter, as Nick mentioned, and for the fourth quarter, the growth from connected products is supported by ongoing single-family new construction completions, which have been behind the starts, resulting in a soft comparison for new construction. We also have some previously awarded product placements scheduled for the fourth quarter across the business. There are strong reasons to be confident in this sales projection as we progress through the period. Additionally, in terms of operating margin, we expect it to be higher in the fourth quarter, likely around 18.5%, compared to approximately 17.5% in the third quarter.

Okay. That's very helpful. Thank you both and good luck with everything.

Thanks.

Thank you.

The next question is from Adam Baumgarten from Zelman & Associates. Please go ahead.

Hey, guys. A quick question on security, really strong margins in the quarter, but it looks like based on the full-year guide, maybe those are stepping down a bit in the second half. Maybe if you could walk through some of the dynamics there?

Yes, Adam, as we've talked about, really strong margins, especially organically in security. We've replatformed the cost basis there in that business, and we're starting to see those results, which we expected. With Yale and August included in that, there will be periods of reinvestment back into that business. We'll also reinvest back into Master Locking. So you may see some periods of just margin volatility that will signal as we make some of those bigger investments back into the brands and to drive the product.

Okay. Got it.

The only thing I would add, Adam, about that margin journey is huge progress, obviously, on the organic margin and the cost base of the business. Of course, we like profitability, but really, we believe that this business will be a growth platform and you can invest behind a profitable growth platform. So the motivation, the strong motivation of the team to get it to the point where we're not getting it is so that we can start to invest in this connected and commercial journey that we see while driving margin improvement for the business and investors but really create the fuel to drive top line as well.

Okay. Got it. Can you share where you see the biggest near-term opportunity within the three pillars of the Flo business over the next year or two?

Yes. I would say it's really in that insurance pillar. I think the consumer is coming along even quicker than I might have expected at the growth rate that I was describing. But there is such a huge opportunity in insurance. And if you talk to property insurers today, it's a little bit of the same path as health insurers started down the path a few years ago. They are no longer just risk pricers. They really do need to mitigate downstream risk and take cost out of the system in order to offset the cost of insurance. I mean I think since 2021, the average US homeowners insurance is up about 30%. I think it's 27%. So there is a need to find ways to take cost out. We have a product that takes $15 billion plus of annualized cost close to zero. And so I think you'll start to see that be the fastest and largest driver as insurers start to gain confidence in this as a proposition and move towards mandating it just as they might fire suppression or alarm system in your house.

And Adam, I would just add, as I think about it simply, the insurance opportunity is really about two things. One, being able to offset unknown risk from storms, fires, et cetera, with known risk reduction, which is preventable water damage. And then two, lowering the affordability of homes, as Nick mentioned, because now you're able to price risk better to homeowners and consumers and one offer them insurance and two offer them insurance at a better rate, which helps overall affordability. So we're excited about the early progress here and where this is going to go.

Great. Good to hear. Thank you, guys. Best of luck.

Thank you.

The next question is from Matthew Bouley from Barclays. Please go ahead.

Good evening, everyone. Thank you for taking the questions. I wanted to touch on the US single-family new construction end market. It looked like, of course, you raised your guidance for the year just for that particular end market. Obviously, if you look kind of high level, there's been a little more chop in starts and new home sales and homebuilder order results. So maybe it's a little bit of timing difference going on, but I'm curious if you can kind of unpack that a little bit. What exactly are you seeing in single-family new construction and kind of what gives you the confidence there to increase the guidance for the year? Thank you.

Hey, Matt. Yes, you're correct to point out the original guidance through this segment up 5% to 7%, and now we see it up 8% to 10%. And I'd remind you, when we speak to the market, we're speaking to the market for our products and when we anticipate them being consumed. And so here in this segment, we do have a lag typically from a start to when our product is consumed and for water, for instance, it's closer to a completion for doors that comes more in the middle. And so as we look at it, first half starts were up 17%, completes were only up 1%. And while it seems like the builder orders to your point, maybe softened a bit. There's still some growth and then we have that tailwind of starts and completion gap to take us through the second half. And so that's really what gives us confidence in this segment continuing to perform through 2024 and beyond.

Got it. All right. Cool. Thank you, David. Secondly, I think you made a comment at the top around sort of confidence in the ability to hit margin guidance. I believe you mentioned some productivity come in both Outdoors and Water. So as we kind of think about the second half, I heard you loud and clear that you'll have some of that kind of margin accretive sales coming with the connected products as well. But as we kind of think about the sequential improvement in margins in the second half and water margins implied to be above 24%. And same question kind of unpack that and what specifically are you expecting on the productivity side that could support that margin ramp? Thank you.

We have strong clarity regarding our balance sheet. Our plants are operating effectively, and we anticipate favorable costs impacting our profit and loss statements in the latter half of the year. This will be evident in both our Outdoor and Water segments. Additionally, we are benefiting from a positive product mix. As we experience digital growth and introduce new innovations that enhance margins, we will see this reflected in the second half. We are also focused on carefully managing our costs until we observe a broader recovery in volume. While we have identified areas of growth, we will continue to manage costs tightly until we see a more widespread improvement. Collectively, these factors give us confidence in our margin growth for the second half of the year.

All right. Thanks, Dave. Good luck, guys.

Thank you.

The next question is from Michael Rehaut from JPMorgan. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. First, I know it's a multiyear ramp and we've discussed a lot about digital and connected. I would like to get a bit more detailed if possible, recognizing that there are many opportunities in the coming years. As you begin to consider some of these initial deals and the strategy becomes clearer, I was hoping to get an idea of, across Water Innovation and Security, what percentage you currently consider digital or connected of your sales. I think you mentioned a 20% figure for security. More importantly, as we look at the sales growth contributions in '25 and '26, what kind of above-market increase might we anticipate as these different products, like Flo, insurance, and lockout tagout, gain traction in the security sector?

Hey, Mike. It's Dave. As we evaluate the current size of this business and its future trajectory, I think a useful reference point for our expectations in the third quarter is that we are now anticipating annualized sales exceeding $300 million. This marks an increase from our previous estimate of approaching $250 million, indicating a significant step change in growth. This will be a key metric for us to monitor since the pace of change makes it challenging to provide a retrospective view. It's more about the current quarter's performance and our outlook moving forward. Looking ahead to 2025 and 2026, we expect growth to be around 150 basis points in the latter half of the year, reflecting the early stages of our initiatives. Our team has identified a comprehensive list of opportunities, and the pipeline remains strong and active, which we anticipate will lead to continued acceleration. As we strive for sustained above-market growth, I believe this is just the beginning of what we aim to accomplish over the next two years.

Great. This is obviously really interesting and presents a significant opportunity over the coming years. I'm eager to learn more about that. Secondly, I would like to discuss some of the changes in guidance by segment. Could you elaborate on the factors contributing to the improved margin outlook for Outdoors, as well as the reduced outlook for security sales? It seems that the decline is more tied to acquisitions than to organic growth. I also noticed that this quarter fell a bit short of our top-line estimates. I'm trying to understand the key drivers behind the improved margin outlook for Outdoors and whether that can be sustained as a new baseline for the company moving into next year, along with the reasons behind the volatility in acquired sales in security this year.

Yes, happy to. So on Outdoors, I'd say two things. So one, we took the sales up a little bit and that business is the most vertically integrated. We'll have some additional volume leverage coming through. And then, as I mentioned, the plants have been performing well, especially within our doors business, and so it's driving some favorable lower cost inventory that's on the balance sheet coming through the P&L as we sell through the back half of the year. So we have good visibility to both of those things that will drive margin. And then on security, the sales adjustment down is really POS driven, I'd say, predominantly through the first half performance. And importantly, as we looked at our trends late into June up until the call, we've seen POS recover across that business and kind of gives us confidence in our full year outlook there for security. So it's really first half softness in Master Lock.

And I'll just add a couple of things to round out your question. With respect to Outdoors, as we said at our Investor Day, and I'm going back a little while, I mean, this was part of the margin improvement journey as we thought about the footprint and making that business more efficient. And so absolutely expect this you know total straight line every quarter, but do expect that we are continually moving this business towards the endpoint that we communicated, and it's tracking really well. And then just on the security side, as Dave said, kind of a pure retail e-com part of Master Lock is where we saw some POS softness and as Dave alluded to improved towards the end of Q2 and into July. So that, it was good to see that improvement. And then the acquired business actually performed pretty well. What we've learned about it as we've gone through time is it's sort of a very big deal, a big deal on top of POS. And so you'll lap some big deals at times. In which case, it may feel like it's pulling back and then you're signing big deals at other times. And so I think we had some last year, but at the same time, we just announced that ADT deal. Those sales aren't really yet pulling through. And so that would be an accelerant. As the business grows, it will get a lot smoother because it will be less dependent on some big partnerships that we announced from time to time.

Great. Thank you.

The next question is from Phil Ng of Jefferies. Please go ahead.

Hey, guys. Mid-single-digit organic growth in Moen North America is actually really impressive. Any color on the split between volume versus price? And do you actually see that business accelerating in the back half? Because there is a decent portion of single-family. It seems like you're expecting that to kind of firm up. And then on the flip side, China was obviously weaker than we all would have hoped. Are you starting to see that business bottom out? I just wanted some color in terms of intra-quarter trends and how you think about the back half of the year?

Yes. Let me address your question about Moen first, and then I'll have Nick discuss the broader situation in China. We experienced both volume and price growth in Moen North America during the quarter, which is encouraging. As mentioned in our prepared remarks, we observed growth across all channels in Moen North America. Given the increase in single-family new construction and the progress with Flo, we anticipate this growth will continue in the second half of the year, which is positive. Now, I'll turn it over to Nick for an overview of China, and then I can provide some additional context on that.

Yes and I'll just before jumping on just comment on a broader thing which I think is actually what you're picking up is really important. That growth in Moen North America and you had that growth in Outdoors. And so we were very pleased to see strong in this market, strong top line performance from these two key engines in our business in the key markets, right? I think that was a big takeaway from us, particularly, as you pull China out, you've got to see that very clearly like the course doing really well. In China, there were really two things at work one, just as a reminder, this time last year, there were a lot, the government pushed to complete a lot of projects that have been sitting kind of in mid-completion mode. And so you had that last, but the Chinese consumer, and you've seen this across the industries and segments is very, very cautious. And I think there's some work to do some Bank of China announcements this morning about interest rate easing. There is some work to do in that economy. I think there comes a point at which it definitely does turn and becomes much more of an R&R focused market and then provide nice growth optionality. It also provides some very nice innovation for the broader portfolio just being that close to some very innovative consumer approach to the market. And so a nice pipeline there. But the one headline that I leave you with before I just give it to Dave is that as this business has come down from its peak and the China housing market has come down from its peak. The team has done a fabulous job in managing profitability and managing the size and there's really resized and replatformed the business. It's gotten to the point now where I'll offer to bottom out and provide some growth. Should it not, it actually isn't really that material anymore to the portfolio. I think in many ways kind of the worse is behind us just given its size now.

In comparison to the rest of our portfolio, this business is smaller than our digital and connected operations. The House of Rohl business is more than twice its size and has less impact overall. As we replatform and the market recovers, we anticipate growth in the future. From a margin perspective, it remains profitable, though its operating margin has decreased from high teens to mid to high single digits. The team is actively working on cost reduction, but this segment is much smaller and less significant within the overall portfolio, and we see other opportunities for growth moving forward.

That's a great perspective. Dave, you mentioned being fairly confident about addressing inflation for Water Innovation this year. However, we are seeing higher metal prices and increased costs for ocean freight and containers. As we look towards 2025, do you plan to implement price increases, and do you still have enough strategies to improve margins? Additionally, with potential changes in administration and discussions around tariffs, how does your current setup compare to 2018 and 2019 in terms of exposure to China? What strategies do you foresee to manage this moving forward?

I'll just make a quick comment on the pricing part, maybe philosophically on the supply chain part and Dave can break it out. Just philosophically, on pricing, we've invested very heavily in category management capabilities that really allow us to understand better how to manage our categories as category leaders and where to meet the consumers. And those insights have led to a very different set of pricing discussions with customers where it really is about driving profitable growth for everybody in the category. And as a consequence of that, we've really turned our businesses that we take price every year. We may moderate, how much or how little we take, but we are in an annual price-taking cadence. I think it's very important to regularly exercise that muscle. Sometimes we may go back, sometimes we may give a little bit here, but net-net, we're taking price and we will continue to do so and just do it consistently and do it in smallish increments where you're not shocking the market because you haven't done it in a long while and you get caught out, you just do it regularly and you do in a good cadence and you maintain a lot of predictability in the market, and we feel very strongly about that. So with that I'll let Dave dimensionalize it.

Yes. I think Nick expressed it well. At this point, we anticipate being able to meet our expectations for 2025 through both internal productivity and incremental pricing. As Nick mentioned, we aim to adjust our prices every year due to our strengths in category management, brand recognition, and innovation. In looking at the latter half of the year, considering the length of our supply chains and our supplier agreements, we foresee minimal impact from the changes that occurred in the second quarter. It's also encouraging to see that at the beginning of the third quarter, metal prices have decreased somewhat, which should further alleviate the impact on 2025. Nick, do you want to address tariffs?

Okay. Just very generally because I would say, look, I think that would be important to just dimensionalize a little bit how our supply chain change and it has changed quite a bit. But we don't invite it. It would be a minimal amount of work if it's been in the past. I'll just remind you even going back to the days, we had a chemist, so there's been plywood tariffs, border tariffs, COVID shutdowns. Our supply chain team has excelled at outperforming the market. And while we don't invite these types of things, it's an enormous amount of work. We tend to accelerate our share gain every time it happens. And even quite recently in some very large customer discussions, our customers have demonstrated their supply chain team just even now how we are outperforming the general market in terms of our ability to deliver on time in full and be very consistent. And so I think we're certainly prepared and we're continuing to prepare ourselves no matter what the results of the election is. I think there's quite a likelihood that we may see some incremental tariffs. But with our first the fairly heavy North American supply chain, I think, are very well equipped with the capability of the team will probably come up even stronger.

If you examine the financials, less than 20% of our material spending is now from China, which is a significant reduction from over 50% in 2017. The team has done a lot of work to position us well and continue that effort despite ongoing tariffs. For components that are still sourced from China, we have dual sourcing in place. Although switching sources might incur higher costs due to incremental tariffs, the advantages of the new source outweigh those costs. We believe we are well-prepared, and the team has diligently worked to ready ourselves for any challenges ahead.

Okay. That's great color guys. Appreciate it.

The next question is from John Lovallo from UBS. Please go ahead.

Hi, everyone. Thank you for answering my questions. My first question is about the trends in fiber. I believe you mentioned an increase in low single-digit points driven by wholesale. I'm curious to know how that trend evolved throughout the quarter and what the exit rate looked like.

John, I think that's pretty consistent through the quarter. So we didn't see much volatility as we would have expected given it's the season for deck building.

Got it. Okay. And then if we just think bigger picture as we move out into next year, I mean, R&R has had a couple of years of being down I know you don't have a crystal ball, but how are you kind of thinking about the kind of the slope of the recovery in repair and remodel spending as we move into next year?

Yes. When we look at the typical factors we consider for forecasting repair and remodel spending, such as consumer confidence, unemployment rates, home equity levels, and current home sales, there are still important insights to gather in the latter half of the year regarding consumer behavior, especially following the election and potential interest rate changes. We'll keep monitoring these elements and will update our perspective for 2025 as the situation evolves.

Just to add something I think about a fair amount as we think about the $33 trillion of home equity. The home equity extraction rate is half of what it was in 2021. And I think that has been a factor of rates since we've just seen fewer people tapping that home equity to go and do things, and I would suspect as rates start to come down and either the HELOC or refi markets start to open back up and that makes more sense for people and that delta might be less large between existing mortgage rates and what they could get. If we see that extraction rates start to even get back up towards its historical average, there would just be more cash available for people to do projects.

Okay. Thanks, guys.

This concludes the question-and-answer session. Thank you for joining today's conference call. You may now disconnect.