Kathryn Thompson: All right, thanks very much.
Kevin Murphy: Thanks, Kathryn.
Operator: Our next question comes from Phil Ng with Jefferies. Phil, please go ahead. Your line is now open.
Phil Ng: Hey, guys. Bill, if I heard you correctly for 2024, you’re expecting your resi business to be down mid to high-single-digits? If I was looking at the fourth quarter trend was down about 4%. So can you help us unpack that just because from a builder commentary it sounds like orders and starts are starting to kind of inflex, I would expect things to be a little less bad. And provide a little more color on the [RMI] (ph) side, certainly higher rates, what that could mean for remodeling projects, any color, how to think about the shape of the air, and just your resi business more broadly would be helpful?
Bill Brundage: Yes, Phil, hey, thanks for the question. And let me clarify, when I was talking about resi down mid to high-single-digits, that was our view of the market, not our view of our performance. Certainly we would expect to continue to take share against that. But look, if you look right now to your point where we exited Q4 with resi down 4%, which had a sales day in it, we’re trading down in that mid-single-digit range from a growth perspective and we’re stepping into the year in a very similar environment. So from a new perspective, yes, we’ve seen starts and permits seem to have stabilized around that $1.4 million start range, as we saw in August, starts dropped a bit, down 15% year-over-year. So it’s still a bit of a choppy environment, and it’s difficult for us to predict exactly what the impact of continued rising rates will be on that new resi side.
But given where we’re entering the year and given how we expect the year to play out, that total resi market down mid to high-single-digits with new resi being a bit more pressured, that’s our best view of the world today and we’ll certainly provide guidance and updates as we go throughout the year. On the RMI side, we just talked a bit about some of that consumer pressure, and we’ve seen that consumer pressure in the digital commerce side of our business. And while our building and remodel business has held up quite well, and as Kevin highlighted, that being more pointed towards the higher-end consumer, larger projects, there’s no doubt there’s tougher comparables as we step through there. And if you look at some of the indicators, just take the Home Improvement Remodeling Index, for example.
That was negative in our second-half, and the forecast is for that market to be down for the first three quarters of this next fiscal year. So we think it will be better than new resi, but still down for the year in negative territory.
Kevin Murphy: And Phil, at the risk of repetition, we do see signs of stabilization as Bill indicated on that new res side, especially as existing home turnover has been slightly diminished and we’ve seen continued demand for housing. But that said, as Bill indicated, we had some good results inside of that building and remodel business that were coming up against tough comps. And on the rough plumbing side, which will be really the first after our Waterworks business to have exposure to new residential upticks. That’s got good commodity pieces involved in it with PVC pipe and the like. And so we’re a bit cautious even though we’re seeing green shoots and signs of stabilization.
Phil Ng: And Kevin, any more color on the RMI side? I mean, it’s more of a debate just because existing homes’ sales remain under pressure and rates are high. How are you seeing that market? Is it stable to flat next year or are you seeing some green shoots on things picking up? How do you think about the RMI side of things?
Kevin Murphy: We think the RMI is going to be down from a market perspective, although not as down as what we’re seeing in new res. We do think that there’s been some shift. If you just take the HVAC side of the business, for example, just like we saw in ‘08, ‘09, we’re seeing a movement from replace, from a system perspective to repair. We’re seeing break fix, starting to take a bigger portion of the business than what we’re seeing in terms of maybe some of those smaller remodel jobs. But like I say, when you look at our overall exposure, that exposure to the higher end of the market, particularly in that showroom, serves us well, serves us well from maybe less pressured consumer on that remodel side. And so when you look at the pro and the higher end remodel side, we’re still seeing pretty good traffic inside of those showrooms and pretty good traffic with our residential trade plumbing group as they start to do those remodel projects.
Phil Ng: Got it. That’s helpful. One last one, on the free cash flow generation, certainly very impressive this past year. Did a great job in managing down inventory. Bill, any more color on how we should think about free cash flow in 2024? How much more do you have on the working capital front, and how should we think about cap deployment?
Bill Brundage: Yes, first off, no change to capital deployment in terms of our capital priorities, investing for organic growth, sustainably growing our dividend, bolt-on M&A, and then as you saw, we still have about $540 million left on our share buyback authorization, and we’re going to manage to the low-end of that 1 times to 2 times net debt to EBITDA range. We were quite pleased with the free cash delivery, really a bounce back after investing heavily through the pandemic in inventory. Actually, a bit ahead of our expectations. We had come through last year talking about maybe about $400 million of inventory that we thought we would normalize. That came through more like $600 as we moved through the year. That $600 is an organic inventory decline offset a bit by acquisitions we did for the year.
So as Kevin highlighted, look, we think we’re in a fairly normalized inventory environment. We think we would get back to our normalized operating cash to net income generation of about 100% as we step through over the next couple of years, pleased with the delivery. And then if you think about just seasonality, typically we would draw down inventories during the summer months and have a little bit of a build back as we step into the first part of our fiscal year into the fall. But you should think about it very much as a more normalized working capital and cash flow generation environment now.
Phil Ng: Okay. Thank you. Appreciate the color.
Kevin Murphy: Thanks.
Operator: Our final question today comes from Bobby Zolper with Raymond James. Bobby, please go ahead. Your line is now open.
Bobby Zolper: Thanks for taking my question. Could you help us understand what decremental margins might look like in the first-half, particularly given there may be some negative year-over-year pricing?
A – Bill Brundag: Yes, I mean, look, we don’t really set out, and it’s difficult to guide on quarterly or half-year operating margins. If you take a step back, we exited the year with a 10.4% operating margin in Q4 at our seasonal peak from a revenue perspective. And as we already highlighted last year, delivering that nearly 11% Q1 operating margin, we would absolutely expect to be down on that as we step into the year, particularly with organic growth in the call it mid-single-digit decline range. So we will have more pressure on operating margin year-on-year as we step through the first-half. And then as markets stabilize and we roll past some of those difficult comparables from a pricing standpoint, we’d expect to get back to some more stabilization as we step through the second-half.
