Truman Patterson: Hey, good afternoon, everyone. Thanks for taking my question. First question, kind of in general for vendors, there’s been some comments about home centers pretty aggressively trying to claw back some of the pricing over the past couple of years as well as some builders. I’m just trying to get an update on negotiations there. if you all haven’t seen any pricing changes, what makes your products a bit more defensive, if you will? And any product brand segmentation that might be a little bit less susceptible to maintaining price?
Nicholas Fink: Sure. Truman, happy. I’ll give some broader perspective how we think about pricing strategy generally and then some of the things that we’re seeing in price interactions. And Dave may add some color. But I’ll just step back for a second. And as I said earlier, fortunately, we’re hoping 2024 comes a little bit more kind of return to normal. And if you think about our brands and our categories fundamental to our ability to invest in brain building and best innovation and even best [indiscernible]. But these are very consistent taking our price in fairly small incremental but year in and year out. And because we do it that way, even in the height of the inflationary period through COVID, you see a business like our Water business only take low single-digit pricing because we were keeping up all the way through, and we were able to manage both pricing and margin.
And for that, pricing philosophy is very critical. That’s the way we think about the business and a big expectation of our leaders here because it is the fuel that allows us to reinvest the life of both consumers and customers. Now as you look across our portfolio, in particular, we tend do not play at the entry level. All of our brands are in. There are more premium and up. And we’re seeing that in some of the share interactions of just a couple of weeks ago here some data with our teams, and we could see some of our brands increasingly interacting with price points above and not below, right, which is really positive kind of that we’re sort of not interacting with things like private label. The other thing I would say that we’ve done as part of the Fortune Brands invested heavily in our category management store set.
And that is really leveraging data and analytics to understand the consumer, understand the category and understand the shelf. And by understanding the way those things work together in the elasticities, that allows us to go into some of our big customers such as the home sensors and actually make price adjustments sometimes some go down, but net up in a way that we know is going to generate velocity and gross margin that we can share with our channel partners. And it’s been a super successful approach. It is really changed the discussion for us from a kind of win-lose, lose-win to a win-win because it’s much more about shelf management and delighting consumers and meeting them where they are. And it is about just moving it from one to the next.
So I do expect in ’24, we’ll see discussions around pricing in one pocket or another. But as we look for those opportunities to we will price where we can. It’s going to continue to be a net contributor to our growth for ’24.
David Barry: And Truman, as we discussed last quarter, we continue to assess and implement strategic price reposition and promotions where they make sense to drive a return. So the next point, leveraging our data, our category management capabilities that we’ve built across the business over the past few years, really be strategic around those price repositions and drive a return. If you look at 2023, our results included a positive low single-digit contribution from price and our 2024 guide also includes a positive low single-digit contribution in price. As Nick mentioned, once we are just back to our normal pricing philosophy, pre-pandemic of incremental price each year supported by investments in brands and innovation that actually ultimately drive more value to the consumer and to our customers at the end of the day.
Truman Patterson: Okay. Perfect. Thank you for that explanation. When I’m looking at your plumbing operating margin guide of $24 million some decent expansion kind of gets us back to peak 2022 levels. I’m hoping you can help us think through — earlier you were talking about potential stranded costs. But could you help us think through some of the main drivers from incremental pricing potentially? Is there continued cost takeout as supply chain has improved, raw material et cetera. Just what’s kind of driving that? And I’m asking in light, fourth quarter op margin came in a little bit sequentially. So I’m just hoping to understand the rebound there.
David Barry: Yes. I think regarding the quarter and the year, we signaled we expected Water to be around 23% for the year and they finished at 22.7%, which in our view, is around 23%. And we’re not trying to optimize our margin quarter-on-quarter, so we feel good about where they finish and are confident in our path to 24% to 24.5%. As I highlighted in my portion of the prepared remarks, our margin expansion initiatives are really threefold. So their internal productivity initiatives driven by our combined organization. Think of these as strategic sourcing, procurement savings, distribution savings indirect sourcing savings. We’ll have favorable fixed cost leverage as you’ll recall from 2023, especially in the first half. We had some headwinds in the P&L as we reduced our inventory.
This did impact the Water margin. And then there is favorable price/cost in Water. I’d say, of those three initiatives, water benefit from each of them. And again, it’s keeping with a bit of a theme, it is a return to normal — back to normal margins than what we would expect to be 24%, 24.5%. And then as we — our long term goal of 25% plus, we still see a path to get there as volumes return to that business.
Truman Patterson: Okay, perfect. Thank you all for the time.
Nicholas Fink: Thank you.
David Barry: Thank you.
Operator: Thank you. Our next question is from Matthew Bouley with Barclays. Please proceed with your questions.
Matthew Bouley: Hey, good evening everyone. Thanks for taking the question. First one on the kind of organic growth outlook and maybe the cadence through the year. I think I heard you say that you’re thinking the first half of the year would be kind of below the midpoint of the full year range. It sounds like R&R is towards the low end of your full year guide. So any color — there’s a couple of pieces. What are you seeing into January? Love to get a little specificity on the outdoors business, particularly given where that business is operating right now? And then just kind of a finer point on what you mean by below the midpoint into the first half.
David Barry: Hey, Matt. This is Dave. I’ll start with that one. So if you think about first half, second half around the guide, as we mentioned, we expect the market to be more challenged in the first half versus the second half by probably 100 basis points or so driven by our U.S. R&R assumption. We exited the year with R&R down, probably around 5%, maybe it gets a little bit better in the first quarter, down 4% — 3.5%, 4%, but sequentially then getting better from there. In the first half, we would expect total sales growth of around 6.5% to 7%, which would imply organic sales down low-single digits, I think they’ll be pretty consistent with our POS expectations for the first half. And then the second half would be up 2% to 3% in total in organic with organic sales up the same low single digits.
So what we’ve seen to start the year, I’d say January has been slow. The cold — extreme cold that came through. We see it impacted our POS data which is down mid-teens over the past 4 weeks in retail and e-commerce and actually consistent with the BofA, the Bank of America credit card data that’s published from improvement of down a similar amount. So we’re seeing demand from new construction activity remains steady and parts of the channel that support that demand have healthy inventory levels. I’d say for the quarter, looking at sales growth of 2% to 4% and operating margins around 14% to 14.5%, which would imply an EPS of $0.71 to $0.75. We do expect margin improvement in all segments in the first quarter versus prior year. The overall expectations for margin improvement are 100 to 150 basis points ahead of last year.
