Fortune Brands Innovations, Inc. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen. My name is Morgan, and I will be your conference operator today. I'd like to welcome you to the Fortune Brands Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Following the speakers' remarks, we will open the call for a question-and-answer session. At this time, I'd like to turn the call over to Leigh Avsec, Vice President of Investor Relations and Corporate Affairs. Leigh, please go ahead.

Good afternoon, everyone, and welcome to the Fortune Brands Innovations third quarter 2024 earnings call. Hopefully, everyone has had a chance to review the earnings release and our supplemental financials. The earnings release and the audio replay of this call can be found in the Investors section of our website. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for reconciliations. With me on the call today are Nick Fink, our Chief Executive Officer; and Dave Barry, our Chief Financial Officer. Following the prepared remarks, we have allowed time to address some questions. I will now turn the call over to Nick. Nick?

Thank you, Leigh, and thanks to everyone for joining us today. On this call, I will walk through the highlights of our third 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 more detailed discussion of our financial results, our updates to our guidance for the remainder of 2024 as well as some thoughts on our emerging expectations for 2025. Before turning to our third quarter performance, I would like to provide some context around our market. While we are increasingly excited about the long-term opportunities in our space and for our company, we continue to operate in a choppy environment with continuous year-over-year U.S. repair and remodel declines and unprecedented market disruption in China. Our seasoned team is managing our business tightly while continuing to prioritize investments in our strategic growth priorities, including our digital transformation. We have purposely moved away from less profitable categories to focus our resources on our supercharged higher-margin opportunities. We continue to streamline our operating model, which has allowed us to operate more efficiently, reduce SG&A and fuel growth. While our short-term results remain pressured in a demand-challenged environment, we are already seeing tangible results from the strategic actions and investments undertaken to advance our longer-term growth opportunities. As in Q2, we saw areas of sales strength in our core North American Moen and Therma-Tru businesses. Our digital products portfolio once again saw some very exciting wins this past quarter and the organization continues to ramp our sales pipeline. Finally, as we approach the two-year anniversary of our new operating model, we are working as a more aligned and efficient organization, including developing new marketing campaigns, launching new products faster and building a new company purpose. This new purpose, which better captures the ambition of Fortune Brands Innovations will help unify and motivate all 11,000 associates across the globe behind our unique opportunity. Net sales were $1.2 billion in the quarter, down 8%. Excluding China, which was again impacted by lower sales as the Chinese consumer remained very cautious. Our organic sales were down 5% in the quarter. Importantly, point-of-sale, excluding China, was down low-single-digits. We have now annualized the sales of Emtek, Yale and August into our organic results. When you're following this transaction, we remain very pleased with their performance as well as how they have helped accelerate our transformation into a digital disruptive company and luxury goods powerhouse. We are fortunate for the exceptional talent that we acquired along with these brands. In the third quarter, we continued our trend of delivering strong margin results. Our operating margin in the quarter was 18.7%, up 130 basis points versus the third quarter of 2023. Our strong margin performance resulted from continuous improvement initiatives, targeted cost reduction activities as well as our continued focus on growing more profitable categories. These initiatives enabled us to continue to make key investments in the quarter. Our third quarter earnings per share were $1.16 and our operating income was $216 million. Turning first to our digital portfolio. We have made excellent progress with our Flo strategy. We have now signed seven insurance contracts. These agreements feed our opportunity pipeline, creating leads, which we then convert into sales. In the third quarter alone, we added around 20,000 users of our Flo Smart Water Monitor and Shutoff. In retail and e-commerce, POS performance was up 80% versus the third quarter of 2023, exceeding our expectations as consumers increasingly gain awareness of the incredible value of our Flo device. We expect our Flo business to grow nicely in the fourth quarter of 2024 and expect this growth to accelerate into 2025. We currently have agreements in place covering approximately 8 million policyholders and are in active discussions with homeowner insurance companies representing around 60 million homeowners. We are also having continued conversations with municipalities and water utility companies across the country, including our recently announced partnership with Miami-Dade County. To give a sense of the amount of sales we have coming down the pipeline, at a conservative 5% sales conversion assumption of the insurance agreements that we currently have under contract. The potential sales pipeline we currently have for Flo is over $160 million. While the timing of this backlog is hard to predict, we reasonably expect to see these sales soon. The significant progress we've made in just a few short months to expand the reach of our smart leak detection is truly impressive. This past quarter, we again had some key wins in our digital product space and saw over 225,000 new device activations in the third quarter between both Water and Security. And now have approximately 4.5 million users across our digital platforms. This continued acceleration gives us confidence in the strong future of Fortune Brands as a digital leader. In addition to the several large insurance partnerships with Flo, our Yale and August businesses made progress with some key customers, including integrations with ADT, ecobee and Airbnb. In addition, we are excited that our new most connected lockout/tagout solution is now in beta testing at several facilities. More to come on this, which we believe will be the next big breakout opportunity. While our digital product journey is well on its way, we have much more runway ahead as we are still learning the best and most efficient ways to get our products to our customers and partners. Expect more from us as we continue to evolve this growth engine. As we stated last quarter, we see a path for well over $1 billion in digital sales by 2030. Turning now to some thoughts on the current U.S. housing market and the market for our products. The external macro environment continues to be uneven and challenging. While the Fed lowered interest rates earlier this quarter, mortgage rates remain elevated above 6%, and many homebuyers and homeowners remain on the sidelines. Repair and remodel data has generally stabilized relative to larger declines over the prior 12 months, albeit at a lower than historical rate as consumers remain cautious. Notwithstanding the recent market softness, we continue to be very excited about our future, including in 2025. Housing fundamentals remain positive with the need for housing remaining strong, home prices holding steady and equity levels exceeding $35 trillion. As we continue to evolve our portfolio and focus on our supercharged categories and as we continue to build upon our already strong brands and introduce meaningful innovations, we expect that our products will further distinguish themselves. With regards to the single-family new construction market, large builders continue to remain resilient as they use their balance sheets to lower mortgage rates and to help get people into new homes. We expect that large homebuilders will continue to gain share, and we have the added torque of the exposure to their growth. While starts were down this summer, the home builder market is continuing to grow. In September, the single-family NAHB housing market index for sales expectations for the next six months were up 8% versus prior year, while builder sentiment was also improving. Turning to repair and remodel. R&R is driven by several factors, including consumer confidence, employment levels, home equity levels and access to credit. Our R&R has been down over the last two years. We believe this has created unprecedented levels of pent-up demand with one recent estimate putting it at $30 billion. As we previously mentioned, Americans have more than $35 trillion in home equity, up 81% from the end of 2019. However, the usage of equity extraction vehicles, like home equity loans and cash out refinancing has fallen as rates remain high. In fact, the percentage of extracted home equity followed by more than half since the fourth quarter of 2019. It is now estimated that over 14% of homeowners have mortgages above 6%, finally making refinancing a sensible option. In addition, as the federal prime rate comes down next year, HELOCs and credit card rates should be more attractive and we would expect more people to utilize them to finance their R&R projects. As interest rates decline and there's more luck in effect subsides, we believe people will increasingly tap into their home equity for renovation projects through a variety of vehicles, including refinancing, HELOCs, key loans and home equity agreements. Finally, we expect that there will be a short-term negative impact from the recent hurricanes on our fourth quarter sales, as we have seen this in our point-of-sale data. Our thoughts are with those impacted, and we have been providing products and assistance to those in need. We expect that there will be opportunities as communities rebuild in 2025, and our teams are working actively to capture. Additionally, these tragedies have put additional pressures on insurance companies to find innovative solutions to offset the losses that they can control through devices like Flo. As Dave will detail more completely in his section, we are actively planning for a variety of outcomes in 2025. We believe the demand environment in the U.S. will inflect positively, with the recovery more weighted to the second half of the year. Additionally, as we complete our pivot from lower growth, less profitable categories to supercharged categories, our mix will help accelerate growth regardless of the external conditions. We will focus on growing our core and accelerating our digital products, and we'll continue to invest behind our long-term growth priorities. As we head toward the end of 2024 and set our sights on 2025, we are focused on execution and delivering on our commitment to above market sales growth and margin performance. Turning now to an update on a key part of our transformation. As we approach the two-year anniversary of the cabinet spin-off and the reorganization of our business from a decentralized mechanical-only business into a digital innovator. I wanted to highlight a key milestone. Over the past nine months, we leveraged associate feedback and senior leader conversations to develop a new purpose statement with supporting strategic drivers, and behaviors. This new purpose captures the unique opportunities Fortune Brands Innovations has to positively impact lives and communities. Our purpose is to elevate every life by transforming spaces into havens. This represents a bold, multi-decade vision for the company where through our products, we can impact the lives of our customers, our associates and our communities. We will bring our purpose to life by executing upon a specific set of behaviors and strategic drivers. Grounding our business in an authentic, clearly articulated purpose, unique set of strategic drivers and expected behaviors will help unlock higher levels of innovation, increased employee engagement and retention and transformative growth. Teams across the globe made a unified effort to ensure that every one of our 11,000 associates had an opportunity to discuss our purpose, behaviors and drivers, helping to underscore each associate's connection to how they can make an impact. As the market improves, the work that we have done to enhance our already strong culture will accelerate our opportunities for growth. We've continued to refine the organization, including recently reducing inefficiencies while continuing to invest in key strategic priorities. A more efficient structure has allowed us to make strategic decisions faster and with more precision and deploy our Fortune Brands advantage capabilities across the portfolio. As we have often noted, this is a multi-year journey, but one which is already showing concrete results.

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 third quarter results. As Nick highlighted, our results reflect our focused execution on a tight set of priorities amidst a challenging external market. Sales were $1.2 billion, down 8%. And excluding the impact of China, organic sales were down 5%. Consolidated operating income was $216 million, down 2%. Total company operating margin improved to 18.7% and earnings per share were $1.16, down 3%. Free cash flow in the quarter was $176 million, which brings our year-to-date free cash flow generation to $262 million. Turning to sales. Net sales results were driven by China softness, low single-digit POS declines and inventory reductions in outdoors and security. Our operating margin of 18.7%, a 130 basis point improvement reflects our team's focus on a narrower set of priorities and our ability to drive continuous improvement savings, offset by our investment in our strategic initiatives which we are confident will result in growth as the end markets improve. Our teams execution resulted in decremental operating leverage of 4% in a sales environment that was softer than expected. As I will detail later, our balance sheet remains strong, and we have the flexibility to manage various economic outcomes while deploying additional capital to drive shareholder value.

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.

Thank you for taking my questions. There's a lot of information here, so I'm hoping you can help us clarify some of it. Starting with the consolidated sales growth for the full year, I noticed it was lowered from a positive range of 2.5 to 4.5 to a flat to plus 1. Additionally, the organic sales outlook was adjusted from down 1 to down 3, now revised to down 1.5 to down 3.5, with these downward changes across segments. In the third quarter, it appears the results fell short of expectations across the board, indicating that the operating environment has become more challenging. Could you help us understand the various factors at play during the quarter and in your outlook? Specifically, how much of the decline is due to a softer third quarter compared to an anticipated slowdown in the fourth quarter or impacts from storms?

Hi, John, this is Nick. I'll try to break it down for you. So if I think about it, sales reported an outlook or organic, excluding China because that's all of the thing was down 5. Within that point-of-sale, excluding China was down low-single-digits. So you start to dial it in a little bit. And certainly, I take it was weaker in the quarter than we thought they were, particularly in the middle of the summer, July or August. It was particularly slow. I think we saw it across consumer company, saw some recovery towards the end of the quarter. But if I look at our performance in particular, I really see three things at play. One, we've deliberately pivoted away from some of the low-margin and commoditized business in favor of focusing on our supercharged categories. And while we did that, we work and did exceed our own expectations on the digital side, but we need to convert those contracts to revenue faster. And to do that, we need to rate capacity even faster than we thought. And that's just a question of throughput. We've signed a deal. They're in the pipeline but it's a space we're learning. And just like mechanic products, you've got to go build the factory in order to produce it, and we realize we need to ramp that capacity faster than we thought. And so those are in the pipeline that didn't materialize in the reported results for the quarter. And then the third thing I would call out that is a marketplace dynamic is we are seeing some trade down to knock off in poster rates, not so much a regular private label, which you'd expect to bring generally important brands making false claims about safety and performance that we're going to come back and as described, we're already doing some of that. We have some of that in play. We've got more of it in the pipeline. But where we've done it, we're already seeing the point-of-sale start to reaccelerate as we do a better job, explains our consumers what the difference is and what the brand premium is worth. And so that sort of leaves me confident as I kind of pull it all together, that while it was a bit softer, and we also had some stuff moving away from us, while a lot of good news coming our way, we just need to listen to the sales even faster.

Yes, and John, I'd add a couple of things and I'll unpack guidance a little bit. But before I do that, what's also evident is the team's focus on margin. And as we re-platformed the business and stepped away from some of the lower-margin categories where brands and innovation don't matter as much. You see that even though sales were softer, we're delivering very strong margin results 4% decremental in a quarter that was softer than we anticipated up 130 basis points in operating margin year-over-year and 110 year-to-date. So the margin is still coming through the story we expect to continue. And then on the guidance, you're right to point out the consolidated change. I'd say that's roughly 3 percentage points lower for the year at the midpoint, which call it $135 million or so, 80 of that came through in the third quarter, which leaves about 55 then in the fourth. And of that in the fourth, about half is hurricane related, about half is continued consumer POS softness that we're working to combat. That said, as we look at the fourth quarter, it still leaves us in a spot where sales are down low-single-digits. We have operating margin improvement of 100 basis points, maybe a bit better than that and high single to low-double-digit EPS. And so EPS growth. And so while not as good as we may have thought 30 days ago, still a pretty good quarter, just not as robust from the consumer, and we were hoping heading in the back half of the year.

That's helpful. Now, regarding margin improvements, outdoor sales were down 6.5% year-over-year, but margins increased by over 300 basis points. Security sales decreased by 14%, yet operating margins improved by 250 basis points. Even on a sequential basis, sales declined while margins increased. What factors contributed to the margin strength in these two segments, both sequentially and year-over-year?

Yes, in outdoor is a combination of doors, Therma-Tru door volumes being better year-over-year and volume even in Larson and being better year-over-year. And then in decking, some of the work we've done to shed some of the lower profitable business that we had. And we've talked about in the past, we exited window supply agreement for window components. We've looked hard at our kind of sourcing and manufacturing around PE and PVC decking to make sure we're driving continuous improvement productivity there. And so a lot of internal initiatives to really drive the margin in outdoors plus some volume coming through on the door side. And then in security, we talked about the actions we took earlier this year to drive the cost savings by altering our footprint. I mean that's really coming through now. And we'd expect that to continue to be a tailwind into 2025. And to Nick's point, this is an area where we are investing back in the business. We're investing in innovation that will come to market next year. We're investing in marketing campaigns for the first time in a while for these brands that will come to market now and into next year and it's all really to combat some challenges on the shelf from the import brand.

Hey guys, Dave, thanks for giving us a framework for '25. I fully appreciate that guidance per se. Frankly, I thought the back half '24 is not that bad. I mean if you flush out some noise, it sounds like organic sales are down low-single-digits, 1% or so. So when we kind of look at the '25 you said slight growth in the market and usually grow a little faster than the market by a few points, are we kind of talking about, low to mid-single-digit organic growth and little more muted in the first half and you see better growth? And then help us kind of think through the levers you have at play in terms of the margin side of things for next year as well.

Yes. It's a great question. It's tough for us to pinpoint right now and still a lot of uncertainty. When you've seen what happened with bond markets over the past month that's going to lead to higher mortgage rates on the flip side. We expect the prime rate to continue to come down, which is going to lead to some affordability benefits around refinances and HELOCs and home equity loans and just everyday borrowing. So it's tough for us to say. I would say we see the outperformance really driven in two areas. So one, improving core category POS based on the actions that we're taking now. And then two, as we talked about conversion of the connected pipeline into sale. And so I would expect our outperformance to accelerate through the year as both of those things come through the P&L, but hard to say kind of what that level is based on the underlying market in this place.

Thank you for addressing my questions. I want to clarify the terminology regarding Flo. When you mention the pipeline and the $160 million in sales with an assumed 5% conversion rate, are you referring to the actual agreements currently in place, or is this still an estimate based on the number of insurance policies you currently have coverage for?

Yes. I'll elaborate a bit. I would say broadly that the $160 million estimate is based on three main types of agreements. First, there are agreements where the product is recommended and offered. Second, there are agreements that include a rebate. Lastly, there are mandated agreements where insurers require policyholders to include the product or risk losing their insurance coverage. However, even with mandated agreements, there is a transition period for homeowners to comply. Those are the three types of contracts we are currently executing in the market. To reach the $160 million figure, we based it on a near 5% conversion rate from the contracts we've already signed. I should mention that we anticipate a much higher conversion rate with the mandated contracts, ideally close to 100% minus any policyholders who might opt out. It’s challenging for policyholders to switch insurance providers, as there are significant barriers. In cases where the product is merely recommended, the conversion rate tends to be lower, and we consider the 5% figure to be very conservative, which is how we arrived at our current estimate for signed contracts.

That's really helpful, Nick. And if I could just point of clarification and then a second question, a point of clarification would be that 5%. Do you work with your partners on, hey, this is kind of when we've done other things for other parts of insurance policies where you're having to lock in, whether it's like alarm monitoring or whatever, like this is kind of the conversion rate we think about or what informs that? And then the second separate question just in the spirit of this week's events. Can you remind us, there's been a lot of moving pieces in your portfolio and your sourcing initiatives. What is your current cost of goods exposure to China? And then what's your total cost of goods exposure that's outside of the U.S. that brought onshore at this point?

In response to your first question, we utilize highly accurate models with insurers to assess the impact of savings. The figures can be quite significant when you multiply them by the number of policies. Additionally, we then establish an expected conversion rate in relation to the supply chain, and our conservative assumption sits at 5%, which is lower than what we actually prepare the supply chain for. Now, regarding the sourcing aspect, we've been focusing on optimizing the supply chain and managing tariffs since as far back as 2017. Our team has a wealth of experience in this field. One notable development is our improved ability to adapt our supply chain. We have nearly completely transitioned from single sourcing to having dual sources. Though the secondary source might be slightly more costly than the primary, it allows us to adjust if the primary becomes more expensive due to tariffs, ensuring efficiency in our operations. Furthermore, our extensive manufacturing presence in the U.S. is integral to our overall network strategy. I'm confident we are well-prepared for increasing tariffs. Although it’s challenging work, our market share tends to grow over time because we execute better than our competitors, and that’s where we prioritize our efforts. Lastly, our team has been diligently preparing for this situation, anticipating tariffs, and today’s environment may provide clarity on their extent and implications based on the network I’ve outlined.

Yes, looking back to 2018, we had over 50% of our cost of goods sold sourced from China, which is now down to less than 25%. The team has been actively working on reducing our reliance on China, and the aim is to minimize it even further. Currently, the U.S. accounts for approximately 40% to 50% of our cost structure. As a reminder, our outdoor segment is almost entirely based in the U.S., and the water segment also has a significant presence here, along with a portion of the security segment. This means a small portion of our business still relies on China, with the remainder coming from other regions, including North America. We are preparing for a scenario where tariffs from China are likely to increase, and the team is optimizing our network in response to that. We see this as an opportunity.

I just refer to the session we had around John's question. I'll just end on that third point. We have seen in the market bunch of import brands they claim to perform whether it be in security and fire safes, in water safety at levels that our own testing demonstrates they do not deliver that is something that you'll see us increasingly ramp up our communications around. Some of it is directly to people's while being in health and safety. I don't think that increased focus on some of that product that we've seen coming into the marketplace and that's really a good pathway.

Hey, good evening. Thank you for taking my questions. Nick, I wanted to follow-up on what you were just referring to with some of that non-compliant product competition. Can you just dive into that a bit further, talk about how big of an impact that had on the quarter? Is that something that you expect to linger here going forward? I know you talked about some initiatives that you're going through to mitigate some of that. But just any way you can size that for us would be helpful.

I'll provide a few examples to begin with. First, regarding the fire safes, we are marketing these products effectively. Our waterproof safes are especially crucial for consumers in high-risk fire zones. There are products in the market that claim similar performance, but our tests show that our safes can withstand a fire much better. Many imported brands fail within two minutes. We introduced collateral that is the first of its kind, backed by our investment in marketing, and we are already seeing a turnaround in point-of-sale metrics, gaining market share quickly—within weeks of activation. This reinforces our belief that when we communicate our value, consumers respond positively. We are also expanding our efforts to include areas like connected security, which we see as a significant opportunity. While the impact has not been enormous, we are positioned strategically to cater to customers who prefer premium brands. There are competitors who advertise misleadingly and claim similar benefits at lower prices, but they do not deliver on those claims. Our storytelling is reshaping our trajectory, and we are making the necessary investments to continue this effort, which will become more visible as we progress. Yes. Firstly I'd say your question is highly logical. You would think one is there in the bottom, just given how long it's going on, how much less of new construction there has been as well as the fact that the government does seem committed to creating that bottom and stimulating that marketplace. That said, I will say, after a couple of years in, we just feel like to comp think on that. The team here has done a fabulous job managing the cost structure and the P&L that is still a profitable business for us. And so the way we think about it as long as we can keep it. Isolated and manage it in that way. And frankly, when I look at the size of the profit pool today, it really could go to zero, and I wouldn't have a noticeable impact on the total company, it really is a market that should give us exposure to growth and grow returns and demographics on telling our growth has to return at some point. And also, it's a really nice innovation engine for the business. We have a great team there that is very, very close to a lot of great innovation in that service on the pipeline from the whole business. And so that's really with a lot of humility to the team over there have done a great job in how we're thinking about it and how we're managing it. When that bottom actually forms that would lose money making that prediction. So we'll just manage the type in the.

Yes, thanks very much guys. Appreciate all the color so far. I wanted to ask you in security, I think you had mentioned that POS was down mid-single digits, but you're guiding to sales down, I think high-single digits, if I'm not mistaken in the fourth quarter. I was just curious if you could sort of talk about that?

Yes, happy to the guide, implied sales down mid-to-high single digits in the fourth quarter, that's right. And I'd say it's continued consumer POS softness. And I said we are starting to see some of the trends churn based on the investments we made, but those investments came late third quarter into the beginning of the fourth quarter. And so not really to predict a complete turnaround yet on that POS trend. Yes, an outdoor is a combination of doors, Therma-Tru door volumes being better year-over-year and volume even in Larson and being better year-over-year. And then in decking, some of the work we've done to shed some of the lower profitable business that we had. And we've talked about in the past, we exited window supply agreement for window components. We've looked hard at our kind of sourcing and manufacturing around PE and PVC decking to make sure we're driving continuous improvement productivity there. And so a lot of internal initiatives to really drive the margin in outdoors plus some volume coming through on the door side. And then in security, we talked about the actions we took earlier this year to drive the cost savings by altering our footprint. I mean that's really coming through now. And we'd expect that to continue to be a tailwind into 2025. And to Nick's point, this is an area where we are investing back in the business. We're investing in innovation that will come to market next year. We're investing in marketing campaigns for the first time in a while for these brands that will come to market now and into next year and it's all really to combat some challenges on the shelf from the import brand.

Hey guys, Dave, thanks for giving us a framework for '25. I fully appreciate that guidance per se. Frankly, I thought the back half '24 is not that bad. I mean if you flush out some noise, it sounds like organic sales are down low-single-digits, 1% or so. So when we kind of look at the '25 you said slight growth in the market and usually grow a little faster than the market by a few points, are we kind of talking about, low to mid-single-digit organic growth and little more muted in the first half and you see better growth? And then help us kind of think through the levers you have at play in terms of the margin side of things for next year as well.

Yes, a great question. It's tough for us to pinpoint right now and still a lot of uncertainty. When you've seen what happened with bond markets over the past month that's going to lead to higher mortgage rates on the flip side. We expect the prime rate to continue to come down, which is going to lead to some affordability benefits around refinances and HELOCs and home equity loans and just everyday borrowing. So it's tough for us to say. I would say we see the outperformance really driven in two areas. So one, improving core category POS based on the actions that we're taking now. And then two, as we talked about conversion of the connected pipeline into sale. And so I would expect our outperformance to accelerate through the year as both of those things come through the P&L, but hard to say kind of what that level is based on the underlying market in this place.

Good afternoon everyone. Thanks for taking the questions. I think you made a comment in the prepared remarks around 2025 with that slightly positive market growth and that you would outgrow that. That in that scenario, you would see meaningful margin progress, I think I heard you say. And so given your outgrowth that maybe you're seeing a little bit of volume leverage. But I guess what are the other pieces of the bridge that might get us to meaningful margin progress? And how do you think about incremental margins in a scenario where the market would be slightly positive? Thank you.

I'll give you a bit of color and context, Matt, I'd say we see margin next year coming from a few areas, right? So productivity, we've had a very nice trajectory. SG&A efficiency as we continue to bring the businesses together that we're finding more SG&A efficiency and then mix, we expect to be favorable. I think price cost will probably be a slight benefit as well. The offset and why we're not being more specific right now is the level of investment back in the business. When we talk to guidance, we'll be clear about where and how we're reinvesting primarily around unlocking growth and setting it up for future growth opportunities. So that's the big offset lever right now. The teams are still working through. And Nick and I look at the decision to make how much are we going to invest back in and how quickly could we turn that into growth at the top line. Yes, the destocking, I think the channel loaded up for a season that was disappointing and so that came out. That was really primarily the driver of the destocking. On the POS side, we were down mid-single in the quarter. As we've looked over the past four weeks, it has improved from there from a POS standpoint, which gives us confidence that improving out of where we were in Q3.

Thank you for joining the Fortune Brands Third Quarter 2024 Earnings Conference Call. You may now disconnect. Have a wonderful rest of your day.