Good afternoon. My name is Paul and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would like to turn the call over to Leigh Avsec, Vice President of Investor Relations and Corporate Affairs. You may begin the conference call.

Good afternoon, everyone and welcome to the Fortune Brands Innovations fourth quarter and full year 2023 earnings call and webcast. Hopefully, everyone has had a chance to review the earnings release issued earlier. The earnings release and the audio replay of this webcast of this call can be found in the Investors Section of our website, fbin.com. I want to remind everyone that the forward-looking statements we make on the call today, either in our prepared remarks or in the associated question-and-answer session, are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. These risks are detailed in our various filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, except as required by law. Any references to operating income, margin, EBITDA, earnings per share or cash flow in today's call will focus on our results on a non-GAAP before charges and gains basis, unless otherwise specified. Please visit our website for reconciliation. With me today on the call are Nick Fink, our Chief Executive Officer; and Dave Barry, our Chief Financial Officer. Following our prepared remarks, we have allowed time to address some questions. I will now turn the call over to Nick. Nick?

Thank you, Leigh, and thank you to everyone for joining us today. Our focus for 2023 was to advance the transformation of Fortune Brands Innovations by prioritizing long term sales growth, preserving margins and generating cash while also making key investments in brand building and innovation, our ongoing digital transformation, and in long term capacity additions. Our teams executed well and delivered solid sales and margin results and excellent free cash flow performance amidst a challenging 2023. The actions we took over the past year to better leverage the strength of our aligned organization and sharpen our focus on our leading brands, meaningful innovation, and advantaged channel relationships give me the confidence in our ability to outperform in 2024 and beyond. Before we get started, I want to take a moment to thank the thousands of Fortune Brands Innovations' team members across the globe for their continued dedication and commitment to excellence. As I reflect on our first year as Fortune Brands Innovations, I'm immensely proud of how our associates have come together, ahead of even my expectations, all working toward a shared vision. Our people are the foundation upon which our business is built, and are the drivers of our next phase of growth. On this call, I will walk through the highlights of our fourth quarter and full year 2023 performance. I will also offer some thoughts on the current macro environment, and why we believe Fortune Brands is uniquely positioned now more than ever, to deliver on our commitment of long term growth and sustained value creation. I will then turn the call over to Dave for a discussion of our fourth quarter and full year financial results and our performance expectations for 2024. For the fourth quarter, we saw net sales of $1.2 billion, a 3%…

Thanks, Nick. As a reminder, my comments will focus on results before charges and gains to best reflect ongoing business performance. All comparisons will be made against the same period last year, unless otherwise noted. As Nick highlighted, our teams executed well and delivered solid sales and margin results and strong free cash flow performance amidst a challenging market. For the fourth quarter, sales were $1.2 billion, up 3% and organic sales were down 3% when adjusting for the impact of the extra fiscal week and FX. Consolidated operating income was $184 million, and total company operating margin was 15.8%. EPS were $0.95 or down 11%. Our year-over-year EPS growth rate was impacted by prior period onetime items related to the Cabinets separation and the extra fiscal week in 2022. Fourth quarter free cash flow was approximately $140 million. For the full year, sales were $4.6 billion, down 2% and organic sales were down 6%, excluding the 53rd week and FX. Consolidated operating income was $738 million. Total company operating margin was 16.0%. Our EPS were $3.91. Our total free cash flow generation for 2023 was an impressive $799 million. To reflect on 2023, a recent study by the NAHB found that the highest mortgage rate seen in 20 years, combined with continued home price appreciation, resulted in the Housing Affordability Index falling to its lowest level in over a decade. These external conditions impacted demand for our products. However, our team's focused on executing key strategies and leveraging our strength in brands, innovation and channel to deliver solid results. As we enter 2024, we are starting to see signs that demand may be reaching a trough and we remain highly focused on long term outperformance. We are committed to pursuing above-market growth, expanding our margins and will remain focused…

Thanks, Dave. That concludes our prepared remarks. We will now begin taking a limited number of questions. Since there may be a number of you who would like to ask a question, I will ask that you limit your initial questions to two and then reenter the queue to ask additional questions. I will now turn the call back to the operator to begin the question-and-answer session.

[Operator Instructions] Thank you. Our first question is from Susan Maklari with Goldman Sachs. Please proceed with your questions.

Thank you. Good afternoon, everyone, and congrats on a good year.

Hey, Sue.

Hello. My first question, Nick is thinking a bit about the business strategically, you're obviously coming into the year, having had a lot behind you with this spin of Cabinets, the acquisitions in there. And one of the things you mentioned in your comments is a focus on growing the core, accelerating investments in the connected products and that initiative. Can you talk a bit more about that? How you think of the opportunity there and the way that, that can potentially come together?

Yes, happy to. And those two things are both separate and interconnected. So I'll talk about them. But if you just start with the core, I mean it is pretty much printed in the DNA of our team that the core of the business has to be healthy, right? So the core brand, how we drive them our channels, how we serve our customers, etc. And if you think back to the remarks we just made, all of those brands, over a long period of time have gained share and delivered margin improvement. And that combination is actually very, very important because to us, margin improvement isn't just about additional dollars to the bottom. It certainly is a lot about that, but it is also about the fact that we are building healthy businesses that therefore have the rocket fuel to reinvest in those businesses and continue to keep it really, really healthy. And so in that core is strong investment in brand. Even in the past year, like '23, we continued to invest in the brand and saw some really great results across the brand portfolio, making significant strides even off of strong basis, a brand like Moen growing awareness [indiscernible], even though it was starting off from the top spot of that. Investing in innovation. The pipeline is really, really healthy. We continue to target 25% to 30% on new product sales for innovation. We think it's a very healthy ratio, which is a ratio in fact, not just helping on itself. It also tells you our core remains healthy because it's not driving all the sales and then investing in our channel, and our channel advantages and serving our customers. And so that taking over the longer term really both bring in our historic organic CAGR, which…

Okay. That's great color. And then perhaps turning a bit, but any thoughts on how you would characterize the health of the consumer today. You talked about the potential to see a lift in R&R activity in the back half of this year. What do you think it takes to see that coming together? And how do you think it could come through across the different products and price points that you are exposed to?

Yes. As we think about the consumer, I think we're coming to a point now where it might be a little bit back to normal, which wouldn't be a bad thing. So obviously -- and which is why we pulled that some of the CAGR since 2019 to just for ourselves as much as help you guys sort of step back and really think about this. But looking across a bunch of consumer data, firstly, I think we've all been surprised at the resiliency of the consumer, they've had a lot to digest over the last few years. But as I look at the data, I mean, things like searches for home renovation continue to be up versus pre-COVID year figure of 13%. We're seeing intent to purchase at or above long term averages for all of our product categories. And then, of course, on top of that, you just have the fundamentals, the under built, very aged housing stock now I think, $33 trillion in home equity and the very low supply of home starts [ph]. And so you have all of that backdrop. I think when there's a lot of noise as there was in '23 about rates and home prices, do cause consumers to step back a little bit and reconsider. And I think we saw that through some of the data. But I think hopefully, now we're coming to a point where that underlying pressure of either wanting new or wanting to renovate that start to turn. So it's hard for us to call exactly when. We did see sequential improvement through all of last year, which was a positive. We're being cautious about the first part of this year in particular, and it's going to forward start with cold snap that we had a couple of weeks ago. But over the long term, I think our consumer is resilient to focus on the home coming through the data points that we're looking at, and as that returns to growth we absolutely expect business to correct at this time.

Sue, this is Dave. I'd add a little bit of color just behind what's embedded in our guidance. And our base case, assumes a 30-year fixed-rate mortgage of between 6.5% and 6.75, which is an improvement over 2023, but still challenging around housing affordability from where we were pre-pandemic shortly after the pandemic. Our teams have modeled what if rates dropped closer to 6%, closer to 5.5%. And from what we can see a 50 basis point move in interest rates roughly equates to 50 basis points of incremental growth for our business on a full year basis. So the next point, we've built this guide and this plan with what we see today and with some of the tailwinds coming out of 2023, and the team will remain agile around demand if affordability improves throughout the year beyond what we're expecting.

Okay, that's great color. Thank you both and good luck with everything.

Thanks.

Thank you. Our next question is from Truman Patterson with Wolfe Research. Please proceed with your question.

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?

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.

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.

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.

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.

Okay, perfect. Thank you all for the time.

Thank you.

Thank you.

Thank you. Our next question is from Matthew Bouley with Barclays. Please proceed with your questions.

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.

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. So we feel good about that progress. And then I'd say outdoor specifically, actually sales at the start the year have held up pretty well. We see the channel getting ready for a spring season, which looks promising. We actually feel good about the order rates in January for outdoors. The channels are putting some inventory in to reflect their expectations in the spring.

And just add to as Dave mentioned the weather just interesting. We also saw exceptional uptake through our e-commerce channels for Flo over the last two weeks. Now small base, it will take some time to build, but just we're going to dig further into it, to the extent there's a correlation between the piece like that. We saw a lot of homes damaged and we did a lot of leaks and kind of seeing it come through in e-commerce. So it's a very interesting point.

Great, yes. That is interesting. Thank you for that Nick and Dave. Second one, I appreciate all that color. That was perfect. Just a high-level question on cash flow. You're speaking to kind of normalizing to that 100% conversion in 2024. Obviously, the portfolio has evolved relative to where you were before the spin, recent acquisitions. You've got a whole organizational realignment. What's kind of the right way to think about cash conversion through the cycle going forward with the sort of new portfolio as it stands today? Thank you.

Yes, I'm happy to touch on that. And I think as evidenced by our results this year, the business can and will be extremely cash generative. We drove almost $800 million of free cash flow -- cash conversion near 200%. And interestingly, if you step back and look at the prior three years for this business, we're now averaging over 100% cash conversion. And so I feel like this -- the end result in '23 kind of got us through the last of the post-COVID supply chain challenges, inventory management challenges, demand swings or back to a steady base. So going forward, working hard to deliver 100% free cash flow conversion of net income or better, while continuing to invest in the business from a capital expenditure standpoint around key strategic initiatives and capacity where needed. And then I think if you look at what we did with that cash flow, in 2023, we were able to fulfill our capital deployment goal quite effectively. So we've acquired and closed on the assets from ASSA ABLOY, $800 million. We've invested about $255 million in the CapEx about $160 million of that was for capacity in our water business and Outdoors business. We paid about $120 million of dividends and repurchased $150 million of shares while deleveraging down to 2.5 times net debt-to-EBITDA. And so I think a really good proof point of the aligned organization driving cash and then us deploying it effectively, and we look to continue that going forward into 2024.

All right. Thanks guys. Good luck.

Thank you.

Thank you. Our next question is from Phil Ng with Jefferies. Please proceed with your question.

Hey, guys. The Security business had a quite strong quarter from a margin standpoint for 4Q as well as the full year. But you're guiding to kind of flattish margins for 2024. So I'm just trying to gauge if there was any one-offs in the fourth quarter and why perhaps had a bigger step-up in profitability just because the integration of ASSA seems to becoming along very well.

Yes. Phil, thanks, this is great question. Why don't I take just a minute here to give you some perspectives around Security and Dave can break it down. But we're feeling really good about the Security business, as the top line progress and the margin progress. And again, sort of back to that philosophy, we want a business that can generate healthy margins so we can invest, drive growth and move it from what was historically a GP grower into something quite a bit more exciting and the team has executed fabulously on that path. And so we're really there, and we're seeing that progress now. And so before I hand it over to Dave, he'll break it out for you between the organic piece and the acquisition just now it's made great progress, and we very much feel that this business is on the path to do what we want to.

And Phil, I'd say the simple answer, the organic business, will continue to expand margin, and we expect them to deliver a margin in the high teens in 2024. And then we're -- as you know, we're absorbing half a year of Yale and August. In that business, the margins are going to fluctuate a bit quarter-to-quarter, just based on investment timing on and customer generation and load-ins, et cetera. And so we expect we're comping the acquisition in the first half so their margin is more like a high single digit. So that's where you're seeing the dilution come into the overall Security segment. But the base business is performing well. We're accelerating, as we mentioned in the prepared remarks, accelerating some retail wins, some online wins with Yale and August and really excited about that business going forward.

And just I'll just add there, on the business, our contribution margins comparable to the portfolio and then really investing for double-digit growth with that digital conversion.

Okay. Super. And then, I guess, Dave, you were talking about back to business back to normal in terms of supply chain and stuff like that. Certainly a lot of news flow on the Red Sea side of things. Any impact in terms of importing components and stuff of that nature? And then how should we think about inflation as well -- sorry.

Sorry, go on.

And how should we think about inflation as well? How is that kind of playing out? Has that started to calm down? I do appreciate you guys are expecting a favorable price cost spread, but talk us through some of the components.

Yes. So I'll start there and David will talk a bit about the inflation. Obviously, the Red Sea and the impacts of the Panama Canal are not kind of lost on us. And those two things sort of working hand-in-hand. Our team has done a great job to maintain service levels. That will mean we will put a bit more capital to work this year to ensure that we don't have disruption for our customers. We may have to put it more expense to work this year to ensure that we don't have service disruptions for our customers, but we always feel that's preferable to protect the business, protect service levels. It does seem to be improving somewhat in the Panama Canal, which is good news because that allows us to take the lines off of the Red Sea, which has obviously been very challenging. But with the protective measures, we think that we find from customer service perspective may absorb the some onetime capital or other expense in order to do that.

And then overall, still on inflation/deflation. So looking -- starting with 2023, we actually finished the year with net inflation in the P&L. If you take into account materials and freight having slight deflation offset by labor and indirect with continued inflation. Now looking forward, we do have areas of deflation on the balance sheet that will come off into the P&L. But again, we see inflation above trend in things like labor and indirect and as Nick mentioned, seeing some pressure on freight from what's going on with both the Middle East and through Panama Canal with water shortage and restrictions on capacity. So I would characterize for 2024, our overall COGS base, if you think of that is $2.7 billion. We would expect roughly less than 1% of net deflation when looking at all the inputs and costs over that base.

Okay, super helpful. Thank you.

Thank you. Our next question is from John Lovallo with UBS. Please proceed with your question.

Good evening guys and thank you for taking my question. The first one is on the $650 million new share repo authorization, which is on top of the $435 million. Just curious how you're sort of thinking about that in the context of doing $150 million last year. But if you go back to '21, you did $450 million. I think you did $580 in 2022. So how aggressive could you guys be? And where do repos kind of fit within the capital allocation priority list?

John, great question. So that $650 million in addition too, but that other one expires much first. And so then the $650 million will be our go forward until we authorize more. In fact now our track record has been to do share repurchases really opportunistically and to look for dislocations in value. We run a returns-focused model against our own plans. And we've over time, done really, really well. I mean if you look at how it has tended to play out, it's from a sort of priority perspective, always, first and foremost, in our own organic opportunities. Those are the most surest and highest returns. And then just interestingly, the way it tended to work out is kind of 50-50 between share repurchase and acquisition opportunities over the long run. Now with acquisitions, we also remain very returns focused. And so there are some nice things we may take a pass on if we don't feel comfortable that the returns are there. And those might be times where share repurchase is preferable. There will be plenty of capacity, and we'll continue to look opportunistically. But when there are those dislocations, I think our track record speaks for itself. We will be there.

Yes, I think if you -- John, if you look at 2023, as a good example, we had an acquisition that was of nice size, fewer share repurchases. So it really is that interplay between -- right, is there attractive accretive M&A? And if not, what -- can we opportunistically buy back shares? The other lever that we watch is our leverage ratio. And we've delevered faster than we expected following the ASSA acquisition and our continued path to delever further in 2024. And as long as cash flow remains strong as we think it will, it gives us opportunity to deploy it effectively, we'll continue to do.

That's helpful. And then on the $55 million of production impact that you guys are lapping. I know you don't anticipate recovering all of that. But can you just sort of remind us of the magnitude of the impact by each segment? And will most of this reversal, whatever the number is, be a first half phenomenon?

Yes. So if you think about -- just to put it into context, right, we're coming off of a year in 2022 with extremely high production and sales. Sales started to slow second half of '22, and then we pulled back our supply chain hard late '22 into early '23. Our 2024 plan has production more balanced to sales, but we're not at that level that we were in 2022. So that's why we're not fully recovering the overhang that we experienced in the P&L in '23. I think if you look at the split, it is split between Water and Outdoors, probably a bit more towards Water than Outdoors, maybe 60-40 and the timing of it, yes, it will recover a bit more through the year as we're building -- as we're producing in line with demand. And you're not going to have these big production ramps and large favorable absorption in any one quarter.

Great, thanks guys.

Thank you. Our next question is from Adam Baumgarten with Zelman & Associates. Please proceed with your question.

Hey, good afternoon, everyone. Just going back to your comment around demand potentially troughing. I think there is a bit more optimism out there. And you cited some of the macro indicators. But anything you're seeing in the business? I know you talked about sequential improvement in a lot of areas throughout the year. But I think you're seeing maybe January side given some of the weather that gives more confidence that we're maybe close to a bottom here?

Yes. I'd say it's more sort of the longer -- when I say longer, I mean, more than like three weeks a series of data item. So when we look at the sequential improvement, we look at the drivers, we look at the search data, look at purchasing and things like that. I'd say just given January is a lower volume time of the year anyway, and then you throw -- I mean here in this region where we are that we've coldest sequential data temperature since 1996. On top of that, it just SKUs. The data is very hard to read through. I mean, in that BofA data that Dave referenced well, it was consistent with ours, things like snow blowers and shovels were way up. And so I think we'll need a few more weeks before we can see it definitively in the shorter series, but longer series stuff would point towards that.

Okay. Got it. Makes sense. And then just on SG&A, maybe how you're thinking about that in 2024 and what a good percentage of sales is from a long term perspective, just given the shift in the portfolio over the last year.

Yes. Still, I'm driving a lot of transformation. And so you'll see some incremental investments in 2024, contemplated within the margin guide that we gave. I'd say the team have built a plan to be thoughtful around those investments and pace them so that we are seeing the top line come through and seeing the margin appreciation come through before we make them but we're pacing those investments. And then I think longer term, as we drive transformation, our goal is to be a top quartile performer. We want to be efficient. We want to continue to invest in brands and innovation and a lot of the transformation investments we're making today are to get as efficient as we can in the non-core activities in the back of the house activities that aren't as value creating and some of our investments in branded innovation. So that's the long term goal. I think that's how you would think about it knowing we'll still make some investments this year to drive transformation.

So just a quick example of what Dave just referred to, if you look at sort of our corporate line expense. I don't have the actual number in front of me, but I would guess core kind of core corporate functions probably CAGR growth below inflation and have done really well in that historically. And then the rest of the growth in investment is really coming from things like digital, Fortune Brands advantage capabilities, things that will really, over time, continue to drive the transformation of the company and help us grow.

Got it. That's helpful. Best of luck guys.

Thanks Adam.

Thank you. Our last question is from Stephen Kim with Evercore ISI. Please proceed with your question.

Thanks very much. Appreciate the opportunity to ask a question here. You made a comment, which I thought was pretty striking, Dave. I believe you mentioned that you were incorporating a 6.5% to 6.75% mortgage rate assumption. But I think you said that if mortgage rates came in 50 basis points lower than that. I assume you mean for the full year that it would add only about 50 basis points to your overall sales. Could you -- first of all, did I hear that right? Because that seems very low. I assume it probably scales dramatically if, let's say, rates are 100 basis points lower or something like that. But can you just give us a little more color around the analytics because I think you said your team sort of ran some numbers and stuff, that would be very helpful.

Yes, happy to, Steve. So looking at the data that we have that we use to create the market forecast the team sensitized rate environment relative to our demand going back over time. And that's what we're seeing. We didn't change our assumptions around outside the U.S. demand. So that could be a piece of it. So that remains down in China, high-single digits in Canada, is a bit worse than the U.S. But the math that they ran just as a, I think, a model for us and a guide would be, yes, 50 basis points in rate would be 50 basis points of incremental growth. I think probably where the model could use some refinement is more -- the R&R data is more murky. We're definitely more correlated to rates, new construction than our data. So maybe there's outside growth coming from R&R that we're not picking up. That correlation is harder to see based directly just on rate.

Got you. Okay. Well, we'll probably take the over on that, but that's fine. The second question, just to clarify, your guidance points, I assume they exclude any impact from an extra week because I was under the impression that you might have an extra week in 2024. Just wanted to clarify that and then also, the D&A ran a little bit hotter than we expected this quarter. Can you give us a sense for what kind of a good run rate would be for D&A?

Yes. No extra fiscal week. We're tired of talking about that. So happy not to have one in 2024. And then I'd say for D&A, running close to $30 million.

Per quarter, you mean, obviously?

Yes, per quarter. Yes.

Got you. All right, great. Thanks so much guys.

Yeah, okay.

Thank you for joining today's conference call. You may now disconnect.