Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the Ice House. Our podcast from Intercontinental Exchange on markets, leadership and vision, and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. And now, welcome Inside the Ice House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
Here at Inside the Ice House we do our best to keep tabs with our past guests to see how their journeys have evolved in the period that's elapsed since the last bared their souls into our microphones. Occasionally, just every once in a while, we open up the library for a return visit from some of our special guests to pick up where the last episode left off. Back in October, 2021 at the height of the pandemic when most of our episodes were produced over Zoom with me sitting in my house in the Catskills and my guests spread somewhere across the lower 48, we recorded episode number 265 with Nick Fink, CEO of Fortune Brands Innovations, though the company had a slightly different name back then.
That episode took listeners from the Great Chicago Fire in 1871, not far from where Fortune Brands headquarters is in Deerfield, Illinois through Master Lock inventing the world's first laminated steel padlock in 1921 to its legacy and spirits through the parent company's 10th year anniversary as an independent New York Stock Exchange listed firm in 2021. Now, we covered a full century and a half over that scant 45 minute conversation. When that talk with Nick ended, as it often does inside the Ice House, with a look into the crystal ball of what might portend for our guest's or his company's future, my final question from that recording done remotely with Nick was, what is next for Fortune Brands home and security, and this was his answer.
Nick Fink:
Well, I think we're really on the cusp of the next big era on housing expansion, but it's going to be different, right? This is not same old, same old. I think it's going to be driven by some really exciting secular wins on top of the demographics I talked about. And so we're going to lean into that. It is going to mean we're going to have to continue to disrupt ourselves. We're going to have to transform ourselves. We're going to invest heavily in digital to do it. It's going to be a very exciting time to be at this business.
Josh King:
We're going to have to disrupt ourselves. And as we'll discuss with Nick, now here in person at the NYSE, at our home at corner of Wall and Broad Streets during a new conversation. Under Nick's leadership, the company has disrupted itself so much that it had to add innovations to the company's name. Our conversation with Nick Fink, CEO of Fortune Brands Innovations on the company's complete transformation, its continued growth as a leading ESG company and how digital can be applied to water, security, and so much more. It's all coming up right after this.
Speaker 4:
Connecting the opportunity is just part of the hustle.
Speaker 5:
Opportunity is using data to create a competitive advantage.
Speaker 6:
It is raising capital to help companies change the world.
Speaker 7:
It's making complicated financial concepts seem simple.
Speaker 8:
Opportunity is making the dream of home ownership a reality.
Speaker 9:
Writing new rules and redefining the game.
Speaker 10:
And driving the world forward to a greener energy future.
Speaker 11:
Opportunity is setting a goal.
Speaker 12:
And charting a course to get there.
Speaker 13:
Sometimes the only thing standing between you and opportunity is someone who can make the connection.
Speaker 14:
At ICE, we connect people to opportunity.
Josh King:
Our guest today, Nick Fink is CEO of Fortune Brands Innovations. That's NYSE ticker symbol, FBIN. Previously served as president and COO until his promotion in January, 2020. Nick joined the company in 2015 and previously worked at Beam Global Spirits and Wine and also serves on the Board of Directors of Constellation Brands. That's NYSE ticker symbol, STZ. He was a guest on this podcast back on episode 265 and is returning for his first in-person Sit down. Welcome, Nick, Inside the Ice House.
Nick Fink:
Thank you for having me.
Josh King:
What brings you and the team back to the corner of Wall and Broad?
Nick Fink:
We were in New York seeing some investors this week, having a couple conversations about some of the things that are happening in the business, some really interesting engagement and a great opportunity to be here with you.
Josh King:
When we last spoke October, 2021, were you already planning for the next phase of the company? You alluded to it in that last podcast that we had.
Nick Fink:
Yeah, I would say we're always thinking about how we can evolve our portfolio, the investments we can make that are going to really drive the next generation of growth for the company. And so some of those thoughts were, I would say had been certainly formed, were being debated, nothing decided at the time, but knew directionally and strategically where we wanted to go. A lot of that then galvanized in the earlier part of 2022, which was a pretty transformational year for our business.
Josh King:
You announced at that time Fortune Brand's intention to separate the business. Why did you call the transaction a separation and not a spinoff?
Nick Fink:
That was very, very deliberate. And to add to that, internally, as you go through this process, and we've seen it before and people talk a lot about RemainCo, SpinCo and RemainCo. We banished the word RemainCo from the company. You're not allowed to use it. It was SpinCo and there was NewCo. And the reason we used separation and not just spinoff, was we wanted to very deliberately communicate to our own team as well as remind ourselves that this wasn't about simply separating a limb and moving on in the current flying formation, but it really was an opportunity to rethink how we're going to go about our business and how we're going to prepare ourselves to succeed for the next era of growth. And that played through sort of both that word separation, which astute to have picked up on, but then how we named the company and how we organize the company post-spin.
Josh King:
The SpinCo, the name that shall not be used, the new company took its name as Master Brand, now trading under the NYSE ticker symbol, NBC. It has brands like Mantra, Diamond, Omega, many others in the portfolio. Before we get to Fortune, Nick, how would you describe what's currently under the roof at Master Brand and what advice do you give to Dave Banyard as he took the helm of the new company?
Nick Fink:
I'm not sure Dave needs a ton of advice. He's a phenomenal leader. As we looked at the portfolio, I got a little bit to answer your question, what was even the genesis for doing something like this? As we looked at the portfolio, you could see we have phenomenal businesses with leading positions. They were becoming increasingly different. One side of the house, there is a set of businesses that are really, really driven by brand, consumer, and trade awareness around the brand, innovation pipeline and channel excellence. And our cabinets business, which was and is the leader in the space, is really also driven by that channel excellence. And I think we'll see innovation over time and how they go about their business. But manufacturing excellence, like being able to do this better than anyone. And that was a divergence in the portfolio. And so as you look a little bit about the business today, I believe it's a phenomenal business.
It'll be the winner in its space. It is the number one player and you can already see, a few quarters in, their results. And as I said on our investor day, hold me accountable for how both businesses do. We should put great businesses out in the world. I don't know that they need a ton of advice. I think they know what to do. I think we set them up well. Dave's a phenomenal leader with a phenomenal leadership team and I think if they keep doing what they're doing, perform well, and reinvest some of that to innovate, how they go about the business, what they bring to consumers, they're going to be a runaway success.
Josh King:
The Fortune Brand side, following the completed separation in December of 2022, the company also took on the extra aspect of its moniker, Fortune Brands Innovation. How does that define what the focus of the company is?
Nick Fink:
So a couple different ways. One, the clue's in the title, so brands and innovation right there in the title. So it tells you a little bit directionally where we're going. And those two things are actually very interlocked. So innovation, obviously bringing newer, better products and ways of doing things to both consumers and customers and trade partners. But also certainly in our space, innovation builds brands, and we want to have brands that create value for the whole value chain, including the consumer at the end of the day. And in our space, you very much build that by continuing to innovate and bring new value. So those things are very symbiotically linked and so that was a big part of the impetus.
The other part I would say is in recognition of the fact that as you look at the markets in which we play and what we say is we fundamentally love our underlying markets. We think in the long run, they're very good markets. I'd say 2023 is challenging as rates have gone up. Part of 22 was challenging. But over the long run, these are great growth markets simply because of supply and demand. But we think that there are secular tailwinds to be found inside of the market that can generate incremental growth. And the change in the name was in recognition of that and our ability to take this portfolio and take the brand strength and the assets that we have and start to tap into some of those other markets.
Josh King:
We're about to get into some of those secular trends. But you alluded, as well, to sort of a different way of structuring and running the company. Back in May, the company announced that it had this new reporting structure. Something about it stood out to us in addition to some of the normal departments reporting up to you like finance, legal, HR, communications. There's something called digital. What is a digital department that happens to report directly to a CEO?
Nick Fink:
If you will, I'll talk a little bit about what that change was and then how we sort of got there. And so '22, interesting year, and as I said, there's a ton of humility and gratitude to our team. We announced this separation in April of '22 and by December 15th had separated this business, reorganized the entire way the company functioned and announced a pretty transformational acquisition and new assets that we were going to bring into the portfolio. So yeah, a pretty busy eight months. And gratitude to the team because they did it, and I don't know a lot of teams that could have executed all of that. As we were going through this total transformation of separating out one part of the portfolio and then by the end of the year adding in a suite of brands that are, for part, a very digital and digitally enabled set of brains and another part, very luxury oriented set of brains that fit into a household role.
As we were going through that, we stepped back and saw an opportunity to think differently about the organization. And actually, I'll, again, credit a couple of IT team members came to me and had done some research and said a lot of companies will wait till they're in their new state to think about how they run it, but there's actually a lot of data that shows you that companies that organize themselves ahead of the event outperform both those other peers and the market, whereas those that wait until after the event, actually, often underperform the market. And that was the big impetus to do the work ahead of it. And so we actually announced the org structure in September prior to the separation in December.
And what was it designed to do? It was really designed to unlock growth and productivity across the organization. And so we looked at the strides we'd made. We built out something called the Fortune Brands Advantage, which were core capabilities that we were playing across the portfolio, but you could still see that we'd invested in and made some real progress, some great capabilities in one part of the business and then it would start to germinate and grow and then we'd go over the other part and go, wow, this is really working over here, maybe you should think about it over there. And then we'd had that debate and then maybe in the next planning cycle you'd sort of invest. And we just came to realize that, at the pace of change today, we actually needed to be able to play those capabilities across the entire portfolio simultaneously, in a focused way and in a prioritized way, but simultaneously.
So very easy example for people to understand. Take marketing, you could see what we'd done in marketing with the refreshing of the Moen brand, which has been incredibly successful, the way consumers have reappraised it, with the building out of the House of Rohl brand really as a concept from scratch and now amongst designers, number one in terms of luxury awareness. And yet you had an iconic brand like Master Lock that wasn't doing a ton of big brand strategic thinking, it was doing some good at the shelf brand activation but could really benefit from the prowess there. Now, we have one chief marketing officer over the entire portfolio. Similarly for digital, similarly for innovation, similarly for product development. And you get to play those capabilities.
You ask specifically about the digital piece, we're obviously in a time of great change and times of great change do often require a concentration of resources. You do need some scale to really move the needle. And what we could see was we had a bunch of really interesting digital initiatives across the organization, whether they be the connected product portfolio that was really gaining some traction at the time, some of our own internal initiatives, some of the use of AI that we had inside the company, but we weren't bringing it together and benefiting from scale. And what scale really allows you to do is take the things that are going to create value because they're unique and make them unique and take the things that aren't going to create value for being unique and commonize them and allow you to move much faster because you have a common platform and set of ways of doing things.
It also allows you to recruit a team and give them a career path because they can move through the company and work on a whole bunch of different things over the course of their careers. And we could see that we felt we really needed to bring this together and accelerate it. Now, we still do it in a very focused way, so people are dedicated to the teams of the products they work on, but they're part of a digital organization. And that accelerated journey really started in, say with some strategic work in '21 and then really some big commitments to make it go in '22 and bring together what we had. And now we've just closed this acquisition adding the Yale and August US and Canada businesses, which really come with a phenomenal development team.
Josh King:
In our last conversation we talked a lot about digitizing water at length and last year you announced the acquisition, another deal, Aqualisa, a digitized showering company. Has there been significant innovation and development in the technology of water both in homes and yards since we last talked?
Nick Fink:
Absolutely. I'd say really twofold. One is the core product itself. So recall at the heart of our digital water journey is our Flo by Moen product, which is a smart AI-driven brain essentially that sits on the main and can detect small leaks and warn you about them and will shut off your main in the event of a catastrophic leak and does so by learning habits and how people use water over time. So it gets smarter and smarter and smarter and smarter. Two things that have really happened, A, and we've learned as we make this journey from an mechanical company to a much more digital company is that you have to keep innovating the core product. Consumers actually expect the product to get better after they purchased it, right? It's not set it and forget it. And so much more focused on constantly taking the core product and making it better, whether it's the firmware, the software or the performance of the product.
And then the other part of it is we've added to that ecosystem. And the way we've added to the ecosystem is other connected and digital products that, over time, will come into this full ecosystem and all start to talk to each other and make the whole far more intelligent. And one of the examples, you referenced irrigation, we brought that out to the market in January of this year and it's smart irrigation done in a way that no one's done smart irrigation before, which is not just saying is it going to rain, is it not going to going to rain? But actually we're measuring moisture levels in the soil and only directing water to where it is needed, which is a step change in the amount of water that will be used.
And when that system is then back talking to the brain and is able to work as a continuum in a conversation, that'll really make a massive difference. And so we've built out that ecosystem, we'll continue to build out that ecosystem, making sure that heart is really healthy. And with that, the amount of impact that we can have both in the avoidance of damage, which you'll recall, single biggest home residential insurance claim is around preventable water damage. But B, just really to the planet and the communities that we live and operate in when we can not just avoid damage but really save water that's simply just being wasted.
Josh King:
Talking about a step change in the amount of water used, what's an electric shower?
Nick Fink:
Well, there are a couple of things, and it's interesting as you get into this space, you put products out into the world and they have some features and benefits that we really try to focus on only launching things that we think create real value. But they have some features and benefits that are interesting and additive, but become exponential when they get connected to the whole network. So a digital or smart shower today does a couple really interesting things. Firstly, it just has fun benefits like I can set it to 101 if you want your hot shower. Turn it on, it'll get to temperature, it will pause. People waste a lot of water when they turn the shower on and go off and brush their teeth, it will pause and it will hold it at that temperature until you're ready to use it. It'll also use less water to get there because it doesn't need to just blend hot and cold water and it can purge the cold water from the hot water line precisely because it's a digital valve and then pause it there.
It has preset features and functions that allow you say, okay, this is my post-run shower, this is my morning shower, and all that is really great and we have some consumers that just love it, but then you eventually start to connect it to the whole network and we'll be in a spot where the Flo by Moen device can say, boy, temperature's dropping outside. I'm worried about a freeze. I might reduce some pressure on the line and I'm going to start to pulse water out of that smart shower to make sure that you don't have stress in your pipes or a pipe break through a freeze. And that is how the ecosystem starts to work together.
And so you asked about Aqualisa, we've built a platform with Moen. Aqualisa, we saw in the UK where we already have a really nice footprint with our House of Rohl business and they really built an incredible leadership position in digital smart showering in that market. And so incredibly on strategy, it's showering and it's smart, but also an opportunity to purchase and acquire the technology that came with that platform, combine it with our own and leverage it across all of our markets.
Josh King:
Water conservation, such an increasing focus of ESG reporting. You need look no further than the controversy between the seven western states about sharing water from the Colorado River to grasp how large the issue is. How does water innovation factor both into your company and your client's company's ESG metrics?
Nick Fink:
Well, we're able to really, really move the needle and we look at a lot of external ESG reports and you can see companies that are huge consumers of water working very hard to offset that. We have a massive installed base in this market. So through Mission Moen, we've committed to save a trillion gallons of water by 2030. And just to conceptualize, what's a trillion gallons?
Josh King:
What is a trillion gallons of water?
Nick Fink:
It's two weeks of Niagara Falls.
Josh King:
Wow.
Nick Fink:
It is not a small amount of water. And when you go compare that to other companies that say consuming water and see their commitments, you can't get to a trillion gallons. So how do we get to a trillion gallons? It's because our installed base is so large that when we can pull the lever, it's enormous and we can pull it a couple different ways. One, it's just by engineering better products that are more water-efficient or aren't going to leak. And then certainly by engineering smart products that really start to make step change difference. You need half the water that you thought you needed to irrigate your property. And you talk about those seven states, people don't necessarily want to be told you can or cannot do this, so maybe you can do it, but there's a better way to do it. And I think that will be a big unlock.
And so it's really an opportunity to have impact because of our scale where we already play and if we can pull the levers to make it better and to drive some awareness for consumers. Hey, if consumers want to opt in and you're on the system and you're providing this data, we may be able to say, we noticed you took a really long shower. Do you want to cut your water bill down by X dollars per month, and here's the product that can help you do it.
Josh King:
Well. So many parts across the globe are trying to conserve water, Nick. Others are being forced to confront water in places that they've never reached before. We spoke recently here on the podcast to Howard Hughes Corporation's CEO, David O'Reilly about a property just down the street from us. Let's listen to just a little bit of that conversation.
Speaker 15:
You had a tin building that was below the floodplain that was very much exposed during Superstorm Sandy and we needed to raise it up. Unfortunately, if we raised it up, the awning of the building would've hit the FDR. So we waited while a lot of elected officials and those in the community debated the best course of action and solution, including one of those solutions which I found a little comical was, let's just bury the FDR. Let's just move the entire highway rather than move this historical location of the Fulton markets-
Josh King:
Perhaps maybe not the right choice for a historic building. [inaudible 00:23:56]
Nick Fink:
We really believe in doing well and doing well by doing good. And you look at the portfolio, just talked about water. Five Run's another example of that. And so we've made some really big advances and the sector's made some really big advances in composite decking. And what does composite decking do? It gives you a beautiful product that is going to last a lot longer than the natural product. And in this case, it's actually 95%-ish recycled content. I sometimes debate with my kids, they're like, "You can't put that in the recycling bin." I go, "We run a recycling facility. I know what I can put in the recycling bin, because I go see it." And never in my wildest dreams did I think I'd be running a recycling facility and I love it. It makes me so proud that we do that.
And you go to visit this facility and there is refuse on one side things that society has done with and beautiful deck board coming out the other side. And that's just an incredible story where you're taking something that's frankly been discarded. But I think it's only part of the story that people understand about this. The longevity and the performance of these products actually mean that you're also creating something that looks beautiful, saves consumers and customers a ton of money because they're not having to treat it, change it, move it just a few years later. And if you think about, and it's not a small thing, the carbon footprint of not having to rebuild it every X number of years.
Josh King:
Not having to harvest the trees that would've gone into the original wood decking.
Nick Fink:
It's really significant. And we have another business that's very akin and actually operates in the same group as Fiberon, which is our Therma-Tru door. And it's exactly the same journey. It's taking commoditized wood and turning that market into a brand-led, highly innovative engineered product. And so we're the leader in high performing fiberglass entry doors. So very, very similar story. Another couple decades down that journey, so the market's already converted to 50% fiberglass and we talk about the energy that those doors save through their performance. But again, just think about the fact that you don't have to replace it as often. That is a lot of doors not sitting on flatbeds of trucks, a lot of trees not being cut down and a massive impact to the environment.
Josh King:
And a construction like Fiberon or your composite door, flooding does happen, but when it gets totally immersed, it doesn't come out warped and need replacing.
Nick Fink:
Well, one of my favorite things to do, and you're more than welcome to come pass a visit, we have an innovation center that's just a fun place to be where you get to look at and play with a lot of stuff. And we have a room, a little room if you'd imagine with one of our doors and kind of plexiglass walls. We fill it to the brim with water and not a drop leaks out. That's the level of performance of the door. So it won't leak, it won't warp. And it's sort of amazing. We talk about the supernatural power of these products. When you're willing to invest in the innovation, you can really do something that's very, very cool with them.
Josh King:
So beyond conserving or maybe holding back water, what are the other focuses of Fortune Brands post-separation?
Nick Fink:
I come back to that construct of brands, innovation, and channel. And that's underpinned by our incredible team, highly talented and they're driving a common highly accelerated journey across our supply chain, our digital transformation and bringing all of that to bear and the capabilities I talked about. And so we are very focused on this water journey and really adding value where we can and we think it will be enormous. And if we can take that damage down to close to zero, that's not only going to do good by our communities, it's also going to create enormous economic opportunity just because that is such a large part, this engineered materials part of the business. That journey of taking people from something that's highly commoditized and really getting them to think about brand and the innovation that can be brought to them over time and being excited and proud to have that in their homes.
And then our security business, which shares a lot of the same attributes as our water business, highly branded, great markets, very innovation-led, and increasingly on a connected journey. And we see the opportunities there to really take it from what has historically been kind of a slower growth, more replacement cycle to I going to have accelerated growth because I can take something that I maybe understood it existed before and introduce a much better way of doing it because now it's digitized and connected.
Josh King:
Talking about the incredible team that you mentioned and sort of hearkening back to youth rethinking the organization of Fortune Brands Innovation, one way to stay ahead of the curve is absolutely to diversify the voices in the decision process. Where does an increase in the company's diversity from its board to its workforce fit into your plan to help Fortune Brands stay relevant with new generations of consumers?
Nick Fink:
Firstly, I'll say I'm very proud of our diversity journey. I remember a few years ago as we were really setting it up and thinking about where we wanted to go, and I sat with Sheri Grissom, CHRO, and we thought about how aspirational did we want to be. And we decided, you know what, we'd rather be super aspirational and go for it. And if we fall short, that's fine, then sort of set easy goals and maybe miss it. And actually, we not only got there, we got there a year early. And I'll talk for a second about why we do it and then how we do it. Firstly, the why is, to your point, we sell to a very diverse group of consumers and customers and if we don't understand what their needs are and where they're going, eventually we'll just be irrelevant.
And so a simple example, but our employee resource groups participate in the innovation pipelines for our company. They're proud, they support each other and they help build each other, but they're actually proud to work on the business. That's what excites them. So they help us think through where the consumer needs are and where they're going. So that's a big part of the reason why and it's not just diversity of background, but it's diversity of thought. And brought a lot of different leaders into the business with different backgrounds that come from digital spaces, that come from other sorts of consumer spaces, have seen other kinds of transformation and just sort of broaden the voices. And we really do it by being very insistent that we see the best talent in the market, not any kind of particular talent, but that we see the best talent and the most diverse pipelines and then we pick the best candidates we can find.
And what I've actually found is when you do that, when you hold the bar high on, I want to see a lot and then I'm picking the best talent I can find, the company actually diversifies pretty quickly. So if you look at the composition of the management team, the composition of the board and the composition of the teams underneath them, you've seen that journey, but it really is talent first and the conversation that's now ensued from that, I think, is very powerful and will be a big unlock over time.
Josh King:
Talent first. After the break, we're going to dive into some of the recent acquisitions that Fortune Brands Innovation has made to really lock down the growth sectors for its continued journey. That's all coming up. Right after this, our conversation with Nick Fink continues.
Speaker 16:
Their grandfather once crashed an auto show by driving through a plate glass window on purpose. Their father was the most awarded SUV ever and their crazy uncle raced sports cars and won. And while the blood of their relatives still runs true, none of them can do what these can. Introducing the next generation of Jeep Grand Cherokee.
Josh King:
Welcome back before the break, Nick Fink, CEO of Fortune Brands Innovations, and I were talking about the company's complete transformation since his first appearance on the podcast just two years ago. So Nick, in the first half we talked about the company's divestment of its cabinets business and the acquisition of Aqualisa, but you've also made a number of other acquisitions in 2023. What role have and will acquisitions play in the continued growth of the company?
Nick Fink:
Acquisitions play a very big role in our company and pretty much always have. It's a core capability of Fortune Brands and I like to think we're all respected for it. Now, I will say we're a very returns-focused company and we're a very disciplined company, so we see a lot and you see a lot and you refine that and then there's a lot inside of that that you like. And then there are a few things that get done because we can do them at the right multiple and the right price. And if you approach it that way, very systematically, there may be some things that we miss out on over time, but we don't get a lot wrong because we tend to be very good buyers of assets. And so it plays a critical role.
We talked about our organizational design and the change in that, and I think that allows us to actually evolve our approach to M&A a little bit. I think we've been great buyers of companies over time, the great track record, very disciplined. I'd like to see us sometimes integrate them, foster them better.
Josh King:
Doesn't everybody?
Nick Fink:
It's one of the hardest things to do. It is one of the hardest things to do. But having an aligned organization with a completely common set of capabilities is going to allow us to tap those unlocks a lot quicker. And so one of the things we've done is actually popped up an integration management office, which didn't make a whole lot of sense before when you were just sort of sending businesses off to more siloed businesses. Now we can play that across the whole portfolio and have the scale to do it. And so I'd say that is the one change and we're holding ourselves accountable to do an even better foster job of these integrations.
Josh King:
Before the deal closes, before the integrations happen, bring us behind the curtain a little bit on your playbook that you use to identify these brands and these assets you want to buy or abilities that another company possesses that you want to gain. Tell us about your process in scanning the landscape.
Nick Fink:
Yeah. Well, it all starts with strategy. A company shouldn't, we believe, just go do a strategy left turn because something became available. It was hyper-opportunistic. We take a step back, actually really around this time of year, we look out at our strategy, usually three year plan, but this year we're actually going even a bit further given the digital cycles and where that's going. And we build our strategy. And we, off of those strategic platforms, identify certain growth areas and we go, these are the areas that we think are most interesting and here's the prioritized order in which we want to go after them. And then at the end of that we say, well, what could be M&A accelerants to these strategies? So we stay on strategy, but what are things that we could add onto the company that could stay on strategy and that we could create value from?
It's not good enough to just to bought really well, which is something we take very seriously. But then we have to see a path to add to that value and we run through that process and that creates a pipeline of really interesting companies. And then we have a fantastic team that will do a combination of proactive outreach and see if there's any interest there. Sometimes there's a multi, multi-year conversations and relationships that are built, but then also manage inbound processes that we see and we'll triage, a lot of triaging going on. Okay, this is interesting and let's try to very quickly decide is it interesting enough that we want to commit resources to it or do we take a pause. And sometimes we take a pause on very interesting stuff because it's not quite on strategy or we go, it is not the highest order thing that we can do right now. And then we run through that process.
That gets us to the point where if we're moving forward, we then start to bring in a business team and build out the case of what we think we could do. We create that value playbook, that's what underwrites a transaction. But once the deal closes, we consider that to sort of be the table stakes of what we need to get. And we go, okay, now it's inside of our business. We have far more information. We reassemble those teams and we go blue sky, what do we think we could do? We are in that process right now with our most recent acquisition and it's actually phenomenal to watch the teams grab it and go, well, this is ours now. And it's really interesting what you guys did with the information that you had at the time, but we think we can take this a lot further.
Josh King:
When we talked in 2021, you said that Fortune Brands is an investor and an employee brand, not really a consumer brand. And when you acquire a company like Schaub, for instance, how do you preserve their brand identity but bring the team and finances into the Fortune Brand umbrella?
Nick Fink:
Yeah, that is very much part of the playbook. So you take brands like Schaub, Emtek, they're phenomenal brands, leaders in the space, highly regarded by their customer base. And so we're not going to go say, oh, forget that, we're going to put Fortune Brands on top of that, it's really bring them in and you preserve what made them really, really special. I was just out there actually with that team last week, looked at the business A to Zed as I walked the manufacturing facility. It is really special. And so we go through that process and say, what is the secret sauce here we absolutely need to preserve? What can they teach us?
And by the way, that's a big part of the cultural journey, being open to being taught. You might be a much bigger company, you can teach me something that I didn't know how to do and we're going to take the best of the best and move forward. And then what are those things that either we can help do better, resources and capabilities maybe they didn't have access to, or again, to the earlier point when we were talking about digital, this is a common set of things that actually don't need to be different because difference doesn't create a whole lot of value. So we can commonize this set of things and we don't need to worry about that, we got that. You don't need to worry about it anymore, go focus on building your brand and what you do really well.
Josh King:
Two other iconic brands you acquired last year were Yale and August, and I certainly remember the Yale lock growing up and Yale on my keys. Those two combined with Master Lock make up the bulk of the company's residential lock business. How has the lock on your shed, your locker, your house changed since a lock's effectiveness was once so famously demonstrated by this 1974 Super Bowl ad?
Speaker 17:
With this high powered 30-caliber rifle, we're going to try to blast open this Master Lock model number 15. We blew a half-inch hole clear through, but the Master Lock still holds tight.
Josh King:
Beyond resistance to firearms, Nick, how have locks changed?
Speaker 17:
If you want to hold onto what you've got, insist on genuine Master Locks [inaudible 00:39:53] known for being tough under fire.
Nick Fink:
And it serves as a reminder how innovation [inaudible 00:39:57]. You talked about that laminated padlock, the strength that came from that. And here we went and made an investment behind this fantastic Master Lock brand to tell the world that this was worth owning. It was worth paying for the innovation and the strength that would come from this. And so that remains absolutely true. Now, it's obviously greatly changed since then in terms of the technology available. And one of the most exciting things that's happened in Master Lock is if you look at Master Lock, its leadership position is in portable security. A padlock is portable. And so when you connect portable security, you do it in a different way than something that's attached. You have to get really proficient at things like Bluetooth low energy at LTE connections. You may not have wifi, you may not have electrical hard wire. You may have to learn how to use battery in a really, really, really tiny footprint.
And that was the innovation of the last few years that we've built out and are now starting to deploy in the market. And actually, what we're finding is, particularly for commercial customers, it is a huge value unlock because now all of a sudden they're able to standardize processes the way in which they grant access codes. People can access machinery in a way that we're able to secure and make sure that they stay safe. They can't access a part of a machine that hasn't been shut down with the lock before they move on to the next part. Things like cell phone towers where somebody no longer needs to drive 45 minutes away to get all the keys and then drive back and then drive the keys back. Nope, it's just access for that period of time in which it needs to be maintained.
Over time, the data that will be generated from that, what was the productivity rate? How quickly did somebody work through their job? And so it's a really exciting journey for a padlock to come along to this space. And now with the addition of Yale and the August business, which are really digital first businesses, we greatly augment the development team and the connection to the residents, which is actually very fitting with the rest of the business. So now we have this really great position in locks that are actually attached to the home. And you go, okay, well you've got Master Lock in security, you've got that know-how and the ability to access that channel. You add brands like Yale and August.
But by the way, as we talked about earlier, we also have the leading fiberglass exterior door business with Emtek, bought the leading premium door hardware business. And so you don't have to have a giant crystal ball to see that at some point all these things may come together and you could have a connected and electrified door that could create a lot of value for consumers and we're uniquely positioned to do that.
Josh King:
So Fortune's security business spans from residential to commercial. You were just covering that. When most people hear innovative and security, they think, Nick, about maybe their first thoughts go to cybersecurity, but how has physical security been disrupted by technology?
Nick Fink:
It really will disrupt it hugely. If you think about security, obviously super important to be able to secure your assets, secure your family, secure yourself, but largely a very mechanical and disjointed journey. Just the analogy, the ring of keys you might've carried around. The ability to take that and actually make it very seamless and integrated is huge. And you're seeing other companies in the space in areas where we don't compete, do it in building access control. One day you may just show up and the building knows who you are and all the rooms that you need to be in will open up for the time that you need to be in them. You can take that same idea and play it through the residence. If you have somebody that needs to show up, well, they have access when you need them to have access.
Did your kids get home? Do you get an alert on your phone? Did they punch the code into the lock? Did they cross the threshold? If somebody approaches your house, does the door know? Can it secure itself? Can it activate some more privacy for you? There starts to be a whole bunch of areas that people may not know today, but after experiencing it for a while, you'd hard to imagine a world where you could live without them. And we're very focused on what we call the internet, and I think we talked about this, but the internet of useful things. We really have to believe there's going to be real consumer value here. And as we've looked at this space, we think that that could create a lot of value for both consumers, and as you pointed out, commercial customers.
Josh King:
Turning our attention to security of a different type. When we spoke back in 2021, supply chain issues had so many sectors at a standstill and was affecting your ability to get products into customer's hands. What has the company learned from shipping delays coming out of the pandemic? And are you using those learnings to reinforce your thoughts about your global supply chain's resilience to future shocks?
Nick Fink:
Absolutely. Absolutely. I think there were huge learnings coming out of that and a lot of which have been reflected in this organizational redesign. And here's one of the most interesting things. We talk a lot about the Fortune Brands advantage, and those are key capabilities where we decided to make investments to get really good at something and then use that to create value for the company and its stakeholders. And an example of that is sourcing. We've been on a big sourcing journey where we went from really the old school sort of relationship-based renegotiation to a much more data and analytical-driven approach where we will really figure out the cost that it should or could take to manufacture something, add a fair margin and put it out to bid. And we'd done that and it yielded immense returns in terms of dollars in fuel that we could reinvest in our growth as well as additive to our margin journey.
But here was the big learning when we got into COVID, it was actually those companies that had been through this journey with us. So arguably the ones that got to the lowest cost are the ones that also performed best through COVID. So why is that? Well, because it took a level of sophistication to get to those costs and we invested alongside those customers to enable that journey for them. And so the big aha was, wow, where we've sort of upskilled and gotten much more data approach even while it might be driving a lower cost, it's also driving more supply chain sustainability.
And so what did we do? One of the things we did under this reorganization was we brought our entire supply chain team together under single leadership. Some of them are dedicated to the businesses, some of them are more generalist across, but we're now taking our entire spend, an entire suite of capabilities and playing it across the whole portfolio. And I think the upskilling in talent, in supply chain sustainability and resilience that we're seeing as well as the acceleration of fuel to reinvest in growth has been a very, very exciting journey.
Josh King:
Geopolitically, what has been your sort of big learning or aha moment about sourcing and manufacturing overseas versus finding new ways to manufacture closer to your customer?
Nick Fink:
Yeah, we've largely been a North American manufacturer with component-based supply chain. We do have manufacturing in China, but as our China business really grew, that sort of became a China for China ecosystem. So we innovate and design, it's actually an innovation engine for the whole company. They're very agile, do a great job, and then manufacture and supply that market, so that became a bit of a closed loop. And then we do have components that come from long lead supply chains as well as closer into different parts of the business and then some much more vertically integrated. A lot more focus on really making sure that we have the diversity of supply across that supply chain.
And thinking a lot about where that should come from. Should it come long lead? Should it be closer to home? If you do get into a time where you just can't get containers on boats as we all experienced, what are the solves for that? I'm very proud of how the team performed. The customer feedback was phenomenal, and they actually showed us data relative to the market that we were performing well above. And I think that was reflected in our share gains. But there's always an opportunity to do better, and so we're thinking very strategically about that. But part of it will have to be built over time, not all of it is available and it has to be done at the right value. And so we're continuing to push into that space and see where we can go.
Josh King:
Here at ICE, Nick, we are celebrating, finally, after about a year and a half the approval of our deal to acquire Black Knight, part of the company's long-term plant, digitize the entire mortgage lifecycle. And we believe there's still a ton of white space in the mortgage process despite, as we talked about earlier in our conversation, rising interest rates, continued low housing supply and that eventually the cycle is going to renew. I was just talking with our CEO, Jeff Sprecher, yesterday after the deal closed and he said it's human nature that people are going to want to get on with their lives. They're going to get relocated. They want to move even if interest rates are different.
And you frequently use the term under-built, but in your last earnings call, you spoke about the recent outperformance by home builders. And my friend Mike Allen at Axios just reported this morning that new apartment construction is on a track to a 50-year high with nearly 460,000 rental units expected to be built across the US with New York and Dallas, really at the top of the list. What's your outlook for new construction across the country in the short and long-term?
Nick Fink:
Well, I'll start with the long-term. It's interesting, I had a recent town hall with our team and we were talking about, I think the Wall Street Journal did a great piece a few months back on how big is the housing under-build? And they sort of presented all the facts across all the estimates, and I think it went from about 1.7 million to seven. And the point I made to the team was it actually doesn't matter because when we're firing on all cylinders as an industry, we still don't seem to be able to chip away it at more than a hundred thousand or so units per year. And whether it's 1.7 or seven, it's a really long-run problem, by the way. I fundamentally believe we also need to solve it to make sure housing stays affordable, but supply does not meet demand. That is the fundamental. So if you look at that, we are going to have to build more units, we're going to have to renovate units.
What we've seen over the last year is that the large production home builders have really built a great system to get land, organize labor, and get houses built. And I think that's why we've seen that outperformance. They're very good at what they do and they're doing it very well. And I also credit them, I think they leaned into some uncertainty and said, we're going to keep building because we see this long-term trend and we think consumers are going to be there. And it turned out that consumers did show up, and I think that's why they beat expectations so much.
Now, in the shorter term, I think when rates go up, consumers do need an adjustment period. You have to sort of readjust your financial picture to maybe afford a house at a higher interest rate. It may have doubled, but if you look at it over a longer period, rates are a lot higher, but they're not actually that high.Consumers have coexisted with rates in this range for many, many, many years and done fine. So I think it's really allowing the consumer to process the change, readjust their personal finances, get used to it, maybe come to accept that they're not going to change, and then lean into it. And I think once we get there, consumers will both be buying new homes, but then also there is a group of consumers that have phenomenally low interest rates that may choose to just stay in place and renovate those homes. They've built up great home equity, they have great rates. It's a wonderful place to be from an asset perspective. And so they can leverage that and really make these homes wonderful.
Josh King:
I was talking with my financial advisor this week. My wife and I were thinking, well, if we buy another piece of property, and she said, look at your current interest rate 2.6% and you're going to get seven or 8% if you take out another mortgage. So get happy where you are and think about those projects that you want to do. And you said on the earnings call, the baby boomer generation continues to prefer aging in place and investing in their homes while millennials and other first-time home buyers are purchasing homes in need of upgrades due to limited available inventory and affordability concerns. How does repair and remodeling factor into your growth?
Nick Fink:
Look, it's still two thirds of our business and a highly profitable and interesting part of the business. And so it is a huge part. Over time it's actually been a very, very steady growth part of housing. Generally, it's a three to 5%, and you've only seen over the last few decades, a couple years around the great financial crisis where you saw negative growth. Here we had some huge laps from I think some stimulus dollars consumers going in, doing a lot of weekend projects that were lapping. And so you'll see some negative growth for a while, but listening to others report out, some of the big retailers, and they're saying project backlogs have maybe shortened, but there's still backlogs. People are still lining up to get projects done. And I think it goes to, which intersting to the bigger project. And I think it goes to that point you made about your financial advisor.
And so we want to continue to lean in that. We have a team that looks at the correlations we have to existing home turnover. And it's actually interesting. It's really shrunk over time, and it's not the most highly correlated thing to doing a renovation project for our products at least. Now it's much more tied to consumer confidence, home equity, do I feel good? And if I'm going to stay in this, I want to redo it so I can enjoy it. And that's where we're going to lean it, is innovating and creating products and building those brands that bring those consumers joy. Also innovating for our customers to make it easier to install, foster. We know they're labor constrained and creating that environment and doing it in a way that addresses all of those groups that you discussed. And so those boomers done very well and might be at a point where the way we want to redo those homes and redo them with some really, really beautiful high-end stuff.
And we've built a portfolio that I think is actually quite groundbreaking in premiumizing our space and bringing it together in a very exciting way. And then also the more premium, mass premium part of the business where I may be trying to figure out how I'm going to afford this mortgage, and I'm looking for products that are beautiful and high functioning, but are accessible. We do not operate at the opening price point, by the way. We are sort of more premium entry level, but accessible. And we'll meet the consumers there too, and do it in a way that's generative for stakeholders across the whole business.
Josh King:
So Nick, it's been two years since we last talked. If we were to come back to the New York Stock Exchange at Wall and Broad Street in 2025, how do you think Fortune Brands Innovation will continue to disrupt itself?
Nick Fink:
Well, I'm really excited to see it because I think the last few years have been further and greater than I might've imagined even talking about it when we spoke about it a couple years ago. But I do think that sitting here in 2025, if we've continued to perform in the core, kept it healthy, continued to take incremental shares, we do, and really just allowed that to feed and continue to fuel the rest of the business, made significant strides with our connected product that really have the opportunity of the kinds of impacts that we've discussed, and then made the rest of the digital journey beyond the connected products, but to our own transformation and doing some of the things like where we're using AI now to help us model what we think these markets are going to do or help us go to market better or present better to consumers. And I'm not sure that journey's ever complete, but we've made a great stride forward in getting that modernization. If those three things are done by 2025, I think it'll present a business that is really on a very different and exciting footing and is primed for a multi-decade period of continued growth and disruption.
Josh King:
And in the meantime, I'll go out and get an electric shower and I'll report to you how our water bill is decreased.
Nick Fink:
I'd like to hear about that.
Josh King:
Thanks so much for joining us Inside the Ice House.
Nick Fink:
Thanks for having me.
Josh King:
And that's our conversation for this week. Our guest was Nick Fink, CEO of Fortune Brands Innovations, NYSE, ticker symbol FBIN. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a question or a comment you'd like one of our experts to tackle on a future show or hear from a guest like Nick Fink, email us at [email protected] or tweet at us @icehousepodcast. Our show is produced by Pete Ash with engineering, editing, and production from Dean Wolf. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
