Q4 2023 Fortune Brands Innovations Inc Earnings Call
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Paul: Good afternoon. My name is Paul and I will be your conference operator today at this time I would like to welcome everyone to the Fortune Brands' fourth quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
Paul: After the Speakers' remarks, there will be a question and answer session.
Lee ASIC: I'd like to turn the call over to Lee ASIC.
Lee ASIC: He is president of Investor Relations and corporate Affairs, you may begin the conference call.
Lee ASIC: Good afternoon, everyone and welcome to the Fortune brands innovations fourth quarter and full year 2023 earnings call and webcast.
Lee ASIC: Hopefully everyone has had a chance to review the earnings release issued earlier the earnings release and audio replay of this webcast. This call can be found in the Investor section of our website F B I and dotcom.
Lee ASIC: Want to remind everyone that the forward looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
Lee ASIC: These risks are detailed in our various filings with the U S E C.
Lee ASIC: The company does not undertake any obligation to update or revise any forward looking statements, except as may be required by law.
Lee ASIC: Any references to operating income margin EBITDA earnings per share or cash flow on today's call will focus on our results on a non-GAAP before charges and gains basis, unless otherwise specified please visit our website for reconciliations.
Joining me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry Our Chief Financial Officer. Following our prepared remarks, we have a lot of time to address some questions I will now turn the call over to Nick Nick.
Nick: Thank you Lee and thank you to everyone for joining us today.
Our focus for 'twenty two 'twenty three with two advanced the transformation of fortune brands innovations by prioritizing long term sales growth.
Nick: So every margins and generating cash while also making key investments in brand building and innovation.
Nick: Digital transformation and in long term capacity additions.
Nick: Our teams executed well and delivered solid sales and margin results and excellent free cash flow performance amidst a challenging 2023.
Nick: The actions, we took over the past year to better leverage the strength of our aligned organization and sharpen our focus on our leading brands meaningful innovation and advantaged channel relationships give me the confidence in our ability to outperform in 'twenty 'twenty four and beyond.
Speaker Change: Before we get started I want to take a moment to thank the thousands of fortune brands innovations team members across the globe for their continued dedication and commitment to excellence.
Speaker Change: As I reflect on our first year as fortune brands innovations I'm immensely proud of how our associates have come together.
Speaker Change: I've, even my expectations, all working toward a shared vision.
Speaker Change: Our people are the foundation upon which our business is built and are the drivers of our next phase of growth.
Speaker Change: On this call I will walk through the highlights of our fourth quarter and full year 'twenty twenty-three performance I will also offer some thoughts on the current macro environment and why we believe fortune brands is uniquely positioned now more than ever to deliver on our commitment of a long term growth and sustained value creation.
I will then turn the call over to Dave for a discussion of our fourth quarter and full year financial results and our performance expectations for 2024.
Dave: For the fourth quarter, we saw net sales of $1.2 billion, a 3% increase over 2022.
Dave: Fourth quarter organic sales adjusted for the impact of the 50, <unk> week and FX were down 3%.
We believe our P O S for the quarter outperformed the broader market by about 100 basis points.
Paul: Good afternoon. My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands 4th Quarter 2023 Earnings Conference. All lines have been placed on mute to prevent any background noise.
Our organic fourth quarter sales reflect continued sequential improvement in year over year performance as market fundamentals gradually improve and our teams continue to focus on delivering above market results.
Operator: After the speaker's remarks, there will be a question and answer session. Now, I would like to turn the call over to Lee Abstra. Vice President of Investor Relations and Corporate Affairs. You may begin the conference. Good afternoon, everyone, and welcome to the Fortune Brands Innovation fourth quarter and full year 2023 earnings call and webcast. Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings release and audio replay of this webcast of this call can be found in the investor section of our website, sbin.com. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question and answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the S.A.
Dave: Fourth quarter 2023 E P S where 95 cents.
Dave: As Dave will describe our year over year EPS performance was impacted by a onetime benefit related to the cabinet separation and the 'twenty 'twenty 250 <unk> week.
Dave: Operating margins for the quarter were 15, 8%.
Dave: For the full year 2023, our teams delivered net sales of $4 6 billion a decrease of 2% over 2022.
Dave: Full year organic sales adjusted for the impact of the 50, <unk> week, and FX were $4 4 billion down 6%.
Dave: As the year progressed, we saw improvement from our point of sale results versus the broader market.
Dave: And our P O S for the full year 2023 finished slightly ahead of our estimates for the broader market.
Dave: R 2023 free cash flow was approximately $800 million.
Dave: Our impressive cash flow performance is just one proof point of the power of our newly aligned organization to drive efficiency Foster.
Lee Abstra: The company does not undertake any obligation to update or revise any forward-looking statements, except as may be required by law. Any references to operating income, margin, EBITDA, earnings per share, or cash flow on today's call will focus on our results on a non-GAAP, before charges and gains basis, unless otherwise specified. Please visit our website for a reconciliation.
Dave: Our full year operating margins were 16% and our full year earnings per share were $3.91.
Dave: Our year over year EPS results also reflect the impact of onetime 2022 items.
Lee Abstra: Joining me on the call today are Nick Fink, our Chief Executive Officer, and Dave Barry, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions. I will now turn the call over to Nick.
Dave: Our strong balance sheet and advantaged capital structure enabled us to strategically deploy capital both organically and Inorganically.
Dave: In 2023, we opportunistically repurchased $150 million worth of shares and today announced that our board of directors has approved a new $650 million share repurchase authorization demonstrating the confidence we have and the continued strength of our business as well as our focus on creating.
Nicholas Fink: Thank you, Lee, and thank you to everyone for joining us. Our focus for 2023 was to advance the transformation of Fortune Brands innovations by prioritizing long-term sales, preserving margins and generating cash, while also making key investments in brand building and innovation, our ongoing digital transformation, and long-term capacity addition. Our teams executed well and delivered solid sales and margin results and excellent free cash flow performance amidst a challenging 2020. The actions we took over the past year to better leverage the strength of our aligned organization and sharpen our focus on our leading brands, meaningful innovation, and our advantaged channel relationships give you confidence in our ability to outperform in 2024 and beyond. Before we get started, I want to take a moment to thank the thousands of Fortune Brands Innovations team members across the globe for their continued dedication and commitment to excellence.
Dave: Long term shareholder value.
Dave: In 2023, we completed our transformative acquisition of the amtech premium and luxury door and hardware business in the U S and Canadian Yale in August residential smart locks business at an extremely attractive multiple.
Dave: The integration is going very well.
Dave: And these brands are continuing to perform above our expectations.
Dave: These brands are already proving that they have the potential to be strong accelerants to connected product and luxury portfolio strategies.
Dave: Stepping back to put our performance in the context of pre pandemic norms versus 2019.
Dave: We delivered an organic sales CAGR of 4%, which we estimate outperformed the market by 150 basis points and we grew our EPS at a 13% CAGR.
Nicholas Fink: As I reflect on our first year as Fortune Brands Innovations, I am immensely proud of how our associates have come together, ahead of even me, all working toward a shared vision. Our people are the foundation upon which our business is built and are the drivers of our next phase of growth. On this call, I will walk through the highlights of our fourth quarter and full year 2023 performance. I will also offer some thoughts on the current macro environment and why we believe Fortune Brands is uniquely positioned, now more than ever, to deliver on our commitment to long-term growth and sustained value creation. I will then turn the call over to Dave for discussion of our fourth quarter and full year financial results and our performance expectations for 2020.
Dave: While broader market demand over that period was lackluster the fundamentals underlying the market, we're not and we expect to see demand accelerate in the coming years.
Dave: We have a proven track record of long term outperformance, regardless of the external environment and I remain confident in our ability to continue delivering market, beating results investing in long term growth.
Dave: And expanding margins.
Dave: Turkey twenty-three was a year of execution as we worked to refine and integrate many of the transformative actions we took towards the end of 2022.
Dave: There are already many tangible examples of what we have achieved that the best is yet to come.
Our fortune brands advantaged capabilities are now more effectively deployed across the organization.
Nicholas Fink: For the fourth quarter, we saw net sales of $1.2 billion, a 3% increase over 2020. However, fourth quarter organic cells adjusted for the impact of the 53rd week, and FX were down three points. We believe our POS for the quarter outperformed the broader market by about 100 basis points. Our organic fourth-quarter sales reflect continued sequential improvement in year-over-year performance as market fundamentals gradually improve and our teams continue to focus on delivering above-market results. Fourth quarter 2023 EPS was $0.95. As Dave will describe, our year-over-year EPS performance is impacted by a one-time benefit related to the cabinet separation and the 2022 53rd week. Operating margins for the quarter were 15.8%. For the full year 2023, our teams delivered net sales of $4.6 billion, a decrease of 2% over 2022. Full-year organic sales adjusted for the impact of the 53rd week and FX were $4.4 billion, down $6 billion.
Dave: Allowing us to advance our growth and margin journeys by reducing cost.
Dave: Our pricing and enabling a high growth focus areas like connected products luxury and outdoor living.
Our organization is more efficiently structured our planning processes are more streamlined and we can now more effectively deploy and reallocate capital to internal priorities with the highest potential rate of return.
Dave: Our businesses are now more appropriately supported by best in class centers of excellence, including cohesive branding strategies and accelerated new product developments.
Dave: We are better able to make the right investments that offer the best returns.
Dave: We recently created a connected products group within our aligned organization.
Dave: By leveraging our acquisition of Yale in August.
Dave: And together with our internal digital team and capabilities. This group is responsible for the development and execution of our connected and digital strategy across the portfolio.
Dave: We believe our connected products group is optimally designed to share best practices talented insights across our Communize platform and will drive our market leadership and new avenues for exceptional growth.
Dave: Our newly aligned and more efficient supply chain and operations organization was able to achieve our near term inventory target levels ahead of schedule and helps drive our impressive cash flow performance.
Dave: Our recently established transformation office has been instrumental in integrating our newly acquired businesses.
Nicholas Fink: As the year progressed, we saw improvement in our point-of-sale results versus the broader market, and our POS for the full year of 2023 finished slightly ahead of our estimates for the broader future. Our 2023 free cash flow was approximately $800 million. Our impressive cash flow performance is just one proof point of the power of our newly-aligned organization to drive efficiency. Our foliar operating margins were 16%, and our full-year earnings per share were $3.91.
Dave: I'll also focusing the right resources on some of the most pressing challenges as well as some of the most exciting opportunities facing the business.
Dave: Our leading brands and quality products inspire loyalty and confidence in categories, where brands matter.
Dave: Our brand power innovation and best in Class service provides a unique value proposition.
Dave: Our focus on innovative products and operations, our drivers of growth productivity enhancement and margin expansion.
Dave: And finally, our excellence and experience and multi step distribution fosters a strong channel relationships with key customers like production homebuilders and large wholesale partners.
Dave: We remain focused on those parts of the market, where we believe there are outsized opportunities for growth.
Nicholas Fink: Our year-over-year EPS results also reflect the impact of one-time 2022 Idaho. A strong balance sheet and advantaged capital structure enabled us to strategically deploy capital both organically and inorganically. In 2023, we opportunistically repurchased $150 million worth of shares and today announced that our Board of Directors has approved a new $650 million share repurchase authorization, demonstrating the confidence we have in the continued strength of our business, as well as our focus on creating long-term shareholder value.
Dave: These include categories like connected products luxury material conversion and outdoor living in sustainability and safety.
Dave: Focusing on our digital and connected products are Mone, Smartwater network, and our connected residential locks business offer incredible growth opportunities.
Dave: In 2023, we approached $250 million in annualized sales from connected and digital products with a large and growing user base.
Dave: We believe the long term opportunity for our digital and connected sales could be in the billions as we work to introduce new products and revenue streams and convert existing mechanical products into more innovative and advanced connected and digital products.
Dave: Importantly, we remain committed to our philosophy of ensuring our products offer real solutions to make life easier safer and more sustainable.
Dave: I encourage you to visit our website to learn more about our digital and connected product opportunity.
Dave: A new video, which helps illustrate my fortune brands is absolutely positioned to win in this exciting space.
Nicholas Fink: In 2023, we completed our transformative acquisition of Amtech Premium and Luxury Door and Hardware and the U.S. and Canadian Yale and August Residential Smart Lock brands at an extremely attractive price. The integration is going very well, and these brands are continuing to perform above our expectations. These brains are already proving that they have the potential to be strong accelerants to a connected product and luxury portfolio strategy. Stepping back to put our performance in the context of pre-pandemic norms versus 2019, we delivered an organic-celled kegger of four..., which we estimate outperformed the market by 150 basis points.
Now turning to some thoughts on the market for our products.
Dave: As we enter 2024, we're starting to see signs that we may be reaching the demand trough and consumer and trend data indicates growth should return in the not distant future.
Dave: The need and desire for homes remains incredibly strong and our products are optimally positioned in the context of the larger macro environment.
Dave: As is well understood. The U S continues to be massively under built with many first time and existing home buyers waiting on the sidelines eager to reenter or enter the market when rates normalize.
Dave: The December 2023 Fannie Mae home purchase sentiment index improved significantly, reflecting increased consumer confidence and expectations of future rate decreases.
Dave: Finally home equity and stock market wealth has rapidly expanded versus 2019 levels and households had been forming at elevated rates.
Nicholas Fink: And we grew our EPS by 13%. While broader market demand over that period was lacking, the fundamentals underlying the market were not, and we expect to see demand accelerate in the coming years. We have a proven track record of long-term outperformance regardless of the external environment, and I remain confident in our ability to continue delivering market-beating results. Investing in long-term growth and expanding markets. 2023 was a year of execution as we worked to refine and integrate many of the transformative actions we took towards the end of 2022. There are already many tangible examples of what we have achieved, but the best is yet to come.
Once the fed definitively signals the end the rate tightening we would expect interest rates to begin to return to historically normal levels and a corresponding significant returned to growth in the housing market.
Dave: Within the larger housing market backdrop, we believe certain products and categories have opportunities for above market growth due to their idiosyncratic attributes and this is where we're focused.
Dave: Additionally, smaller ticket items, including those in our portfolio with strong brand and feature benefits tend to outperform in softer environments.
Dave: It is difficult to call when exactly a recovery will occur. We believe this fundamental demand together with a strong and optimally positioned brands will result in medium to long term tailwind for our business in both new construction and repair and remodel.
Dave: Starting with new construction.
Dave: As we communicated on our last call. We expect the single family New construction market to return to growth in 2024.
Dave: As a reminder, new construction represents around a quarter about total sales in our businesses, particularly our mone and third mature brands enjoyed very strong relationships with many large national production builders.
Dave: We are just now starting to see growth in this channel as evidenced by recent P. O S improvement in MAU and shower head values and thermal to wholesale.
Nicholas Fink: Our Fortune brand's advantage capabilities are now more effectively deployed across the organization, allowing us to advance our growth and margin journeys by reducing costs, optimizing our pricing, and enabling our high growth focus areas like connected products, luxury, and outdoor living. Our organization is more efficiently structured, planning processes are more streamlined, and we can now more effectively employ and reallocate capital to the internal priorities with the highest potential rate. Our businesses are now more appropriately supported by best-in-class centers of expertise, including Cohesive Branding Strategy and Accelerated New Product Development. We are better able to make the right investments that will offer the best. We recently created a connected products group within our aligned organization by leveraging our acquisition of Yale in August. And together with our internal digital team and capabilities, this group is responsible for the development and execution of our connected and digital strategy
Dave: And this should be a tailwind into 2024.
Dave: Turning to R&R.
Dave: In our market remains dynamic and there are many variables that are impacting the repair and remodel space, including consumer savings and confidence.
Shipment levels home equity levels in existing home turnover.
Dave: As we indicated during our third quarter earnings call, we expect the R&R market for our products to be down low single digits in 2024.
Despite a continued soft demand environment as we enter 2024, we're confident in the mid to long term trends of R&R, which have proven to be exceptionally consistent overtime.
Dave: We believe the current combination of high home equity levels low supply of homes aging housing stock and the fact that many homeowners so living in homes, they purchased with low or no mortgages will cause many people to rethink their existing space and undertake R&R projects to turn what they have to what they want.
Indeed, a recent study highlighted that homeowner dissatisfaction rate has doubled since 2021.
Dave: As homeowners look to update and upgrade their homes with products that delight and meaningfully increased enjoyment and functionality of their homes.
Dave: Our branded innovative and high quality products will help fulfill that need.
Dave: Now turning to our individual businesses.
Dave: Starting with water innovations this segment delivered above market sales as its leading brands innovative products and strong channel relationships continue to drive its performance.
Nicholas Fink: We believe our Connected Products Group is optimally designed to share best practices, talent, and insights across our commonized platform and will drive our market leadership and new avenues for acceptance. Additionally, our newly aligned and more efficient supply chain and operations organization was able to achieve our near-term inventory target levels ahead of schedule and helped drive our impressive cash flow performance. A recently established transformation office has been instrumental in integrating our newly acquired business and is also focusing the right resources on some of the most pressing challenges as well as some of the most exciting opportunities facing the business. Our leading brands and quality products inspire loyalty and confidence in categories where brands matter. Our brand power, innovation, and best-in-class service provide a unique value proposition.
Dave: We believe our organic P O S outperformed the market for our products by low single digits for the full year of 2023.
Dave: Our results over the last four years give us confidence in this segments continued ability to outperform the market.
Dave: Our four year organic net sales growth CAGR of 4% is 140 basis points above our broader market estimate.
Dave: During this four year period, we also saw 130 basis points of margin expansion.
Dave: We remain confident that the business will maintain its market, beating topline performance with margin appreciation overtime.
Dave: Looking forward to 2024, while we continue to focus on delivering above market sales performance across the segments. We plan to continue to make thoughtful investments in our key priorities, including branding and marketing digital and capacity.
Dave: We expect to open two new facilities in 2024, including a new highly efficient West Coast distribution center for a moment and a state of the art UK production facility for the house of ROHL.
Nicholas Fink: Our focus on innovative products and operations is a driver of growth, productivity enhancement, and margin expansion. And finally, our excellence and experience in multi-step distribution fosters our strong channel relationships with key customers, like Production Home Builders and large wholesalers. We remain focused on those parts of the market where we believe there are outsized opportunities for growth. These include categories like Connected Products, Luxury, Material Conversion, and Outdoor Living, and Sustainability and Safety.
Dave: These targeted investments will help drive our strategy to grow the core and accelerate digital and connected products.
Dave: We look forward to seeing many of you at the upcoming kitchen, and Bath show in Las Vegas, and I would encourage everyone to come visit our booth to see the tangible results of this strategy firsthand.
Dave: Moen is also well positioned to capture the outsized growth associated with the secular tailwind of connected products and sustainability.
Dave: Own brand proposition is only strengthening and our recent branch survey work indicates that we are the most trusted kitchen and Bath Faucet brand in North America and are perceived as the highest quality as well as the most innovative.
Dave: A great example of our focus on meaningful impactful innovation is our Smartwater network led by Flo by Moen.
Nicholas Fink: Focusing on our digital and connected products, Armon Smartwater Network and our connected residential lock offer incredible growth opportunities. In 2023, we approached $250 million in annualized sales from connected and digital products with a large and growing user base. We believe the long-term opportunity for our digital and connected sales could be in the billions as we work to introduce new products and revenue streams and convert existing mechanical products into more innovative and advanced connected and digital products. Importantly, we remain committed to our philosophy of ensuring our products offer real solutions to make life easier, safer, and more sustainable. I encourage you to visit our website to learn more about our digital and connected product opportunities and watch our new video, which helps illustrate why Fortune Brands is optimally positioned to win in this exciting space.
Dave: Slow is our AI enabled connected leak detection product and as the hub of the mowing Smartwater network.
Dave: So it has the potential to save billions of dollars in insurance claims and offers a workable solution to many water and energy conservation needs.
Dave: It is so rare to have the opportunity to develop an entirely new market for product that is good for people good for the planet and good for business.
And I'm very excited to see what this incredible product and ecosystem will do.
Dave: Our house of ROHL portfolio has performed well as our brand product and showroom strategy resonates with luxury consumers and designers who have remained relatively resilient.
The house of ROHL suite of brands combined with the power of the newly acquired Amtech business is now half a billion dollar business on an annualized basis and is well positioned to capture an increasing share of the luxury market in 2024 and beyond.
Dave: We're making key investments in capacity for the house of ROHL and combined with a customer focus and product design work that amtech is known for we are excited about the future of our luxury portfolio.
Dave: Finally in China, the housing market continued to be weak and consumers remain cautious however by focusing on thoughtful innovation and proactively transforming as the Chinese housing market evolves into an increasingly R&R focused market.
Nicholas Fink: Now turn to some thoughts on the market for our product. As we enter 2024, we're starting to see signs that we may be reaching the demand trough, and consumer and trend data indicate growth should return in the not-distant future. The need and desire for homes remains incredibly strong, and our products are optimally positioned in the context of the larger macroenvironment. As it is well understood, the U.S. continues to be massively underbuilt, with many first-time and existing homebuyers waiting on the sidelines, eager to reenter or enter the market when rates normalize.
Dave: Our mainland China business has strongly outperformed the market.
Dave: We continue to expect big things from this business as it serves as an innovation engine for our larger water business and offers attractive optionality for future opportunities when the market returns to growth.
Dave: Turning to our doors are full year results for both sales and margins reflect the soft market and inventory actions in the first part of the year.
Looking forward, we are focusing on the most profitable and highest returning opportunities in this space.
Dave: As we accelerate our journey to evolve the brands in the outdoor segment, we're excited to unveil a comprehensive collection at the upcoming Ibs industry show in Las Vegas.
Dave: Finally, we are increasingly leveraging the strong relationships, we have with our channel partners as a result of the long standing partnerships and our third mature business.
Nicholas Fink: The December 2023 Fannie Mae Home Purchase Sentiment Index improved significantly, reflecting increased consumer confidence and expectations of future rate declines. Finally, home equity and stock market wealth have rapidly expanded versus 2019 levels, and households have been forming at elevated rates. Once the Fed definitively signals the end of rate tightening, we would expect interest rates to begin to return to historically normal levels, and a corresponding significant return to growth in the housing market. Within the larger housing market backdrop, we believe certain products and categories have opportunities for above-market growth due to their idiosyncratic attributes. And this is where we are.
Dave: Our fiber one business is a great proof point the power of our strong channel relationships.
A P O S data indicates that our fiber on wholesale sell through consistently paced ahead of the market the strong sequential improvement throughout the year and exited the year up mid single digits versus last year and above the market is.
Dave: As people invest in the outdoor spaces, we continue to believe composite decking will gain in popularity as consumers and the trade increasingly understand the value proposition of our advanced material decking products.
Dave: I am pleased with the progress that team's made and as we enter 2020 for this business is well positioned.
Dave: A third mature and licensed brands continued to remain in the brains of choice as consumers and trade professionals gravitate toward their value proposition.
In the coming year, we will be introducing some innovative and festival new products for license at key price points within our portfolio. We continue to explore new synergistic product offerings between outdoor brands in a larger portfolio, including in tech hardware and you're all connected locks, which we expect to drive incremental future growth.
Nicholas Fink: Additionally, smaller ticket items, including those in our portfolio with strong brand and feature benefits, tend to outperform in softer environments. While it is difficult to call when exactly a recovery will occur, we believe this fundamental demand, together with our strong and optimally positioned brains, will result in medium to long-term tailwinds for our business in both new construction and repair and removal, starting with new construction.
Dave: Our furniture doors enjoy long standing relationships with large production homebuilders and while the slowdown in new construction starts impacted us in 2023.
Dave: We believe this to be a tailwind for the business in the coming year as we exited the year with positive wholesale P. O S temperature.
Dave: 2023 was a Europe continued transformation for the outdoors business as the teams worked hard to make the business operate more efficiently.
Our margin results in the fourth quarter were proof of our commitment to delivering our margin progress.
Nicholas Fink: As we communicated on our last call, we expect the single-family new construction market to return to growth in 2024. As a reminder, new construction represents around a quarter of our total sales, and our businesses, particularly our mowing and thermitry brains, enjoy very strong relationships with many large national production buildings. We are just now starting to see growth in this channel, as evident by recent POS improvement in moen showerhead values and thermitruve holes. And this should be a tailwind into 2020. Turning to R&R.
Dave: Longer term, we continue to be confident in the secular tailwind driving the conversion to advance more sustainable materials and outdoor living.
Dave: This segments long term performance is impressive and demonstrates our ability to outperform even in the face of volatile and challenging environments.
Dave: Our four year net sales growth CAGR for this segment of 6% on an organic basis, which outperformed our estimates for the broader market by 210 basis points.
Dave: During the same period, we also saw a 240 basis points of margin expansion on an organic basis.
Dave: Finally, our security segment performed very well in the quarter and in the year with above market sales growth and significant margin progress.
Dave: We've worked hard to transform this business from a GDP growth business focused solely on padlocks and face into an innovative and growth oriented business and is able to take advantage of strong secular trends like connected products and safety.
Nicholas Fink: The R&R market remains dynamic, and there are many variables that are impacting repair and remodel, including Consumer Savings and Compensation, Employment Levels, Home Equity Levels, and Existing Home Turnovers. As we indicated during our third quarter earnings call, we expect the R&R market for our products to be down low single digits in 2020. Despite a continued soft demand environment as we enter 2020, we're confident in the mid- to long-term trends for R&R, which have proven to be exceptionally consistent over time. We believe the current combination of high home equity, a low supply of homes, aging housing stock, and the fact that many homeowners are living in homes they purchased with a low or no mortgage will cause many people to rethink their existing space and undertake R&R projects, turning what they have into what they want. Indeed, a recent study highlighted that the homeowner dissatisfaction rate has doubled since 2021.
Dave: We announced several significant actions in 2023, including the transformation of our supply chain and the addition of the connected Lux team.
Dave: Yeah, Oh in August our expanding relationships with large home centers, and we recently announced a significant partnership between Airbnb and Ah Yeah on August smart residential products.
Dave: In addition, our connected lock products continued to receive critical acclaim and attention, including our recently launched E L assure locked too.
Dave: I'm also like security business is now around one third industrial and commercial and we have developed a niche in a critical and growing remote access portable security space across the globe.
Dave: We're proud of how our business is helping companies around the world protect their people and their assets are.
Dave: Our four year organic net sales growth CAGR for this segment is 3%, which outperformed our estimates for the broader market by 220 basis points.
Dave: During the same period, we also saw a 380 basis points of margin expansion on an organic basis.
Dave: To recap 2023 was a year of transformation and execution for fortune brands setting the stage for future acceleration.
Dave: I'm immensely proud of everything that our teams achieved this past year, while executing on our commitments in a challenging macro environment and investing in key long term growth priorities.
Dave: In 2024, which Dave will speak to in greater detail, we will continue focusing on driving above market growth by selectively pursuing the most attractive growth opportunities.
Nicholas Fink: As homeowners look to update and upgrade their homes with products that delight and meaningfully increase the enjoyment and functionality of their homes, our branded, innovative, and high-quality products will help fulfill that dream. Now turning to our individual businesses, starting with water innovation. This segment delivered above-market sales as its leading brands, innovative products, and strong channel relationships continue to drive its performance. We believe our organic POS will outperform the market for our products by low single digits for the full year 2020. Our results for the last four years give us confidence in this segment's continued ability to outperform the market. Our 4-year organic net sales growth CAGR of 4% is 140 basis points above our broader market. During this four-year period, we also saw 130 basis points of margin. We remain confident that the business will maintain its market-beating top-line performance with margin appreciation over time. I am looking forward to 2024.
Dave: We expect to return to margin expansion and we will remain focused on generating cash and deploying capital effectively.
We will execute on our largest strategy of focusing on those supercharged parts of our categories, which have the potential for incremental growth opportunities.
Dave: Additionally, we will manage any periods of continued softness actively positioning fortune brands innovations for the future.
Dave: We will be a stronger more efficient business that will accelerate when the markets return to growth.
Dave: I will now turn the call over to Dave.
Dave: Thanks, Nick.
As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance.
Dave: All comparisons will be made against the same period last year unless otherwise noted.
Dave: As Nick highlighted our teams executed well and delivered solid sales and margin results and strong free cash flow performance amidst a challenging market.
Dave: For the fourth quarter sales were $1 2 billion up 3% and organic sales were down 3% when adjusting for the impact of the extra fiscal week and FX.
Dave: Consolidated operating income was 184 million and total company operating margin was 15, 8% each.
Dave: E P S, where 95 cents or down 11%.
Dave: Our year over year EPS growth rate was impacted by prior period, one time items related to the cabinet separation and the extra fiscal week in 2022.
Dave: Fourth quarter free cash flow was approximately $140 million.
Dave: For the full year sales were $4 6 billion down, 2% and organic sales were down 6%, excluding the 50 <unk> week and FX.
Nicholas Fink: While we continue to focus on delivering above-market sales performance across the segments, we plan to continue to make thoughtful investments in our key priorities, including branding and marketing, digital, and capacity. We expect to open two new facilities in 2024, including a new, highly efficient West Coast Distribution Center for Mowat and a state-of-the-art U.K. production facility for House of Roll. These targeted investments will help drive our strategy to grow the core and accelerate digital and connected products. We look forward to seeing many of you at the upcoming Kitchen & Boss show in Las Vegas, and I would encourage everyone to come visit our booths to see the tangible results of this strategy. Moen is also well positioned to capture the outsized growth associated with the secular tailwinds of connected products and sustainability.
Dave: Consolidated operating income was $738 million.
Dave: Total company operating margin was 16.0%.
Dave: Our EPS were $3 91, since our total free cash flow generation for 2023 was an impressive $799 million.
Dave: To reflect on 2023, a recent study by the NIH be found at the highest mortgage rates seen in 20 years combined with continued home price depreciation resulted in the housing affordability index falling to its lowest level in over a decade.
Dave: These external conditions impacted demand for our products.
Dave: However, our teams focused on executing key strategies and leveraging our strength in brand innovation and channel to deliver solid results.
As we enter 2024, we're starting to see signs that demand may be reaching a trough and we remain highly focused on long term outperformance.
We are committed to pursuing above market growth expanding our margins and we will remain focused on generating cash while continuing to deploy our capital and effective and impactful ways.
Dave: I am confident in the ability of fortune brands to continue to make progress towards our previously communicated long term targets, while focusing on those immediate opportunities to drive accelerated growth.
Nicholas Fink: Our own brand proposition is only strengthening, and our recent brand survey work indicates that we are the most trusted kitchen and bath faucet brand in North America and are perceived as the highest quality as well as the most innovative. A great example of our focus on meaningful, impactful innovation is our Smart Water Network, led by Flow-by-Mowen. Flow is our AI-enabled connected leak detection product and is the hub of the Moen Smart Water Network.
Dave: Now, let me provide more color on our segment results.
Dave: Beginning with water innovations sale.
Dave: Sales for the fourth quarter were $663 million up 3% organic sales were down 2%, excluding the impact of the 50 <unk> week and FX.
Dave: Fourth quarter sales results were driven by Pos down low single digits.
Dave: For the year sales were flat with organic sales down 5%, excluding the impact of the 53rd week and FX.
Dave: Looking forward, we expect continued R&R softness into the first part of 2024, although there are certain parts of our market, including single family, New construction channel, which are showing signs of growth.
Nicholas Fink: Flo has the potential to save billions of dollars in insurance and offers a workable solution to many water and energy conservation needs. It is so rare to have the opportunity to develop an entirely new market for a product that is good for people, good for the planet, and good for business. And I'm very excited to see what this incredible product and ecosystem will do. Our House of Roll portfolio has performed well as our brand, product, and showroom strategy resonates with luxury consumers and designers who have remained relatively resilient. The House of Wall Street of Brands, combined with the power of the newly acquired M-TEC, is now half a billion dollar business on an annualized basis and is well positioned to capture an increasing share of the luxury market in 2024 and beyond. We're making key investments in capacity for the House of Roll, combined with the customer focus and product design work that EmTech is known for. We are excited about the future of our Lux report. Finally, in China, the housing market continued to be weak, and consumers remained cautious.
Dave: Water innovations operating income was 144 million in the fourth quarter.
Dave: Operating income for the full year was $583 million.
Dave: Operating margin was 21, 8% for the quarter and 22, 7% for the full year.
Dave: Consistent with our larger returns focused investment strategy, our Mo and brand investments are generating results. Additionally.
Dave: Additionally, we are making key investments in capacity for our house of ROHL luxury portfolio and combined with the customer focus and product design work that amtech is known for we are excited about the future of our luxury brands.
Dave: China sales declined high single digits in the fourth quarter and for the full year.
Dave: The Chinese market remained soft throughout 2023.
Dave: And though the completion of delayed projects accelerated new home sales and starts continue to decline as the Chinese consumer remains cautious how's.
Dave: However, as we have stated our team's performance has been nothing short of remarkable with double digit outperformance versus the larger market and we are confident we will lead as that market evolves to R&R led growth.
Dave: Turning to outdoors.
Dave: Fourth quarter net sales were $309 million down, 7% and were down 6% when adjusting for the impact of the 50 <unk> week and FX.
Dave: For the full year sales were $1 3 billion or down 12% and were down 11% when adjusted for the 53rd week impact and FX.
Nicholas Fink: However, by focusing on thoughtful innovation and proactively transforming as the Chinese housing market evolves into an increasingly R&R focus, Moen China has strongly outperformed the market. We continue to expect big things from this business as it serves as an innovation engine for our larger water business and offers attractive optionality for future opportunities when the market returns. Turning to outdoors, our full-year results for both sales and margins reflect the soft market and inventory actions in the first part of the year. Looking forward, we are focusing on the most profitable and highest-returning opportunities. As we accelerate our journey to evolve the brands in our outdoor segment, we're excited to unveil our comprehensive collection at the upcoming IBIS industry show in Los Angeles.
Dave: Accordingly, our sales improved sequentially versus the prior year throughout 2023.
Dave: Four doors, which includes our therma true Larson and solar innovations brand sales were down high single digits in the quarter.
Dave: R&R softness was partially offset by low single digit new construction growth.
Dave: Recent data indicates we are starting to see growth in our products that serve single family, new construction, which should be a tailwind in 2024.
Dave: Decking sales were down mid single digits in the quarter as weaker retail sales offset our strong wholesale channel P O S.
We remain focused on the most profitable and attractive portions of this growth category.
Dave: Outdoor segment operating income was $43 million during the quarter down 7%.
Nicholas Fink: Finally, we are increasingly leveraging the strong relationships we have with our channel partners as a result of the long-standing partnerships in our ThermaChem business. Our Fibron business is a great proof point of the power of our strong channel relationships. Our POS data indicates that our fiber-on-whole-cell cell food consistently paced ahead of the market, showed strong sequential improvement throughout the year, and exited the year up mid-single digits versus last year and above the mark. As people invest in their outdoor spaces, we continue to believe composite decking will gain in popularity as consumers and the trade increasingly understand the value proposition of our advanced material decking products. I am pleased with the progress that Keith has made, and as we enter 2024, this business is welcome. A Furniture and Larson Brands continue to remain the brands of choice as consumers and trade professionals gravitate toward their value proposition.
Dave: Operating income for the full year was $174 million, reflecting operating inefficiencies in our first half inventory reduction actions second.
Dave: Segment operating margin for outdoors was 13, 9% in the quarter and 13.0% for the full year.
Dave: Importantly, our fourth quarter operating margins were 10 basis points higher than our fourth quarter 2022 results on lower net sales.
Dave: Finally, our security segment performed well in the quarter ending the year with fourth quarter sales of 189 million up 20%.
Dave: Fourth quarter organic sales were up 4% when adjusting for the impact of the 50 <unk> week and FX.
Dave: Our fourth quarter operating margins were 17, 2%.
Dave: Full year sales increased 14% to 723 million and.
Dave: Organic sales increased 3% when adjusting for the impact of the 50 <unk> week and FX.
Nicholas Fink: In the coming year, we will be introducing some innovative and fashionable new products for life at key price points within our portfolio. We continue to explore new synergistic product offerings between our door brands and our larger portfolio, including M-TEC hardware and Yale Connected locks, which we expect to drive incremental... Ourthermy doors enjoy long-standing relationships with large production houses. And while the slowdown in new construction starts impacted us in 2023, we believe this to be a tailwind for the business in the coming year as we exited the year with Positive Wholesale POS for Thermo. 2023 was a year of continued transformation for the outdoors business, as the teams worked hard to make the business operate more effectively. Our margin results in the fourth quarter were proof of our commitment to delivering on margin privacy.
Dave: Our full year operating margins were an impressive 16.0%.
Dave: 90 basis points from 2022, and we saw sequential improvement every quarter this year.
Dave: The performance of this segment is a direct result of our application of the fortune brands advantaged capabilities as we have focused on higher growth opportunities and greater efficiency.
Dave: Looking forward, we expect to continue to see growth and margin progress in this increasingly optimized business.
Dave: Turning to the balance sheet.
Dave: Our balance sheet remains strong with cash of $366 million net debt of $2 3 billion and our net debt to EBITDA leverage is two five times, reflecting our commitment to delever following our mid year acquisition.
Dave: We finished the year with a full 1.25 billion available on our revolver.
Nicholas Fink: Longer term, we continue to be confident in the secular tailwinds driving the conversion to advanced, more sustainable materials and outdoor living. This segment's long-term performance is impressive and demonstrates our ability to outperform even in the face of volatile and challenging environments. Our four-year net sales growth CAGR for this segment is 6% on an organic basis, which outperforms our estimates for the broader market by 210%. During the same period, we also saw 240 basis points of margin expansion on an organic basis.
Dave: We purchased $150 million of shares in the full year, including $20 million in the fourth quarter.
Dave: Our 2023 free cash flow of 799 million reflects the performance of our business and our lower working capital due to specific initiatives to shrink our balance sheet.
Dave: Our outstanding cash flow performance. This year is a proof point of the power of our newly aligned organization and demonstrates how the entire fortune brands organization is effectively working together.
Dave: In summary.
Dave: Our teams delivered solid 2023 results, while continuing to strategically invest to best position the company for long term growth, including investments in innovation brand building and our digital transformation.
Nicholas Fink: Finally, our security segment performed very well in the quarter and in the year with above market sales growth and significant margin. We've worked hard to transform this business from a GDP growth business focused solely on padlocks and safes into an innovative and growth-oriented business that is able to take advantage of strong secular trends like connected products and services. We announced several significant actions in 2023, including the transformation of our supply chain and the addition of the connected lock. Yale and August are expanding relationships with large home centers, and we recently announced a significant partnership between Airbnb and their Yale and August smart residential product. In addition, our Connected Lock products continue to receive critical acclaim and attention, including our recently launched Yale AssureLock II.
Dave: We worked to transform into an aligned and increasingly agile organization that is prepared to respond to any macro conditions.
Dave: As Nick outlined in his remarks, we believe that fortune brands as a uniquely positioned now more than ever to deliver on our commitment of long term growth and sustained value creation.
Dave: We have a proven track record of outperformance I remain fully confident in our ability to deliver results by focusing on those categories, where there are unique growth opportunities and where we have the right to win.
Dave: Before turning to the details of our outlook for 2024.
Dave: Let me first provide some thoughts on the market backdrop.
Dave: As a reminder, our market outlook reflects our best estimate of when our products are consumed.
Dave: The timing of which may differ from macro trend due to lag effects.
Dave: For 2024, we expect the global market for our products to be flat to down 3%.
Nicholas Fink: Our Moss Block security business is now around one-third industrial and commercial, and we have developed a niche in the critical and growing remote-access portable security across the globe. We're proud of how our business is helping companies around the world protect their people and their assets. Our four-year organic net sales growth CAGR for this segment is 3%, which outperforms our estimates for the broader market by 220 basis points. During the same period, we also saw 380 basis points of margin expansion on an organic basis.
Dave: With the U S housing market flat to down 2%.
Dave: Within this market forecast, we expect U S R&R to be down between two and 4%.
Dave: U S single family, new construction to be up between five and 7% with starts up mid single digits and completions up low single digits.
Dave: And the China market for our products to be down between seven and 9%.
Dave: We expect the market in the first half of the year to be below the midpoint of our full year range as R&R remained at the lower end of our estimate.
Nicholas Fink: To recap, 2023 was a year of transformation and execution for Fortune 500, setting the stage for future acceleration. I am immensely proud of everything that our teams achieved this past year while executing on our commitments in a challenging macroenvironment and investing in key long-term growth priorities. In 2024, which Dave will speak to in greater detail, we will continue focusing on driving above-market growth by selectively pursuing the most attractive growth opportunities. We expect to return to margin expansion and will remain focused on generating cash and deploying capital effectively. We will execute on our larger strategy of focusing on those supercharged parts of our category, which have the potential for incremental growth. Additionally, we will manage any periods of continued suffering, actively positioning Fortune Brands innovations for the future. We will be a stronger, more efficient business that will accelerate when the markets return to growth. I will now turn the call over to Nick.
Dave: As the year evolves, we will continue to monitor market trends as well as our performance and will update our guidance if warranted.
Dave: Based on those assumptions, we expect full year net sales to be up.
Dave: Three and a half to five 5% with organic net sales down 1% to up 1%.
Dave: We expect operating margins between 16, 5% and 17, 5%.
Dave: The midpoint of which implies a 100 basis points of margin improvement.
Dave: We expect operating leverage of around 40%.
Dave: Margin improvement is expected to be driven by internal productivity initiatives, partially offset by incremental investments favorable fixed cost leverage and favorable price cost.
Dave: We expect each item to contribute roughly equally to our margin expansion and have good line of sight to delivering this improvement.
Dave: Based on these assumptions, we expect full year EPS within the range of $4 in 'twenty.
Dave: To $4 40, the midpoint of which represents a 10% increase versus our 2023 results.
Dave Barry: As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance. All comparisons will be made against the same period last year, unless otherwise noted. As Nick highlighted, our teams executed well and delivered solid sales and margin results and strong free cash flow performance amidst a challenging market. For the fourth quarter, sales were $1.2 billion, up 3%, and organic sales were down 3% when adjusting for the impact of the extra fiscal week and FX. Consolidated operating income was $184 million, and total company operating margin was 15.8%. EPS was 95 cents, or down 11 percent. Our year-over-year EPS growth rate was impacted by prior period one-time items related to the cabinet separation and the extra fiscal week in 2022. Fourth quarter free cash flow was approximately $140 million.
Speaker Change: Now, let me speak to our outlook for each segment as it relates to our overall guidance.
Speaker Change: We expect.
Speaker Change: Water net sales up 3% to 5% with organic net sales down 2% to flat.
Speaker Change: We expect segment operating margins between 24% and 24 and a half per cent.
Speaker Change: Outdoor net sales to be up 1% to 3% with segment operating margins between 13, 5% and 14, 5%.
Speaker Change: Security net sales up 10% to 12% with organic net sales flat to up 2%.
Speaker Change: And operating margins between 15, 5% and 16, 5%.
We expect 2024 of free cash flow conversion of around 100% of net income, which implies free cash flow of around $520 million, including capital expenditures of around $200 million.
Speaker Change: Consistent with our track record.
Speaker Change: Following organic investment and paying an attractive dividend M&A and opportunistic share repurchases remain our top allocation priorities.
Dave Barry: For the full year, sales were $4.6 billion, down 2%, and organic sales were down 6%, excluding the 53rd week and FX. Consolidated operating income was $738 million. The total company operating margin was 16.0%, and our EPS was $3.91. Our total free cash flow generation for 2023 was an impressive $799 million. To reflect on 2023, a recent study by the NAHB found that the highest mortgage rate seen in 20 years combined with continued home price appreciation resulted in the housing affordability index falling to its lowest level in over a decade.
Speaker Change: Today, we announced that our board approved a new two year $650 million share repurchase authorization to ultimately replace the current authorization, which expires. This march 1st.
Speaker Change: This new authorization signals, our continued confidence in the strength of our business and our commitment to driving long term value for our shareholders.
Speaker Change: As discussed we are going into 2024 is a more aligned and focused organization well positioned for acceleration when the market returns to growth.
Speaker Change: We remain confident in both the long term fundamentals of our market and our ability to outperform by focusing on those parts of the market with the best opportunities for long term growth, while making progress on our margin journey and generating cash.
Dave Barry: These external conditions impacted demand for our product. However, our teams focused on executing key strategies and leveraging our strength in brand, innovation, and channel to deliver solid results. As we enter 2024, we are starting to see signs that demand may be reaching a trough, and we remain highly focused on long-term outperformance. We are committed to pursuing above-market growth, expanding our margins, and will remain focused on generating cash while continuing to deploy our capital in effective and impactful ways. I am confident in the ability of Fortune Brands to continue to make progress towards our previously communicated long-term targets while focusing on those immediate opportunities to drive accelerated growth. Now, let me provide more color on our segment results. Beginning with Water Innovation, sales for the fourth quarter were $663 million, up 3%. Organic sales were down 2%, excluding the impact of the 53rd week and foreign exchange.
Speaker Change: I will now pass the call back to Lee.
Lee ASIC: Thank you.
Lee ASIC: 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'd like to ask a question I'll ask that you limit your initial questions to two and then reenter the queue to ask additional questions.
Lee ASIC: Now I'll turn the call back to the operator to begin the question and answer session.
Lee ASIC: If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment to be we'd have to sorry to pick up your handset before pressing the star keys.
Lee ASIC: Again that is star one to register for a question at this time.
Lee ASIC: Thank you. Our first question is from Susan <unk> with Goldman Sachs. Please proceed with your question.
Susan: Thank you good afternoon, everyone and congrats on a good year.
Dave Barry: Fourth quarter sales results were driven by POS down low single digits. For the year, sales were flat, with organic sales down 5%, excluding the impact of the 53rd Weekend FX. Looking forward, we expect continued R&R softness into the first part of 2024, although there are certain parts of our market, including the single family new construction channel, which are showing signs of growth. Water Innovation's operating income was $144 million in the fourth quarter. Operating income for the full year was $583 million.
Susan: Sure.
Susan: Hello.
Susan: My first question. Nick is is taking a bit about the business strategically you're obviously coming into the year, having had a lot behind you with the spin of cabinet the acquisitions in there.
Susan: Things you mentioned in your comments is our focus on growing the core accelerating investments in the connected products and that initiative can you talk a bit more about that how you think of the opportunity there and the way that that can potentially come together.
Nick: Yes, happy to and those two things are.
Dave Barry: Operating margin was 21.8% for the quarter and 22.7% for the full year. Consistent with our larger returns-focused investment strategy, our Mullen brand investments are generating results. Additionally, we are making key investments in capacity for our House of Roll luxury portfolio. And combined with the customer focus and product design work that EmTech is known for, we are excited about the future of our luxury brand. China sales declined by high single digits in the fourth quarter and for the full year.
Speaker Change: Separate and interconnected.
Speaker Change: But if you just start with the core I mean it is.
Speaker Change: Pretty much you printed in the DNA of our team that.
Speaker Change: Core of the business S&P healthy right.
Speaker Change: Our brands.
Speaker Change: How do we drive them.
Channel, how we serve our customers et cetera.
Speaker Change: I think back to their work.
Speaker Change: We just made all of those brands.
Speaker Change: Over a long period of time.
Speaker Change: <unk> gained share and delivered margin improvement and that combination is actually very very important because.
Speaker Change: The margin improvement isn't just additional dollars to the bottom and that certainly is a thought about that but it is also about the fact that we are building healthy businesses. Therefore have the rocket fuel to reinvest in those businesses and continue to.
Dave Barry: The Chinese market remained soft throughout 2023, and though the completion of delayed projects accelerated, new home sales and starts continued to decline as the Chinese consumer remains cautious. However, as we have stated, our team's performance has been nothing short of remarkable, with double-digit outperformance versus the larger market, and we are confident we will lead as that market evolves to R&R-led growth. Turning to the outdoors,
Speaker Change: You bet for really really healthy.
Speaker Change: And so in that core right.
Investment in.
Speaker Change: Brian.
Speaker Change: Even in a softer year like 43.
Speaker Change: It did cause some really great results.
Speaker Change: Across the brand portfolio, making it difficult.
Speaker Change: Stripes eaten up front basis and my phone.
Speaker Change: Going to awareness.
Speaker Change: Duration, even though.
Speaker Change: Just starting off from the top spot for that investing in innovation pipeline is really really healthy target.
Dave Barry: Fourth quarter net sales were $309 million, down 7%, and were down 6% when adjusting for the impact of the 53rd week NFX. For the full year, sales were $1.3 billion, or down 12%, and were down 11% when adjusted for the 53rd week impact and FX. Importantly, our sales improved sequentially versus the prior year throughout 2020. However, for Doors, which includes our ThermaTru, Larson, and Solar Innovations brands, sales were down high single digits in the quarter.
Speaker Change: 25% to 30%.
Speaker Change: Product sales for innovation.
Speaker Change: Healthy ratio, which is the ratio of effects such as helping in of itself. It also tells you the core remains healthy because it's not driving all of the sale.
Speaker Change: And then.
Speaker Change: Vesting in our channel.
Speaker Change: Our channel.
Speaker Change: And serving our customers and so you know that taking over the longer term really both.
Speaker Change: Our historic organic CAGR, which is 7% and then we look to do the supercharge categories, which method.
Dave Barry: R&R Softness was partially offset by low single-digit new construction growth. Recent data indicate we are starting to see growth in our products that serve single-family new construction, which should be a tailwind in 2024. Decking sales were down mid-single digits in the quarter as weaker retail sales offset our strong wholesale channel POS. We remain focused on the most profitable and attractive portions of this growth category. The Outdoors segment operating income was $43 million during the quarter, down 7%.
Speaker Change: The leading one.
Speaker Change: That can really drive that incremental growth over time and from future for this business and that's why.
Speaker Change: <unk> got a team to really create the scale things like creating a connected products group across the whole company.
Speaker Change: Leveraging our digital know how combining as we did with.
In August.
Speaker Change: Really starts to make big strides in it.
Speaker Change: Because while smaller today than the core business.
Dave Barry: Operating income for the full year was $174 million, reflecting operating inefficiencies and our First Half Inventory Reduction Act. Segment operating margin for outdoors was 13.9% in the quarter and 13.0% for the full year. Importantly, our fourth quarter operating margins were 10 basis points higher than our fourth quarter 2022 results on lower net sales. Finally, our security segment performed well in the quarter and in the year, with fourth quarter sales of $189 million, up 20%. Fourth quarter organic sales were up 4% when adjusting for the impact of the 53rd week and FX. Our fourth quarter operating margins were 17.2%. Full year sales increased 14% to $723 million.
Speaker Change: Only at the rate it is profoundly in it from a growth perspective, it doesn't take a whole lot longer before they really start to see material.
Speaker Change: And then that's what will drive the growth rate.
That historical.
Organic.
Speaker Change: And so we're very excited about that but it's really important though is you.
Speaker Change: The parallel between the two.
Speaker Change: Is the symbiosis between both of those things and what we've found as we've continued to invest in this type of innovation things like connected really resonate.
Speaker Change: Consumers are looking for innovative brands, they're looking for passport brands, particularly as we see younger consumers come into their.
Speaker Change: First time homebuyer.
Speaker Change: Home buying years.
Speaker Change: A very attractive and so.
Speaker Change: Whether or not they may be you know an immediate aerobic sector, you're seeing them out there pushing that advertisers are seeing it in the press that resonate really really well back into where it all those things are working very very well together.
Speaker Change: Okay. That's great color and then you know, perhaps turning turning a bit but.
Speaker Change: Thoughts on how you would characterize the health of the consumer today, you talked about the potential they see a lift in R&R activity in the back half of this year.
Speaker Change: It takes to see that coming together and how do you think it could come through across the different products and price points that you are exposed to.
Dave Barry: And organic sales increased 3% when adjusting for the impact of the 53rd week and FX. Our full-year operating margins were an impressive 16.0%, up 90 basis points from 2022, and we saw sequential improvement every quarter this year. The performance of this segment is a direct result of our application of the Fortune Brands Advantage capabilities as we have focused on higher growth opportunities and greater efficiency. Looking forward, we expect to continue to see growth and margin progress in this increasingly optimized business. Turning to the balance sheet. Our balance sheet remains strong, with cash of $366 million, net debt of $2.3 billion, and our net debt to EBITDA leverage is 2.5 times, reflecting our commitment to D-Lover following our mid-year acquisition. We finish the year with the full 1.25 billion available on our Revolver. We purchased $150 million of shares in the full year, including $20 million in the fourth quarter.
Speaker Change: You know as we think about the consumer I think we're coming to a point now where it might be a little bit back to normal which wouldn't be a bad thing.
Speaker Change: Obviously, which is why we call that sort of the CAGR for 2019.
Speaker Change: As much as.
Speaker Change: You guys, just sort of step back and really think about this but looking across a bunch of consumer data now firstly I think we've all been.
Speaker Change: The resiliency.
They've had a lot to digest.
Speaker Change: Over the last few years, but you know as I look at the data I mean things like.
Speaker Change: Searches for home renovation continues to be up versus couple.
Speaker Change: 13% we're.
Speaker Change: We're seeing in terms of the purchase at or above long term averages for all of our product categories.
Speaker Change: And so and then of course on top of that you just have the fundamentals.
They're both very aging housing stock.
Speaker Change: Now I think 33 trillion.
Speaker Change: In home equity.
Speaker Change: And the very low.
Speaker Change: Hum It doesn't start until you have all of that backdrop, I think when theres a lot of noise as there was 23 about rates and home prices.
Speaker Change: You do cause consumers to step back a little bit and reconsidered I think we saw that through.
Speaker Change: The data.
Speaker Change: But I think hopefully know where to reach out.
Speaker Change: Sure.
Dave Barry: Our 2023 free cash flow of $799 million reflects the performance of our business and our lower working capital due to specific initiatives to shrink our balance sheet. Our outstanding cash flow performance this year is a proof point of the power of our newly aligned organization and demonstrates how the entire Fortune Brands organization is effectively working together. In summary, our teams delivered solid 2023 results while continuing to strategically invest to best position the company for long-term growth, including investments in innovation, brand building, and our digital transformation. We worked to transform into an aligned and increasingly agile organization that is prepared to respond to any macro condition. As Nick outlined in his remarks,
Speaker Change: Underlying pressure.
Speaker Change: Either wanting new or.
Speaker Change: Renovate does start to I'm.
Speaker Change: So it's hard for us to call exactly when we.
Speaker Change: We did see sequential improvement through all of last year. It was a positive we're being cautious about the first part.
Speaker Change: This year in particular.
Speaker Change: So let's start with all staff that we had a couple of weeks ago, but.
Speaker Change: Over the long term I think the consumer is resilient to focus on the phone.
Speaker Change: The data points that we're looking at and.
Speaker Change: Is that required for growth.
Alright.
Yes.
Speaker Change: David I'd add a little bit of color.
What's embedded in our guidance.
David: And our base case assumes a 30 year fixed rate mortgage of between $6 five and six and three quarters, which is an improvement over 2023, but still challenging around housing affordability from everywhere.
Pandemic this shortly after the pandemic.
David: Our teams have modeled what if rates dropped closer to six closer to five and a half and from what we can see.
David: A 50 basis point move in interest rates, roughly equates to 50 basis points of incremental growth for our business.
Dave Barry: We believe that Fortune Brands is uniquely positioned, now more than ever, to deliver on our commitment to long-term growth and sustained value creation. We have a proven track record of outperformance. Before turning to the details of our outlook for 2024, I remain fully confident in our ability to deliver results by focusing on those categories where there are unique growth opportunities and where we have the right to win. Let me first provide some thoughts on the market backdrop. As a reminder, our market outlook reflects our best estimate of when our products are consumed, the timing of which may differ from macro trends due to lag effects. For 2024, we expect the global market for our products to be flat to down 3%, with the U.S. housing market flat to down 2%. Within this market forecast, we expect U.S. R&R to be down between 2 and 4 percent.
David: On a full year basis. So the next point, we built this guide in this plan.
David: What we see today and with some of the tailwind coming out of 2023 and the team will remain agile around.
Demand if affordability improve throughout the year beyond what we're expecting.
Speaker Change: Okay. That's great color. Thank you both and good luck with everything.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question is from Truman Patterson with Wolfe Research. Please proceed with your question.
Truman Patterson: Hey, good afternoon, everyone. Thanks for taking my question.
First question I'm kind of in general for vendors, there's been some comments about home centers pretty aggressively trying to claw back some of the pricing over the past couple of years as well as some builders I'm just trying to get an update on negotiations there.
Truman Patterson: If you all haven't seen any pricing.
Truman Patterson: Changes you know what makes your products a bit more.
Truman Patterson: Sensitive if you will and any.
Truman Patterson: Product brand segmentation that might be.
A little bit less susceptible to maintaining price.
Speaker Change: Sure Tim Happy I'll give some.
Dave Barry: U.S. single-family new construction is expected to be up between 5% and 7%, with starts up mid-single digits and completions up low single digits, and the Chinese market for our products to be down between 7 and 9 percent. We expect the market in the first half of the year to be below the midpoint of our full year range as R&R remains at the lower end of our estimate. As the year evolves, we will continue to monitor market trends as well as our performance and will update our guidance if warranted. Based on those assumptions, we expect full-year net sales to be up. 3.5% to 5.5% with organic net sales down 1% to up 1%. We expect operating margins between 16.5% and 17.5%, the midpoint of which implies 100 basis points of margin improvement.
Tim: Auto perspective is how do we think about.
Tim: Pricing strategy generally and then.
Tim: One of the things that we're seeing.
Tim: Interactions and they've made some color.
Tim: Step back for a second.
Tim: So the earlier, we're sure hoping to report.
Tim: More normal.
Tim: Normal and if you think about our brands and our categories.
Tim: Under mental ability to invest in brand building and innovation.
Tim: These are very consistent.
Tim: Taking your price.
Tim: Fairly small incremental.
Tim: Youre in your house and you know because we do it that way even in the height.
Tim: Inflationary period.
Tim: But if you're a.
Tim: Business like our water business I'll at least take low single digit pricing because we were keeping up the whole way through and we were able to manage both the pricing.
Tim: And margin and so that pricing philosophy is.
Tim: Very critical to the way, we think about that.
Tim: No big expectation of our.
Tim: Leaders here it is.
Tim: The fuel that allows us to reinvest for life.
Tim: And customers now as you look across our portfolio in particular.
Tim: And do not play at the entry level all of our brands have friends there.
Dave Barry: We expect operating leverage of around 40%. Margin improvement is expected to be driven by internal productivity initiatives, partially offset by incremental investment, favorable fixed cost leverage, and favorable price cost. We expect each item to contribute roughly equally to our margin expansion and have a good line of sight to delivering this improvement. Based on these assumptions, we expect full-year EPS within the range of $4.20 to $4.40, the midpoint of which represents a 10% increase versus our 2023 results. Now, let me speak to our outlook for each segment as it relates to our overall guidance. We expect Waternet sales were up 3% to 5%, with organic net sales down 2% to flat.
Tim: More.
Premium.
Tim: And we're seeing that in some of the share interactions.
Tim: A couple of weeks ago.
Tim: There was some data with our teams and we can see celebrities increasingly interacting with price points above.
Tim: The law right, which is really positive sign that we're sort of not contracted.
Tim: With things like private label. The other thing I would say that we've done as part of a fortune brands.
Tim: <unk> invested heavily in our category management.
Tim: And that is really leveraging data and analytics to understand the consumer I understand the category.
Tim: This shelf and by understanding the way those things work together.
Tim: That allows us to go into every customer.
Customers, such as the home centers and actually make price adjustments.
Tim: Some go down.
Tim: But net up.
Tim: In a way that we know is going to generate.
Custody and gross margin that we can share with our channel partners and it's been Super successful approach has really changed the discussion for us from a kind of I wouldn't lose went into a win win because it's much more about shelf.
Dave Barry: We expect segment operating margins between 24% and 24 and a half percent. Outdoor net sales to be up 1% to 3% with segment operating margins between 13.5% and 14.5%, security net sales up 10% to 12%, organic net sales flat to up 2%, and operating margins between 15.5% and 16.5%. We expect 2024 free cash flow conversion of around 100% of net income, which implies free cash flow of around $520 million, including capital expenditures of around $200 million, consistent with our track record. Following organic investment and paying an attractive dividend, M&A and opportunistic share purchases remain our top allocation priorities. Today we announce that our board approved a new two-year, $650 million share repurchase authorization to ultimately replace the current authorization, which expires this March 1st.
Tim: Wealth management and for lighting.
Tim: Immersion meeting them, where they are and it is about just moving it from one five.
Tim: So I do expect in.
Tim: For both the discussions around pricing.
One bucket or another but as we look for those opportunities to price, where we can it's going to continue to be a net contributor.
Through our growth.
Speaker Change: Yeah Truman.
Speaker Change: We discussed last quarter we.
Speaker Change: We continue to assess and implement strategic preposition.
Promotions, where they make sense to drive a richer so the next point.
Speaker Change: Bridging our data our category management capabilities that we've built across the business over the past few years really be strategic around those price repositioned to drive a return if you look at 2023 our results included.
Speaker Change: Positive low single digit contribution from bright and our 2024 guide also includes a positive low single digit contribution right Nick mentioned.
Speaker Change: Just back to our normal pricing philosophy pre pandemic of incremental price.
Speaker Change: Each year supported by investments in brands and innovation that actually ultimately drive more value to the consumer and to our customers at the end of the day.
Speaker Change: Okay perfect. Thank you for.
That explanation win.
Dave Barry: This new authorization signals our continued confidence in the strength of our business and our commitment to driving long-term value for our shareholders. As discussed, we are going into 2024 as a more aligned and focused organization, well positioned for acceleration when the market returns to growth. We remain confident in both the long-term fundamentals of our market and our ability to outperform by focusing on those parts of the market with the best opportunities for long-term growth while making progress on our margin journey and generating cash. I will now pass the call back to Lee.
Speaker Change: When I'm looking at your plumbing operating margin guide for.
Speaker Change: For 'twenty for some decent expansion kind of gets us back to peak 2022 levels I'm, hoping you can help us think through you know I earlier, you were talking about potential stranded costs, but could you help us think through some of the main drivers.
Speaker Change: From incremental pricing potentially is there continued cost takeouts of supply chain.
Speaker Change: It has improved raw material.
Speaker Change: Et cetera, just what's kind of driving that and I'm asking in light.
Speaker Change: Fourth quarter op margin came in a little bit sequentially. So I'm, just hoping to understand the rebound there.
Speaker Change: I think regarding the quarter and the year.
Speaker Change: No expected water to be around 23% for the year. They finished at 22, seven which in our view was around 23% we're not optimum.
Speaker Change: Optimizing our margin quarter on quarter.
Speaker Change: We feel good about where they finished and are confident in our path to.
Speaker Change: 24% to 24, 5%.
Speaker Change: I highlighted in my portion of the prepared remarks.
Speaker Change: Our margin expansion initiatives are really threefold, so their internal productivity initiatives driven by our combined organization.
Lee Abstra: Thank you. Thanks, Dave. That concludes our prepared remarks. We will now begin taking a limited number of questions. And so there may be a number of you who would like to ask a question. I will ask that you limit your initial questions to two and then re-enter the queue to ask additional questions. I will now turn the call back to the operator to begin the question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad at the confirmation tone will indicate your line is in. You may press star 2 if you'd like to remove your question.
Speaker Change: These are strategic.
Speaker Change: Strategic sourcing procurement savings distribution savings.
Speaker Change: Indirect sourcing savings will have.
Less favorable fixed cost leverage as you recall from 2023, especially in the first half.
<unk> had some headwinds in the P&L as we reduced our inventory.
Speaker Change: You did impact the water margin and then there is a favorable price cost in water I would say so of those three initiatives water benefit from each of them.
Speaker Change: And again keeping with.
Speaker Change: Bit of a theme that has returned to normal back to normal margins here that what we would expect to be 24 to 24 and a half and then as we our long term goal of 25, plus I still see a path to get there as.
Speaker Change: Volumes returned about visits.
Speaker Change: Okay perfect. Thank you all for the time.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from Matthew Bouley with Barclays. Please proceed with your question.
Matthew Bouley: Hey, good evening, everyone. Thanks for taking the question.
Matthew Bouley: First one on the kind of organic growth outlook and maybe the cadence through the year I think I heard you say that youre thinking the first half of the year would be kind of below the midpoint of the full year range. It sounds like R&R is towards the low end of your full year guide. So any color. There's a couple of pieces you know what what are you seeing into January.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing start. Again, that is star one to register for a question at... Thank you. Our first question is from Susan Maklari with Goldman Sachs. Please proceed with your question. Thank you. Good afternoon, everyone, and congratulations on a good year.
Matthew Bouley: Hum.
Matthew Bouley: To get a little specificity on the outdoors business, particularly given where that business is operating right now and then just kind of a finer point on what you mean by below the mid point into the first half. Thank you.
Matthew Bouley: Hey, Matt This is Dave I'll start with that one.
Susan Maklari: Thank you. Thank you. Hello.
Dave: So if you think about first half second half around the guide as.
Dave: As we mentioned and expect the market to be a more challenged in the first half versus the second half I, probably 100 basis points or so driven by our U S. R&R assumptions when we exited the year with R&R down probably around 5% maybe.
Susan Maklari: My first question, Nick, is thinking a bit about the business strategically. You're obviously coming into the year having had a lot behind you with the spin-off of cabinets, the acquisitions in there, and one of the things you mentioned in your comments is a focus on growing the core, accelerating investments in the connected products and that initiative. Can you talk a bit more about that, how you think of the opportunity there and the way that that can potentially come together? Yeah, I'd be happy to. And you know, those two things are both separate and interconnected.
Dave: Maybe it gets a little bit better in the first quarter.
Dave: Around 4%.
Dave: Five, 4%, but sequentially than getting better from there.
Dave: In the first half we would expect total sales growth of around six 5% to 7%.
Dave: Which would imply organic sales down low single digits, I think that'd be pretty consistent with our expectations for the first half.
Dave: And then the second half would be up 2% to 3% in total and organic with.
Nicholas Fink: So I'll talk about them, but you know, if you just start with the core, I mean, it is, you know, very much imprinted in the DNA of our team that the core of the business has to be healthy, right? So that core brand, how we drive it, our channels, how we serve our customers, et cetera. Thank you. Thank you. Thank you. We just made all of those brands.
Dave: Organic sales up low single digits.
Dave: What we've seen to start the year I would say January has been slow the cold extreme cold that came through we see it impacted our PFS data, which is down mid teens over the past four weeks in retail and e-commerce actually consistent with the Bofa to Bank of America credit card data that's published for Elbit.
Dave: Prove it up or down a similar amount.
Dave: So we're seeing demand from new construction activity remained steady and parts of the channel that support that demand.
Nicholas Fink: Over a long period of time, James Sher and Lowered Margin Improvement. And, you know, that combination is actually very, very important because, to us, margin improvement isn't just about additional dollars at the bottom. It certainly is a lot about that, but it is also about the fact that we are building healthy businesses that, therefore, have the rocker fuel to reinvest in those businesses and continue to keep that core really, really strong. And so, you know, in that corollary, strong investment in brands, even in a past year like 23, we can see some investment in brands and see some really great results across the brand portfolio, making significant strides even off of strong All right. All right. Thank you, or whoever you want.
Dave: Healthy inventory level, let's say for the quarter looking at sales growth of 2% to 4%.
Dave: And operating margins around 14, or 14, 5%, which would imply an EPS of <unk>.
Dave: 71% to 75%.
Dave: We do expect margin improvement in all segments in the first quarter versus prior year.
Dave: Overall expectations for margin improvement are 100 to 150 basis points ahead of last year.
Dave: We feel good about that progress.
Dave: And then I'd say outdoor specifically, it's really sales to start a year have held up pretty well.
Dave: See the channels getting ready for a spring season.
Dave: Look promising, but we actually feel good about the order rates in January for outdoors.
Nicholas Fink: Investing in innovation, a pipeline that is really, really healthy; we can see the target at 25 to 30% New Product Sales for Innovation, which I think is a very healthy ratio, which is, in fact, not just healthy in and of itself, it also tells you the core remains healthy because it's not driving all the... And then investing in our channel and our channel advantages and serving our customers. And so, you know, that taking over the longer term really built our historic organic kegger, which is 7.1.
Dave: The channels are putting some inventory and it reflects their expectations for the spring.
And I'd just add since Dave.
Dave: Dave mentioned the weather.
Dave: Interesting.
Dave: We also saw exceptional uptake.
Dave: For our e-commerce channels.
Dave: Hello.
Dave: Over the last two weeks in a small base.
Dave: I will take it.
Dave: We signed a bill suggests.
Dave: We're going to dig further into it.
Dave: Because there's a correlation between or things like that.
Dave: So a lot of homes damage and a lot of leaf.
Dave: Uh huh.
Dave: E Commerce.
Dave: Right.
Speaker Change: Great. Yeah that is interesting thank you for that Nick and Dave.
Nicholas Fink: And then, you know, we look to these supercharged categories, of which Connected is the leading one, that can really drive that incremental growth over time and become future cores of this business. And that's why we work together as a team to really create scale, things like creating a connected products group across the whole company, leveraging our digital know-how, and combining, as we did with Yale in August, to really start to make big strides in there. Because while smaller today than the core business, compounding at the rate that it is compounding at, from a growth perspective, it doesn't take off a whole lot longer before And then that's what will drive the growth rate above the historical average. And so we're very excited about that. What's really important, though, as you can see the parallel between the two, is the symbiosis between both of those things.
Speaker Change: Second one and I appreciate all that color that that was that was perfect. Just a high level question on on cash flow.
Speaker Change: Speaking to kind of normalizing to that 100% conversion in 2024, obviously the portfolio has evolved relative to where you were before the spin recent acquisitions, you've got a whole organizational realignment whats kind of the right way to think about cash conversion through the cycle going forward with the sort of new portfolio is it.
Speaker Change: Stands today I'm happy to touch on that and I think as evidenced by our results. This year the business can and will be extremely cash generative.
Speaker Change: We drove almost $800 million of free cash flow and.
Speaker Change: Cash conversion near 200% and interestingly, if you step back and look at the prior three years for this business, we're now averaging over 100% cash conversion.
Speaker Change: So I feel like this the end result in 'twenty three kind of got us through the last of the post COVID-19 supply chain challenges inventory management challenges demand swings.
Nicholas Fink: And what we've found is as we've continued to invest in this type of innovation, things like Connected, it really resonates back to the core brand. Consumers are looking for innovative brands, they're looking for tech-core brands, particularly as we see younger consumers come into their first-time home-buying years, are very attracted to that, and so, you know, whether or not they may be an immediate consumer of a connected branch, they're seeing it out there, they're seeing it advertised, they're seeing it in the press, and that resonates really, really well back into core health So those things we find are working very, very well. Okay, that's a great color.
Speaker Change: Back to a steady base going forward.
Working hard to deliver 100% free cash flow conversion of net income or better.
Speaker Change: While continuing to invest in the business from a capital expenditure spend standpoint around key.
Speaker Change: Key strategic initiatives and capacity where needed.
Speaker Change: And then I think if you look at what we did with that cash flow in 2023.
Speaker Change: We're able to fulfill our capital deployment goal quite effectively so we acquired and closed on the assets from us obviously.
Speaker Change: 800 million, we invested about $255 million into Capex.
Nicholas Fink: And then, you know, perhaps turning a bit, but any thoughts on how you would characterize the health of the consumer today? You talked about the potential to see a lift in R&R activity in the back half of this year. What do you think it takes to see that coming together?
Speaker Change: $160 million of that was for our capacity in our water business and outdoors business, we paid about 120 million of dividends and repurchased $150 million of shares while deleveraging down to two five times net debt to EBITDA and so I think really good proof point of the aligned organization driving cash.
Nicholas Fink: And how do you think it could come through across the different products and price points that you are exposed to? Yeah, you know, as we think about the consumer. I think we're coming to a point now where it might be a little bit back to normal, which wouldn't be a bad thing. So obviously, and which is why we pulled out some of the CAGRs for 2019 just for ourselves as much as to help you guys just step back and really think about this. But you know, looking across a bunch of consumer data, you know, firstly, I think we've all been with John Collins. Searches for Home Renovation continue to be up versus pre-COVID years. I think it was 13.
Speaker Change: And then deploying it effectively and look to continue that.
Speaker Change: Forward into 2024.
Alright, Thanks, guys. Good luck. Thank you.
Speaker Change: Thank you. Our next question is from Phil <unk> with Jefferies. Please proceed with your question.
Phil: Hey, guys. The security visitor had a quite strong quarter from a margin standpoint for <unk> as well as the full year.
Phil: But you're guiding to kind of flattish margins for 2024.
Phil: Just trying to gauge if there was any one offs in the fourth quarter and why perhaps a bigger step up in profitability just because the integration of assets seems to be come along very well.
Phil: Yeah.
Speaker Change: Great question, why don't I pick up just a minute here to give you some perspectives around security and Dave can break it down, but we're feeling really good about the security business because the top line progress and the margin progress and again sort of back to that philosophy, we want a business that can generate healthy margins. So we can invest to drive growth and you know me.
Nicholas Fink: We're seeing attempts to purchase at or above long-term averages for all of our products. And so, and then, of course, on top of that, you just have the fundamentals of the underbell, very aged housing stock, now I think $33 trillion, and the very low supply. And so you have all of that backdrop.
Move it from what was historically, a GDP grower into something you know quite a bit more exciting and the team has executed fabulously on that policy, so really they're in and we're seeing that progress now.
Nicholas Fink: I think when there's a lot of noise, as there was in 23 about rates and home prices, you do cause consumers to step back a little bit and reconsider. And I think we saw that through some of the data. But I think hopefully now we're coming to a point where the underlying pressure of either wanting new or wanting to renovate does start to... So, you know, it's hard for us to call exactly when.
Speaker Change: I'll hand, it over to Dave you don't break it out for you between the organic piece of me the acquisition.
Dave: <unk> made great progress and we very much feel that this business is on the path.
To do what we wanted.
Dave: And Phil I'd say, the simple answer the organic business will continue to expand margin and we expect them to deliver margin in the high teens.
In 2024, and then as you know we are absorbing half a year of Gail in August.
Dave: And that business the margins are going to fluctuate a bit quarter to quarter, just based on investment timing customer generation unloading et cetera that we expect.
Nicholas Fink: We did see sequential improvement through all of last year, which was positive. We're being cautious about the first part of this year in particular, and it's been a slower start with the cold snap that we had a couple weeks ago. But, you know, over the long term, I think our consumer's resilience is focused on the home. Through the data points that we're looking at, and, you know, as that returns to growth, we absolutely agree. And hey, this is Dave.
Dave: We're comping the acquisition in the first half that their margin is more like a high single digit and so thats why youre seeing the dilution come in to the overall security segment, but the base business is performing well.
Dave: Accelerating as you mentioned in the prepared remarks accelerating.
Dave: Some retail wins.
Dave: Online wins with August and really excited about that business going forward.
Speaker Change: I'll just add there.
Dave Barry: I'd add a little bit of color just behind what's embedded in our guidance. And our base case assumes a 30-year fixed-rate mortgage of between 6 12 and 6 34, which is an improvement over 2023 but still challenging in terms of housing affordability from where we were pre-pandemic to shortly after the pandemic. Our teams have modeled what if rates dropped closer to 6, closer to 5 12, and from what we can see, a 50-basis point move in interest rates roughly equates to 50-basis points of incremental growth for our business on a full-year basis. So the next point, we've built this guide and this plan with what we see today and with some of the tailwinds coming out of 2023, and the team will remain agile Okay, that's great color.
Speaker Change: The August business.
Speaker Change: Contribution margins comparable to the portfolio and then you're really investing for double digit growth with the official conversions there.
Speaker Change: Okay Super.
Speaker Change: And then I guess, Dave you were talking about back to business back to normal in terms of supply chain and stuff like that.
Speaker Change: Certainly a lot of news flow on the Red Sea side of things any impact in terms of importing components and stuff of that nature and then how should we think about installation as well sorry, it's.
Dave: Got it.
Dave: And how should we think about inflation as well how does that kind of playing out as that started comdata. Do appreciate you guys are expecting a favorable price cost spread but talk us through some of the components.
Susan Maklari: Thank you both and good luck with everything. Thank you. ... ... ... .. ... .... ... ... Hey, good afternoon, everyone.
Speaker Change: So I'll start there.
Speaker Change: Dave you talked a bit about the inflation obviously.
Truman Patterson: Thanks for taking my question. First question, kind of in general for vendors, there's, you know, been some comments about home centers pretty aggressively trying to claw back some of the pricing over the past couple of years, as well as some builders. I'm just trying to get an update on negotiations there.
Speaker Change: Yeah, the Red Sea and the impacts of the Panama Canal now come alive for Us and those two things are working hand in hand.
Speaker Change: Our team's done a great job to maintain service levels that will mean, we will put a bit more capital to work this year.
Speaker Change: To ensure that we don't have a disruption for our customers we make.
Truman Patterson: If you all haven't seen any, you know, pricing changes, what makes your products a bit more defensive, if you will, and any, you know, product brand segmentation that might be a little bit less susceptible to maintaining price. Sure, I'll give some broader perspective of how we think about pricing strategy generally and then even some of the things that we're seeing in price interactions, and Dave may have some follow-up. But you know, I'll just step back for a second.
Speaker Change: But more expense to work this year to ensure that we don't have service disruptions for our customers.
So that's preferable to protect the business protect service levels.
Speaker Change: It does seem to be improving somewhat in the Panama Canal, which is good news because it allows us to take the lines off of the Red Sea, which has obviously been very challenging.
Speaker Change: But with the protective measures, particularly fine from a customer service perspective, and they absorbed.
Nicholas Fink: You know, as I said earlier, fortunately, we're hoping for 23%, a little bit more of a return to normal. And if you think about our brands and our categories, they are fundamental to our ability to invest. Thank you all for joining us.
Speaker Change: System, one time capital or other expense in order to do that.
Speaker Change: And then I'd say overall.
Inflation deflation, so looking starting with 2023.
Speaker Change: We finished the year with net inflation in the P&L, if you've taken to account.
Nicholas Fink: Thank you. Thank you. These are very consistent.
Speaker Change: <unk> and freight having slight deflation offset by labor and indirect with continued inflation now looking forward. We do have areas of deflation on the balance sheet that will come into the P&L, but again, we have we.
Nicholas Fink: This is an interview with COVID. You see, a business like our water business only pays close.,,,, And for that, you know, pricing philosophy is very critical to the way we think about the business, and it's been a big exercise. Our leaders here because it is the fuel that allows us to be the best for life.
Speaker Change: We see inflation above trend in things like labor and indirect.
Speaker Change: And seeing some pressure on freight for what's going on with both the middle East and through Panama.
Speaker Change: Canal with water shortage in restrictions on capacity.
Speaker Change: I'd characterize for 2024, our overall Cogs base, if you think of that as $2 7 billion.
Nicholas Fink: ...
Nicholas Fink: Now, as you look across our portfolio, in particular, you know, we tend not to play at the entry level. You know, all of our brands are brands that are more premium and up, and we're, you know, we're seeing that in some of the shared interactions. Thank you very much. Down here, we've got new data with our teams, and we can see some of our worms increasingly interacting with spice points above and not below, with things like... The other thing I would say that we've done as part of the Fortune Grant sponsors is invested heavily in our category management skill set, and that is really leveraging data and analytics to understand the consumer, understand the category, and understand the. And by understanding the way those things work together in the U.S., that allows us to go into some of our big customers, such as the home, and actually make price adjustments, and some go down, but not up, in Thank you, and have a great day!
Speaker Change: We would expect roughly less than 1% of net deflation.
Speaker Change: Looking at all of the input.
Costs over that base.
Speaker Change: Okay Super helpful. Thank you.
Speaker Change: Thank you. Our next question is from John Lovallo with UBS. Please proceed with your question.
John Lovallo: Good evening, guys and thank you for taking my questions.
John Lovallo: First one is on the 650 million new share repo authorization, which is on top of the $435 million just curious how you're sort of thinking about that in the context of youre doing $150 million last year, but if you go back to 'twenty. One you did $4 50, I think you did $5 80 in 2022.
John Lovallo: How aggressive could you guys be in and where do repos kind of fit within the capital location priority list.
John Lovallo: Yeah.
Speaker Change: Great great questions. So that you know that 650 <unk> in addition to but that other one expires you much person. So then other 650 will be our go forward.
Speaker Change: Until we authorize war.
Speaker Change: <unk> now.
Speaker Change: Track record has been to do share repurchases really opportunistically and so look for dislocations in value, we run a tourist focused model against our own.
Speaker Change: And we've over time done really really well.
Dave Barry: So, you know, I do expect that we'll see discussions around pricing in one pocket or another, but as we look for those opportunities to price where we can, it's going to continue to be a net. Thank you. Yeah, and Truman, as we discussed last quarter, we continue to assess and implement strategic price prepositions and promotions where they make sense to drive a return. So the next point, leveraging our data, our category management capabilities that we've built across the business over the past few years, really be strategic around those price prepositions and drive a return. If you look at 2023, our results included a positive low single-digit contribution from Price. And our 2024 guide also includes a positive low single-digit contribution from Nick Benson. All of these are a combination of different types of prices.
Speaker Change: Look at how it has tended to play out from a.
Speaker Change: Priority perspective, always first and foremost in our own organic opportunities. Those are the most surest and highest return and then interestingly the way it tended to work out as kind of 50 50.
Speaker Change: Between share repurchase and acquisition opportunities over a long run now with acquisitions. We also remain very returns focused and so there is some nice things we may take a pass on if we don't feel comfortable that the returns are there.
Speaker Change: And those might be times, where share repurchases.
Speaker Change: Is preferable.
Speaker Change: There'll be plenty of capacity and we'll continue to look opportunistically, but when there are those dislocations I think our track record speaks for itself we will be there.
Speaker Change: Yes, I think.
Speaker Change: If you look at 2023 is a good example, we had an acquisition that was a nice size.
Truman Patterson: Nick mentioned it's just back to our normal pricing philosophy pre-pandemic of incremental price each year supported by investments in brands and innovation that actually ultimately drive more value to the consumer and to our customers. Okay, perfect. Thank you for that explanation.
Speaker Change: Fewer of share repurchases.
So it really does that interplay between right as they're attractive accretive M&A and if not you know.
Speaker Change: What can we opportunistically buy back shares the other lever that we watch is our leverage ratio and we've de levered faster than we expected following the Asa acquisition and our continued path to deal.
Speaker Change: Further in 2024 and as long as cash flow remained strong as we think it will it gives us opportunities to deploy it effectively.
Truman Patterson: When I'm looking at your plumbing operating margin guide for 24, some decent expansion kind of gets us back to peak 2022 levels. I'm hoping you can help us think through, you know, earlier you were talking about potential stranded costs, but could you help us think through some of the main drivers, you know, from incremental pricing potentially, are there continued cost takeouts, the supply chain has improved, raw materials, etc. Just what's kind of driving that, and I'm asking in the light of the fourth quarter operating margin coming in a little bit sequentially, so I'm just hoping to understand the rebound there. Yeah, I think, you know, regarding the quarter and the year, we projected water to be around 23% for the year, and they finished at 22.7, which in our view is around 23%.
Speaker Change: Yes.
Speaker Change: That's helpful and then on the the $55 million of production impact that you guys are lapping I know you don't anticipate recovering all of that but can you just sort of remind us of the magnitude of the impact by each segment and will most of this reversal or whatever the number is.
Speaker Change: A first half phenomenon.
Speaker Change: So if you think about just to put it into context right, we're coming off of a year in 2022.
Speaker Change: With extremely high production and sales.
Speaker Change: Sales started to slow second half of 'twenty, two and then we pulled back our supply chain hard late 'twenty two into early 'twenty three.
Speaker Change: Our 2024 plan as production more balanced sales, but we're not at that level that we were in 2022. So that's why we're not fully recovering the overhang that we experienced in the P&L in 'twenty three I think if you.
Speaker Change: Look at the split is split between water and outdoor is probably a bit more towards water then outdoors maybe.
Speaker Change: Maybe 60 40.
Speaker Change: And the timing of it it will recover but recover a bit more through the year as we are building.
Truman Patterson: So we're not trying to optimize their margin quarter on quarter, so we feel good about where they finished and are confident in our path, you know, that 24 to 24 and a half. As I highlighted in my portion of the prepared remarks, our margin expansion initiatives are really threefold. So they're internal productivity initiatives driven by our combined organizations. Think of these as strategic sourcing, procurement savings, distribution savings, and indirect sourcing savings.
Speaker Change: We are producing in line with demand and so youre not going to have these big production ramps and large favorable absorption in any one quarter.
Speaker Change: Great. Thanks, guys.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question is from Adam Baumgarten with Zelman and Associates. Please proceed with your question.
Adam Baumgarten: Hey, good afternoon, everyone.
Adam Baumgarten: Just going back to your comments around demand potentially dropping I think there is still a bit more optimism out. There you said, it's some of the macro indicators that anything youre seeing in the business and anytime that sequential improvement and a lot of areas throughout the year, but anything youre seeing maybe January side, given some of the weather that gives more confidence that we're getting.
Dave Barry: We'll have favorable fixed cost leverage, as you recall, from 2023, especially in the first half. We had some headwinds in the P&L as we reduced our inventory, and these did impact the water margin.
Adam Baumgarten: To have bottomed.
Adam Baumgarten: Yeah, I'd say, it's more sort of a longer more but I'd say laundry I mean more than like three weeks.
Adam Baumgarten: Series of data Adam So when we look at the sequential improvement.
Dave Barry: And then there is a favorable price cost for water. I'd say, you know, so of those three initiatives, water benefits from each of them. And again, keeping a bit of a theme, it is a return to normal, back to normal margins for them, what you'd expect to be, you know, 24, 24 and a half, and then, as we, our long-term goal of 25 plus. I still see a path to get there as volumes return to that business. Okay, perfect. Thank you all for your time.
Adam Baumgarten: We look at the drivers if you look at the.
Adam Baumgarten: Search data.
Adam Baumgarten: Look at purchasing and things like that I would say just given January is a lower volume.
Adam Baumgarten: Or any way and then you throw.
Adam Baumgarten: Yeah.
Adam Baumgarten: I mean here in this region, where we are.
Adam Baumgarten: The coldest.
Adam Baumgarten: Central data temperature since 1996 on top of that it just skews datasets very hard to read through I mean that'd be great.
Adam Baumgarten: Data that Dave referenced Noelle.
Noelle: It was consistent with hours things like snow blowers, and shovels were way up and so I think I think it will need a few more weeks before we can see it definitively in the shorter series, but longer serious stuff would point towards that.
Speaker Change: Okay got it makes sense and then just on SG&A, maybe how youre thinking about that in 2024 and what a good percentage of sales is from a long term perspective, just given the shift in the portfolio over the last year.
Speaker Change: Yeah.
Speaker Change: Still driving a lot of transformation and so you'll see some incremental investments in 2024.
Truman Patterson: Thank you. Our next question is for Matthew Bouley. Good evening, everyone.
Speaker Change: Contemplated within the margin guide that we gave I'd say no.
Speaker Change: They've built a plan to be.
Matthew Bouley: Thanks for taking the question. First one on the kind of organic growth outlook and maybe the cadence through the year, I think I heard you say that you're thinking the first half of the year would be kind of below the midpoint of the full year range. Sounds like R&R is towards the low end of your full year guide. So any color, there's a couple of pieces.
Speaker Change: Awful around those investments and paste them. So that we are seeing the top line come through and seeing the margin depreciation come through before we make them.
Speaker Change: We're pacing those investments and then I think longer term as we drive transformation. Our goal is to be a top quartile performer.
Speaker Change: We want to be efficient.
Speaker Change: We want to continue to invest in brands and innovation and a lot of the transformation.
Speaker Change: Transformation investments, we're making today are to get as efficient as we can and the noncore activities in the back of the house activities that arent as value, creating in some of our investments in brand and innovation. So that's the long term goal I think that's how you think about it knowing we will still make some investments this year to drive transformation.
Matthew Bouley: What are you seeing into January? I'd love to get a little specificity on the outdoors business, particularly given where that business is operating right now, and then just kind of a finer point on what you mean by below the midpoint into the first half. Thank you. Hey Matt, this is Dave.
Dave Barry: I'll start with that one. So if you think about first half and second half around the guide, you know, as we mentioned, expect the market to be more challenged in the first half versus the second half by probably 100 basis points or so, driven by our U.S. R&R assumption. When we exited the year with R&R down probably around 5%, you know, maybe it gets a little bit better in the first quarter, down 4%, you know, 3.5%, 4%, but sequentially, then getting better from there. In the first half, we would expect total sales growth of around 6.5% to 7%, which would imply organic sales down low single digits with our POS expectations for the first half. And then the second half would be up 2% to 3% in total and organic with... Organic sales up, you know, the same single digit. So, you know, what we've seen to start the year, I'd say January has been slow. You know, the cold, extreme cold that came through, we see it impacted our POS data.
Speaker Change: So just a quick example, but they prefer to go you can look at it through our.
Speaker Change: Corporate <unk> expense.
Expenses I don't know the actual number in front of me, but I would guess core kind of core corporate functions, yet probably CAGR.
Speaker Change: Below inflation.
Speaker Change: And they've done really well that historically and then the rest of the growth and investment is really coming from things like digital Fortune brands advantaged capabilities. Do you think that will really over time continue to drive the transformation of the company.
Correct.
Speaker Change: Got it that's helpful Best of luck guys.
Speaker Change: Thank you Dave.
Thank you. Our last question is from Stephen Kim with Evercore ISI. Please proceed with your question.
Speaker Change: Yeah.
Stephen Kim: Thanks, very much guys I appreciate the opportunity to ask question here.
Stephen Kim: You made a comment which I thought was pretty striking.
Dave I believe you mentioned that you were incorporating a six 5% to six and three quarter percent mortgage rate assumption, but I think you said that if mortgage rates came in 50 basis points lower than that I assume you mean for the full year that it would add only about 50 basis points to your overall sales could you first of all did I hear that right and could that seems very low.
Dave Barry: We've seen a decline in sales growth down mid-scene over the past four weeks in retail and e-commerce, and actually consistent with the B of A, the Bank of America credit card data that's published for home improvement, also down a similar amount. So we're seeing demand from new construction activity remain steady, and parts of the channel that support that demand have healthy inventory levels. We're looking at sales growth of 2% to 4% and operating margins around 14% to 14.5%, which would imply an EPS of $1.8 million. $71.75.
Stephen Kim: I assume it probably scales dramatically, if let's say rates are 100 basis points lower or something like that but can you just give us a little more color around the analytics because I think you said your team sort of ran some numbers and stuff that would be very helpful.
Stephen Kim: So looking at the data that we have that we used to create the market forecast.
Stephen Kim: Sensitize rate environment relative to our demand going back over time, and that's what we're seeing now we didn't change our assumptions around outside the U S demand so that could be a piece of it.
Stephen Kim: <unk> remained.
Stephen Kim: I mean down in China high single digits in Canada is a bit worse in the U S.
Matthew Bouley: We do expect margin improvement in all segments in the first quarter versus the prior year, and the overall expectations for margin improvement are 100 to 150 points ahead of last year. You can feel good about that progress. And then I'd say, you know, outdoors specifically, actually, sales to start the year have held up pretty well. We see the channels getting ready for the spring season, which looks promising.
Stephen Kim: But the math they ran just as.
Stephen Kim: I think our model for us and our guide would be yes, if a 50 basis points and rate the 50 basis points of incremental growth.
Stephen Kim: I think probably where the model could use some refinement in the R&R data is more murky, we're definitely more correlated to rates on new construction in our data.
Stephen Kim: Maybe there's outside growth coming from R&R that we're not picking up that correlation is harder to see directly just done right.
Matthew Bouley: So I actually feel good about the order rates in January for outdoors. Thank you. And I'd just add, since Dave mentioned the weather, just, Interesting.
Speaker Change: Gotcha, Okay well.
Speaker Change: I'd take the over on that but that's fine.
Speaker Change: And the second question I just.
Speaker Change: Just just just to clarify your guidance points I assume they exclude any impact from.
Speaker Change: An extra week.
Speaker Change: Was under the impression that you might have an extra week in 2024.
Nicholas Fink: We also saw exceptional uptake through our e-commerce channels for Flux. Over the last few weeks, we've had a small base that will take time to build, but we're going to dig further into it. There's a correlation between the freeze and eCommerce. We saw a lot of homes damaged and a lot of leaks.
Wanted to clarify that and then also other DNA ran a little bit hotter than we expected. This quarter can you give us a sense for what kind of a good run rate would be for DNA, yes, no extra fiscal week, we're tired of talking about that they were happy not to have one and 2024.
Speaker Change: And then I'd say you know for <unk>.
Matthew Bouley: Agreed. Yeah, that is interesting. Thank you for that, Nick and Dave. Second one, and I appreciate all that color.
Speaker Change: G&A.
Speaker Change:
Speaker Change: Running.
Speaker Change: Close to $30 million.
Matthew Bouley: That was perfect. Just a high-level question on cash flow. You're speaking about kind of normalizing to that 100% conversion in 2024. Obviously, the portfolio has evolved relative to, you know, where you were before the spin, recent acquisitions, you've got a whole organizational realignment. What's the right way to think about cash conversion through the cycle going forward with the sort of new portfolio as it stands today?
Per quarter, he may not be perfect yep.
Speaker Change: Gotcha, alright, great. Thanks, so much guys.
Speaker Change: Thank you for joining today's conference call you may now disconnect.
Okay.
Dave Barry: Thank you. Yeah, I'm happy to touch on that. And, you know, I think, as evidenced by our results this year, the business can and will be extremely cash generative. You know, we drove almost $800 million of free cash flow, and cash conversion near 200%. And interestingly, if you step back and look at the prior three years for this business, we're now averaging over 100% cash conversion. And so I feel like the end result in 23 kind of got us through the last of the post-COVID supply chain challenges, you know, inventory management challenges, demand swings; we're back to a steady base. And so going forward, you know, working hard to deliver 100% free cash flow conversion of net income or better while, you know, continuing to invest in the business from a capital expenditure standpoint around key strategic initiatives and capacity where needed. And I think if you look at what we did with that cashflow in 2023, we were able to fulfill our capital deployment goal quite effectively. So we acquired and closed on the assets from us, Obloy, for 800 million. We invested about 255 million into CapEx, about 160 million of that was for capacity in our water business and outdoors business.
Matthew Bouley: We paid about 120 million in dividends and repurchased 150 million shares while deleveraging down to two and a half times that debt to EBITDA. And so I think, you know, really good proof point of the aligned organization driving cash and then us deploying it effectively. And we'd love to continue that going forward in 2024. All right. Thanks, guys. Good luck. Thank you.
Speaker Change: [music].
John Lovallo: Hey guys, the security business had a quite strong quarter from a margin standpoint for 4Q as well as the full year. But you're guiding to kind of flattish margins for 2024. So I'm just trying to gauge if there were any one-offs in the fourth quarter and why perhaps not a bigger step up in profitability just because the integration of assets seems to be coming along very well. Yeah, Phil, thanks. It's great, Christian.
Nicholas Fink: Why don't I take just a minute here to give you some perspectives around security, and Dave can break it down for you. But we're feeling really good about the security business, both the top line progress and the margin progress. And again, you know, sort of back to that philosophy, we want a business that can generate healthy margins, so we can invest, drive growth, and you know, move it from what was historically a GDP grower into something, you know, quite a bit more exciting. And the team has executed fabulously. So, we're really there, and we're seeing that progress now, and so, I'll just hand it over to Dave, and And Phil, I'd say, you know, the simple answer, the organic business.
Dave Barry: We'll continue to expand margin, and we expect them to deliver margin in the high T's in 2024. And then, as you know, we're absorbing half a year of Yale in August. In that business, the margins are going to fluctuate a bit quarter to quarter just based on investment timing, on customer generation, on load-ins, etc. And so we expect, you know, we're copying the acquisition in the first half of their margin to be more like a high single digit. And so that's where you're seeing dilution come into the overall security segment, but the base business is performing well. We're accelerating, you know, as we mentioned in the prepared remarks, accelerating some retail wins, some online wins with Yale in August, and we're really excited about that. I'll just add there that on the Elm August business, your contribution margin is comparable to the portfolio, and then you're really investing. Double-Digit Growth. Okay, great.
Speaker Change: [music].
John Lovallo: And I guess Dave, you're talking about getting back to business, back to normal in terms of supply chain and stuff like that. Certainly, a lot of news flow on the Red Sea side of things, any impact in terms of importing components and stuff of that nature? And how should we think about inflation as well?
John Lovallo: And how should we think about inflation as well? How's that kind of playing out? Has that started to calm down?
Dave Barry: I do appreciate you guys are expecting a favorable price-cost spread, but I'll talk us through some of the components. Yeah, I'll start there, and then I'll maybe talk a bit about inflation. Obviously, the Red Sea and the impacts on the Panama Canal are not kind of lost on us in terms of Working Hand in Hand.
Dave Barry: Our team has done a great job to maintain service levels. That will mean we will put up a bit more capital to work this year to ensure that we don't have any customers. Thank you for joining us!
Dave Barry: service level. It does seem to be improving somewhat in the Panama Canal, which is... Good news, because that allows us to take the line. The Red Sea, which has obviously been very challenging, with the protective measures, the people we find from a customer service perspective may absorb, one time, in capital or other expenses. And then I'd say overall, Phil, on inflation and deflation. So looking, starting with 2023, we actually finished the year with net inflation in the P&L if you take into account materials and freight having slight deflation offset by labor and indirect. You know, looking forward, we do have areas of deflation on the balance sheet that will come off into the P&L, but again, we have inflation above trend in things like labor and indirect, and as Nick mentioned, we see some pressure on trade from what's going So I would characterize, you know, for 2024, our overall COGS base, if you think of that as 2.7 billion, we would expect roughly less than 1% of net deflation when looking at all the inputs and costs over that base. Okay, super helpful.
John Lovallo: Thank you. Thank you. Nishu Sood, John Lovallo, Good evening, guys.
Adam Baumgarten: And thank you for taking my questions. The first one is on the 650 million new share repo authorization, which is on top of the 435 million. Just curious, you know, how you're sort of thinking about that in the context of you doing 150 million last year, but if you go back to 21, you did 450, I think you did 580 in 2022. So you know, how aggressive could you guys be?
Adam Baumgarten: And where do repos kind of fit within the capital allocation priority list? John, great question. So, you know, that 650 in addition to, but that other one expires, you know, March 1st. And so then the 650 will be our go forward until we authorize more or it expires. Now, you know, our track record has been to do share repurchases really opportunistically and to look for dislocations in value. We run a returns-focused model against our own plans.
Nicholas Fink: And, you know, we've, over time, done really, really well over the years. Look at how it has tended to play out, from a sort of priority perspective, always first and foremost in our own organic opportunities; those are the most certain and highest returns. And then, you know, just interestingly, the way it tended to work out is kind of 50-50 between share repurchase and now, with acquisitions. We also remain very returns-focused, and so, you know, there will be some nice things we may take a pause on. I don't feel comfortable that the returns are there yet. And those might be times where, you know, she sure repurchases them, preferable.
Dave Barry: You know, there'll be plenty of capacity, and we'll continue to look opportunistically, but when there are those dislocations... to go track. So we will be there. I think, you know.
Speaker Change: [music].
Adam Baumgarten: John, if you look at 2023 as a good example, we had an acquisition that was of Knightside. Fewer share repurchases. So it really is that interplay between, is there attractive accretive M&A, and if not... What can we opportunistically buy back shares? The other lever that we watch is our leverage ratio. And we've deleverred faster than we expected following the ASA acquisition and our continued path to delever further in 2024. And as long as cash flow remains strong, as we think it will, it gives us opportunities to deploy it effectively. That's helpful. And then, you know, on the 55 million dollars of production impact that you guys are lapping, I know you don't anticipate recovering all of that. But can you just sort of remind us of the magnitude of the impact of each segment?
Dave Barry: And will most of this reversal, whatever the number is, be, you know, a first half phenomenon? Yes, if you think about just to put it into context, right, we're coming off of a year in 2022 with extremely high production and sales. Sales started to slow in the second half of 22. And then we pulled back our supply chain hard, late in 22 into early 23.
Dave Barry: You know, our 2024 plan has production, you know, more balance to sales, but we're not at that level that we were in 2022. So that's why we're not fully recovering the overhang that we experienced in the P&L in 23. I think if you look at the split, it is split between water and outdoors, probably a bit more towards water than outdoors, maybe 60, 40.
Dave Barry: And the timing of it, yeah, it will recover, you know, recover a bit more through the year as we're building, as we're producing in line with demand. And so you're not gonna have these big production ramps and large favorable absorption in any one. Great. Thanks, guys. Our next question is from Adam Baumgarten. Don't miss it.
Adam Baumgarten: Just going back to your comment around demand potentially troughing, I think there is, you know, a bit more optimism out there, and you cited some of the macro indicators, but anything you're seeing in the business, I know you talked about sequential improvement in a lot of areas throughout the year, but anything you're seeing maybe on the January side, given some of the weather, that gives more confidence that we're really close to a bottom. Yeah, I'd say it's more sort of a longer series of data. When I say longer, I mean more than like three weeks of data. And so, you know, when we look at sequential improvement, we look at the drivers, we look at the, you know, data. I'd say, just given January is a lower volume time of year anyway, and then you throw, you know, the rest of the year into the summer. I mean, here in this region where we are, it was the coldest consecutive day that we had had.
Nicholas Fink: And on top of that, it just skews the data, so it's very hard to read through. I mean, in that B of A data that they have referenced, you know, well, thanks for joining us. We'll see you next time.
Dave Barry: So, you know, I think we'll need a few more weeks before we can see it definitively in the shorter series, but the longer series... Okay, I got it. Makes sense. And then just on SG&A, maybe how you're thinking about that in 2024, and what a good percentage of sales is from a long-term perspective, just given the shift in the portfolio over the last year. Yeah, you know, I'm still driving a lot of transformation. And so you'll see some incremental investments in 2024 contemplated within the margin guide that we gave. I'd say the team that built the plan to be thoughtful around those investments and pace them so that we are seeing the top line come through and seeing the margin appreciation come through before we make them.
Nicholas Fink: But we're pacing those investments, and then, I think, longer term, as we drive transformation, our goal is to be a top quartile performer. We want to be efficient, we want to continue to invest in brands and innovation, and a lot of the transformation investments we're making today are to get as efficient as we can in the non-core activities, in the back of the house activities that aren't as value-creating as some of our investments in brands and innovation. So that's the long-term goal; I think that's how we think about it, knowing we'll still make some So just a quick example of what they prefer to do is to look at sort of their interplay.
Adam Baumgarten: I don't know if you can see it in front of me, but I would guess core, kind of core corporate function, probably CAGR growth below inflation, and they've done really well at that historically, and then the rest of the growth and investment is really things like digital, you know, Fortune Brand's advanced capabilities, you know, things that will really, over time, bring New Jersey.
Adam Baumgarten: All right, that's helpful. Best of luck, guys. Great. Our last. Evercore ISI.
Operator: ....
Stephen Kim: Thanks very much, guys. I appreciate the opportunity to ask a question here. You made a comment which I thought was pretty striking, Dave.
Dave Barry: I believe you mentioned that you were incorporating a 6.5% to 6.75% mortgage rate assumption, but I think you said that if mortgage rates came in 50 basis points lower than that, I assume you mean for the full year, that it would add only about 50 basis points to your overall sales. First of all, did I hear that right? That seems very low, but I assume it probably scales dramatically if, let's say, rates are 100 basis points lower or something like that. But can you just give us a little more color around the analytics? Because I think you said your team sort of ran some numbers and stuff. That would be very helpful.
Stephen Kim: Yeah, happy to, Steve. Looking at the data that we have that we use to create the market forecast, the team sensitized rate environments relative to our demand going back over time, and that's what we're seeing. Now, we didn't change our assumptions around outside U.S. demand, so that could be a piece of it. So that remained the same, remains down in China, you know; high single digits in Canada is a bit worse than the U.S. But the math that they ran just as a, I think a model for us and a guide would be, yes, a 50 basis point in the rate would be 50 basis points of incremental growth. You know, I think probably where the model could use some refinement is more, you know, the R&R data is more murky. We're definitely more correlated to rates of new construction in our data. And so maybe there's outside growth coming from R&R that we're not picking up, but that correlation is harder to see based directly.
Dave Barry: Gotcha. Okay. Well, you know, we'll probably take the over on that, but that's fine. The second question, just to clarify, your guidance points, I assume they exclude any impact from an extra week?
Stephen Kim: Because I was under the impression that you might have an extra week in 2024. Just wanted to clarify that. And also, DNA ran a little bit hotter than we expected this quarter. Can you give us a sense for what kind of a good run rate would be for DNA?
Dave Barry: Yes. No extra fiscal week. We're tired of talking about that. So happy not to have one in 2024. And then I'd say, you know, for DNA, running, you know, close to 30 million per quarter. You mean. Yeah, per quarter.
Stephen Kim: Alright, great. Thanks so much, guys. Thank you for joining today's conference. You may now disconnect.
Operator: Thank you. Thank you. Thank you. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??