Q – Ryan Merkel: I wanted to start with the comments about order activity improving and stabilization in the market. But it looks like the first quarter revenue guide is maybe a little softer than we were thinking, Tony, is that just seasonality or maybe talk about the cadence and how you see sales progressing in ’24 maybe it’s a stronger second half?
Tony Trunzo: Yes. Hey, Ryan, it’s Tony. So yes, there is an element of seasonality in Q1. There’s also security sales are going to be lower because of the [indiscernible] we just made about ADT, and our expected reduction in revenue from them during Q1. And also the impact of Genesis in Q1, which is at $25-ish million somewhere in that zip code. If you look at what I call the trade channels, it’s still a little bit up and down. But by and large, we’ve seen inventories begin to work their way down. I think there’s still some normalization in some areas, it’s got to happen in the next couple of quarters, and that’s certainly contemplated in our guidance. But then, beyond that, I think things really are starting to settle out a little bit as well. So yes, all those things are affecting Q1, and that’s why you’re going to see a little bit of a ramp as we go through 2024.
Ryan Merkel: Okay. That’s helpful. And then the gross margin and P&S stood out just curious, you’re going to be able to build off the fourth quarter level as we think about ’24, just talk about the pluses and minuses and sort of the direction of gross margin for P&S?
Tony Trunzo: Yes. So I think the two things we were most excited about in 2023 was our ability to generate significant cash flow, a little choppy, but we certainly did a great job, I think, over the course of a year. And the other was a sequential improvement in gross margin in P&S. We expect that to continue, if you look at it year-over-year, quarter-to-quarter again, you still might see some variation. But we’ve really made a lot of progress. underneath kind of all of the volume declines, and all that sort of stuff in our fundamental cost structure, and we talked a little bit about that in the scripts in terms of what those things are. And the expectation of 0.5 to a 1 of gross margin expansion in P&S this year, is predicated on basically flat volumes. So we really feel like there’s an opportunity, if we see volumes begin to grow, again, for some really meaningful margin expansion in that business.
Jay Geldmacher: Yes. I would add also, Ryan, that I talked, I think we’ve been talked about in our last call together, that is supply chain has continued to improve, the input costs continued to be trend in a favorable fashion. And that has continued, including between material componentry, and, of course, freight, which is a good thing. And that’s just going to continue. And that the various actions that we’ve talked about that you guys are just talking about, over the last couple of quarters, cost actions, impacts, provides a benefit to us on the gross margin expansion. So I think between what I had said, as well as what Tony had said, that, we feel very positive about the opportunity there for further margin expansion.
Operator: Your next question comes from the line of Erik Woodring with Morgan Stanley.
Erik Woodring: I have two. Maybe one just on the clarification point on ADT. Just to confirm the North American hardware business seems to be gone after 2025. You’re kind of very clear on the trajectory of that. But is there anything else with them because, Jay, you mentioned kind of other areas of collaboration and partnership. And so just want to kind of understand one level higher how you think about the relationship with ADT after 2025, if there’s anything that you can do that’s incremental, or if you still have a relationship, just how that stands? And then I have a follow up. Thank you.
Jay Geldmacher: Yes. Thanks, Eric. As we indicated, this legacy hardware program that Tony talked about in terms of end of that program into 2025. But as I’ve not just stated today, but I’ve indicated for quite some time, our relationship with them is very good. And we spend a lot of time on that. And so we’re continuing to talk about other opportunities. And we’ll keep you guys informed.
Erik Woodring: Okay. Yes. That is very clear the. Maybe it’s for Tony, any update to how to think about the ceiling for P&S gross margins. If I just think about some of the comments you’ve made tonight, you’ve obviously taken cost actions on that business, you’re getting leverage in that business, despite flat volumes, it seems like getting rid of Genesis and ADT will be margin accretive and I’d imagine that when volumes recover that’s all positive for P&S gross margins. And so anyway, to think about the longer-term trajectory? Or there any headwinds that I’m missing that we’re not necessarily considering, as we think, again, 1, 2, 3, 4 or 5 years out? And that’s it for me. Thanks so much.
Tony Trunzo: Thanks, Eric. So obviously I don’t have a number for you in terms of a long-term gross margin target for P&S. And the reason we don’t have one is because of the long list of things you just laid out and the puts and takes around them. From where we sit today, there are more from a market perspective and from our own execution and our own sort of position in the market. I think the balance is certainly looking out over a few years more tailwinds than headwinds. We’ve done a really good job maintaining price, which was — if you recall back during the inflationary surge, we were basically matching increased input costs with our price increases. And that was diluted to margin because we weren’t getting margin on top of it.
But we really felt like as input costs abated, we were going to be able to hold price and that has proved to be true. We have made substantial progress in a number of other manufacturing efficiency areas. We have divested some businesses that are lower margin. And we feel like there are opportunities to grow in some higher margin areas. And all of that is happening against the backdrop over the past, I guess, five or six quarters of declining volumes, as the decline slows and as volumes flatten out, you’re seeing that in the gross margins, you’re seeing a little bit more benefit and to the extent that you begin to see volumes expand again, I think there’s a real opportunity for us to see significant margin expansion.
Jay Geldmacher: And I’d also add just a couple of summary. Of course, the input cost, I talked about that before in the last call, our cost actions that we’ve been taking. The price piece that Tony just talked about, of course, the leverage opportunity when the market begins to come back. But just a couple of additional comments, the portfolio optimization piece that we’ve been talking quite a bit about. And then the proof of the pudding is things like Genesis, as well as operational optimization, like when we closed off the San Diego facility, move that to an offshore third party. We have other opportunities there. And we will share more of those. And the other that I wanted to just mention is because with our heavy focus on MPI, just in terms of bringing more new products to market, but also with that then looking at opportunities with more growth tied to MPI, but also margin expansion with new products.
So all those wrapped together, I think, is a great way of summarizing. We’re not just relying on one or two pieces, we’re, I think we have a good plan of attack with all the different items that we’ve mentioned here between Tony and I.
Erik Woodring: That is super helpful. Totally realize there’s a lot of moving pieces. So I appreciate all that color, I mean honestly. So thank you.
Operator: [Operator Instructions] Your next question comes from the line of Cory Carpenter with JPMorgan.
Danny Pfeiffer: Hey, this is Danny Pfeiffer on for Cory Carpenter. Thanks for the questions. On the first, given the uncertain timeline of broader macro recovery, do you think you have any further room to take price if necessary? And maybe if so any color on kind of what that cadence could look like throughout 2024? And then on the second, maybe on the pace of product innovation within products and solutions for 2024? Are there any specific verticals to call out for having kind of the most runway? Thanks.
Tony Trunzo: Sure. So thanks, Danny. So on price, our outlook 2024 assumes basically 1% on price. So not a significant factor in our 2024 outlook. I think we’d be cautious about taking a more assertive position there, just as you know, as the market has been a little bit soft, and we want to remain competitive and all those sorts of things. We’re not losing price, which I think is really important because we did achieve a significant amount of price, incremental leverage on the price line is probably going to have less of a factor on our results than operating leverage, as we see expansion in volumes.
Jay Geldmacher: I would agree with that. And I would just say not losing prices is a very important piece and as the market, we all know we’re all watching, what’s happening out there in the world in terms of inflation, and with supply chains that have normalized, then you are going to be in — we’re in a situation then that there’s a little more competition competitiveness out in the marketplace that we see for both businesses. You also asked about, I think, Danny right on security, MPI or MPI in general? I’ll make comment on MPI in general. And I’ve said it before, but it’s worth saying again, I mean, we have MPI is very important to us in terms of capturing additional market share, looking at opportunities to expand our total reach in the market in terms of share with new products.
We mentioned, this time and before about content in a home. And we also mentioned about being able to add a bunch of additional wins with our RNC builder community. One of the reasons with that is the expansion of our footprint in each one of those new homes. And as we continue to do that, we will have more new products that are able to expand our footprint there. So focusing on the velocity of new products in each one of the segments we serve is a big focus for us and that’s why I have highlighted not just today, but through the past few quarters, the number of new products that we are bringing to market and there’ll be more to share.
