Kevin Wheeler: Good morning, Jeff.
Jeff Hammond: Yes, so I just want to come back on price. I think your comment, Kevin, was both channels are going to be competitive. But formulaically, I think you go negative on price with your material price formulas on the DIY side. So, I’m wondering if your comment implies that there’s some pricing pressure on the wholesale side or do we stick more there? And if we do, what the upside is to maybe North America margins given the fall-off in steel? Thanks.
Kevin Wheeler: Well, steel has stabilized now for a while. So, and through the process it — there’s also been many non-steel related cost that as Chuck had mentioned in our remarks as stabilized. But, they haven’t come down. So, we have made the appropriate adjustments there in both channels. And as we continue to reiterate, we are going to keep the channels competitive. Again, historically as I look back over the last year, we are managing our business as we have in the past. And we are a similar view as we go forward. So, our goal is to remain competitive in both channels. We do a lot of business with customers in both channels and that’s our commitment. And again, we look at more of stabilization as we go forward since it looks like materials and steel have kind of plateaued and kind of stabilized.
So, don’t see a competitive issue between the channels or as we go forward into 2023. There is always some historic price paid. But, it’s nothing different than we have seen in the past.
Jeff Hammond: Yes. I mean I understand that the steel stabilization. But, I think you mentioned 40% to 45% kind of decline. And I guess relative to past cycles that’s a much bigger kind of increase and then decrease. So, I am just wondering if the behaviors are any different.
Kevin Wheeler: Yes. I mean that’s decline, I think I’ll just going comment that if you would have stayed at that the peak, we would have probably been really challenged on the margin profile in North America. But what happened is we kind of grew into a little better margin profile as steel retreated a bit. And, we come out of the fourth quarter and steel does take another tick down maybe 20% to 25% in Q1. And then kind of flattens out. So, we had quite a bit of headwind in ’22 on North American margin because of some of the higher steel cost earlier in the year.
Jeff Hammond: Okay. And then, just one last one, I think the last couple of years you signed up for $400 million buyback. I think you are stepping it down to $200 million. And just anything that informs the kind of the lower buyback versus the past couple of years?
Kevin Wheeler: Yes. I mean where we are looking at is and we committed to $200 million as a buyback. And we are a little bit shy of our cash conversion target of 100% cash conversion in 2022, did that consciously, built inventories, worked our backlogs down. Pleased with that, now we will be working on reducing inventories in the next year. But as we entered 2023, we paid $200 million as the target that we are committed to. We are going to looking at kind of how ’23 rolls out from really an acquisition perspective as we go through the year. We may revisit that as we go through the year. And as we work down inventories and see our cash potentially grow a bit. But, we are going to revisit it as we go through the year with the opportunities we think still to be out there on M&A.
Jeff Hammond: Okay. Thanks so much.
Operator: Thank you. Our next question will come from Matt Summerville of D.A. Davidson. Your line is open.
Will Jellison: Hi, good morning. This is Will Jellison on Matt Summerville. I wanted to ask both questions today about capital allocation priorities. And starting off with organic growth, I was wondering if you can provide any more insight into what sorts of capital expenditure projects and investments you are considering making in 2023? And how those support the business and its growth moving forward?
Kevin Wheeler: Yes. On the organic growth I mean just a couple of comments around that. So, we always invest in innovation, product development. From a capital perspective, some of those support new product developments. I would say when you get into the developments of the heat pumps, some of the other growth categories where we might have to support that.
Chuck Lauber: And when we break down the capital, we look at it from a growth perspective maintenance as well, we will be at some pretty large facilities that we have to invest back in. And there is also a pretty large cost reduction component as we invest in automation, new technologies, and so forth and efficiencies in our factory. So, those are three buckets that I would say that there is no specific major expense outside our normal. But, there is a consistent spend in all three categories under company.
Will Jellison: Understood, okay. And then pivoting to capital allocation conversation to acquisitions, can you speak to actionability of the pipeline? What kind of things you are observing in the market for potential targets out there? And what’s your overall thought is for how many of those could be acted upon in 2023.
Kevin Wheeler: Let’s just talk about the environment, which is a bit — is a bit strange right now, what the, some of the potential higher interest rates to talk of Recession and so forth. And what I can tell you that multiples haven’t really changed, maybe ticked down a little bit, but there’s a lot of wait and see approach out there with I would say, targets. So, we’re continuing to stay close to our potential targets and stay active in the pipeline. And we look at this as an opportunity as you get an uncertain times with our balance sheet. These are nice opportunities, but again, needs to play out a bit, we need to get through some of the uncertainty. But we feel good about our pipeline, we feel good about the companies that are in it.
And we’re going to continue to work on driving some of those closures. As far as actionability, it always depends on the person saying yes, as we go forward, and — we’ll keep working through there, but we’ve made small acquisitions each still last few years. Hopefully, we’ll be able to bring a couple of those across the finish line in 2023.
Operator: Thank you. And one moment please for our next question. And our next question will come from Susan Maklari of Goldman Sachs. Your line is open.
Charles Perron: Hey, good morning, everyone. This is Charles Perron in for Susan this morning. Thanks for taking my question.
Kevin Wheeler: Yes, good morning. Charles says, thank you. Can you help us out there?
Charles Perron: Yes, I guess my first question, I would like to go back to the North America margin outlook for 2023. And it’s going to help us walk through the trajectory of the margin throughout the year, obviously, we’re going to have water heater volumes, probably deleveraging in the first half. And then coming back, obviously, gradually throughout the year, but also, if you think about the price cost, you mentioned that nonsterile category should improve through 2023. So, is it fair to expect maybe a gradual ramp in the margins throughout the year?
Kevin Wheeler: Yes, first to comment on Q4, we’re really pleased where we came up in Q4 in North American margins is 23.3. And I do want to kind of call out the fact that we did have some pretty strong boiler volumes in that quarter. So, that’s, that’s coming off, we’re pleased where we’re coming off, but we got some help on some higher margin boiler, commercial boiler, product sales that helped us come out of that. So, the gains for the year on the margins is, it possibly expands a little bit, but we’ve got our outlook fairly even through the year, the way the balancing kind of occurs. And I talked a little bit earlier on the cadence that it’s 52:48 for residential, a little lighter, we have boilers that are usually strongest in the third quarter.
So, it’s fairly smooth for the year we don’t have non-steel costs in our assumption and outlook, coming down a great deal at the back half of the year, potential opportunity as we look at it, but we just, we see some opportunities, but we haven’t got much of that opportunity baked into our outlook.
Charles Perron: Got you. That’s a good color there. And then my follow-up on the boiler sales guidance for ’23, a 10% to 12% sales growth, that’s impressive considering the significant growth you’ve seen in ’22. Can you expand maybe on the drivers of the growth there or volumes versus price? And may be the initiative, supporting industry volume growth, considering the weakening that we’ve seen in the commercial or non-residential indicators over the span of the last few months?
