We’ve paid down close to $100 million of payables during the course of 2023. This year, we’re starting at less than $60 million in payables. And so, we will not have that huge cash drain that we saw last year on just paying that payables balance down. Reason for that is we reduced inventory towards the end of the year, and in the prior year, at the end of 2022, we were building inventory. And so, that is the cause of that. But it puts us in a much better position to generate free cash flow this year. That, along with higher net income and tight management on working capital, will give us much better free cash flow number than what we saw last year.
Steven Forbes: Scott, that’s super helpful. And maybe just given that you guys provided first quarter guidance, any — can you sort of marry that together and give us a thought on sort of what the guidance implies for liquidity as of quarter end 1Q?
Scott Bowman: The quarter end 1Q, yeah, and so, yeah, our total liquidity will be close to $200 million at the end of the quarter.
Steven Forbes: Thank you, both.
Operator: Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.
Peter Benedict: Hi, guys, good evening. Thanks for taking the question. Well, first, just on — maybe talk a little bit about inflation. I think I heard Trichlor stabilize. I don’t know, but just what’s the inflation view that’s embedded, I guess, in the outlook for ’24? That’s my first question.
Michael Egeck: Yeah, Peter, thanks for the question. It varies by product category this year, like it does most years, but a little more pronounced, we think, going into ’24. The pricing — we have the pricing on ’24 from the equipment companies, as is typical their practice, their 3% to 5% increases in price with corresponding increases in MAP prices. So, it’s not a — it’s not margin dilutive for us. And that’s well-planned and our purchases have been made. So, very easy to follow. On terms of the chemicals, that each of the levels of guidance low, mid and high, we have planned a low-single-digit ASP decline. We’re not seeing that at the moment in chemicals. Chemical prices are holding from where they were during the pool season in fourth quarter.
But we think it’s prudent that, that we plan some slight decrease in prices. And if we don’t get that, then we should see a little bit more of a tailwind. So, inflation in the equipment business and slight deflation in the chemical business. Taken all together with the other categories, we think it’s a pretty flat year, inflation overall.
Peter Benedict: That’s helpful, Mike. And just related to that, just the promotional tone. I guess, your promotional tone, but also what’s happening in the industry, how that’s evolved here since — over the last several months and what you’re kind of thinking as you look out to ’24 in terms of promotions?
Michael Egeck: Yeah, again, it differs by section of the business. In the residential business, this last pool season, we think was a very normalized in terms of promotions. We were pleased to see that our promotions were as we planned them. Going into the residential business for fiscal year ’24, we again expect normal promotional environment, normal weather, which we’ve also assumed, should — make sure that stays intact. We believe we can plan our promos slightly down, but sufficient to move the inventory that we need to move, including any rec items or other items that are a little more price-sensitive. In terms of the PRO side, there was more competition on price, as I mentioned in my script on the PRO side in fiscal year ’23.
Fiscal year ’23 saw, kind of, convergence of domestic production of chemicals, specifically, Trichlor coming back online. At the same time, there was a fair amount of imports in the market, that looks to have stabilized. I think supply and demand on the PRO side now looks to be in pretty good place. Prices have been stable for the last quarter and we expect that, kind of, normalization, if you would, of pricing in PRO now to be set for the next year.
Peter Benedict: That’s great. And then, maybe, one for Scott, just on the margin profile of business. And, obviously, you’re just coming on-board here. So, maybe, premature, but pre-COVID, this business was kind of, call it, 17% on the EBITDA line. I think your outlook this year is somewhere mid-12, so I think at the midpoint. How are we thinking about maybe the profitability of the business kind of in a stabilized environment? I mean, you talked about SG&A dollars being down a little bit, I think, for this year. Any more color on kind of your view on the opportunities to build back the margin kind of longer-term? Thank you.
Scott Bowman: Yeah. Sure. I’ll start with just the product gross margin. So has been impacted here lately with some of the price changes that we’ve made. I think it was the right thing to do to make sure we have that balance, price and volume and positioning. So I think that was definitely the right thing to do. I think our opportunity is in a couple of areas. When you look at DC costs. The inventory adjustments that we talked about, the burden of the excess inventory will improve. And so we were impacted by about over 200 basis points of DC costs for 2023, and that does also include the expensing of capitalized DC cost. And so, the way that, that works is as we draw-down our inventory, we have to bring those capitalized DC cost to the income statement to kind of match with the flow of those goods, okay.
