Yahoo Finance

Nicholas Fink

Thanks, Leigh, and thank you to those joining our call. On this call, I'll discuss the impact of tariffs on our company, summarize our first quarter performance, give an update on a few of our key strategic priorities and discuss the external macro environment.
In addition to giving an overview of our expectations around the impact of tariffs, I will provide some color into the areas where we believe we have opportunities to outperform and grow share. Then Dave will review our financial results and assumptions and give more information on tariffs, our mitigation efforts and our balance sheet.
I would like to take a moment to thank Dave and extend my heartfelt gratitude for his partnership as our CFO. Now as he fully transitions to his new role of President, Security and Connected products, I'm excited for how he will accelerate our success with that portfolio. I'm also pleased to have Fortune Brands new CFO, John Baksht, join us for Q&A today. Jon's level of experience as a successful public company CFO is outstanding, and he's quickly learning our business and already providing valuable insights.
He and Dave are working closely together to ensure a smooth transition Jon is one of several recent highly talented key hires that we have made as we prepare to consolidate most of our U.S. office associates into one state-of-the-art campus in Deerfield, Illinois.
We've been delighted by the quality of talent that we are attracting and now have a world-class leadership team fully in place. Additionally, we're pleased to have many of our existing out-of-state associates willing and able to continue their career journeys with us & Deerfield with the numbers of associates who have chosen to relocate and remain with the company exceeding benchmarks.
Overall, I am extremely pleased with our progress as we consolidate our offices into one headquarters campus. By establishing an inspiring hub where our associates can effectively collaborate and ideate, we will elevate our execution and expedite our growth potential. We anticipate that our first wave of associates will come together at the new campus towards the end of the summer. These are very dynamic times.
Fortune Brands Innovations has demonstrated the capabilities to respond promptly, adapt swiftly and identify opportunities even in the face of challenging circumstances such as the initial tariff increases from 2017 to 2019, the COVID-19 pandemic and the subsequent supply chain disruptions. Through each of these challenges, our team's execution exceeded our customers' expectations as well as our own, enabling us to capture additional share. This proven track record gives me great confidence that we will continue to thrive and deliver exceptional results for our stakeholders.
Our associates are demonstrating the same urgency and strategic thinking with the current tariff situation from both a supply chain and commercial perspective. I'm very grateful to our teams for rising to the challenge presented by the current uncertainty and focusing on the very real opportunities we have right now and delivering for our customers and consumers.
In response to the uncertainty of the external environment, we have established a focused set of priorities designed to ensure that we can continue to execute our strategy and deliver for customers and consumers. This includes mitigating the expected impact of tariffs by leveraging our strong U.S. footprint, investing behind our successful brands and impactful innovation, expanding our digital business, and driving free cash flow to support our fortress balance sheet. By dedicating our resources to these crucial priorities and sustaining strategic investments, I have confidence that we will succeed.
We remain agile in a very rapidly changing environment and have already taken significant actions to mitigate our exposure to the anticipated impacts of tariffs and to optimize our competitive positions in light of our robust U.S. and North American supply chain and operations footprint and leading brand positions.
Our initial guidance of February 6 included the impact of the then announced tariffs in our EPS range assumed that some additional tariffs could be imposed. However, because of the uncertainty around how consumer demand will trend throughout the year, we will not be providing detailed full year financial guidance this quarter. Instead, we will be providing a framework that outlines how various volume scenarios may impact our full year EPS.
I will provide a high-level view on how we're thinking about the impact of tariffs and the related mitigation actions in 2025. We expect to fully offset the anticipated $200 million of 2025 tariff impact through a combination of supply chain opportunities, cost-out activities and strategic pricing actions across all of our channels and brands. Assuming current tariff levels, we expect the full annualized impact of tariffs in 2026 to be around $525 million, which we expect to fully mitigate through supply chain actions and other mitigation strategies.
In addition to our 3 main mitigation strategies, we have been actively engaged with senior-level officials in the Trump administration, key agencies and members of both the House and the Senate to educate them on our story and to find ways to further bolster U.S. manufacturing. While we are not planning on any tariff exclusions or exemptions, we believe ourselves to be well positioned if there are government actions to support U.S. manufacturers. Notwithstanding some of the shorter-term cost challenges, we believe the tariffs and current geopolitical situation are creating some very relevant short- and long-term growth opportunities, and we are working to maximize these opportunities including leveraging our significant U.S.
and North American manufacturing presence.
We are predominantly a North American-based manufacturer with around 60% of our COGS from the U.S. and 70% from North America. We have 15 North American manufacturing and distribution sites, including 12 U.S. sites, employing thousands of Americans. Since 2017, we've reduced our spend from China by over 60%.
And by the end of the year, we expect our China COGS to be around 10%. We've already made significant progress on other large supply chain moves which will further reduce our exposure to China. Many of our competitors, particularly in our outdoors & Security segments, sourced almost exclusively from China, putting us at a clear and immediate advantage.
In other parts of our supply chain, we are noting potential tranche shipping of Chinese products, and we are confident these actions will be exposed and stopped leading to further opportunity. In the coming months, we expect our advantage supply chain will offer us opportunities to take share in many of our categories.
Beyond our supply chain, we have several other competitive advantages. We are price leaders and the majority of our sales are through complex channels, which allow us to more effectively pass along price increases where and as needed. We have sophisticated data capabilities. allowing us to take strategic and more surgical pricing actions.
With leading brands in spaces where brands, innovation and quality matter, giving us a competitive advantage during periods where consumers are looking for more value. Our products are generally smaller ticket items that can enhance the space at a relatively low cost.
Finally, we make digital products that help solve some of the most pressing challenges facing the world today. and can help consumers and commercial customers reduce costs, and therefore, have idiosyncratic demand curves with nontraditional drivers.
Importantly, we have a fortress balance sheet with strong annual cash flow. This robust foundation allows us additional flexibility to navigate challenging external conditions without compromising our long-term strategy of opportunistically deploying capital and paying a reasonable dividend. We believe that we are well prepared for any future economic downturns with the ability to generate cash and maintain a strong balance sheet while continuing to invest for the future.
We have demonstrated that we can deliver attractive decremental margins in the face of material market declines and take various cost-out actions, if necessary. Importantly, while our recently announced headquarters consolidation was driven by highly strategic reasons, it also has the expected impact of reducing our SG&A. Additionally, we are now hiring for those roles made available by associates who chose not to relocate and have full control over the pace of hiring with the ability to scale back discretionary rehiring if external conditions warrant. We are many months ahead of other companies that may potentially look to make tough decisions about their workforce in the coming months.
Turning now to some thoughts on the current housing market and the market for our products. We continue to see the effects of uncertainty around the economy, weighing on the consumer and ultimately on our demand. The spring selling season has been slower due to cautious consumer behavior. In the repair and remodel sector, consumers are similarly hesitant to laying major purchases because of the uncertain environment.
Larger, more discretionary projects are expected to be more impacted than smaller R&R tasks. Despite this, the housing market is still under bolt with significant pent-up demand. And historically, the housing sector tends to recover first during economic downturns. We believe the medium- and long-term fundamentals in this space remains strong.
Turning to our first quarter performance. Our first quarter results reflected a softer market, including inventory reductions across our channels, primarily in water. Consumers and customers are showing caution due to the external uncertainty. Amidst this uncertain backdrop, we delivered margins and EPS in line with our expectations. Sales were $1 billion, down 7% versus the first quarter of 2024 were down 5% organically, excluding the impact of China and FX.
Our results reflected the impact of a soft demand environment with point of sale, excluding China, down low single digits and reductions in wholesale inventories. Our teams remain focused on our key priorities, amidst a volatile environment and delivered margin results in line with our expectations while continuing to invest in a narrow set of long-term strategic initiatives.
Our operating income was $136 million, and our operating margin was 13.1%. Our earnings per share were $0.66.
This past quarter, we saw the implementation of several key initiatives. We believe the progress that we made on these strategic initiatives will result in long-term value. Our new Master Lock and SentrySafe brand campaigns launched and we have seen an immediate positive uptick of sales and website traffic. Our Larson (inaudible) aisle rollout accelerated this past quarter with extremely favorable responses and will bring new energy to this category.
Our Moen brand is stronger than ever, and we were recently recognized as the most trusted brand of faucets for the tenth consecutive year. Moen introduced updated fashionable product suites that are in line with current trends, receiving very positive market feedback. These products are expected to perform well throughout the year and beyond. And as I will detail in a bit, our flow leak detection to us continues to have incredible momentum. We've sold more flow devices year-to-date than all of 2024.
We are pleased with the performance of our digital products with over 200,000 device activations in the first quarter. Our digital business remains strong, and we believe that we are on track to deliver around $300 million in sales in 2025 in this portion of our business. Our flow business was especially strong with impressive momentum. We added 3 new major insurance partnerships in the first quarter, including our recently announced partnership with Liberty Mutual Insurance, one of the largest national insurance companies. Flow sales increased by 180% over the first quarter of 2024.
We also unveiled our first bundled subscription model with very positive feedback on our pricing structure. Even before we start marketing this new pricing model, we saw consumer uptake. We are confident that our flow business will continue to accelerate even in the current uncertain environment, driven by its clear win-win value proposition for both homeowners and insurers. These new insurance partnerships, growing consumer awareness of the criticality of this product and its ability to protect homes and lower insurance premiums is fueling its continued strong momentum.
Our Yale lock business is accelerating with many recent developments and new partnerships. This past quarter, Yale expanded into some of the largest retailers with very encouraging initial sales, and we introduced new multifamily Smart Lock solutions. In partnership with Google, our new enhanced Yale smart lock with Matter to rollout later this quarter. replacing the prior (inaudible) lock. We recently announced that ADT and Yale have partnered together to introduce the first ever biometric Z-Wave credential command class lock and industry-first innovation, which allows ADT users to unlock and disarm their security system from their door using just their fingerprint.
And finally, we made important strides with our Master Lock connected lockout tagout this past quarter. This commercial safety solution has been adopted at several large-scale customers, including a Zynga manufacturing and Cushman Wakefield, Connected like our tag out is a significant and attractive opportunity for manufacturing companies because it leverages technological advancements to provide superior protection, efficiency and safety for employees during maintenance and servicing of machinery while reducing workers' compensation claims. We continue to expect big things out of this digital business.
Turning now to our individual business results. Starting with Water Innovations. This segment saw sales decrease by 10% or 7% organically, excluding China and FX. Our results reflect a softer demand environment with window sale, excluding China, down low single digits as well as inventory destocking in wholesale as our partners prepared for a softening environment. Our results also reflect a transition to enhanced pricing discipline in our e-commerce channels, resulting in lower point-of-sale and shipments in the quarter.
Within this segment, we saw market outperformance in our House of Rohl business as the luxury consumer remains resilient. Looking forward to the remainder of 2025, this segment will be impacted by tariffs, and we cannot accurately predict the demand landscape. We are focused on addressing our tariff exposure through sourcing moves, cost-out activities and selective pricing actions. We believe that our domestic on operations will provide us with a competitive advantage, particularly against finished goods, which come directly from China or other tariffed countries.
In addition, the current geopolitical environment is providing us with opportunities to distinguish our safe and reliable on products versus inferior and dangerous and posture brands. We will focus on achieving above-market sales by targeting areas of the market with significant growth potential. Our strategy includes making careful and selective investments in our key priorities such as branding, marketing and digital initiatives. I am confident in the ability of our new leadership in our water business to launch another era of market outperformance for the storied business.
Turning to Outdoors. Sales decreased 3% on softer retail point-of-sale and wholesale inventory reductions in doors, partially offset by double-digit sales growth in decking. We remain laser-focused on leveraging our expertise and investing behind our core categories and in those products, which we expect will offer the most attractive growth opportunities. Our Outdoors business has a significant North American manufacturing base with strong domestic manufacturing presence.
We expect this advantaged operational footprint will give us a strong competitive advantage, particularly in the case of Therma-Tru, where many of our competitors are sourced directly from China. The high tariffs should result in narrowed price differentials in our North American supply chains should provide more stability of products. In addition, we are in the first phase of our antidumping lawsuit where we are seeking to address unfair trade practices of a number of China-sourced fiberglass door products. The combination of tariffs and the antidumping lawsuit is an opportunity to even further accelerate our expected market outperformance. Finally, our Security segment sales decreased 4% in the quarter, primarily due to soft point of sale as consumer confidence decreased and channel partners took out inventory.
However, we see opportunity in this business to take share because many of our competitors' products come from China, and we are accelerating our branding efforts around helping consumers understand the true value of our products, which has already been proven very successfully in our [Safes] business.
We expect to see some benefits in the second half of the year related to some new product rollouts in both traditional security and our digital locks business. Our Yale Lock business is showing positive momentum as we look to the back half of the year and comp against disruptions in 2024.
To recap, as we look across the balance of the year, we are acutely aware of the pressures of the external environment and we'll be executing on a narrow set of clear priorities. These priorities include mitigating the expected impact of tariffs controlling costs. continuing to drive our strong brands and digital portfolio and maintaining our fortress balance sheet. We have full confidence in our team's ability to mitigate the expected impact of tariffs through strategic sourcing moves, cost-out activities, and pricing actions.
While we have less clarity around volume and demand trends, the current situation creates several opportunities to drive market outperformance across our portfolio. Our digital business remains strong with opportunities for growth even in the current environment. Our brands are trusted and known for the dependability, safety and design. We have advantaged supply chains across our portfolio with reduced reliance in China, which we can leverage to our advantage.
And finally, we have a world-class leadership team in place and engaged high-performing associates who are energized by external challenges. As we have done in the past, we will seek and execute upon opportunities to excel in the current environment.
I will now turn the call over to Dave.

David Barry

Thank you. Before I begin, I would like to express my heartfelt gratitude to Nick for his exceptional friendship, leadership and mentorship during my tenure as CFO. As I continue in my new role, the enterprise perspective I have gained as a result of my tenure as CFO will be invaluable. And I know all of our stakeholders are in great hands with Jon.
As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance. Additionally, comparisons will be made against the same period last year, unless otherwise noted.
As Nick mentioned, in light of the uncertainty around price elasticity and the demand environment, we will not be providing our usual detailed guidance for the year, and we have suspended our prior financial and market assumptions. However, I will provide a framework and range for 2 different EPS scenarios based on different volume assumptions resulting from potential consumer behavior. But first, let me start with our first quarter results.
As Nick highlighted, our teams executed our priorities amidst a very dynamic macro environment in which we saw demand slow from mid-February through the end of the quarter and continuing into the second quarter. In the first quarter, sales were $1 billion, down 7% and down 5% organically, excluding China and FX. Consolidated operating income was $135.8 million down 19%. Total company operating margin was 13.1% and earnings per share were $0.66.
Our first quarter sales performance was driven by low single-digit POS declines and low single-digit impact from inventory reductions in wholesale and retail channels as consumers and customers reacted to an uncertain economic environment.
Beginning with Water Innovations, sales were $565 million, down 10% and down 7% organically, excluding the impact of FX in China, which was, as expected, down significantly versus 2024. Our results reflect POS, which was down low single digits, excluding China, and channel inventory reductions at wholesale and retail as well as the impact of lower POS and shipments into the e-commerce channel as we transitioned to enhanced pricing discipline.
Within our Water segment, House of Rohl continues to outperform the market. Water Innovations operating income was $113.2 million, a decrease of 20%. Operating margin was 20% as expected, reflecting the impact of lower volumes and higher cost inventory moving on to the P&L.
Turning to Outdoors. Sales were $305 million, down 3% and driven by low single-digit POS declines. Looking forward, we expect doors to be a relative beneficiary of the anticipated impact of tariffs, particularly in Therma-Tru, and we expect to see the benefit of the LARSON aisle reset, which is accelerating through the second quarter. Outdoors segment operating income was $31.7 million, down 16% from the prior year quarter. Segment operating margin was in line with our expectation at 10.4%.
In Security, our first quarter sales were $163 million and declined 4%, reflecting low single-digit POS declines and continued Yale destocking of older product lines ahead of new product line introductions later this year. Our Safe products delivered positive POS as the impact of our innovative marketing campaign continues to resonate. Segment operating income was $23.2 million, down 13% and segment operating margin was 14.2% and reflecting the impact of lower volumes and continued investment into innovation and brand building. As noted, many competitors in this space are sourced from China and we would expect to have an opportunity for us in the near term given the current tariff environment.
Turning to the balance sheet. Our balance sheet remains solid with cash of $340 million, net debt of $2.6 billion and our net debt-to-EBITDA leverage is 2.8x, reflecting a seasonal peak. Given the EPS scenarios that I will outline shortly, we expect net debt to EBITDA to be between 2.0x and 2.5x at year-end. We have $970 million available on our revolver.
In the first quarter, we returned over $200 million to shareholders via a combination of share repurchases and dividends, including $175 million of share repurchases in the first quarter. We have repurchased $225 million of shares year-to-date. Our first quarter free cash flow was negative $113 million, reflecting the typical seasonality of our business and in line with our expectations.
Given the current environment, we are actively managing our expenses and cash flow. And after paying our dividend, we will remain returns-focused and opportunistic in deploying capital through additional share repurchases and M&A. Additionally, we have a head start on expense and cash flow management given the timing of the headquarter consolidation projects currently underway.
Before turning to our outlook, let me provide additional detail on our tariff exposure. As a reminder, we are a predominantly U.S.-based manufacturer with 60% of our cost of goods in country and 70% of our cost of goods in North America. Our footprint leaves us very well positioned to both service our customers at a high level and take share in this current environment.
As Nick mentioned, under the current tariffs as of May 5, 2025, we expect unmitigated impact of approximately $200 million in 2025 and $525 million annualized. Of the $525 million annualized impact, $45 million is related to China and the balance is Rest of World. We expect to fully mitigate the in-year and annualized impacts.
Turning now to our outlook. Given the uncertain external market environment, we are not providing our usual detailed financial guidance for 2025. However, I will provide a framework to set a range for our expectations. This framework assumes all tariffs remain in effect at the current levels. We expect to fully offset the impacts of anticipated tariffs in 2025 through supply chain moves, cost-out activity and strategic pricing actions, with the most meaningful in-year impacts coming from price and cost controls.
While we have good line of sight to our ability to mitigate tariffs, we cannot predict how the consumer will react and consequently, the impact on our volume remains uncertain. To help frame potential outcomes, we are providing new guidance for a full year 2025 EPS range of $3.70 to $4.20 underpinned by 2 different volume scenarios.
Both scenarios assume that we fully offset the in-year impact of tariffs through supply chain moves, cost-out activities and pricing actions at an average mid-single-digit percentage rate across the entire business. Each scenario also assumes an additional $0.06 to $0.08 negative impact to EPS and due to required withholding tax from China cash repatriation that will take place in the second quarter, partially offset by the full year impact of incremental share repurchases.
Given the uncertainty surrounding the consumer and recent data points suggesting a slowdown, our EPS outlook incorporates 2 potential outcomes, low single-digit or high single-digit volume declines. In the event we see low single-digit volume declines, coupled with the mid-single-digit price increase from tariffs, we expect to see low single-digit revenue growth and operating margins around 17%. This would equate to EPS of around $4.20.
In the event we see high single-digit volume declines, coupled with the same mid-single-digit price increases, we expect to see low single-digit revenue declines and operating margin around 16%. This would equate to EPS of around $3.70.
Regardless of what scenario plays out, the teams are working with agility and urgency on executing our supply chain moves, cost-out activities and pricing strategies. We will continue to find win-win solutions with our customers where our products are more favorably positioned versus our competition.
In conclusion, while the current external environment remains uncertain and challenging, we have full confidence in our team's ability to navigate these complexities. We expect to fully offset the impact of anticipated tariffs in both 2025 and 2026 through supply chain actions, cost out and pricing. By focusing on our key priorities, including mitigating the impact of tariffs, concentrating on our successful brands and impactful innovation, expanding our digital business and managing our balance sheet.
We believe we are well positioned to succeed. We believe our competitive advantages such as our North American focused supply chain, strong balance sheet and leading brands will enable us to thrive despite the current external conditions. We will proactively manage these dynamic periods while actively positioning Fortune Brands innovations for the future.
We'll now pass the call back to Leigh to open the call for questions.

Leigh Avsec

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 2 and then reenter the queue to ask additional questions. I will now turn the call back over to the operator to begin the Q&A session.
Operator, can you open the line for questions? Thank you.

Question and Answer Session

Operator

(Operator Instructions) Phil Ng, Jefferies.

Philip Ng

Dave, congrats on the new role and Jon and Curt, looking forward to working with you guys again. I appreciate all the great color. I guess, first off, Nick, a question for you. Obviously, a very dynamic environment. You guys announced this transformation effort kind of moved the headquarter and kind of thin out the layer of management.
How does that kind of progress? And how does that allow you to kind of navigate this dynamic backdrop?

Nicholas Fink

Phil, happy to give some perspective around that. Why don't I start just by putting it in context, at least the way I think about it. I think of this as we're in the third of 3 phases around our transformation. If you think about that kind of first phase, we've transformed the portfolio we spun the cabins business out, right, Yale, Amtech acquisition. We also did the acquisition around Springwell.
So a lot of portfolio transformation kind of Phase 1.
Phase 2 is really a transformation into an operating company. so we could fully leverage our scale, particularly for the digital transformation, but also around marketing, supply chain, I think things that you're really starting to see yield dividends, particularly in this dynamic environment. I'm sure we're going to talk about tariffs a bit, but you can see the speed at which we're going to be able to move. And I think a lot of that is thanks to the fact that we are much more of a consolidated and aligned operating company.
And the third phase is really in a co-location to drive innovation and performance acceleration. And so we're in the midst of that third phase, which I think will get us to the finish line of this transformation effort. To date, it's a heavy lift. I won't minimize it. It's a heavy lift, but it's going really well.
And we now know who is coming along to continue their careers with us amongst the impacted population who isn't, and we turned up actually pretty materially better than industry benchmarks would suggest. And so we're very happy about the talent choosing to relocate to the area and continue their careers with the company. for those not continuing, they remain very engaged and our hiring process is well underway.
And I got to say maybe part of this was the timing ended up even better than we thought because we are in a dynamic economic environment. But both the quantity and quality of talent that we are seeing interested in joining our company is pretty spectacular. And so I think we're going to see a very, very dynamic group joined the company, and I think you've already seen that as we filled out the leadership team.
And then the third part that you alluded to here just sort of like industry dynamic environment that actually unintended but perhaps happily gives us a lot of flexibility is -- we're now in the rehiring process, and we can control the pace of that rehiring in what is going to be a dynamic and changing economic backdrop. I know there a lot of companies out there are thinking about restructuring are thinking about how to control costs and manage this environment.
We're actually -- if you think about it, almost 6 months ahead of that process because of the move, people have opted out, we're in the rehiring phase, and we can really control the pace we hire. Right now, we're all systems go full steam ahead on critical roles. But as we see the economy unfold here, we're going to be able to control the pace of that. And I think that's just going to give us a lot more flexibility than had we been at the -- just at the front end of it now.
So in sum, it is a heavy lift, but I think we're going to land in a really good place. Headquarters open towards the end of this summer. So everyone gets to come together in a highly energized place and invite you to come visit us. This will -- the first thing that's going to get people in the face as they walk through the doors. This is a company that innovates and makes things and that's going to be a big part of this is about bringing people together so they can innovate, move faster with more agility and performing and better.
It's going to be an exciting chapter for our company.

Philip Ng

Super. Appreciate all the color. Dave, on the tariff side of things, great color. So if I heard you correctly, you're fully expecting to offset the $220 million impact this year. And then, I guess, on an annualized basis, it's $525 million.
So number one, how should we think about that $525 million being divvied up by segments where you have exposure? And then how much of these mitigated actions you have, whether it's price increase, cost offsets and to kind of help us contextualize when this hits your P&L, there's a lag dynamic it's pretty impressive if you're expecting your downside scenario is $370 million that's pretty manageable? Just any color would be helpful.

David Barry

Yes. Thanks, Phil, and thanks for the kind words. Happy to give some more color on tariffs. Let me first clean up just the exposure. So it's -- in-year impact was $200 million Annualized was $525 million.
And as we've talked about on prior calls, the teams have anticipated that this environment would likely be coming at us, although it's more extreme. And I think we all kind of imagined a few quarters ago. So there's been work underway to move the supply chain. The supply chain moves are the most impactful lever we will deploy. But as you know, they take time.
time to implement, but also then longer time to actually impact the P&L.
And so those are underway. We expect supply chain to be more of a mitigating factor as we move late into '25 into early '26. So in the meantime, all of our brands across channels are taking price. And I think it's also good to remember that about 65% of our business is through wholesale and/or direct-to-consumer where we have a better ability to pass through price with ease. And so successful negotiations with customers on price already more negotiations ongoing.
Price and cost out are going to be the 2 biggest levers for us this year and feel good about line of sight to delivering that mitigation.
As I think about impact, I can break it down a little bit. So $525 million annualized impact, say about $425 million of that or 80% is China-related, balance is rest of world. And then looking at segments, Water is about 60% of the impact; Security, 25%; Outdoors 15%. We'll start to see P&L impact from the tariffs in this quarter late in this quarter, but then really ramping third quarter into fourth quarter and see, I'd say, more than 50% of the in-year impact in the fourth quarter. So pricing coming in now will offset here in the next couple of quarters to start to ramp as we go through the year and then supply chain actions impacting the P&L late this year into next year.
So that's how we're thinking about it.
Now I think in our 2 scenarios, a bit of context around the downside scenario high single-digit volume declines, implies an acceleration in volume declines from where we are year-to-date. So year-to-date, we've seen volume down low single digits in the first quarter. It's down mid-single digits to start the second. So it would be an acceleration to get to that $370 million. I mean, I think as we think about it, the consumer reaction to what's happening in the external environment remains the biggest unknown for the business, and we can control supply chain we can control pricing, our cost down, it's just what's going to happen to the consumer, and that's why we decided to frame our guidance a little bit differently this time and give these 2 end posts.

Operator

John Lovallo, UBS.

John Lovallo

The first one is on the digital initiative. I mean there's certainly a lot of focus and excitement internally on that. And there's been some good progress with the 200,000 activations in the quarter, the major insurance wins. I think Liberty this quarter. I guess the question is, how confident are you in still achieving that $300 million in sales?
And along the same lines, internally, how do you sort of balance these efforts with continuing to drive the performance in the core business where the market is for better or worse focused?

Nicholas Fink

John, I'll start with a couple of thoughts and then coincidentally, we're very lucky to -- we got the President of the Connected business on the call here today. So I'll let him really dig in and opine. We're obviously super excited about the Connected and the Digital business and the performance has been phenomenal. I mean we talk a lot about flow, the growth rate in the quarter alone, and it's no longer a small business, I get this clip. Dave touched a lot on in his remarks on the Security business, which had some bumpy lapse last year as we really transitioned that from more kind of mid-cycle start-up to a more consistent sort of roll out of new products.
But we're really seeing some great performance there and some big new partnerships announced that are really meaningful. The confidence really comes from the fact that these drive a lot of value outside of kind of the normal sort of consumer repair and remodel need, whether it be something like flow that actually takes cost out of the system, right? People are going to have to say cost out of the system no matter the economy. In fact, the tougher the economy, the more likely they're going to be driven to do that and flow just does that. In our new subscription model that we've just started trialing really allows consumers to do that at a very low entry level.
And then if you look at on the security side, whether it be the (inaudible) business, which is really actually going to help stabilize at the end of the day and started to put a price on that or the consumer business where you could do things like disarm your alarm system with your finger as you enter your door in the fingerprint. I mean, again, huge value drivers to consumer that just sort of detaches us from the normal cycle. So a lot of confidence there.
The second part of your question, which I just want to answer before I hand it to Dave is a very important one, [Rich], how do you balance these things. And obviously, you put a lot of focus and a lot of investment on the rest of the business. I do think coming together in our new headquarter single campus, again, driving industrial design, innovation, commercial discussions, supply chain discussions, performance all in the same place is actually really going to help accentuate that performance. We've got a really big and very important core business. that we need to continue to drive.
If you look at this year, and you'll see that roll out over the course of the year, you're going to see a lot of innovation around the core business. Moen has a lot that's coming to market that we rolled out at our sales events in the KBIS this year. You've seen the last some perfect aisle, which will be a total refresh of that aisle. Our 1,700 stores really, really impactful. And then in security, brand new campaigns behind Master Lock, SentrySafe, new industrial design rolling up, much cleaner product segmentation and making it much easier for the consumer and the pro to navigate our products on our shelves.
So I think you're going to see a lot of focus and excitement around the core, and I really think it's going to show up in our share numbers.

David Barry

John, a couple of things I'd add. So one -- I'm sorry, just a couple of things. So good start to the year and on pace to deliver the full year goal. So that's a performance update. I'd keep it that simple.
I'd say the team is actually doing a great job of staying focused on opportunity news given the challenges in the current environment elsewhere. And as Nick talked through in his prepared remarks, we have signed new insurance partners. We've launched subscription-based pricing test.
Additionally, we've qualified another national installation partner for Flo and signed up more than 40 regional carriers, which was a new initiative this quarter to -- if we focus on national carriers in the past year now moving into the regional carriers and really adding focus on driving sales activation through the agent base, which is the next level of activation that we're doing to drive sales on flow.
And then for Yale, we touched on some of the partnerships that are coming, the launch with ADT. Google is going -- we've also won more than $10 million of placements in retail and e-commerce, which was a focus and a point of synergy from the acquisition to take this brand back through our traditional channels, and we're starting to see that play out and come to fruition. So we're excited about the momentum and on track to deliver our full year estimates.

John Lovallo

Great. That's really helpful. And then so far, the feedback that we've received today from investors has been on the water segment and the seeming underperformance versus your large competitor. And POS was down low single digits. I know there's some inventory destock.
But I guess the question would be, one, just any more color on that e-commerce pricing strategy that you mentioned? And then any kind of relative share shifts that may be worth noting in the quarter, please?

Nicholas Fink

Yes, I'm happy to give a bit of color on it and Dave can round it out. But as you look at that, you're right, low single-digit declines in POS. We did see a fair amount of inventory come out, particularly from a wholesale channel, I think, in preparation for some softness, and we've probably seen that come through a bit with the builders. And then as we to segment the low single-digit POS declines will look across. The feedback from the retail areas on our business has actually been very good.
particularly of late, where they've been telling us that we're doing better than categories. So I'm going to take that at face value.
In e-commerce, we did transition and we are transitioning through to a firmer pricing strategy so that we can keep all channels healthy and competitive. But that is a transition as you do it. I mean you sort of got to force it at one place and then it takes a while before you see the uptick in the other channels. We also have to make sure that we have all offerings available no matter where the consumer is. So we felt it was necessary and important thing to do.
We noticed with some new analytics we've gotten a bit out of whack and now we're transitioning through it.
But I acknowledge, I think it could cost us some share in e-commerce as we're doing it, but our focus is being a long-term share gainer, and we will do the right things for the health of the brand even if it means a trade-off in a quarter or 2.

David Barry

And I would add, John, if you think about the Water sales down 10% organic ex China, FX down 7%. Nick talked about that low single-digit POS decline, which is really consistent with what we saw across the rest of the portfolio. We were surprised as the quarter went along was the inventory drawdown, especially in wholesale, with the mid-single-digit impact on the segment. As we look at weeks of supply with some of our bigger wholesale customers, they're now below any point they've been in the past 18 to 24 months. And so I think it's a sign potentially softening single-family new construction volume and multifamily new construction volumes they're seeing, but that was probably the biggest surprise in the quarter on the Water side.

Operator

Trevor Allinson, Wolfe Research.

Trevor Allinson

First one, you talked about reducing your China exposure. I think you said that 10% of COGS by the end of the year. On the $525 million impact in 2026, is that assuming current China exposure or your exposure after you've moved that to 10% of COGS? And then what additional assumptions are there around cost to move products elsewhere? And what other countries are you primarily moving that exposure to?

David Barry

Trevor, this is Dave. I'll start with some and then Nick can give some context. On the $525 million number is unmitigated. So before any mitigation actions so we'd expect to be able to -- that number will come down, obviously, as we mitigate and we'll update in subsequent quarters. Now that's progressing.
As we looked at supply chain shifts, right, as we talked about, we have a global footprint. We have significant presence in the U.S. and in other North American sites. And so it's leveraging really finding the best cost position for our customers given our footprint. And those things take time, and there are investments to your point.
I think most of the investments, though, are capital when I say a reasonable amount of capital to stand up some assembly lines and production lines in our nearshore facility. So that's how I think about the incremental cost. I think our capital forecast around that 3% to 4% of sales kind of encompasses that. I wouldn't expect it to be a material number outside of our typical capital range. And then on the cost side, I mean, we're again trying to get to a lowest cost position given our network to be able to continue to be competitive and take share in our markets.

Nicholas Fink

I'll just add for a bit of context, Trevor. From a strategic perspective and a call out to our supply chain team that have just simply been phenomenal, have really led kind of a 2-part strategy. One is a bet on our U.S. and North American manufacturing footprint. And so as I said in my remarks, in 12 U.S.
sites, 15 North American sites. That was a decision that was made. I mean we've been thinking about debating this comparing this obviously for several years now.
The other leg to the strategy has been a hyperflexible supply chain. And so they've -- as we've debated what to do over the last several years rather than betting on any particular country, we've been on making our supply chain hyperflexible so that we could move it about as needed. And you're seeing that come through now in the speed some of the mitigation that Dave discussed. And as we've done in other times of great dislocation we really expect that this is going to generate a competitive advantage for us, and we're going to press that advantage to service our customers very well.

Trevor Allinson

Yes, it makes a lot of sense. And then my second question is somewhat related and just your general approach to China here. I mean there's been speculation that tariff rates could come down here in the not-too-distant future. You've been moving your supply chain out of China for a while, you're accelerating here. Do you change your approach to moving your supply chain if tariff rates on China specifically were to come down significantly?
And then a second question would be on your business actually in China just given everything that's going on between the 2 countries. Do you have any different views on that business now that the dynamic seems to be changed between the 2 countries?

Nicholas Fink

I'll just take this quickly. I'd say firstly, on the moving about, I think the lanes of travel are pretty well set. The amount of tariff may vary greatly. But I think the lines of travel are pretty well set on where this administration expects the supply chain to go from a regionalization standpoint. And as I just said, we're going to maintain a hyper flexible supply chain and be able to move it around and at some other point, I'm happy to detail how we do some of that, but there are specific initiatives that we undertake to make it very flexible.
But I think the lanes have traveled pretty well set, and we expect it to be shored up and to take advantage of our U.S. footprint.
The second part is our business in China is really at this point, as we said before, China for China. It's manufactured in China as for China and sold in China and managed very, very well by a team there. It's organic. It's been homegrown and they've done a phenomenal job managing it through a lot of disruption over the last few years. I'm not going to predict where that economy goes.
But I will say what we were expecting to see, we're certainly kind of the end of sort of the big disruptions and at least bottoming out of that business.
We'll see if this makes it any worse, but I think strategically, it kind of stays where it is, which is a closed-loop system. That still serves that consumer over there and also gives us exposure to a lot of innovation that we see from suppliers in that market.

David Barry

Yes. And I'd just add, this is -- as a reminder, this is the last quarter of a challenging comp where we were comping accelerated completions. And so our sales were down in the 30% range in China as expected, but now expect to see a much more stable, not necessarily return to growth, but at least not these 30%, 40% decline quarters in that market and also the size of the business makes it much less impactful on the overall Fortune results going forward. So we feel like what we see today, the worst of that is behind us.

Trevor Allinson

Thank you for all the color, and good luck moving forward.

Operator

Susan Maklari, Goldman Sachs.

Susan Maklari

Nick, I want to start with your comments around the ability to leverage this environment and the assets that you do have in the U.S. to gain share. Can you talk a bit about how some of those conversations may be starting or areas that you're especially focused on? And how we should think about that coming through over time? And what it could mean for the upside perhaps to some of those already really meaningful growth targets that you've set across the various segments?

Nicholas Fink

Yes. Well, we're very focused on it. I would say, never let a disruption go to waste, and we do believe there's a lot of opportunity. I'll start with Outdoors. I mean if you look at Outdoors business, very vertically integrated.
For a U.S. manufacturer and as the leader, particularly the leader in exterior fiberglass stores with manufacturing here in the U.S. capacity that we invested in. And we've seen a lot of competition over the last few years, and frankly, some unfair competition, as we've outlined in our antidumping suit from China, that I believe between those 2 things is going to go away.
No matter where tariffs settle, I think that kind of behavior has been called out. And people are going to need the volume in the marketplace, and we're one of the few that can provide that volume. So that's an example of a place where we think there's a lot of opportunity. There's still a lot of inventory that was bumped into this market that will have to be chewed through but that's going to happen at some point. And I think people are going to be actually looking for those that could provide consistent, reliable volumes.
So a big opportunity for that business.
I'm going to Dave's business for a second in the Security business, a lot of competition from Chinese brands entirely sourced product from China in the securities and safes business. We think there's a big opportunity there with our North American manufacturing footprint. And then finally, in Water, we've maintained a high level of manufacturing here in the U.S., and that's a very complex supply chain with a lot of moving parts, but we see a lot of opportunities as we outlined in our mitigation to really continue to leverage and grow the U.S. North American footprint that we have to serve customers.
And ultimately, when you look at all this mitigation we're talking about, we're talking about doing it with just mid-single price adjustments on average across the portfolio, which is really very modest for the amount of dollars we're mitigating. And so we think that in and of itself will give us a competitive advantage in addition to being able to supply consistently through any disruptions have that footprint. The fact that we can do it and what is going to be a fairly modest relative to other price increases is going to give us an opportunity across the portfolio.

Susan Maklari

Yes. Okay. That's great color. And then turning to Security. The margin there really outperformed nicely relative to what we had in our model.
And appreciating some of the current operating pressures that are coming through. But any thoughts on some of the cost benefits that you're seeing there? And anything on how we should think about the path forward over time as some of those benefits continue to come in?

David Barry

Sue, it's Dave. As we talked about with security, now that Yale is in that segment, the margins can be a bit lumpier quarter-to-quarter just based on investment patterns within that business and new customer launches. The core Master Lock margins remain very strong, right, in that high teens level. And then as we invest behind Yale, the margin could fluctuate and they might move a few hundred basis points over the quarters based on our expectations.
So nothing that we're seeing that's unusual. We are continuing to invest there and Nick highlighted the brand campaigns that we've launched for SentrySafe and Master Lock, it's Master Lock first campaign in decades, and we immediately -- you can watch our website traffic and our brand metrics start to spike as that in the market. So it's resonating with consumers, and we'll continue to lean in that.
We're driving some new innovations for all 3 brands with Master Lock, SentrySafe and Yale, having launched new products or having new products coming later this year. So you're seeing just margin, a bit of the investment cycle, timing predominantly for Yale with a very healthy core Master Lock business underneath.

Nicholas Fink

And I'll just add this to put it in some context, I mean, this is that was part of a multiyear plan. We looked at that business and we said the brains in that business were far too solid, beautiful great brands that we had for us not to be investing behind them, but we were not going to be investing behind them at the margins that the business used to have, if you recall, you've tracked us for a long time. And so we undertook even going back to our Investor Day to do a lot of work to replatform that whole business to really healthy margins so we could start to invest in innovation and branding.
And that is just coming to the marketplace now, right? So it takes a while, but we're really excited that not only did we deliver that margin journey, but we did it in a way that's actually allowed us to reinvest in a significant way behind the business.

Susan Maklari

Yes. Okay. Thank you all for the comments and good luck.

Operator

Michael Rehaut, Fortune Brands.

Michael Rehaut

Mike Rehaut with JPMorgan, not joining the company, I guess.

Nicholas Fink

Welcome to the team.

Michael Rehaut

That's right. You didn't realize how much the new headquarters would change personnel, I guess. First, I'd love to try and delve in a little bit more in terms of at least the guide's framework. And in particular, a couple of aspects. One, it looks like you're baking in this $370 million to $420 million framework, a high -- mid-single-digit price increase to offset tariffs it looks like if you just do the back of the envelope math on your sales base, that's about $230 million, which would exceed the $200 million that you expect to hit you this year in tariffs.
So I know you had also talked about cost reductions. And I'm just curious if those numbers are right because it would seem like the pricing is more than offsetting the tariff headwind?
And also just a second element to the pricing question or to the guidance question. It looks like you're also -- even without the negative impact of the potentiality around volumes being impacted by tariffs, that volume is coming in a little bit softer than expected. just given that the high end of the impact may be the high end of the framework is still below your prior guidance. So just trying to understand some of the moving pieces there.

David Barry

Yes. Mike, it's Dave. I'll try to put it Nick's context. On the pricing side, I think if you're kind of lower in the range of mid-single digits, you'd probably get to a more realistic number of where we'll be still in that mid-single-digit range. And then as that comes across the year, there'll be different realization levels and timing.
And so it will flow through a bit differently as it comes across. So there will be then cost out and supply chain activities that help that.
On the 2 scenarios, I'd say a couple of things on volume, recall from our prior guidance that the second half has easier comps. We exited some low-margin product, right? China flattens out. We had the issue with the security distribution center going offline in the fourth quarter. So there -- it get better like the comp perspective in the second half from a volume -- year-over-year volume comparison.
And then I say as we think about the volume scenarios with the downside scenario at $370 million and high single-digit volume declines, we'd be looking to target decrementals on the volume in the mid-20s or better. And that's where the cost levers that Nick outlined come into play. And so if we see volume trending that way, we can pull back on hiring and reduce some SG&A there. That would be our target from a volume standpoint.

Michael Rehaut

Okay. No, that's helpful. And I guess, secondly, just maybe zeroing a little bit into the upcoming quarter, the second quarter. You had said that sales were on track to be down, I believe, mid-single digits, if I heard that right. Any other type of framework around how to think about 2Q either by segment and also from a margin?

David Barry

Yes. Obviously, given the Fortune level, I think we see sales down in that low to mid-single-digit range, Mike, as you mentioned, that's roughly in line with quarter trends, where we see POS down in that 4-ish percent range. It does imply sequential growth we're right now seeing inventory moves one way or another really. There isn't a lot of pre-pricing buys, and we don't see any inventory reductions. The other unusual item I'd call out in the quarter is around the tax rate.
And because we are repatriating about $100 million of cash from China as a onetime dividend our tax rate is going to approach 30% in the quarter, and that's going to be unusual given where we've been historically. So I just want to make sure I call that out for the group.

Operator

This concludes the Q&A session. I'll now turn the call back over to Nick Fink for closing remarks.

Nicholas Fink

Well, thanks, everyone, for joining us today, and thank you for your thoughtful questions. So having got a choppy environment, but do our very best to put this company on some really good footing, and we see some solid advantages we can take about the job. And thank you also for welcoming Jon and Curt to their first call.

Jonathan Baksht

Thanks, Nick. I'm really thrilled to be here. I'm joining at a really exciting time with the transformation underway and the move to the new headquarters. I see an enormous opportunity to Fortune Brands innovations, and I look forward to speaking with many on the call today in the future.

Nicholas Fink

Well, we're delighted you joined and I'll just say we have a lot of interest for Jon's role. We set a very, very high bar and Jon cleared it clearly easily. So we're very excited to have Jon and Curt on board. And I'll just say, as we continue to progress on this ongoing transformation, Jon, Dave and Leigh are all emblematic the phenomenal talent that we can both attract and retain in this business. And so I have full confidence that with the very strong team we have, we're going to navigate choppy waters ahead and deliver ahead of competitors for our customers.
while seizing the opportunities that disruption inevitably creates. So with that, thank you.

Operator

Thank you for joining today's conference call. You may now disconnect.