Good morning, ladies and gentlemen. My name is Emily, and I'll be your conference operator today. At this time, I would like to welcome you to Ferguson's Fourth Quarter Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of the prepared remarks, there will be a question-and-answer session. [Operator Instructions. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's Vice President of Investor Relations and Communications. You may begin your conference call.

Good morning, everyone, and welcome to Ferguson's fourth quarter earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in the section entitled Risk Factors in our Form 10-K available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today and we specifically disclaim any obligation to update these statements. In addition, on today's call we will discuss certain non-GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO; and Bill Brundage, our CFO. I will now turn the call over to Kevin.

Thank you, Brian, and welcome everyone to Ferguson’s fourth quarter results conference call. On today's call, I'll cover highlights of our full-year and Q4 performance, as well as a more detailed view of our performance by end market and customer groups. After that, I'll turn the call over to Bill for the financials and our outlook for fiscal year ‘24. Finally, I'll come back at the end to give a brief update on our view of market share and some of the significant opportunities we see in the years ahead before Bill and I take your questions. So starting with our full-year performance, our teams delivered strong results in a dynamic and challenging year. We'd like to express sincere thanks to our associates for their unwavering commitment to help make our customers' projects simple, successful, and sustainable. Revenue of $29.7 billion was 4.1% above last year, further building on the 25% growth we saw in fiscal year 2022. Our teams delivered solid gross margins and we proactively managed our operating expenses, delivering adjusted operating profit of $2.9 billion, down 1% on prior year, while we grew adjusted diluted earnings per share by 1%. Cash delivery in the year has been excellent, driven in part by disciplined inventory management with net cash provided by operating activities increasing $1.6 billion to $2.7 billion. This cash delivery allowed us to execute against our capital allocation priorities. We returned $1.6 billion to shareholders via dividends and share buybacks during the year. And we're pleased to welcome associates from eight acquisitions during the year continuing our strategy of consolidating our fragmented markets. Our balance sheet remains strong at the bottom-end of our leverage range with 1 times net debt to adjusted EBITDA. And we continue to deliver strong overall returns on capital of 35% for…

Thank you, Kevin, and good morning or afternoon, everyone. And let me start with the fourth quarter results. Net sales were 1.7% below last year, driven by a 5.3% organic decline, partially offset by 2.2% from acquisitions and 1.4% from the combined net impact of one additional sales day and foreign exchange. As expected, price inflation stepped down further from 5% in Q3 to approximately 1% in Q4. Gross margin of 30.6% was up 10 basis points over the prior year. Our teams maintained pricing discipline, despite deflation in certain commodity categories. We had a strong own brand performance and we managed inventories down further resulting in some gross margin benefit on the sell-through of order inventory. Cost base has been well contained through our seasonally largest quarter, enabling us to deliver a 10.4% adjusted operating margin, down 30 basis points over last year. Adjusted operating profit of $814 million was down $35 million or 4.1% lower, compared to prior year. Adjusted diluted earnings per share was 2.8% lower than last year with the reduction due to lower adjusted operating profit and higher interest expense, partially offset by the impact of our share repurchase program. And our balance sheet remains strong at 1 time's net debt to adjusted EBITDA. Moving to our segment results, the U.S. business delivered another solid quarterly performance against strong comparables. Net sales declined by 1.5%. Organic revenue declined 5.5% on top of a 19.8% prior year comparable. And this was partially offset by a 2.4% contribution from acquisitions and a 1.6% positive impact from one additional sales day. We delivered adjusted operating profit of $804 million, down 3% over the prior year, delivering a 10.8% adjusted operating margin. Turning to our Canadian segment, markets softened further with some sustained pressure from the adverse impact of…

Thank you, Bill. I want to touch very briefly on the latest views of our market share and the total addressable market within North America. With three quarters of our revenue coming from leading positions in a $340 billion market opportunity, we're confident in our strategy to grow both organically and via acquisition. During the past year, we've talked about how the breadth of our customer groups uniquely position us in the markets that we serve. We're able to leverage our knowledge, expertise, scale, and product breadth to better serve our customers’ project needs in a more holistic way. That means bringing together our core strengths, our value-added solutions, our global supply chain, our digital experience, and our associates across customer groups to help make complex projects simple, successful, and sustainable. The trade professional is our core customer, but we're expanding our role to influence and serve the general contractor, the developer, the architect, engineer, and owner. We build relationships with key decision makers that influence the construction landscape. Our multi-customer group solutions and the integration of environmental product solutions generate synergistic value as we bring scale to highly fragmented markets. When we do this, we add value and can sell from the ground up solutions focusing on the entire project rather than just selling products. Our ability to bring together market-leading capabilities in both plumbing and HVAC provide us with a competitive advantage for serving these professionals in capturing growth from the dual trade market for years to come. The combined HVAC and residential trade plumbing market amounts to approximately $100 billion, of which we estimate nearly $30 billion of the market is serviced by more than 65,000 dual trade plumbing and HVAC professionals. This segment of the market is growing rapidly. We're focused on expanding our HVAC offering…

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Bouley with Barclays. Matthew, please go ahead. Your line is now open.

Hey, Good morning, everyone. Thanks for taking the question. I guess first, just asking around the, kind of, buildup to your growth guidance in fiscal ‘24, a couple pieces here, but just, you know, what does organic growth look like quarter to-date? And then kind of giving your assumptions around second-half versus first-half, I'm curious what the implied improvement might be in the second-half? And I guess further to that if you could sort of break out your residential versus non-residential assumptions through all that? Thank you.

Yes, good morning, Matt. It's Bill, I will start with that. Thank you for the question. First off, from a quarter-to-date perspective, through August and September to-date, organic decline is about in the same range of where it was in Q4. So Q4 we were down 5.3%m, it’s been a very similar range to that. And that's to be expected as we entered the year in a very similar market environment to where we exited the year, and the comparables are still quite tough. If you take a look back at Q1 last year we had 13% organic growth last year 15% price inflation. So we'd expect that growth would continue to be pressured as we step into the first-half through the first quarter into the second quarter. And then our guidance does imply for the year getting back to broadly flat that organic would still be down slightly for the year with then the tail of acquisitions and the additional sales day bringing us back to that broadly flat midpoint of our range. In terms of resi versus non-resi, from a residential perspective, we're expecting residential to be down in the mid to high-single-digit range. We expect new res to be a bit worse than that, RMI to be a bit better than that. And then from a non-residential perspective, we're expecting non-residential markets for the year to be down in the low-single-digit range.

Got it. That's perfect, Coller. Thank you for that, Bill. Second one, I guess jumping down to the margin line, again, on the guidance. So the assumption of a 30 basis point decline and operating margin at the midpoint, I'm curious, you know, how to think about the gross margin within that? And maybe in this question also, if you could touch on, I think you said in Q4 here you had still a little bit of a benefit to the gross margin from sell-through older inventory. So maybe you can kind of quantify that in the fourth quarter and then sort of the expectations around gross margin next year? Thank you.

Yes, so to your point, Matt, the guide of 9.2% to 9.8% operating margin for the year, midpoint of 9.5% does imply being down about 30 basis points from where we finished the full-year this year. That's really driven by strong first-half comparables, particularly Q1. Again, if you look back, I just commented on the growth environment we had in Q1 and the inflation environment we had in Q1 last year, but also from an operating margin perspective, we delivered nearly an 11% first quarter operating margin. So given where organic decline is right now, again about where it was in Q4, we're expecting to have some margin compression as we step through into Q1, into Q2. So most of that normalization -- modest normalization is driven by that strong comparable. In terms of the gross margin in Q4, 30.6%. Look, we are really pleased with how the teams delivered in a pretty choppy environment. First off, from a commodity pressure perspective, we did seek some pressure on commodities from a pricing deflation point of view. Commodity deflation was down in the high-single-digits in Q4 and our teams maintained really strong pricing discipline. Secondly, we're pleased with our own brand performance, just under 10% of our revenue was owned brand. And then lastly, yes, we did highlight, we did sell through some older cost inventory. If you look at the inventory reduction for the year, down about $600 million organically, $300 million of that came in Q4. So a piece of that strong 30.6% gross margin was driven by that sell-through of some older cost of goods sold inventory. And then rather than trying to quantify those specific points, we just go back to the fact that through this normalization period, we're expecting those gross margins to normalize somewhere in the low-30% range and then get back to a period where we would grow them over time as we execute our gross margin and our product strategy.

Perfect. Thanks Bill, good luck guys.

Our next question comes from Mike Dahl with RBC Capital Markets. Mike, please go ahead, your line is now open.

Good morning, Thanks for taking my questions. Just as a follow-up, can we talk specifically more about the pricing environment? I think it came in as expected in terms of the deceleration to 1% versus 5% contribution last quarter. I think prior quarter, you had talked about seeing some price decline sequentially, specifically on the commodity dynamics. You're talking about broadly neutral in terms of the full-year, you know, impact from price in ‘24, but can you walk us through in a little more detail what the dynamics are? Are you actually entering the year with slight pressure on price, due to the commodity dynamics and expecting that to improve through the year or how would you characterize that dynamic?

Yes, Mike, it's Bill. I'll start and then pass it over to Kevin. So to your point, if you look back at last fiscal year, we saw compression of price through the year as we are rolling over difficult comparables. So go back again to first quarter last year, we had price inflation in total of 15% that dropped to about 10% Q2, about 5% Q3, and then as we just highlighted, about 1% in Q4. That 1%, we're still seeing low-single-digit inflation on finished goods, which again, finished goods are roughly 85% of our revenue. And again, commodities in the fourth quarter were down in the high-single-digit range. As we've stepped into Q1, we have seen pricing in total go slightly negative. Again, that's to be expected if you go back to that 15% comparable from a price inflation point of view in Q1 last year. But maybe more importantly, if you look at the two-year stack on price inflation, it was close to 30% over two-years in Q1 that we're facing. So we're expecting that price to go a bit negative and we've seen that. However, as we roll through the year, we would expect to get back to a more normalized pricing environment for the industry, which as we talked about in the past, is likely in the low-single-digit range. Calling which quarter that actually happens is pretty difficult, but we've still seen good supportive pricing on the finished goods side of the world.

Yes Mike, we're experiencing very much what we thought we would experience. If you do look at what our commodity-based product basket is, it's about 15% of what we do. And we knew that, that was going to move into a deflationary period, but we also believed that not all those products would move in the same direction at the same velocity. And that's what we're seeing. If you look at our commodity-based product basket of PVC pipe and fittings, copper tube and fittings, cast iron, ductile iron, and carbon steel. Yes, they've moved into deflationary territory, but haven't moved at the same velocity for different customer groups. And then to Bill's point, we do believe that there's a structural floor principally from labor costs inside of manufacturing around that finished goods portion of our business, which is 85% of what we do, and we're seeing that play out. And we don't think that there are any real catalysts for further abnormal price inflation as we go through our fiscal year, which is why we think that the pricing environment is going to be broadly neutral. And then we'll get back to a place where annualized price increases will start to flow through on that finished goods side of the business.

Okay, got it. That's very helpful. Thanks for that. Second question, I guess, just on the capital deployment, it's good to see some of the recent M&A activity, both in terms of, kind of, size and types of business. I know you're playing across a lot of different verticals with a lot of opportunities. You've got plenty of capital, so you don't necessarily need to pick and choose, but maybe just help us frame up, kind of, you do have some points of emphasis on things that you want to focus on. So kind of where are you seeing the focus and then when you talk about the pipeline being healthy, you know, any additional color on kind of mix and size of deals in terms of types of businesses or again relative size?

Mike, I'll start with that and then pass it over to Bill to talk a little bit about the pipeline that we're seeing. If you take a step back and look at our business, we during our strategic planning process are looking at all of our different customer groups, all of our different geographies and finding where we need to invest both organically, as well as through M&A to have the right relationships in the local marketplace that allows us to outperform organically as we go forward. But then if you take a look at where our focus areas have been over the course of the last 12 months to 24 months and where they'll continue to be, we really are focused on making sure that we are focused on HVAC acquisitions to make sure that we have good HVAC capabilities and good OEM manufacturer relationships across the entirety of the country, so that we have HVAC wherever we're plumbing and that expertise can be driven for that dual trade HVAC and plumbing contractor that we think is so important to the growth of the market. We're also focused on the Waterworks business when you look at our diversification strategy in areas like storm water, urban green infrastructure and soil stabilization. It gives us a great complement to an already incredibly strong Waterworks business where the customers are buying these products. They just may not have been buying them from us and it further offers us an opportunity to drive specification with engineers that allow us to capture the whole of the project. So those are two real strong focus areas for us as we go forward. Maybe Bill can touch on where we're seeing the pipeline?

Yes, the pipeline is still quite full and healthy. It is a good mix of both geographic and capability acquisitions. Most from a size range, as you've seen in the past, most of the targets in our industry are in that call it $30 million to $300 million revenue range. And look, we still feel good as we look out at the medium-term outlook that we can add between 1% to 3% annualized revenue growth through consolidating our markets over time. Certainly, that's going to ebb and flow in any one quarter or any one fiscal year, but we feel pretty positive about the pipeline as we look at it today.

Great, thank you.

Thanks, Mike.

Our next question comes from Ryan Merkel with William Blair. Ryan, please go ahead. Your line is now open.

Hey guys, congrats on the quarter.

Thanks, Ryan.

My first question is just a follow-up to what you said earlier about the outlook for non-res in ‘24 down low-single-digits. Can you just unpack that a little bit more? I think you mentioned softness in traditional non-res that then the megaprojects you’re seeing increased bidding activity? How do we think about that?

Yes, that's exactly right, Ryan. As we look at non-res overall, and obviously there are concerns out there around interest rate and what's happening with the natural office environment, and that's really what we're seeing. We're seeing some pressure across the country in those traditional areas of commercial, things like office, knock-on retail after residential, and that traditional tailwind that you would have seen after good, strong residential build-out on the non-res side. And then as we discussed previously, we do think that it really is a generational opportunity with some of these megaproject tailwinds, but they're going to be of bit stretched out. These are long-term projects, three-years plus in terms of what that life cycle looks like. And if you look at our experience, as well as what we're seeing from a data perspective, you're starting to see a ramp up, but we probably won't see that peak until, call it, ‘25 and ‘26. But what we're seeing right now is, across multiple customer groups, working together with the owners, engineers, and so forth, we're ramping up our bidding activity at a pretty substantial rate. We're starting to see that revenue play through, but there likely will be that air gap, if you will, between that slowdown in traditional commercial and what that pickup is in these large mega projects. And that's why we think that the market will be down low-single-digits and it'll start to pick up from there.

Got it. Makes sense. Okay, and then a question on SG&A. You've done a really good job controlling expenses. How are you thinking about SG&A in ‘24?

Yes, Ryan, thank you for that. We've been pretty pleased with the ability to flex the call space. If you look at the actions we took during the year, both on the labor side of the equation, as well as the non-labor side of the equation. The teams did a really nice job, first off managing FTEs, full-time equivalents, down both with some permanent actions, but more importantly managing down overtime and temporary labor. So if you look at where we exited the year and you look at full-time equivalents, year-on-year we were down about 6%, which is right in line with where organic volume decline was. And that 6% was down excluding acquisitions. So we feel like we're entering the year in a good spot from a headcount perspective and from managing that labor cost perspective. As we step through the year, we're still facing wage pressure. Wage inflation has been in that, call it mid to high-single-digit range still. It's been that way for the last two to three years. We'd expect that to continue to be somewhere in that range as we step through the year. So we're going to do everything we can to manage volumetric headcount, manage discretionary spend, recognizing that as we set out in our guidance, we think that we're going to be operating in a broadly flat revenue environment for the year. So you'll likely see a little bit of pressure from a year-on-year perspective in SG&A through the first-half as we're expecting more challenging markets. And then as we get back to more supportive markets, we'd expect to get back to better operating leverage in the future.

Very helpful, thank you. Pass it on.

Thanks, Ryan.

Thanks.

The next question comes from John Lovallo with UBS. John, please go ahead. Your line is now open.

Good morning, guys. Thank you for taking my questions as well. The first one is just going back on the outlook for operating margin of 9.2% to 9.8%. Just curious kind of what drives the high and low-end of that 60 basis point range given, you know, the expectation for relatively flat sales?

Yes, sure. At the top end, John, we would expect maybe a bit more of a supportive market. Kevin talked a lot about megaprojects if we get a little bit more of that activity coming through quicker. And then if we get more stabilization on the commodity pricing side of the world and maybe a bit of a tailwind and an easing of some of that commodity deflation pressure that we're facing right now as we step into the fiscal year. The bottom end of the operating margin range would contemplate a bit more market pressure and a bit more commodity pressure that can't be fully offset in the short-term from an SG&A perspective. And so that kind of frames both the top and the bottom end of that operating margin guidance.

Okay, that's helpful. And then there's obviously been a lot of media reports about consumer savings starting to dwindle, you know, credit card balances rising, you know, student loan payments resuming. I'm curious, you know, how you guys think about the impact of these factors? Have you seen any impact so far? And would you expect more impact, if there was any, on sort of the more discretionary categories in the portfolio?

Yes, John, we have seen some pressure on the consumer as it relates to our business, particularly in the area of our residential digital commerce business. You saw that having continued pressure quarter-on-quarter. And then we saw it play through a bit in the normal RMI or remodel side of the business. But generally speaking, we tend to skew towards the higher end of that remodel project, and we've seen good supportive markets. If you look at the custom builder, custom remodeler activity, we still see good growth in our showroom. Yes, it's not a frenetic pace for that custom builder and custom remodeler like it was previously, but it's still a good pace with good growth. The phone's still ringing and we're seeing good activity in the showroom. And to see that building and remodel group in Q4 being plus 2 on a plus 21 comp, we're pretty pleased with what that looks like.

Great. Thank you, guys.

Thank you, John.

Our next question comes from Dave Manthey with Baird. David, please go ahead. Your line is now open.

Thank you. Good morning, everyone. Kevin, did I hear you right that the low-end of the guidance range would be mainly, because of revenue coming in less-than-expected, that you feel you can hold that 30% line on the gross margin and the higher-end would be better than expected gross margin? Is that how we should read what you said?

Yes, David. It’s Bill, I'll take that. So look, there is a wide range of outcomes on either side of that broadly flat revenue guide. But so certainly a bit more pressure from a top-line perspective or a bit more benefit would move the operating margin midpoint guidance around a bit. And then really highlighting the fact that commodity pressure in general could have a more pointed impact on both gross margin and operating margins, if we had more commodity pressure in the short-term would probably move us down towards that low-end of the operating margin guide versus if commodities stabilize and return to a more normalized inflationary environment, that would help move us up. So it's a bit of a combination of both revenue and gross margin outcomes that could impact that operating margin guidance.

Okay. Thanks for that, Bill. And then on the commodity basket, have prices stabilized sequentially or they still falling as you enter the new fiscal year? And then I guess related on inventory levels, are they where they need to be today and any categories where you're seeing extended lead time still?

Yes, Dave, I'll take the second question or second portion of the question first, and that's on supply chain and inventories. We do have inventories back to where we want them to be, and we're making sure that we're focused on having the right level of inventory for our branches to make sure that they can take care of customers same day, next day. If you look at where supply chain pressures are, as we discussed in the last quarter, they have pretty much normalized. And last quarter, we called out a couple of key areas where we were still seeing some pressure. Even those have normalized. There may be just a handful of products on the luxury side of the appliance market that still have some supply chain challenges, but generally speaking, we're in a good place from an inventory perspective. When you take a look at commodities, we did say that and we do believe we're seeing that commodities are moving at different velocities for different portions of the business and different customer groups. I don't think that we've seen necessarily the end. I won't point to that, but we have seen some stabilization. We see some areas where even in the areas of PVC pipe where we're seeing increases being announced and then flowing through the marketplace. So we believe that we have framed the guidance right to being pricing broadly neutral for the fiscal year, and that encompasses what we think we're going to see from a deflationary perspective inside the commodity basket.

Very good, thanks guys.

Thanks, Dave.

Our next question comes from Kathryn Thompson with Thompson Research Group. Katherine, please go ahead. Your line is now open.

Hi, thank you for taking my questions today. I appreciated the color that you had on the non-res end market and the focus on megaprojects within the U.S. But if you could step back historically and look at what has been your mix for more traditional light commercial. So a lot of the follow-on post-residential construction, where that is historically, where that is today, and any additional quantification of understanding where your -- what mix is of these larger projects? Thank you.

Yes, so Catherine, if you look at the overall non-residential market, we have historically performed quite well as it relates to the knock-on commercial side of the business, call it roughly 33% of what we do from that non-res piece. And if you look at where that mega project landscape is playing out, it's playing out with some of those larger contractors. These are complex projects that require sophisticated resources. And so that plays well to our customers, who have historically drifted to that knock-on commercial build-out, who are now focused on what those megaprojects look like. And the good part for us, we look at it as a catalyst for what the Ferguson Growth Strategy is. And that is getting closer to the owner, engineer, and driving product specification from underground water, wastewater, stormwater infrastructure up through mechanical piping systems, fire suppression, and industrial pipe valve and fitting. And we think that, that catalyst with megaprojects really allows us to unlock what those capabilities are. And so that partnering with those large contractors for this work we think will serve us well in years to come.

Okay, helpful. And then as you think about your strategy outlined with expanding to HVAC, how does that strategy fit into, kind of, bifurcating the resi versus non-res in terms of your targeted mix?

So when we look at the residential portion of the business, just over half of what we do with non-residential just being under half, that HVAC buildout, and we've been in the HVAC business for a number of years. In fact, we're currently trading in over 46 states. We've got good exposure, but we just need to have that expertise being driven throughout all of our operations that have standard and really solid plumbing business. And so you see us doing that with a balance of M&A and organic growth. But if you look at where we think the residential trade repair market is going, we think it's gravitating towards that dual trade, multi-trade contractor. We see consolidation in that contractor market, which we think plays quite well to a national platform that allows for expertise in plumbing and HVAC with a good partnership with equipment manufacturers, both unitary and ductless, and we think that we're building out capabilities that will be very valuable for that trade professional.

All right, thanks very much.

Thanks, Kathryn.

Our next question comes from Phil Ng with Jefferies. Phil, please go ahead. Your line is now open.

Hey, guys. Bill, if I heard you correctly for 2024, you're expecting your resi business to be down mid to high-single-digits? If I was looking at the fourth quarter trend was down about 4%. So can you help us unpack that just because from a builder commentary it sounds like orders and starts are starting to kind of inflex, I would expect things to be a little less bad. And provide a little more color on the [RMI] (ph) side, certainly higher rates, what that could mean for remodeling projects, any color, how to think about the shape of the air, and just your resi business more broadly would be helpful?

Yes, Phil, hey, thanks for the question. And let me clarify, when I was talking about resi down mid to high-single-digits, that was our view of the market, not our view of our performance. Certainly we would expect to continue to take share against that. But look, if you look right now to your point where we exited Q4 with resi down 4%, which had a sales day in it, we're trading down in that mid-single-digit range from a growth perspective and we're stepping into the year in a very similar environment. So from a new perspective, yes, we've seen starts and permits seem to have stabilized around that $1.4 million start range, as we saw in August, starts dropped a bit, down 15% year-over-year. So it's still a bit of a choppy environment, and it's difficult for us to predict exactly what the impact of continued rising rates will be on that new resi side. But given where we're entering the year and given how we expect the year to play out, that total resi market down mid to high-single-digits with new resi being a bit more pressured, that's our best view of the world today and we'll certainly provide guidance and updates as we go throughout the year. On the RMI side, we just talked a bit about some of that consumer pressure, and we've seen that consumer pressure in the digital commerce side of our business. And while our building and remodel business has held up quite well, and as Kevin highlighted, that being more pointed towards the higher-end consumer, larger projects, there's no doubt there's tougher comparables as we step through there. And if you look at some of the indicators, just take the Home Improvement Remodeling Index, for example. That was negative in our second-half, and the forecast is for that market to be down for the first three quarters of this next fiscal year. So we think it will be better than new resi, but still down for the year in negative territory.

And Phil, at the risk of repetition, we do see signs of stabilization as Bill indicated on that new res side, especially as existing home turnover has been slightly diminished and we've seen continued demand for housing. But that said, as Bill indicated, we had some good results inside of that building and remodel business that were coming up against tough comps. And on the rough plumbing side, which will be really the first after our Waterworks business to have exposure to new residential upticks. That's got good commodity pieces involved in it with PVC pipe and the like. And so we're a bit cautious even though we're seeing green shoots and signs of stabilization.

And Kevin, any more color on the RMI side? I mean, it's more of a debate just because existing homes' sales remain under pressure and rates are high. How are you seeing that market? Is it stable to flat next year or are you seeing some green shoots on things picking up? How do you think about the RMI side of things?

We think the RMI is going to be down from a market perspective, although not as down as what we're seeing in new res. We do think that there's been some shift. If you just take the HVAC side of the business, for example, just like we saw in ‘08, ‘09, we're seeing a movement from replace, from a system perspective to repair. We're seeing break fix, starting to take a bigger portion of the business than what we're seeing in terms of maybe some of those smaller remodel jobs. But like I say, when you look at our overall exposure, that exposure to the higher end of the market, particularly in that showroom, serves us well, serves us well from maybe less pressured consumer on that remodel side. And so when you look at the pro and the higher end remodel side, we're still seeing pretty good traffic inside of those showrooms and pretty good traffic with our residential trade plumbing group as they start to do those remodel projects.

Got it. That's helpful. One last one, on the free cash flow generation, certainly very impressive this past year. Did a great job in managing down inventory. Bill, any more color on how we should think about free cash flow in 2024? How much more do you have on the working capital front, and how should we think about cap deployment?

Yes, first off, no change to capital deployment in terms of our capital priorities, investing for organic growth, sustainably growing our dividend, bolt-on M&A, and then as you saw, we still have about $540 million left on our share buyback authorization, and we're going to manage to the low-end of that 1 times to 2 times net debt to EBITDA range. We were quite pleased with the free cash delivery, really a bounce back after investing heavily through the pandemic in inventory. Actually, a bit ahead of our expectations. We had come through last year talking about maybe about $400 million of inventory that we thought we would normalize. That came through more like $600 as we moved through the year. That $600 is an organic inventory decline offset a bit by acquisitions we did for the year. So as Kevin highlighted, look, we think we're in a fairly normalized inventory environment. We think we would get back to our normalized operating cash to net income generation of about 100% as we step through over the next couple of years, pleased with the delivery. And then if you think about just seasonality, typically we would draw down inventories during the summer months and have a little bit of a build back as we step into the first part of our fiscal year into the fall. But you should think about it very much as a more normalized working capital and cash flow generation environment now.

Okay. Thank you. Appreciate the color.

Thanks.

Our final question today comes from Bobby Zolper with Raymond James. Bobby, please go ahead. Your line is now open.

Thanks for taking my question. Could you help us understand what decremental margins might look like in the first-half, particularly given there may be some negative year-over-year pricing?

Yes, I mean, look, we don't really set out, and it's difficult to guide on quarterly or half-year operating margins. If you take a step back, we exited the year with a 10.4% operating margin in Q4 at our seasonal peak from a revenue perspective. And as we already highlighted last year, delivering that nearly 11% Q1 operating margin, we would absolutely expect to be down on that as we step into the year, particularly with organic growth in the call it mid-single-digit decline range. So we will have more pressure on operating margin year-on-year as we step through the first-half. And then as markets stabilize and we roll past some of those difficult comparables from a pricing standpoint, we'd expect to get back to some more stabilization as we step through the second-half.

Okay, got it. Thank you. And then you mentioned that you're seeing slight negative year-over-year pricing. Can you give us any magnitude? Is that down 1%, down 2%, any kind of quantification you could give on that would be helpful?

Yes, to-date, through the first, call it, whatever seven weeks or so, we're -- I'd say, at very low-single-digits as we've stepped into the year. Nothing dramatic, but more a continuation of that trend that we saw, again, rolling over those very difficult commodity inflation comparables.

All right, great. Thank you very much. I appreciate it.

Thanks, Bobby.

This concludes today's Q&A session. I'll now hand over to Kevin Murphy for closing remarks.

Yes, thank you, and thank you for your time today. In closing, I just want to say thank you again to our associates. Their execution during the quarter and the year as a whole was something we're very thankful for. And in addition, really their dedication to serving our customers and making their complex projects more simple, successful and sustainable. And despite the challenging macro environment that we find ourselves in, I believe the business is really well positioned with a balanced business mix, res, non-res, new construction, RMI, and it's an agile business model with a flexible cost base, generating good cash, normalizing our customers' ordering patterns to get back to a traditional working capital profile and generating cash to fund our capital priorities. So as we go through the year, it looks like it's going to be a tale of two-halves, our best guess. First-half, second-half, almost the inverse of what we saw this past year. So we're looking forward to what our associates can do to leverage the model that we've built to go after some structural trends in both our residential and non-residential markets that will serve us well for years to come. Thank you for your time. Very much appreciate it, and we'll talk soon.

That concludes the Ferguson fourth quarter and year-end results conference call. I'd like to thank you for your participation and you may now disconnect your lines.