Keith Allman: Our margin improvement expectations, and frankly the history of it, has been driven by a basket of initiatives that we drive. Certainly there is the incremental margin improvement that comes from incremental volume, so that drops down at, call it 25% to 30%, and that’s certainly above our fleet average of the company, so that’s the significant driver in our margin expansion. But it’s also part of the benefits of our continued investments in innovation, so we have an innovation pipeline and an expectation over those years to be launching margin accretive products and products that both contribute to our market outperformance on the top line, as well as margin improvements. We’re very excited about the momentum we have in terms of the Masco operating system and what that’s been able to produce in terms of leverage in our factories, in term of variable overhead.
In addition to the new product launches and our brand building, in addition to the benefit to the top line, that gives us also pricing power, and we’re confident in that and being able to have that be a contributor to margin expansion as well. The big driver would be the drop down in the incremental volumes, but we also have a pipeline and defined initiatives around labor productivity, variable cost productivity, etc. to drive the margin expansion.
Richard Westenberg: Yes, and Mike, the only thing I would add to that is, as Keith mentioned, a big driver is the drop down on the volume, but as we’re growing, as we’re introducing new products and getting the price for that from innovation, we continue to stay disciplined on price and disciplined on cost, so as we grow, we do see that 25% to 30% drop down. Although pricing and cost initiatives may not be as significant of a contributor, they will contribute both directly as well as indirectly in terms of continuing to leverage that incremental drop down.
Michael Rehaut: Okay, that’s helpful color, I appreciate it. I guess maybe secondly, kind of staying on this topic for a moment, you look at the decorative margins on average between 2015 and 2021, the segment averaged 19.5%, 19.4%, so it kind of seems like you’re getting back to that midpoint, whereas maybe plumbing, you’re getting a little bit above that, which kind of more speaks, I think, to the volume leverage. Just wanted to make sure I’m thinking about this right in that–you know, is the right way to think about this is that the operating leverage, the incremental margins much more so comes through on the plumbing side over the next couple years, whereas decorative, it kind of seems like you’re getting back to that historical gross margin, and maybe there’s some perhaps even deflation that is a margin benefit over the next couple of years as more recently, when you had an inflationary environment that was margin dilutive.
Just trying to think about returning to that historical average and what’s assumed in decorative, because if I’m thinking about this right, it does seem like the incremental margins on sales leverage more so apply to plumbing than decorative, and would love any thoughts on that if I’m not thinking about it the way you are.
Keith Allman: No, I think simply said, you’ve got it. I think that’s right – we have a higher drop down on incremental margins in plumbing, a little bit lower, call it in the 25% range in deco. In deco specifically thinking about paint, we have a different pricing dynamic, which we’ve talked about – I won’t get into the details on that, but no, I think you’ve got it right, Mike.
Michael Rehaut: All right, perfect. Thanks so much, appreciate it.
Operator: Your next question comes from Anthony Pettinari from Citi. Your line is now open.
Anthony Pettinari: Good morning. Can you discuss price-cost spread in plumbing and DA in 4Q, and maybe any updated expectations around brass carryover? Then just thinking about COGS, maybe more holistically, what level of cost inflation does the full-year guidance contemplate?
Richard Westenberg: Yes Tony, thanks for the question. From a Q4 perspective, we saw–we did see some favorable pricing, kind of low single digits in the plumbing both for the quarter and for the calendar year. For DAP, it was a lot more muted, and as we look into 2024, we’re expecting in the plumbing segment kind of low single digit pricing as a tailwind, but for the decorative architectural products, we’re expecting a bit of a headwind from a pricing perspective, kind of modest price give-back.
Anthony Pettinari: Okay, that’s very helpful. Then this is maybe just a minor point, but in terms of the DA margin target in ’26 being a range versus plumbing and company targets single points, is that the pricing mechanism you discussed, or just any background there?
Richard Westenberg: No, I think just–you know, we’ll give point estimates and range estimates in terms of our guidance in this, we felt a little more appropriate just given some of the uncertainty. As I think Mike articulated, we’ve got a little bit more of a drop down dynamic in terms of the volume dropping down to margins on plumbing, and so we felt pretty confident with regards to our 20% margin target in 2026. On decorative, we just have a range of 19% to 20%, and as Mike pointed out, it’s more consistent with where we ranged historically.
Anthony Pettinari: Okay, that’s helpful. I’ll turn it over.
Operator: Your next question comes from Susan Maklari from Goldman Sachs. Your line is now open.
Susan Maklari: Thank you. Good morning everyone.
Keith Allman: Morning.
Susan Maklari: My first question is thinking about the macro and what that could imply for the business this year. There’s increasingly an expectation that rates will move down as we get later into the spring and the summer, and as we think about that perhaps driving that existing home sales coming back, how should we think about the timing of those events relative to how you could start to see that coming through in the business, and what are the segments that could be most benefited by that?
Keith Allman: Susan, good morning. When you think about the correlation to our top line drivers, existing home sales is certainly an important factor, but not nearly as important as really how the consumer feels and how the consumer confidence is developing, that confidence driven by the amount of equity in their home, for example. If you think about, let’s say, the existing home turnover, pick a number – say it’s, let’s call it 5 million, so if we have 5 million units turn over, that’s on a 130 million unit base, so roughly–what is that, 3%? We know, or we estimate that a newly purchased home in that year will spend approximately 30% more on home improvement, so if you take 3%-ish spending 30% more, you start to see how that minimizes the impact of that.
Said differently, for every million dollars of existing home turnover increase, it only drives a couple tenths of a percent of overall top line volume in the market, so a 25% increase in existing home turnover drives two-tenths of a percent in the overall market roughly. It’s important to us, particularly when you look at something like DIY paint, that tends to be a little bit more sensitive to existing home sales, but more important I think is the correlation to R&R spend as it relates to home price appreciation and consumer confidence, so as rates decrease and the consumer becomes more confident, that’s really a driver of what we think will really be pushing the R&R market.
Susan Maklari: Okay, that’s helpful. Then shifting to the working capital, you’ve made a lot of really impressive progress there over the last year. As you think about ’24 and just the go forward, what’s the ability to continue to drive benefits from that, and anything you’d highlight there?
Richard Westenberg: Yes Sue, it’s Rick, good morning. Appreciate the question. As you noted, we did as a business unit, really across the business drive working capital efficiencies and improvement. We brought it back down to 16% of sales in 2023, which is more in line with historical levels, and it really was a big contributor to our cash flow in 2023 – it contributed over $200 million in terms of cash flow, in terms of our free cash flow number, which was very beneficial. I think going forward, we plan to really hold working capital in a disciplined manner, make sure we’ve got enough inventory to keep up our service levels, which are important from a customer perspective, but to stay disciplined on that. Our guidance for 2024 is that we’d have working capital as a percent of sales of 16.5, so a modest increase, but we’ll calibrate that based off of the timing of when the market comes back and starts to grow.
But we’ll as a business stay disciplined, now that we’ve got the working capital kind of back to where we’d like it to be.
Susan Maklari: Okay. Thank you and good luck with everything.
Keith Allman: Thanks Sue.
Richard Westenberg: Thank you.
Operator: Your next question comes from Adam Baumgarten from Zelman. Your line is now open.
Adam Baumgarten: Hey, good morning everyone. I believe you mentioned on the call that paint pricing was lower in ’23. I guess a couple questions – one, when did that occur throughout the year, and is the outlook for ’24 that you mentioned down based on just the carryover, maybe from some of the movements in ’23, or do you expect incremental pricing pressure beyond what you maybe recently saw?
Richard Westenberg: Yes Adam, maybe just to clarify, for the calendar year 2023, we saw a very modest price increase. It actually corresponded with commodities, so we saw material costs down in Q4 in the paint sector, but for the full year, we saw appreciation overall, and so we saw a slight price increase in terms of the 2023 number. As we look into 2024, as I indicated or as we indicated, we do see some price down in 2024, and that’s really a reflection of what we expect to see, which is kind of modest low single digit deflation in the inputs, so kind of keeping that price-cost relationship in check.
Keith Allman: To your point, Adam, there would be some carryover, obviously, with it being a little bit–the price give-back a little bit later in ’23.
Adam Baumgarten: Okay, got it. That’s helpful. Then for you, Rick, now that you’ve been at Masco for, I believe it’s almost four months now, where you do see the biggest opportunities for Masco from a cost side going forward?
