福腾创新 (FBIN) 2026年第三季度业绩电话会议：业绩指引与1.2亿美元扭亏计划

核心要点

• Fortune Brands Innovations公布2026财年第三季度销售额为11亿美元，同比下降3.1%。营业利润下降24.6%至1.56亿美元，营业利润率收窄390个基点至14.0%。
• 第三季度每股收益（EPS）为1.14美元，其中包括关税净退税带来的0.14美元收益，以及与公司欧洲法律实体重组相关的0.28美元净税收收益。
• 水业务销售额下降5.5%至5.84亿美元，营业利润率收窄680个基点至17.6%，反映出不利的价格/成本关系、销量去杠杆效应以及服务成本上升。
• 管理层下调了全年业绩预期，预计销售额为42.05亿至42.75亿美元，EPS为3.20至3.30美元。预计第四季度销售额为9.25亿至9.95亿美元，EPS为0.19至0.29美元。
• 公司预计，随着2027年的结束，其组织与投资组合调整举措将带来超过1.2亿美元的年度效益，其中包括到2027年第一季度实现7000万美元的年化销售及管理费用（SG&A）节省跑率。
• 管理层预计业绩改善将在2027年第四季度更加明显。其长期目标是在实现高于市场增速增长的同时，使基础EBITDA利润率超过20%。

核心财务数据

公司在第三季度确认了2900万美元的关税毛退税。扣除可变薪酬费用后，退税为营业利润贡献了1800万美元，为EPS贡献了0.14美元。管理层预计关税净退税将为全年EPS贡献约0.59美元。

业务与运营表现

水业务

水业务销售额下降5.5%至5.84亿美元。剔除中国市场后，销售额下降4.3%。业绩受到服务受限、零售需求软化以及9月份与新房建设相关的批发需求进一步疲软的影响，但部分被电子商务的增长所抵消。

营业利润下降31.8%至1.03亿美元。尽管关税净退税带来了135个基点的收益，利润率仍下降680个基点至17.6%。管理层将基础业绩的下滑归因于不利的价格/成本关系、固定成本摊薄减少以及客户服务成本上升。

在问答环节中，首席财务官（CFO）Peter Clifford估计，水业务利润率稀释的约一半来自价格/成本因素，约25%来自制造杠杆缺失，其余来自加班费和空运费等高额服务费用。管理层目前预计将在2027年第一季度末或第二季度初实现价格/成本的全面覆盖。

户外业务

户外业务销售额增长0.8%至3.47亿美元。剔除Fiberon后，得益于较轻松的渠道库存同比基数和更高的实现价格，销售额增长3.4%。主要在Therma-Tru品牌中与新房建设相关的批发需求较为疲软，限制了增长。

营业利润持平于5300万美元，而利润率下降20个基点至15.3%。销量下降以及原材料和运费成本上升被有利的产品组合部分抵消。Larson因铝成本上涨承受了巨大的利润率压力，管理层表示定价和其他举措正在实施中。

安防业务

安防业务销售额下降2.4%至1.82亿美元，主要是服务方面的挑战拖累了零售和电商表现。商业渠道需求以及耶鲁（Yale）在多家庭住宅客户中渗透率的提高提供了一定抵消。

营业利润增长16.9%至3900万美元，利润率提高350个基点至21.3%。关税净退税贡献了约715个基点，而较高的服务成本和SKU优化库存调整拉低了利润率。库存调整造成了约450个基点的负面影响。

本季度服务水平提升了10个百分点，进入第四季度时履约率达到了90%以上的高位区间。管理层下一步的优先事项是以更低成本维持这一水平。

投资组合与转型举措

Fortune Brands已签署协议，拟以1.6亿美元出售Fiberon，并预计交易将在年底前完成。出售收益拟用于偿还债务和业务再投资。

公司还将退出服务中国本土市场的商业运营，同时保留支持北美市场的制造、研发和采购能力。该重组预计将于2027年第三季度末前完成。

欧洲、中东及非洲地区（EMEA）的水业务将进行运营布局优化，目标是在2027年第四季度前完成。受影响的中国和EMEA业务合计在3.2亿至3.3亿美元的收入中产生了约5000万至5500万美元的年度营业亏损。

管理层还在逆转公司此前部分集权化做法。预计到年底，将有80%以上的受薪员工归属于具体业务部门，而2026年早些时候这一比例仅约为40%。产品开发资源正被直接重新分配给各业务单元，以加快产品上市并强化责任制。

管理层业绩指引

与此前指引相比，管理层将第四季度销售额的减少归因于：被出售或退出的业务影响约2000万美元，市场疲软（主要是单户住宅建设）影响2500万美元，以及渠道去库存影响5500万美元。对应的EPS影响分别为约0.08美元、0.11美元和0.12美元。

第四季度EPS预计还将吸收约0.14美元的投资组合优化和组织架构调整成本，管理层将其定性为主要属非经常性费用。与关税退税相关的可变薪酬预计将对第四季度EPS构成额外的0.07美元不利影响。

管理层预计2027年将是重建之年。投资组合变更、成本缩减、新产品发布及执行力提升带来的效益预计将在下半年日益显现，主要拐点设在2027年第四季度。

风险与关注事项

• 单户住宅新建在第三季度进一步走弱，客户在进入第四季度时变得更加保守。
• 零售修缮与改造需求保持稳定但依然疲软。
• 随着管理层寻求将库存降至接近2024年底的水平，渠道去库存将对近期销售额构成压力。
• 水业务面临更长周期的转型过程，原因在于定价执行差距、服务成本高企、销量去杠杆以及新房建设敞口。
• 在效益形成规模之前，退出中国市场和EMEA重组在2027年上半年可能仍会拖累业绩。
• 公司预计要到2027年下半年才能完全跨越所有预期的货架空间损失影响。
• 在节省资金达到最大跑率之前，产品优化、重组和服务改善可能会产生额外的近期成本。

分析师问答亮点

管理层表示，2027年保留的基础业务导致全年EPS指引下调了0.23美元。非核心业务（主要是中国业务和Fiberon）导致指引进一步下调了0.02美元。

在剔除中国业务、Fiberon及一次性项目后，Clifford将核心公司的营业利润率概括为约14%至15%，EBITDA利润率为17%至18%。该财务状况尚未包含计划中7000万美元SG&A节省的大部分收益、EMEA重组效益以及潜在的价格/成本修复。

管理层表示，安防与门业业务的改善速度可能快于水业务。新产品和更好的商业执行力可能在2027年下半年开始产生更明显的贡献，但产品开发、定价和SKU优化举措通常存在数月实施滞后期。

在资本分配方面，管理层的首要目标是将杠杆率降至2.5倍以下。长期杠杆率区间仍保持在2.0倍至2.5倍。增长与利润率扩张的内部投资是首要任务，其次是保持资产负债表弹性；管理层表示，近期的过剩资本可能会用于支持股份回购。

业绩电话会议完整文字记录

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完整财报电话会议逐字稿

管理层陈述

Operator

Greetings, and welcome to the Fortune Brands Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Curt Worthington, Vice President of Finance and Investor Relations. Please go ahead.

Curt Worthington

Good afternoon, everyone, and welcome to the Fortune Brands Innovations Third Quarter 2026 Earnings Call. Hopefully, everyone has had a chance to review our earnings release. The earnings release, earnings presentation and audio replay of this call can be found on the Investors section of our fbin.com website.

I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating profit or margin, earnings per share or free cash flow on today's call will focus on our results on a before charges and gains basis unless otherwise specified. Please visit our website for our reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

With me on the call today are Jesse Singh, our Chief Executive Officer; and Pete Clifford, our new Chief Financial Officer. Following our prepared remarks, we have allowed time to address questions.

With that, I will turn the call over to Jesse. Jesse?

Jesse Singh

Thank you, Curt, and good afternoon, everyone. I've now completed my first full quarter as CEO, and I'd like to thank the Fortune Brands team for their hard work through a period of significant change. Over the last 90 days, I've spent time with our customers and our teams digging into our execution challenges. While there is clearly work to do, what I've seen thus far has reinforced why I joined Fortune Brands.

We have exceptional core brands. Moen, House of Rohl, Therma-Tru, Larson, Master Lock and Yale are brands that consumers and pros know and trust with market positions built over decades that are extremely difficult to replicate. Because of our focus as a product-driven company, we have continued to maintain a strong portfolio of products, and each of our businesses has a robust downstream sales force and new product launches that are differentiated and well received by our customers. That is a strong foundation to build from.

I've also seen firsthand the level of engagement by the key decision-makers at our customers and channel partners. Our brands matter to their businesses and when we perform, they perform. Our customers have been clear about what they need from us: reliable service levels, closer collaboration, stronger marketing and accelerated product development. The good news is that achieving those expectations is within our control, and we have a path forward with customers and channel partners who are invested in the outcome.

I also see a clear opportunity to run each of our market-leading businesses better. Through our deep dives, we have identified growth, operational and portfolio actions that, as we execute them, will meaningfully improve our results.

Third quarter results, excluding tariff and tax benefits, were in line with our August outlook and mixed by business. In Water, our performance was impacted by our exposure to new construction, which softened further during the quarter. Outside of service challenges, our Outdoors & Security businesses have generally performed in line with the market.

In Outdoors, our Doors business continues to be resilient, and we expect Therma-Tru to benefit from the positive outcome of the recent antidumping case. While Therma-Tru continues to offset inflation through continuous improvement, margins have compressed, and we expect to take some pricing actions, balancing price and share. At Larson, higher aluminum and freight costs have driven significant commodity inflation, which has pressured our margins. We have actions underway to return to a more favorable price/cost position.

In Security, I'm encouraged by the traction of this year's new product launches, which continue to build momentum during the quarter. That momentum was partially offset by limited product availability in Yale as we prioritize service levels for our contracted business. As stated on our last earnings call, real long-term value creation will take time, and this will be a multiyear journey with milestones and progress along the way.

Over the coming quarters, we will continue to highlight key milestones and provide more specifics on our long-term strategy and growth profile. Today, I'll focus on where we are on this journey and how our recent actions will translate into our results in the future. Our back-to-business plan is designed to restore consistent performance and long-term shareholder value. A graphic describing the back-to-business plan has been included in our earnings presentation.

The plan is organized around 4 main pillars: establishing high-performing customer-focused business units, optimizing our portfolio across and within those business units, building a business-led sustainable growth engine and expanding margins while sustaining our growth investments. In our first pillar, we are unwinding much of the centralization of the last few years and realigning our functions to create more entrepreneurial business segments. We have had unnecessary complexity and inconsistency that has impacted our speed, our innovation and our ability to consistently deliver high-quality service to our customers.

Moving to a more focused organization will allow us to improve our execution and the productivity of our SG&A. By the end of this quarter, we will have completed the realignment of most of our salaried employees to be focused on specific business units. Earlier this year, roughly 40% of those employees were aligned to a specific business or a specific geography. By the end of this year, that number will be above 80%.

Key short-term milestone of these changes is to improve our service and responsiveness to our customers. Our supply chain team has brought back key people to help restore the institutional knowledge, systems know-how and product level expertise we lost during our headquarters consolidation. We are also rebuilding our sales and operations planning process and restoring safety stock to appropriate levels.

As we said last quarter, we expected some pressure on volumes and a higher cost to serve our customers in the near term as the team puts these actions into place. Service levels in the past quarter improved 10 percentage points with fill rates reaching the high 90s range entering Q4. While I am encouraged by this progress, our focus now is on consistently delivering those levels in a cost-effective manner.

We have also made changes to our leadership team to create greater focus and enable future growth. Dave Barry is now leading Moen as EVP and President, and Rachel Roberts has become Chief Commercial Officer for Moen. In our luxury portfolio, House of Rohl will continue to be led by Matt Zimmer, who now reports directly to me. We have also made changes across all of our businesses, including a new sales leader at Moen, a new General Manager for Doors and a strong executive added back to Security.

In addition, we recently announced the appointment of Peter DuBois as EVP and Chief Information Officer, bringing more than 25 years of technology and digital leadership experience. This morning, we also announced that Morgan Fox will be joining the organization as our Chief Legal Officer and Corporate Secretary. Morgan brings more than 20 years of legal experience, including 15 years in-house at publicly traded companies, including a recent role as GC of The AZEK Company.

Our second pillar is optimizing the portfolio across and within our business units, beginning with addressing underperforming businesses and geographies. On October 15, we announced that we had signed a purchase agreement to sell our Fiberon decking business for $160 million. This is a great outcome for Fortune Brands and for the Fiberon team. We expect the transaction to close before year-end, and we intend to utilize the proceeds to reduce net leverage and reinvest in the business.

We are also taking additional portfolio actions. We are restructuring our China business and will exit our commercial operations servicing the Chinese domestic market while maintaining manufacturing, R&D and sourcing functions that support our North American end markets. We expect this restructuring to be completed by the end of the third quarter of 2027.

We will also rationalize the EMEA operating footprint of a business within our Water segment, which is expected to be completed by the fourth quarter of 2027. We believe this action gives the business a more competitive cost structure and scalable capacity that can support expansion and profitable growth. We expect these portfolio actions to be earnings and margin accretive. On an annualized basis, these businesses generate a combined operating loss of approximately $50 million to $55 million on revenue of $320 million to $330 million. As we complete these actions, the business may experience some near-term headwinds through 2027, but we expect these initiatives to scale to a full run rate benefit by the end of next year.

Beyond these 3 actions, we will continue to optimize the portfolio for growth and profitability within our segments, including driving accretive growth from our connected businesses and addressing pockets in each business that are weighing on profitability and growth.

Our third pillar is building a business-led sustainable growth engine. This year, our focus is on stabilization. 2027 will be a rebuilding year in which we invest towards future growth. We are prioritizing the end markets and channels where we are underpenetrated, accelerating the development and launch of new products and improving our commercial sales and marketing performance. In general, across our company, we have a strong position in single-family new construction and are under-indexed in the more resilient R&R and commercial markets.

Our fourth pillar is expanding margins while sustaining our growth investments. Through our organizational realignment, we are on track to deliver an annualized run rate of $70 million in SG&A savings by the first quarter of 2027 and expect the recently announced portfolio actions to increasingly contribute as we move through the back half of 2027.

As a result, we expect the combined inflection to be fully visible in our results by Q4 2027. At the same time, we will focus on driving operational excellence across sourcing, product engineering, pricing and mix management. Each of these areas has the potential to deliver meaningful impact over the next 2 years. We have started executing our back-to-business plan and expect to see some benefits in the last quarter of 2027.

Near term, we expect our results to be pressured by our portfolio actions, our exposure to single-family new construction, a reduction in channel inventory and a lag effect of shelf space losses from 2025 in the first half of 2026. Water is a longer turnaround that could extend beyond next year. We expect the improvement cycle in our other businesses to be shorter. In Outdoors, we expect portfolio and product actions to drive margin improvement. In Security, as we lap the shelf resets and continue to improve service, we expect stronger results as we exit 2027.

As we look at the remainder of 2026, we see an incrementally weaker single-family new construction market, while repair and remodel demand at retail has been relatively stable but remains soft. As a new management team, we are taking a conservative approach to channel inventory in this period of uncertainty. We also plan to use our net tax benefit to fund additional portfolio and alignment actions in the fourth quarter. These are difficult but necessary decisions that will impact our near-term results, but put us in a better position heading into 2027.

Before I close, I want to welcome Pete Clifford, who we've recently appointed as Chief Financial Officer. Pete brings more than 30 years of financial leadership experience, including public company CFO and COO roles at AZEK and Cantel Medical. He is a disciplined operator and pragmatic leader who understands the day-to-day realities of running a manufacturing business. I worked with Pete at AZEK, and I'm excited to have him on the team.

I'd also like to thank Ashley George for her leadership as Interim Chief Financial Officer through a period of significant change. Ashley has returned to her role as Senior Vice President of Finance, supporting our Water businesses, where she will help drive our efforts to strengthen execution and improve profitability. Ashley, thank you.

We have exceptional brands. We have customers and channel partners who want to win with us, and we have a team that is engaged and moving with urgency. Our job now is to execute. It will take time, and our results over the next several quarters will reflect a company in the middle of that work. We expect the actions we have announced to date will deliver more than $120 million of annual benefit as we exit 2027. Our longer-term target is to exceed 20% underlying EBITDA margins while driving above-market growth. We intend to build a stronger, simpler and more customer-focused company, one that delivers sustainable growth, margin expansion and shareholder value.

With that, let me turn it over to Pete.

Peter Clifford

Thank you, Jesse. I'm honored to join the Fortune Brands team. As Jesse highlighted, we have well-recognized brands, great products, deep relationships with our channel partners, customers and pros, and we are building strong teams. As I look at the business, there are opportunities to improve our operational rigor, optimize our cost structure and bring a more disciplined approach to capital allocation. I'm excited about the opportunity and look forward to reengaging with many of you over the coming weeks and months.

As a reminder, my comments will focus on our results before charges and gains, unless otherwise noted, and comparisons will be made against the prior year. Similar to last quarter, our presentation provides a breakdown of the gross and net impact of tariff refunds on reported operating income and EPS for the third quarter and full year 2026.

During the third quarter, we recognized $29 million in gross tariff refunds. This amount includes the portion that was recognized as a reduction in inventory in the second quarter as well as incremental tariff refunds recognized in the third quarter related to Phase 3 of the CAPE process.

Net of variable compensation expense, this translated to $18 million of operating income and $0.14 of EPS in the quarter. For the full year, we expect net tariff refunds to contribute approximately $0.59 of EPS, which is reflected in our updated guidance. In addition, we also recognized a net tax benefit of $33 million or $0.28 per share related to an internal restructuring designed to streamline the legal entity structure of our European operations. The restructuring is intended to reduce future operating costs such as statutory reporting, legal, tax and treasury costs and is consistent with our efforts to simplify our organization.

Now turning to our consolidated results for the quarter. Total company sales were $1.1 billion, down 3.1%. The decline in sales was primarily driven by Water and Security, partially offset by Outdoors. Consolidated operating income for the quarter was $156 million, down 24.6% with margins of 14%, down 390 basis points. Third quarter EPS was $1.14. Operating income benefited by $18 million from net tariff refunds, while EPS benefited from both net tariff refunds of $0.14 and the net tax gain of $0.28 I just spoke about.

Our third quarter effective tax rate was essentially 0 compared with 25% in the prior year period, reflecting the legal entity restructuring impact I outlined earlier. Excluding these discrete items, our underlying effective tax rate for the third quarter was approximately 24.4%.

Turning to our segment results. Sales for Water were $584 million, down 5.5%. Excluding China, sales were down 4.3%. Sales were impacted by service levels and softer demand in retail. We also experienced further softening in new construction-related demand in wholesale during the month of September. These were partially offset by growth in e-commerce. Water's operating income was $103 million, down 31.8% with margins of 17.6%, down 680 basis points, which included a benefit of 135 basis points from net tariff refunds. The underlying margin decline was driven by unfavorable price/cost, volume deleverage and higher cost to serve our customers.

Within price/cost, we incurred additional expenses related to portfolio optimization and alignment actions. I would also point out that we did not fully realize the price necessary to offset inflation. We believe this weighed on margins several hundred basis points in the quarter. We view this as an execution gap and a key focus of the pricing and mix management work Jesse described.

In Outdoors, sales for the quarter were $347 million, up 0.8%. Excluding Fiberon, sales were up 3.4%, driven primarily by favorable year-over-year comps in channel inventory and higher price realization. This was offset by softer new construction-related demand in wholesale, mostly in Therma-Tru. Channel inventories were mostly flat in the quarter. However, we lapped the material destocking in 3Q '25. Outdoors operating income was $53 million, flat to last year, with operating margins of 15.3%, down 20 basis points. The margin decline reflects lower volumes and higher material and freight costs, which were partially offset by favorable mix.

In particular, we have seen significant margin compression in Larson as a result of the sharp run-up in aluminum prices earlier this year, which is flowing through our income statement during the second half of the year. We have not yet fully offset this headwind, and we expect to address it going forward.

Turning to Security. Sales for the quarter were $182 million, down 2.4%, reflecting declines in retail and e-commerce, largely due to service challenges. This was partially offset by growth in our commercial channel, which benefited from solid customer demand. Additionally, Yale benefited from continued traction with multifamily customers where we've seen increased penetration over the past year.

Security's operating income was $39 million, up 16.9% with operating margins of 21.3%, up 350 basis points. The net tariff refund contributed about 715 basis points to margin, which was offset by higher cost to serve as we continue to recover back to more traditional service levels. In addition, as part of our efforts to refocus our portfolio on our highest return opportunities, we recognized an inventory adjustment related to SKU rationalization during the quarter, which impacted margins by approximately 450 basis points.

Turning to the balance sheet and cash flow. Free cash flow for the quarter was $331 million compared to $177 million last year, primarily reflecting the tariff refund proceeds as well as lower capital expenditures. Year-to-date, free cash flow was $371 million. We ended the quarter with net debt of approximately $2.1 billion and net debt-to-EBITDA of 2.5x. We anticipate our net leverage will decline further by year-end due to the Fiberon divestiture.

Cash proceeds from tariff refunds totaled $117 million in the quarter, bringing collections to approximately $126 million year-to-date. We expect to collect the majority of the remaining balance before year-end, which is reflected in our full year free cash flow outlook. The actions that drove our third quarter tax rate are expected to result in a cash tax benefit of approximately $50 million in 4Q '26.

Before we get into our full year guidance, I wanted to provide some context on the operating environment we are seeing entering 4Q externally as well as internally. Externally, we see a more challenging environment in new construction than 90 days ago. Retail R&R is stable but still soft, and we do not anticipate lapping all of our expected share losses until the back half of 2027. Internally, I see a team moving forcefully to embrace the changes required to win.

As Jesse mentioned, we are now largely complete with realigning our teams to more customer-focused business units. We have acted quickly against structural cost issues and made important decisions to act on dilutive parts of the portfolio. We are also making incremental progress against improved service levels and making significant progress against our mission of building great teams.

The backdrop for our changes to 4Q and full year '26 guidance can be summarized in a couple of distinct buckets: First, businesses being exited and sold. We have top line and bottom line pressure in China and Fiberon. Second, the market. The market, particularly in home construction, is more challenged and customers are starting to communicate more conservatively.

Lastly, channel inventory. New leadership brings a very different philosophy on channel inventory behavior in an uncertain macro. We intend to be deliberate in helping our customers maintain reasonable inventory levels through year-end to derisk the first half of 2027.

A couple of additional points of clarification with regard to the fourth quarter forecast: One, you should think of the Water sales forecast as not only a rightsizing of the channel inventory given the macro, but also an unwinding of a rather large 1Q '26 load-in that we will comp against in 1Q '27. And second, we anticipate a similar amount of run rate expense in 4Q as 3Q as it relates to investments and accelerating portfolio optimization and alignment. For the fourth quarter, we expect net sales to be in the range of approximately $925 million to $995 million, and we expect EPS before charges and gains of $0.19 to $0.29.

Relative to our previous guidance, the sales step down comes from 3 items: The businesses we are exiting or selling approximately $20 million; the market, primarily single-family new construction, approximately $25 million; and channel inventory, approximately $55 million. On EPS, those 3 items account for roughly $0.08, $0.11 and $0.12, respectively. Separate from net sales reduction, we also expect to incur roughly $0.14 of portfolio optimization and alignment actions.

Finally, as a reminder, we will see approximately a $0.07 headwind to 4Q '26 EPS driven by the tariff refund impact on variable compensation. For the full year, we are expecting sales to be in the range of $4.205 billion to $4.275 billion with EPS of $3.20 to $3.30. In our earnings release, we provided a bridge of the changes on our full year EPS guidance.

As I've outlined here today, our 3Q and 4Q results include a lot of noise for things like Fiberon and China as well as onetime items for net tariff refunds, tax benefits and other portfolio and alignment actions. Underneath that noise, we believe the core business looks like a business with operating income margins in the mid-teens and EBITDA margins in the high teens. This is in line with what I expected when I took on this opportunity.

To be clear, that profile excludes the bulk of the $70 million in SG&A actions taken, the expected benefit of the Water EMEA footprint rationalization efforts and the price/cost recovery missed in 2026 due to our execution challenges on price realization, which I mentioned earlier. As we have articulated, the lag from the China commercial exit and the phasing of the Water EMEA footprint rationalization will likely make the first half of '27 more dilutive, and our turnaround will become more apparent in 4Q '27, by which point we will have fully exited China, completed the Water EMEA footprint rationalization and put a leaner, more efficient SG&A structure in place, delivering the more than $120 million of annual benefits Jesse outlined.

In addition, price/cost recovery should be more favorable, and we will have lapped some of the more challenging volume quarters. As Jesse mentioned, we are in the early stages of a multiyear improvement plan and our updated guidance for 2026 continues to reflect our ongoing efforts to stabilize our performance. We still have work to do to improve our execution, optimize our cost structure and realign our business. While these actions will take time, we are confident that with the right focus and investment, we can set the company up for a stronger future. As Jesse mentioned earlier, our target is to achieve EBITDA margins above 20%.

With that, I'll turn the call back to Curt.

Curt Worthington

Thanks, Pete. That concludes our prepared remarks. We will now begin the question-and-answer session. [Operator Instructions] Operator, can you open up the line?

Operator

[Operator Instructions] Our first question is from Keith Hughes with Truist Securities.

分析师问答

Keith Hughes

We do have a lot going on in the numbers here. I guess from a big picture perspective, can we talk about in the guidance you gave for the year, how much is core and noncore? And I've got an eye towards doing estimates for 2027.

Peter Clifford

Keith, this is Peter. I appreciate the question. Just to reinforce for clarity, we put in the press release and the prepared remarks, the elements of the step down for the full year guidance. To be clear, the pieces are the core business is stepping down EPS by $0.23 for the full year, and it's largely driven by the commentary we've given on channel inventory assumption has changed with revenue impacted by about $55 million. And then to a lesser degree, about $25 million worth of market, largely driven by new construction starts impact on our wholesale channel.

As far as noncore, i.e., kind of China and Fiberon, EPS is stepping down about $0.02, driven by a drop in revenue of approximately $20 million. And then we've got several discrete kind of onetime impacts. First discrete item is a tax benefit generated from the legal entity restructuring we were doing in the U.K., which has driven about $0.28 of favorability in the year. The second discrete item is tariff refunds have come in favorably in 3Q, adding about an additional $0.07 of favorability to the year. And then lastly, we're proactively using those onetime impacts to make some tough choices faster on the portfolio and alignment decisions that we need to make to position ourselves for a good 2027.

Jesse Singh

Yes. So Keith, just kind of high level. Pete dove into the details. The takeaway you should have is the underlying business that will remain in '27, we are lowering that guidance by $0.23 in the quarter. I'm sorry, across the back half of the year, it will manifest itself in the quarter.

Keith Hughes

Okay. I think I see. Let me ask one other question on one of the details you gave, Pete, about the $55 million channel inventory hit. Is this more a function of an overload, I guess, it would be in the first quarter of 2026? Or is this more a reaction to the market and adjusting to that in the upcoming, I guess, would be fourth quarter?

Peter Clifford

Yes, Keith, I think it's probably a balance of both. I think there was clearly a larger load-in in 1Q, where our reported growth was about 1%. When you balance that with the reported growth in the fourth quarter, you kind of get a blended growth rate that's more in line with the second and third quarter. And I just think given the macro of what we heard from customers in September, tone definitively turned more conservative. And with that, I just thought it was prudent that we needed to start thinking about the channel inventory a bit more conservatively in the remainder of the guide.

Jesse Singh

Yes. And you should think of it as there's a -- we're looking at our channel inventory. And you should think that as we end '26, we're trying to get closer to where we ended '24 relative to what we see as inventory in the channel. So it's -- we feel like having less inventory in the channel, especially given our service levels, probably is a natural outcome at this point in the cycle.

Operator

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

Ketan Mamtora

Pete, when I look at the underlying EBIT margin in Water, excluding the tariff refund, can you just high level break it down for us in terms of how much is sort of unfavorable price cost versus kind of volume deleverage, elevated service costs, just the key buckets here.

Peter Clifford

Yes. I mean, again, I'm going to give you the answer of 6 weeks and 2 days in, Ketan. But I think largely on the margin dilution, about half is probably price cost right now, 25%, I would call out just lost leverage on our fixed manufacturing overhead. And then the remainder is, I'll call it, the premium service cost as we're having to put more overtime in and air freight to kind of serve customers in a stronger fashion. Those are some of the elements that I think I would kind of call out.

Ketan Mamtora

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

Peter Clifford

I think the original view was sometime in this quarter. But candidly, as I've been kind of digging in here in the first 6 weeks, I think largely, the portfolio has done a really good job of kind of measuring price realization. I think we bumped into a part of the business that hasn't been doing it perfectly. And I think it's helped us understand that we're not fully covering cost here in the third quarter. I think the reality is we probably won't fully cover. It will be closer in the fourth quarter. But I think it will be late 1Q before we really probably have incremental actions in place, maybe possibly the start of the second quarter where we're back to being fully covered from a price/cost perspective.

Jesse Singh

Yes. Just as Pete highlighted, and you know us well enough to know our intent is to be as transparent as possible. I think as we have gone through the year, our price realization is probably coming in under what we may have communicated on the previous couple of calls. And I think that's really an outcome of a SKU-by-SKU analysis to realize that in certain cases, we haven't fully executed or realized pricing.

And in this kind of a market, it's a blend of a lot of things. It's not just announced price, but it's also the way in which that is executed on the ground and also the way it's offset with any discounting or any kind of individual execution items. And so I think it's a recognized area where we see a tremendous opportunity to execute better in terms of how we go to market. That's one of the opportunities we have as we look to '27, on the execution side.

In addition, it's reasonable to expect given this inflationary environment in a few of our raw material components and with some of our freight that there's probably going to be some additional incremental action as we move through '27.

Operator

Our next question is from Phil Ng with Jefferies.

Philip Ng

Well, Pete, welcome back. I appreciate all the insights you shared. A lot of numbers to unpack. So I just want to make sure I heard you correctly. It sounds like you're -- obviously, you're making big investments to improve the profitability and you're trying to jam through some restructuring.

Did I hear you correctly that the headwinds that you're seeing perhaps in the back half of this year is going to -- that's a good run rate in the first half of 2027, and you really don't see these net good guys and negatives turn positive first half until 3Q '27 and really, the big inflection is fourth quarter '27? I just want to make sure I understand some of those directional components.

Peter Clifford

Yes. I think first, the commentary in the prepared remarks was more to get myself grounded as well as the investment community on is there anything really different fundamentally about the business. And in my view, there really isn't. If you strip out the noise of China and you strip out the noise of Fiberon and the tax benefits and so some of the other discrete one-timers at its core business from an op profit perspective, it feels like it's in the 14% to 15% range with an EBITDA of 17% to 18%.

And again, that doesn't include any of the $70 million of structural cost initiatives that the team has been cranking away on. It doesn't include any of the cost -- price/cost recovery opportunity from '26, and it doesn't include the EMEA rationalization. So the business largely looks like what I expected when I took the opportunity and gets me excited about late next year when we finally have lapped the China exit, we've lapped the EMEA rationalization, and we've got in place that structural cost is fully in the run rate. It gives me confidence that we've set the tone internally that we think this is a 20% plus EBITDA business.

Philip Ng

Okay. Helpful. And Jesse, I guess you've done your tour, you spoke to a lot of your customers. At least it sounds like feedback, big picture is constructive. But I guess in terms of these commercial actions and new product innovation and whatnot, is your expectation we're really not going to see much of it until exiting '27? I just want to help us kind of think through some of the puts and takes and appreciate the turnaround in water is going to take longer.

Jesse Singh

Yes. I -- first, let's -- high level, depending on how you look at the business, we've got 2 businesses outside of water that are operating, I would say, in a reasonably normal cadence that will benefit from some increased focus on growth. So if you think about our doors business, we're starting to launch new products. We're starting to accelerate new products. That takes time to get in the market. I would expect that we would see some benefit from that as we exit or as we kind of get into the back half, probably into the fourth quarter of '27.

By the way, that business is doing a good job as we speak of offsetting its single-family new construction exposure with just better blocking and tackling on the sales side. And then as you look at our security business, there's a few kind of shelf losses that will lap in the first quarter. So without being specific, hopefully, we'll start to see some of the benefits of the new product we've launched similarly as we move into the back half of the year.

And I think specifically on the water business and on our Moen business, but also Moen and House of Rohl, we have been launching new products over the last 6 months or so. Those are starting to come into the market. And as those come into the market, depending on the segment, they start having a benefit. And so you'll start to see some of the benefit of those new products plus better execution. I think you'll start to see some of the benefits of that once again, as we move through the back half of 2027.

And once again, I think there's just a lag, right? If you think about the different segments we play in, there's a natural lag of activity. And again, I'll just leave you with one thing. This is not all about shelf space or anything like that, although that's a part of it. A lot of it has to do with just our own execution. Our business in Moen and House of Rohl can do better with our current footprint. We've got great position at retailers. We've got a great position at wholesale, and we've got a great position online. We can execute better with the hand we've been given. And so that is our intent in addition to expanding the market with launching new products.

Operator

Our next question is from Michael Rehaut with Melius.

Michael Rehaut

Great to have the old gang back. Looking forward to working with you both, Jesse and Pete. So good to hear your voices. First, I just wanted to zoom out a little bit and think about the back-to-business plan aside from kind of the portfolio restructuring, when you think about the core changes to the business itself that you're going to endeavor this year and I guess, multiyear, but let's say, particularly over the next 12 months, how should we think about that starting to impact the core profitability and needle moving?

Because one thing that I was a little surprised to hear perhaps was that you won't be lapping the share losses until the back half of next year. And I'm just wondering, as you think about executing the plan on kind of the fundamental blocking and tackling of the business, if you wouldn't expect some of that to yield results maybe over the next 2 or 3 quarters? Or is that just being too optimistic relative to the -- how the business works itself?

Jesse Singh

Yes. I think that there is -- there's a natural lag. So the results we're experiencing now and the last quarter are really an outcome of what happened a year ago and including profitability, including execution, including some of our supply chain challenges, although some of that happened earlier this year.

And I think similarly on the growth side, we believe that the market can and will expand, and we believe we can help that happen. But this is one where there's just a lag on the growth side. I think where you'll start to see the benefit of the blocking and tackling, so to speak, in the short term is as we put more of a focus on these core businesses and as we get into some of the profitability of each and every SKU, you can start to see as we optimize, deal with some unprofitable SKUs, you could start to see those actions start occurring really over the next 2 quarters.

The challenge is there's just a lag on that activity actually hitting the P&L. So it's not that we're not in the middle of starting to execute the actions on the, call it, the profitability and operational excellence side. It's just that there's a lag. You can identify a series of unprofitable SKUs. You can decide what to do with them, but it might take you 2 or 3 months, 4 months, 5 months to really have that materialize in the market. And depending on where it is, it might even take 9, 10 months. And I think it's similar on pricing and some of these other things we're talking about.

Peter Clifford

I'd just add, Mike to it. I think as a general statement, just from where we're starting from, I think the security and door side, we have opportunities to move a little bit faster or maybe some of the longer pull is on the water side.

Michael Rehaut

Right. Right. No, I appreciate that, Pete, thanks for those comments, Jesse. I guess maybe a second question on this idea. When you look at Water specifically, I'm just kind of wondering from your examination of the business, what were kind of the core reasons for the share losses?

Was it service or maybe the sales organization, there was some disruption obviously talked about there with the corporate headquarter moves, or any other elements that you felt contributed to those share losses? And to your point about doing the work now and there's a lag to showing up is part of that just to the extent you're able to gain some shelf space back or some share back, you're really not going to see that until '28 because '27 is more baked.

Jesse Singh

Yes. On your first question, and unfortunately, I'm a football fan, so I'm going to sound a little bit like a coach after a game. I mean when you have a situation where you take a step back in the market, it's usually not one thing, right? It's a bit of all of the above. We've got a great market. We've got a great position. We matter in the market, and we've got very loyal customers up and down the supply chain. But every once in a while, you don't execute right, and that leads to a negative outcome.

And I'll reiterate, as we look at our future, we don't view this as a zero-sum game. We just see opportunity either where we're already playing or where we have the right to play. That doesn't mean it's necessarily negative to somebody else, where we can execute better and grow and expand our profitability. So we believe that we'll see some of the benefits of that.

Obviously, if I'm talking about a year lag, there's some stuff that we've launched in the market that's doing well. And there's additional stuff that we're going to launch. And there's also some other levers we can pull as we move forward. But this is really just about market expansion and doing what's right for our customers, and we'll win our fair share.

Operator

Our next question is from Susan Maklari with Goldman Sachs.

Susan Maklari

Welcome back, Pete.

Peter Clifford

Thanks, Susan.

Susan Maklari

I want to go back to the conversation around new products. Can you talk a bit more about how you're thinking of innovation across the entire business? You mentioned some of the efforts in Moen and House of Rohl. Is that where a lot of that is concentrated? And then I guess, what does the new product development mean in terms of your ability to grow the revenues, either across the segments or on a consolidated basis? What level of revenue growth are you tying to that 20-ish percent EBITDA margin?

Jesse Singh

Yes. On the EBITDA margin comment, I think there's a bit of an extrapolation of what we see as an opportunity with the actions we've already announced, additional actions that we have in the hopper and being able to size the business appropriately in a number of different areas. And as you look at that, I wouldn't say our target of -- or our interim target of 20% EBITDA is really predicated on anything more than just our own internal actions and execution based on what we see as the opportunity ahead of us. And so that's not necessarily predicated on any specific growth rate. And forgive me, Susan, I just forgot your second -- the second part of your question.

Susan Maklari

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

Jesse Singh

Yes. So I think one of the biggest changes, so when you talk about focused business units, we had our product development structured at a corporate level and at a functional level. And what that means is to give you a little bit of the challenge sometimes in getting things through the system, if you're in our security business and you want to launch a new product, there wasn't a dedicated new product team to your business. You would have to work through a matrix someone different on the scoping of the product, someone different on the costing, someone different on the execution of it.

So for us, realigning the new product development team to each business and in many cases, the subsegment of the business allows less resources to deliver more efficient and faster new product growth. Your question on the segment is we see opportunity in each of our businesses to really have accretive or accretive growth really coming from our new products.

And House of Rohl, as you mentioned, is a terrific luxury portfolio. It's been performing better than the rest of our water business. But that business candidly didn't have a general manager for a year. right? And so our acceleration now with new leadership in place over the last 4 months really sets us up to kind of push the new product focus there much harder.

Susan Maklari

Okay. That's very helpful. And then maybe a question for Pete. As you think about the cash generation of the business and the leverage and the initiatives that you've outlined, can you talk a bit about what is the optimal leverage for the company and how you think about priorities for capital allocation?

Peter Clifford

Yes. I think the first goal here is to get below 2.5x leverage, which we expect to do this quarter. I think long term, kind of the goalpost probably ought to remain sort of 2 to 2.5x to keep our balance sheet strong enough to give us some flexibility. On week 6, day 2, I'm not sure I can fully align yet with everybody on the capital allocation priorities.

But what I would say is I think we've got to improve our execution where ROIC is clearly the best investing in ourselves first. So I think we've got to prove that discipline to ourselves that should be the #1 priority is investing internally in our growth and margin expansion opportunities. Again, maintaining a strong balance sheet leverage profile and then any excess, I think, in the near term is clearly going to go towards share repurchases.

Operator

Our next question is from Mike Dahl with RBC Capital Markets.

Michael Dahl

I wanted to talk more about some of the portfolio actions. So obviously, the Fiberon divestiture we knew about and then the China exit and EMEA restructure are incremental. You kind of highlighted the collective numbers, but those are on 3 different time lines. So I was wondering, can you get a little more granular on which contributes what?

And then since it sounds like these will be included in part of your ongoing earnings until the exits are complete, can you give us a better sense of, okay, what does it take to exit the China commercial business in terms of either like investments or severance dynamics or other kind of charges or cash impacts and same thing on the EMEA restructure. And these kind of seem like 3 of the easiest low-hanging fruits. So just taking a step back, just give us a sense of post this, any other portfolio actions we should be thinking about?

Jesse Singh

Yes. I'll kind of answer it at a high level and then maybe let Pete take some of the execution. Obviously, on a transaction, once that transaction executes, the benefit will become visible. And so we're not going to parse it out specifically right now. I would expect on our next call that we'll be able to give clarity and start to report on an ongoing basis in a way that gives you more clarity there.

In terms of what's it going to take to kind of execute the EMEA and the China exit, Pete, I don't know if you have any commentary just in terms of you've been diving in just on some of the moving parts and why it takes 6 months.

Peter Clifford

Yes. I mean, look, we had the announcement earlier this week with our teams. So that part is complete. We will work with our customers that we have over there. I think the bulk of the teams will probably transition through the late first and second quarter. And I would expect the third quarter to be a much more skeletonized kind of crew serving the last of customer requirements. And I think the goal would be to be completely ramped down very early in the fourth quarter.

Jesse Singh

Yes. And then on the factory reset and operations reset there, it's just really important that we continue to service customers as we kind of scale down and scale up. So that will really be driven by customer service. And so you should think of any time you're impacting an operation, you want to make sure that you do a good job, both not only with the people, but also with your customers.

Peter Clifford

And then I think, Mike, obviously, the first quarter, you're going to immediately see the lift on the quality of earnings of Fiberon being out. But as well, I think we will look to with our '27 results, report Water ex China, like we've historically at times done here to give people a better understanding and view of what the water business looks like without China.

Jesse Singh

Yes. One additional point. The EMEA action will benefit the Water P&L.

Michael Dahl

Okay. And just second quick question. You talked about using the tax benefit to reinvest in some tougher decisions around optimization and alignment. You were already making some of those investments. Can you just be a little more specific about what is kind of incremental to what you had previously already been doing and had discussed last quarter?

Peter Clifford

Yes. I think I could give you an example here in the third quarter, Mike, in our connected business, we had inventory base of about $8 million of product that was aged and a little bit older technology. And the decision was where do we prioritize our sales team's time? Do we try and sell an older platform and delay a new product launch? Or do we write off the product, get people focused and excited on the new technology and new product launch. And obviously, in this case, we chose to write off that inventory and get the teams focused on what's important and what's the future.

Operator

Our next question is from Sam Reid with Wells Fargo.

Richard Reid

You talked a little bit about getting closer to price/cost neutrality as we move into, let's call it, mid- 2027, I believe. Can we talk through the market appetite for pricing? And I'm thinking specifically in water, but also in Larson, where there's been some commodity headwinds with aluminum and then also just Therma-Tru?

Jesse Singh

Yes. Look, obviously, we're not going to get into specifics just at a very high level, when we're looking at pricing actions, there's really 2 sides to it, right? So one is the actual kind of announcement in the marketplace and that dialogue, call it, list price or however you want to have it. And then the other one is kind of the manifestation or the execution. There's actually 3 components like how effectively do you execute it.

And then the third element is the gross to net kind of back-end discounting, what's the right way to promote products, et cetera. I think in general, in all of our markets, we're not sitting here saying maybe with the exception of kind of opening price point and maybe a bit in our new construction area. We're not sitting in a situation where we are shopping for pennies or our consumers are shopping for pennies, right? And so I think it's really important that we just price our products appropriately in the bands that we play in. And we play in a lot of tiers across our product line, entry-level, mid-price point, premium products. It's just really important that we price right within those tiers. And once again, we view opportunity in each of our businesses to be able to take additional actions in each of those 3 areas that I mentioned related to price.

Richard Reid

Really helpful. And maybe just circling back on to your bridge. The bridge math for Q4 was very helpful. I'd love to drill down a little bit on perhaps some of the portfolio optimization and alignment actions. Can you -- that $0.14 headwind, could you just maybe decompose exactly what's embedded in that just in greater detail? Would just love some additional context as we're flowing that through our model and perhaps how to think about that impact continuing into 2027.

Peter Clifford

Yes. I mean, obviously, it's largely going to be nonrecurring. So that example I gave you of the $8 million is the biggest piece of the 3Q opportunity set. Candidly, the fourth quarter is a little bit of a placeholder for a guy who is on week 6, day # 2. But we do suspect that there'll be more there to again accelerate maybe some decisions that were tabled for the last year or 2 to try and get a jump start on where we want to be in the future.

Jesse Singh

Yes. And you should once again think of these are onetime in nature because they involve, as Pete pointed out, with some outdated Yale locks to just -- they involve -- it involved the decision to stop selling them and therefore, take a write-down on what was there. And so it's those kinds of decisions that we believe are wise to make moving forward to make sure that we've got the cleanest business we can have relative to both growth and profitability moving forward.

All right. With that, thanks again for joining us this evening. I know we have a number of follow-up calls, and we look forward to seeing many of you at upcoming conferences. And with that, have a great evening. Thank you so much.