Joe O’Dea: Thanks for those details.
Operator: Our next question comes from the line of Chris Snyder with UBS. Chris, your line is now open.
Chris Snyder: Hey, sorry about that. I was on mute. Thank you guys for letting me hop back in here. I just wanted to ask on gross margin. I don’t believe this has come up. Can you just talk about what level of gross margin is implied in the guide next year as we’re going from $3.7 billion to $4 billion of revenue to that $13.00 to $14.50 of earnings? Thank you.
Neil Ashe: Yeah, sure. Chris, I’ll take that. The — as Karen pointed out, the — all we are guiding to is net sales and adjusted EPS. I’m confident in your math skill, so you’ll quickly realize that, that implies that we are — we don’t need to be at the levels of margin we were in the fourth quarter to — for the full year next year to deliver that range. What it does say, though, is that, as I was responding to Jeff Sprague earlier, we have structurally improved this business, which allows us to operate at higher margins than the company has operated in the past. It’s worth saying that the fourth quarter gross profit margins are the highest in the history of the company. So we don’t have to maintain those levels to continue to deliver what we consider to be outstanding performance.
And further, as I have pointed out repeatedly, the — and our value creation model is about growing net sales, turning profits into cash and not growing the balance sheet as fast. So we’ve made structural changes, which allow us to operate at these higher margin levels and to turn those margins into cash. So we feel really good about kind of the permanence of the changes that we’ve made in the lighting business and the continued opportunity we have to improve that. At the same time, we can continue to grow the portfolio through ISG and then through adding additional businesses to the portfolio.
Chris Snyder: I really appreciate that. And if I could follow up with one more, and it’s probably the biggest question that I get, is when we look at this gross margin, I mean it’s pretty incredible, up 340 basis points versus the start of the year. But at the same time, volumes have rolled. I understand that there’s the backlog dynamic. I understand maybe the macro is a bit softer. But do you guys think that there is any negative volume impact from this big uplift in gross margin? And how does the company think about balancing that? It feels like there’s a bit of maybe a sliding scale dynamic. Thank you. I appreciate it.
Neil Ashe: Yeah. No, I appreciate you asking the question and giving us the opportunity to address it. We talked a bit about this in the third quarter call. But I want to reflect on it some more, which is most importantly, our strategy in the lighting business around product vitality, service, technology and productivity has put us in a position to manage price and to manage margins in a step function better way than we have in the past. And so we feel really good about that. As we have evaluated volumes, and I was addressing this with Jeff’s question, we strategically managed price where we choose to where we think we can drive volume. We realize that at these margin levels, we’ve created a significant amount of value. And so we have a lot of incentive to continue to operate at these margin levels.
All of the data that we are looking at across verticals says that we are appropriately pricing for the volume that’s available in the market. And that’s our goal over time. So we will — that’s why we’ve continued to layer in margin and cash flow during this low volume period and why we believe we’re well positioned for the inevitable return of volume growth at some point in the future.
