Nick Fink: Sure. As security just talking more on the Master Lock and SentrySafe side of the portfolio, and most of the really, really healthy loss year. Then you can see the consumer kind of slowed towards the end of the year, and we saw that continue to play out into Q1. But interestingly, I’d say that decline in Q1 of about 50% of that is destocking, right? So that brings actual PLS [ph] number much closer to kind of mid-single digits. And there’s a lot of work underway in that business to drive into much, much more of a growth business by focusing both on some exciting areas like commercial where it’s now a third of the business, and we’ve been seeing really, really nice growth connected, integrating it with the August side where we think we can drive a lot of growth.
As well as just refreshing the offering in both SAFE and in padlocks, now it’s going to start to hit shelves as we go through the year and so a lot of work has gone to reenter that business over the last few years and just starting without the business to a much, much healthier margin profile and gives us confidence to invest and sort of stick behind where this business is heading and continue to be very excited about it.
Matthew Bouley: Got you. Okay. But thank you for that Nick. Secondly, just looking at the balance sheet, it looks like inventory dollars stepped up a bit, presumably the acquisition played into that. But maybe just kind of refresh us on how you’re thinking about inventory going forward? Does there need to be any sort of rightsizing of production from here? Or is that really just the acquisition, any additional color there? Thank you.
Dave Barry: Matt, I’d say a few things. The acquisition is a piece of it, but also say we’re back more to a normal seasonal first quarter where we’re building inventory for a couple of reasons: one, to mitigate Chinese New Year supply chain impacts and two, in advance of spring and summer seasons. And so we still expect to deliver free cash flow conversion of around 100% for the year and have positive free cash flow quarters Q2 to Q4, which is consistent with this business. I don’t think there’s anything unusual in the results. I think actually last year, first quarter was more unusual as we’re pulling inventory down at such a rapid rate. We had positive free cash flow in the first quarter of 2023 back to normal results.
And the team continues to work to optimize inventory, and we’ll do so throughout the year more driven by systems enhancements and process enhancements. And then the final driver is we brought in a bit of extra inventory to buffer our supply chain against the Suez Canal and Panama Canal disruptions that have taken place here pay holding on to that maybe a bit longer than we expected through the year, just given those continued disruptions.
Matthew Bouley: Got you.
Nick Fink: And – the only thing I’d add to that is you go back to the first question about the aligned organization, which excited me and you saw a lot of this last year, and I think we’ll continue to see this year is there’s not kind of one special [ph] operations team really owning not just inventory but thinking about the total balance sheet from a shareholder perspective and working to pull every lever on it. And so they’re having conversations with some of our suppliers offers. We’re going to have to put extra inventory on the water to support all of our businesses. What are the impacts of total working capital, how do we think about that? And just having that shareholder lens inside the business of working all the time is part of what’s going to drive total working capital improvement beyond just inventory. And I think the big drivers last year, and I think you’ll continue to see that improvement in this year.
Matthew Bouley: Thanks Nick. Thanks Dave. Good luck guys.
Nick Fink: Sure.
Operator: Our next question comes from Susan Maklari with Goldman Sachs. Please proceed you’re your question.
Susan Maklari: Thank you. Good afternoon, everyone.
Nick Fink: Hi. How are you Su?
Susan Maklari: I am good. My first question is on the acquisition you did of the water filtration operations there, which is an interesting add to your whole smart water network that you’re building out there. Can you talk a bit about that opportunity, how it fits into this, where it can go over time, the potential there? And maybe just how to think about the M&A pipeline more broadly and what you’re seeing as well?
Dave Barry: Sure. I’ll start with SpringWell. So it’s a space we’ve been looking at for quite some time. We’ve been fairly discerning about wanting to find a very high-quality entry point into that business. But I’ll break it down. I mean, firstly, just the business itself. We’re excited about that addressable market. Its $4 billion in the U.S. alone today, it’s growing. Concern about water quality is growing. And there’s going to be a tech enablement for that and the ability to know the quality of water kind of coming in and out of your system. And so just in and of itself, a very exciting entry point. Secondly, a digital native business, right. Started up as digital native, the team – not even sure they used that word because there’s no other way they build the business when you started today.
And just as we have with Yale, August or with MTech [ph], the team is really kind of holding it to the side and saying, “I want to learn everything about what you do and be careful to integrate only the best of the best if they do something better than we do. We’re going to adopt that into our business.” and we’re being very, very deliberate about that. But their ability to interact with consumers in a digital setting, the speed at which they can get things done, the way they work at sale is very, very interesting to us. And that is a capability that we will seek to adopt over the entire business. And so another flow of that. That’s very interesting. And then the third part is just – there is a lot of industrial logic around our Smart Water Network and filtration.
They go in at the same point. Certainly flow, I mean there’s other elements to the Smart Water Network, but the flow goes in at the same point as filtration. And if you’re coming in to get someone to touch your main and to put a filter on it or vice versa, put a flow on it, it is a very logical cross-sell. So really is an early experiment and kind of remarkable, that team got it done so quickly, we just flow up on their side. I wouldn’t say we spent time training them on flow and really understanding how it works, and we’re seeing double-digit attachment rate. So that thesis is playing itself out very quickly. And so we’re excited about where we can take it to continue to push into the water quality arena and do it in a smart way.
We think this is going to be a very, very important foundational piece to the whole Smart Water Network. And then the second part of your question, the M&A pipeline continues to be robust. We’ll continue to be very, very disciplined about how we think about it. But as we deepen these capabilities, I think you’ll find us to be more selective around things that really have these secular growth tailwinds like a water quality, right? It’s probably growing double digits as an area. But we’re going to be able to go deeper and extract more value from them. And so going forward, I’m excited about what’s happened in the pipeline. I think it’s going to generate a lot of cash we’ll be disciplined in deciding how to deploy it in the best manner possible for shareholders, but I think there’s going to be a lot of interesting opportunity to continue to build our business.
Susan Maklari: Okay. All right. That’s encouraging. Thanks for the color. And then maybe turning a bit to the consumer. I talked a fair amount about new versus R&R activity in the quarter. But anything that you would highlight in terms of consumer behavior or any changes you’re seeing in the business across the various price points, luxury versus some of the other offerings that you have? Just anything of note there? And I guess anything that’s changed in the last couple of weeks as well with that.
Nick Fink: Yes. I don’t know – and Dave, feel free to add color. I don’t know that a ton has changed. Just thinking back to some of the trends we talked about on the last call, and I did mention that in consumer has still been somewhat choppy. I think the luxury consumer has outperformed. If I looked at the point of sale for the luxury business, it was probably up mid-single digits. And so more resilient, they’re kind of still at the same rate, almost 2x what the underlying water business is doing. Consumer interest continues to be there. We do a lot of work around that to make sure that we’re right because we’re placing bets on where that consumer will be. We are continuing to see a shift online. And so being very cognizant about investing in and building our online capabilities.
And that’s not just the pricing piece is the whole online shelf and the ability to manage that. I think SpringWell is going to play very, very well into that capability. But beyond that, I don’t think a whole lot new Dave gave some color around kind of the sequential dollars that we’re seeing through retail and e-commerce. And I think we just want to see how it plays out now. I do think as the noise around rates stabilizes, whether that impacts people’s ability to move or not tends not impact our product that much, but just a level of confidence probably does. And you hopefully see more consumers come in and do some of these projects that they’re talking about.
Dave Barry: Yes, I would agree with everything Nick said in relation to the consumer as they’re engaged with us in housing. I think one area we did see a change is in security from our recent trends. And that probably speaks more towards the broader consumer. That’s a piece of the portfolio that’s more exposed generally to the consumer. And as we look at where the POS trends were soft, it was on the consumer products that were really a bit core and then some of the noncore things like TSA locks, bike locks and things that were maybe purchased into quarters yes, that weren’t going forward. And so I think that may be a read into how the broader consumer is thinking that it’s a trend we’ll keep an eye on, but I think everything Nick said around the consumer with respect to housing, we haven’t seen a lot of change in trends in that state.
Susan Maklari: Okay. All right. Thank you for the color and good luck with everything
Nick Fink: Thank you.
Operator: Thank you for joining today’s conference call. You may now disconnect.
