Richard Westenberg: That’s a good question. Yes, as I mentioned, first of all as I mentioned in my opening comments, I’m really excited to be part of the Masco team and the strong business and operations and portfolio that we have. I’m really excited about the portfolio brands and products in the business. I’ve had the opportunity to really get out and meet all of the business unit leaders, and I’ve been out to many of the business units – I was actually in Germany at Hansgrohe last week, really impressed with the team and really impressed with the mindset in terms of the Masco operating system and the mindset of continuous improvement, operational efficiency and cost reductions. I think we need to continue to exercise ourselves in that regard.
I think with regards to opportunities, it’s really leveraging the mindset that we have here at Masco and across the business units, as well as leveraging our scale as we continue to grow the business and drive that productivity and that efficiency, really across all of our business but particularly on the plumbing side as we look at our global business.
Adam Baumgarten: Great, thanks. Best of luck.
Richard Westenberg: Thank you Adam.
Operator: Your next question comes from Mike Dahl from RBC Capital Markets. Your line is now open.
Mike Dahl: Hi, thanks for taking my questions. I wanted to ask again about costs – I think a question was asked earlier around price-cost spread, and I heard the comments around price. I didn’t hear specifically your expectations for input costs for both segments that are embedded within the ’24 guide, so could you address that please?
Richard Westenberg: Sure Mike, I’m happy to do that. As it pertains to 2024, we’re expecting for input costs not to be a material impact, not to be significant in 2024. Obviously we’ll see how the year plays out. In plumbing specifically, we expect to see some modest decline in input costs, but offset with some freight and some other inflation. Obviously, as I think we all know given the dynamics in the Red Sea, freight cost is a little bit volatile and there’s a bit of a headwind in the first half – that’s baked into our outlook as a contributor to our expectations in the first half of the year. That’s a little bit of the dynamic on plumbing. In terms of decorative architectural products, I think we mentioned a couple times, we expect relatively modest input cost decrease in 2024.
Keith Allman: Mike, specifically we’re thinking in plumbing, relatively flat commodities, sort of staying where they are now, and for paint inputs, while they’ve moderated sequentially when you look at resins, we are seeing a little bit of deflation in those input costs, but other costs, including copper-zinc, TIO2, they’re moderated–excuse me, they’ve moderated more and they will moderate a little bit more, but not significant benefit.
Mike Dahl: Got it, okay. Thanks. Then my second question, just back on the free cash flow, the conversion rate, obviously 90% is still high. I think your business typically targets 100% conversion on that income. When I look at the moving pieces, it doesn’t seem like working cap is that much of an incremental usage, and then you’ve got capex, I think down year-on-year. Just any other drivers in terms of things we should be thinking about, levels of investment or non-working cap line items? Any other moving pieces there?
Richard Westenberg: Mike, those are the two, really. Working capital, I think Sue had asked in terms of that dynamic, we do expect a little bit of build in working capital in 2024. We’ll watch that, obviously, but we’ve got it down to a pretty balanced level right now, so as the market returns, we expect some building working capital. Capital expenditures, as you noted, will be down year-over-year from ’23 to ’24, but it’s still higher than our depreciation and amortization, so our capex guidance for 2024 is $200 million, our D&A is $160 million, so that capex versus D&A is another contributor to the 90% guide.
Mike Dahl: Okay, that’s helpful, thanks.
Richard Westenberg: Sure.
Operator: Your next question comes from Truman Patterson from Wolfe Research. Your line is now open.
Truman Patterson: Hey, good morning guys. Rick, looking forward to working with you going forward. First question for me, in your plumbing segment, your supply chain is heavily reliant on shipping products to the U.S. and Europe. I’m hoping you can give an update on some of the Red Sea shipping issues currently, any supply chain issues or incremental costs embedded in your ’24 guidance.
Keith Allman: We are seeing, as you might expect, Truman, elevated costs for the containers that normally would be routed through the Red Sea, that now have to go around, and you’re exactly right – it’s primarily for our European business. Those container costs have increased and we’ve contemplated that in our guide, and that’s all part and parcel of how we think next year is going to shake out, but we are seeing an increase in those costs.
Richard Westenberg: Truman, to your other question, although we’re seeing elevated costs, so far our service levels have been able to be retained, and so we’re not having disruption per se but we’re watching, obviously, the dynamics closely.
Truman Patterson: Okay, got it. Just thinking through your ’24 revenue guidance of flattish versus flat to down low single digit R&R market, first, are you all expecting your smaller ticket portfolio to outperform big ticket, and then second, you all have mentioned some incremental market share gains this year specifically, could you just elaborate on that a little bit – product categories, geographies, channels, etc. of some of these kind of near term gains?
Keith Allman: We do think that how we have repositioned our portfolio, Truman, to be the lower priced, lower ticket repair and remodel focus is more resilient than the higher priced, higher ticket items that are oftentimes more associated with new construction, so when you compare our type of project that a consumer would execute with paint, plumbing, lighting, hardware, etc., those tend to be more resilient than the bigger tickets, say cabinets and windows, which I’m very familiar with. So yes, we think that bodes well, and that fits in with the strategy and how we aim to be attractive, and who we aim to be attractive to as it relates to investors, as it relates to a higher margin, more resilient, less cyclical portfolio, and that’s really important to us.
We’ve demonstrated, as we said, the ability to meet our commitment of double digit EPS growth through cycles when you look at 14% EPS CAGR from ’19 through to where we are today, 2023, so we’re very pleased with that and we think that is partly driven–more than partly driven by the reconfiguration of our portfolio, so that’s a significant part of it. Remind me of your second question, Truman, the second end of that?
Truman Patterson: Yes, just the near term market share gains that embedded in your guidance, just hoping you could elaborate on product categories, geographies, channels, etc.
Keith Allman: Sure. We’re going to continue to invest in our share gains and continue to outperform the market, as we have up to 2023. To highlight a few of those, we’re particularly focused on the showroom channel in plumbing, and that involves our channel relationships with and our programs to drive growth. Our innovation pipeline is certainly a part of that brand and the pull that we have, as I mentioned before, both from the trade and the consumers is part of that. We’ve invested extensively in involving showroom associates and creating advocacy in the showroom market, so it’s not just about products, it’s also about capturing the hearts and minds of the folks in the showroom that sell our products, as it relates to involving them in literally in the design of our products, and we treat that as an operational type of exercise for us to create advocacy.
We measure it and we drive it. Certainly pro paint – when you look at our pro paint, Truman, on a stacked basis over the last three years, we’ve driven 60% growth – six-zero. I know a year, year and a half ago, there was a lot of questions on the stickiness of that demand, and we’ve proven that we’re not only able to maintain those share gains but also intend to grow those share gains, and that’s through service, through having the right product in the can, obviously, but through our overall competitiveness as it relates to as applied costs and jobs. Look at our net promoter scores that we’re clocking on our new and existing pro paint customers – it’s industry leading, so we feel really good about that, so there’s a couple areas there, plumbing, wholesale, pro paint, but we’re really driving across the board an expectation of market outperformance and margin expansion.
Truman Patterson: Great, thank you and good luck in ’24.
Keith Allman: Thank you.
Operator: Your next question comes from Garik Shmois from Loop Capital. Your line is now open.
Garik Shmois: Hi, thanks for squeezing me in. First question is just on the 2026 margin targets. I was wondering if you could speak to maybe some of the levers you can pull more on the cost side if the remodeling market doesn’t, say, recover to that 3% to 5% expected range.
Keith Allman: Variable cost productivity, making sure that we’re matching our shifts and our operating plan to the volume that we’ve had. It’s very hard to do, but we’ve gotten very good at that, for obvious reasons, in the last couple years with the volatility we’ve seen. Depending on where the overall market goes, there’s fixed cost productivity that we would drive. We continue, as Rick mentioned, to be disciplined in both price as well as our ability to manage costs and to make sure that we are continuing to invest in those key areas that drive growth and nothing more, so cost maintenance, variable cost productivity, direct labor productivity, matching our fixed footprint to actual demand, all those sorts of things are part of our Masco operating system.
It’s what we’re measured on and what our teams across the company are compensated on in terms of the ultimate metric of how we perform, is our ability to do that. It’s about all those disciplined together. There’s no one silver bullet. We will hit those margin commitments in 2026, and just like we have hit our double digit earnings for growth commitment through cycles. I believe–you know, that’s something I value and we as a company value very much, is the hard earned credibility that we’ve developed with the investment community and our high say-do ratio.
Garik Shmois: Understood, thanks for that. I wanted to follow up just on one of the bigger ticket item businesses that you offer. Your cited bigger ticket is likely to remain–is more volatile or perhaps underperform smaller ticket, and just wondering about the spa business, what you’re assuming for that in 2024, maybe if we exclude the Sauna360 deal. What are you expecting on an organic basis?
Keith Allman: Yes, I like our spa business. It’s a strong business with global market share. It’s one of–on a percentage, one of our more global businesses. I like the tailwinds behind it as it relates to the overlay with an aging population and the importance placed on mental and physical health, and we have a tremendous team there. We’re going to continue to drive market share and the business is growing and doing a fine job. I’m not going to get into specifics of how we parse out within the segment where it’s growing, but I like that business and we’re going to continue to invest in it. We have a great product offering that’s recently launched, that’s performing well for us. We have industry-leading technology that makes those devices very easy to use and monitor and interface with, and as I said, it’s an outstanding team out there, so that business is going to continue to perform very well for us in ’24 and beyond.
Garik Shmois: Sounds good. Thanks again, best of luck.
Renee Benedict: We’d like to thank you all for joining us on the call this morning and for your interest in Masco. That concludes today’s call. Thank you.
Operator: Ladies and gentlemen, this concludes today’s conference. Thank you for joining. You may now disconnect.
