Operator: Thank you. Next question is coming from Matthew Bouley from Barclays. Your line is now live.
Matthew Bouley: Hey, good evening, everyone. Thanks for taking the question and I want to pass along my best wishes to Pat as well. So a question on how you’re seeing the year play out, 2023, in terms of cadence. You’ve got the 6.5% to 8.5% market decline for the full year, and then you also made the comment that you see decrementals as kind of less favorable in the first half than in the full year with those inefficiencies in Q1. So I guess it would be helpful if you could put some color specifically on that Q1 outlook, and then kind of outline how you’re thinking about sort of top line cadence and the resulting margin progression through the year. Thanks.
David Barry : Yeah, hey, Matt, it’s Dave. I’ll take that one, and then Nick and Pat can add on. I’d say we typically don’t give quarterly guidance, but there’s some unique attributes in the first quarter that we alluded to that it’s worth expanding upon. So let me start with the first quarter, and then I’ll also provide some color on first half, second half cadence and how we’re seeing the year progress per your question. So in the first quarter, we expect sales to decline low double digits, really driven by market softness and select channel inventory reductions primarily in Outdoors and Water. As we said on the call, we expect to be through most of the channel inventory declines by the end of the quarter but still will be a headwind in the first quarter.
And then within each segment specifically, we’d expect low double-digit sales declines in Water and Outdoors and low single-digit at Security as they’re less exposed to kind of the housing market as the channel inventory declines. On an operating margin standpoint, and this is where there’s a bit of departure here from the full year and so I’ll talk to that in a minute, but operating margin, we expect the first quarter to be at 12.5% to 13%. And that includes roughly $30 million of cost coming into the P&L from impacts of our production curtailments and stranded fixed costs related to our inventory reduction efforts. So we said on the call, what we said earlier, we’re targeting inventory reduction of about $175 million to $200 million. About $65 million of that actually occurred in the fourth quarter, but we’re hanging up some unfavorable cost from production curtailments that will come off the balance sheet into the P&L in the first quarter.
So if I look at a normalized margin for us, excluding that $30 million, we’d be roughly flat to prior year. It’s about a 300 basis point impact. And then within each segment, we’d expect Water margins down in the low-20s, Outdoors in the high single digits and Security in the low double digits for the quarter. So with that said, with sales kind of down low double digits and the margin between 12.5% and 13%, we’d expect a first quarter EPS of $0.57 to $0.61. But now let me step back and just put the year in context a little bit. So looking at first half, second half cadence, for the first half, inclusive of that first quarter that I just talked through, we see a first half sales decline between 7% and 9% and a first half operating margin between 15% and 15.5%.
And that implies a first half decremental leverage of slightly greater than 30%. So as we mentioned earlier, we see the first half a bit higher than our full year average, and that’s because of these stranded costs from our inventory reduction efforts. If we say the full year was about $50 million to $55 million, the first half is about $40 million, with $30 million of that in the first quarter, as I discussed. So that’s going to be the headwind on the margin side in the first quarter and the first half. But then as we look to the second half, we see a sales decline between 3% and 5% and an operating margin between 17% and 18%, which implies a decremental margin better than 20%, which is more in line with our historical performance during a down market.
So a lot to digest there, and the business is digesting a lot in the first half, in the first quarter. And we do expect the year to start off in a choppy manner just given the volatility of builder orders and starts. But as we look forward and look in the second half, we see the business performing kind of more indicative of how we would perform relative to market and with decrementals in a down market on the margin.
Matthew Bouley: Got it. That’s super helpful, Dave. I really appreciate that. Second one, just zooming into the very near term, you made those comments about kind of year-to-date trends. And you just mentioned at the top, in the response there, that you do expect some destocking in Water and Decking, I think, through Q1. I think I also heard you say in the prepared remarks that, in some cases, you’re seeing customer inventories returning to a more normalized level. So I’m just curious, any more color on that kind of destocking outlook, how confident are you that it will be complete by Q1 across your businesses? And if you have any color on what you’re seeing in POS year-to-date that would be helpful as well. Thank you.
Nicholas Fink : Hey, Matt, it’s Nick. Why don’t I start and then I’ll hand it to Dave, he can give a bit more color. On the inventory thing, as I said earlier, a lot of that build is at our customers’ customers, which is unusual, particularly in Water, right, with our exposure to the production plumber as they saw the surge in new construction. And so most of that, we believe unwound itself in 2022. But there could be some trickling out in the first part of ’23, maybe a little bit at retail, a bit more Decking, although we think that’s mostly through. And if you look at Decking, at the end of the day, it’s probably down mid- to high single digits ’22 and then flattish to slightly down in ’23. And Dave can give a bit more color about that.
But you got to — as you, I think, are pointing out, you sort of put that against point-of-sale growth. And as we said in the prepared remarks, we saw that come off quite a bit after Labor Day. Interestingly though, in January, as I’m sure you’ve read elsewhere, it was slightly better than expected. So coming through our POS retail data, for example, it kind of matched 2021 almost dollar for dollar, week for week, sort of flattish for the month, which I think is better than we’re feeling about the year. We’ll see how it unfolds, but we’re going to prepare the business for a much more challenging POS performance than that and see where it goes.
David Barry : And Matt, this is Dave, I would just add. I think Nick did a good job of summarizing it. But as we move through the second half of last year, our teams got a lot closer to our customers with what’s happening with their inventory and their customers’ inventory. And so as we look going forward and continue to have those conversations, it’s one of the things that gives us confidence that, hey, based on our market expectations for right now and our sales forecast for the year, there are some pockets of inventory in the channel that need to come out to normalize in the first quarter, as I mentioned, within Outdoors and Water. But otherwise, we feel like we are getting to normalized levels. And then as we progress from the second quarter on, our sell-in will more approximate our sell-out in the business.
Matthew Bouley: Wonderful. Well, thank you Dave, thanks Nick. Good luck guys.
Nicholas Fink : Sure.
Operator: Thank you. Next question is coming from Adam Baumgarten from Zelman. Your line is now live.
Adam Baumgarten: Hey, everyone. Thanks for taking my question. Just curious on the acquisition front, sort of what you’re seeing out there, if you’re seeing any multiples come down, if the pipeline is pretty full. Also just your general kind of appetite for M&A in this type of environment as we look forward.
Nicholas Fink : Yes, I’d say certainly, multiples have compressed from where they were kind of ’21 and even part of ’22. I think you saw that a lot more risk-off environment in the later part of last year, and I expect it will be the same this year. Although, as we pointed out and we got three smaller deals done over the course of last year. We feel very good about those and integrations are going really well. And I think kind of have a prudent capacity to take good assets and put them on the platform continues to deliver for us. And I’ll add that this new structure really creates a much stronger acquisition platform because now we can play all of our capabilities across acquisitions, which is exciting. And so there are some things out there, but we’ve also got this pending transaction for the Emtek and the U.S. and Canadian Yale smart lock business, which we’re really excited about because they are very supportive of our existing connected home strategy and our existing luxury strategy, and so they’ll be great strategic accelerants.
And so we’re continuing to move towards what we hope will be a midyear closing date. We’re kind of deep into integration planning, cooperating with the Department of Justice as they work through their case and anticipate that, that will close midyear. So I think we’re probably going to be watching that closely and, of course, watching the balance sheet closely in a tough environment to make sure that we keep the strength of our balance sheet intact as we move towards hopefully closing that. And if that goes as planned, it would be great. If not, there are other opportunities that are very interesting out there.
Adam Baumgarten: Got it. Thanks. And then just on the China revenue guide of down 15% to 20% you’re assuming for the year. I guess, is that — should that improve kind of similar to the overall business, a bit tougher in the first half and then improve as we move through the year? Or is it fairly balanced throughout the year in your assumption?
David Barry : Adam, it’s Dave. I’ll handle that one. So let me give you a bit of context around China, and then I’ll get to your question specifically. But if we look at the market there, it continues to be challenged, especially in new construction. So new starts in China are down 40% and new sales were down 30% in ’22. And so it’s a challenging environment. As we said, our team did a great job delivering decrementals that preserve profitability and rightsizing the business and the level of investment for the current environment. But we expect that the market environment will continue to weigh on sales growth into 2023 because, if you think about China in the new construction side, the lag from kind of a start to our product is closer to 12 to 18 months versus where in the U.S., it’s coming closer to three to six months.
And so the headwinds that we saw come through in ’22, it will continue to be a hangover into ’23. The team has plans in place to beat the market. It’s a consistent theme across our business heading into ’23 with focused plans to beat the market. And longer term, we see China that market, transitioning more to an R&R market, just much like the U.S. And we feel like our business is taking steps now to remain really well positioned to grow with our brands, innovation and channel relationships to win in the long term. But I wouldn’t — I think it’s too early to say that China going to get better as the year progresses just given the hangover we’re going to have from their new construction declines last year.
Adam Baumgarten: Hey, guys. That’s helpful. Thank you.
Operator: Thank you. Next question is coming from Stephen Kim from Evercore ISI. Your line is now live.
