Mike Harrison : We saw the nice improvement that you guys delivered in inventory levels during 2023. Are those inventories where you want them to be at this point in the year? And I guess, is there any way for you to quantify the impact? Presumably, if you’re working down inventory, you were running your plans more slowly. Can you quantify the impact of lower fixed cost absorption last year? And presumably, you’ll make some of that up this year if you’re running your plans a little bit harder?
Chris Villavarayan : Sure, I’ll take that. So in terms of — as I think about quantifying the improvement, we certainly saw a significant onetime improvement. If you take our improvement in free cash flow, I would call it, just less than half of that was driven by that performance. Looking forward into 2024, we’re not obviously signaling that we would get too much better than that, though, as there are pockets of the business that we can improve. Maybe I’ll break it down by business. If you look at the four end markets, my perspective is, especially with where we are forecasting volumes to be possibly lower especially on our industrial business that is certainly something that we are looking at further opportunities. In inventory reduction as well, that’s probably an area where we’re also looking at fixed cost absorption.
So that’s something that the team — the industrial team is very focused on as we look forward on what extra opportunity there is in terms of utilization of the facilities we have, with the understanding that this volume will obviously be needed at some point. So that’s certainly something that we’re focused on. Across the rest of the platform, I think we’re at a good point in terms of efficiency. There is probably something more that we can do in terms of utilization, but that will be probably something that we would work through the year because we are showing two of the businesses going up slightly in volume.
Carl Anderson : And Michael, maybe just to add to that as well, as I just look at the top of the house from our conversion on the incremental revenue. So in 2023, we had about $300 million of higher revenue and our EBITDA was up $140 million. So it’s about a 47% conversion on the incremental revenue. And as you look to 2024, we’re expecting to have conversion on incremental revenue of 60% to 65%, if you just look at what we put out for a guide perspective. So I do think, as what Chris alluded to, we kind of like where we are. But there’s always more productivity and there’s more efficiencies we can get, and I think you’re seeing a pretty healthy conversion as we enter into this year.
Mike Harrison : All right. Thanks very much. And then just curious in the Refinish business. I don’t see that there’s an acquisition contribution line in there. Can you comment on how much of the volume that you saw in the quarter or revenue in the quarter was from that André Koch acquisition?
Carl Anderson : Yeah. We had about $14 million of revenue in the fourth quarter that related to the recent acquisition of André Koch.
Mike Harrison : Prefect. Thanks very much.
Carl Anderson : Thank you.
Operator: Our next question is from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Arun Viswanathan : Great. Thanks for taking my question. Congrats on the ’23 progress. I guess I just wanted to get your perspective on where you are in your evolution. So I think you’ve mentioned long-term margin targets several times on this call, but that you’re not necessarily there. So obviously, you had very good progress in ’23, up 180 basis points on a consolidated basis to the 18.4. And Refinish now — or at least Performance Coatings, I know it’s being dragged down a little bit by industrial, but it appears that you’re potentially closer to that normalized level within Refinish at least over 20%. So how much more do you think there is on the margin front? Do you expect to kind of approach 20% on a consolidated basis over the next couple of years? And is that $100 million that you referenced kind of the main driver of that coming back to you?
Chris Villavarayan : That’s a good question, Arun. If I give you the answer to that, you might not show up in May. So — but I’ll give it to you. I’ll break it down a bit more. I think if you — to your point, the progress in ’23, we jumped up 180 basis points if you take where we’re heading for ’24. It’s that, call it, 100 basis points. But I think there’s been a lot of questions about Q1 to Q2, Q3 jump up. But if you look at how the guide would work through Q1 to Q2, Q3 and Q4, Q2 and Q3 have always been our stronger quarters as we have been somewhat cyclical. And you would argue Q2 and Q3 would need to get to that 20% almost to be able to hit where we have guided, to your point that essentially means we’re coming back very close.
I still believe there’s more opportunity here. If we look at the earnings potential of this company, going back to just converting on the incremental sales as Carl answered to that last question, I do believe that there’s more opportunity here. And that’s what you will see in May. We want to lay out a three-year target with what we are going to accomplish year-over-year, to see what more we can do to drive the earnings potential. And on top of that, even if we look at, let’s call it, this low single digits or mid single digit growth, what more we can accomplish with that. And so across the growth and the earnings potential, I think there’s a lot of value that we can drive to shareholders. And that’s certainly what we’ll lay out for you in May.
Arun Viswanathan : That’s great. And then maybe I can just ask a similar question as a follow-up on free cash flow. So you’re converting over 40% of your EBITDA into free cash flow. And given what you’ve said so far with your incremental margins going up, it looks like you’re probably going to be headed higher on that conversion as well. So over the next couple of years, with your leverage down under three now and free cash flow may be approaching $500 million plus in the next couple of years, is that kind of normalized free cash flow? And if so, how do you expect to spend that once you reach that level?
Carl Anderson : Yeah. I think we would view that as normalized cash flow, especially being over $500 million as we get into 2025 and beyond. I think we will be — as I mentioned, leverage will be right where we want from a target perspective at the end of this year. And so we will have optionality in front of us. And so I think we will be looking to deploy some of that capital and looking at share repurchases as well as we will be evaluating — continuing to evaluate M&A-related opportunities that we believe will be accretive for the company. So those are kind of the two areas that we will be focused on. And I think we’re definitely going to be looking to continue the momentum that we had in ’23 into ’24 and getting leverage where — to the target range that we outlined.
Arun Viswanathan : Thanks.
Carl Anderson : Thank you.
Operator: Our next question is from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Steve Haynes : Good morning. This is Steve Haynes on for Vincent. Maybe I just wanted to come back to the guide for a sec. So I think historically, your first quarter is maybe 22% or 23% of what you do annually. So if we were to kind of use that to annualize your first quarter guide, it suggests something a bit above the midpoint of where you’ve guided the full year. So is there something different in the phasing this year? Or are you being a bit conservative in the back half that’s, I guess, maybe causing some of this? Or maybe there’s just something else in the math that we’re missing there.
Carl Anderson : No, yeah, I think you’re looking at it the right way. I mean, simplicity, if you take the $240 million EBITDA divided by 0.23, you get about $1.43 billion, which is kind of right in the guidance range that we provided, albeit a little bit at the higher end versus the midpoint. But no, I think the seasonality that we expect this quarter and for this full year is similar to what we’ve had in the past.
Steve Haynes : Okay. And then also in the 2023 numbers, there’s some elevated costs tied to ERP and other investment. What does the 2024 guide, I guess, assuming the bridge in terms of further costs related to either of those things?
Carl Anderson : Yeah. So we had about $40 million of costs related to ERP as well as consulting costs for some of the productivity initiatives that we had this year. As we look into 2023 [ph], I would expect that to drop down by at least $30 million. So kind of that new run rate of costs in ’24 would be, call it, in that $10 million — maybe $5 million to $10 million type of range.
Steve Haynes : Okay. Thank you. Appreciate it. Thank you.
Operator: Our next question is from Josh Spector with UBS. Please proceed with your question.
Josh Spector : Yeah, hi. Good morning. If I go back earlier in the year, I mean, when you guys had the production issue that impacted Refinish, you talked about a couple of hundred million dollar backlog. Where is that now? Does that still exist? Does that really matter as we look into 2024?
Chris Villavarayan : Yeah. Josh, I’ll take this one. So you certainly won’t hear us talking about S/4 going forward. I think in terms of where we finished the year. I would say all our North American plants are back to pre-implementation run rates, and our facility in West Virginia has done a stellar job of bringing the backlog back to what we have normalized pre the implementation of S/4. And as we think about — going forward, as you think about Q1, we don’t show — there is no upside or we don’t see any benefit from, let’s call it, a backlog improvement. We are back to where we are. We do believe there’s more efficiency that we can get from our S/4 system. So that is something that the IT and the operational teams are working on, but certainly not something that should drive something meaningful through, let’s call it, the front half of the year.
The objective there is just to get the efficiency in the system working great before we roll that out into smaller chunks into — over the next several years in the rest of the world.
