Material flow. At one point, we had 1,000 tractor trailers with parts in them in Monterrey. And that is really a symptom of an inefficient material flow process. Now the good news is, yes, we have a lot of work in front of us, but we have a very skilled team. We’ve brought some new team members in, very steep and lean principles. We have engaged some external folks to come in who are more hands-on, not consultants to help us identify the issues. We’ve seen the progress starting the momentum shift in Q4 and we’ve tailored our internal review process, such that Bob and I are sitting down with the business unit presidents and their operational leaders on a pretty regular basis to review how we’re doing making sure that we’re keeping the cadence going and that this isn’t short-term fixes.
These are really fixing some of the more systematic things that we’ve got to get after. So I have a lot of confidence in that. And it’s really going to be key for us to have the bending of the curve. That’s why you see us targeting a positive EBITDA improvement versus ’23. Because that will really start to build the momentum. And as you can imagine, a lot of the enhancements and the changes and the improvements we’re making, they’re not happening in day 1 in ’24. And we’ve obviously factored that into our guidance. They start gaining momentum as we get into the second half. And what happens then is you really get that momentum of those cost improvements into ’25 and then I’m not sitting here making a call, but if you can get some positive revenue momentum if the market is just either flat or up slightly, that puts this business in a much, much better position to leverage that growth and get that margin expansion.
I think the rest of the pieces play out. I mean, our capital deployment, return on invested capital, those things I feel really good about. It’s really going to be predicated on, one, our execution of the cost improvements internally. And then two, does the broader macro start to improve late in ’24 and into ’25?
Robert Mack: Yes. I think one thing to keep in mind, too, Craig, is when we put these targets out, if you look at where we are for ’24, we’ve got 1.5 point of headwind from FX and interest rates on the finance interest side. And so we would be mid-13s on a constant currency, constant interest basis. So we have made actual improvement from 2021. It’s just we’ve had these headwinds. That’s not an excuse. We said we’ve got to overcome those, but we are making some progress. And I think you’ll see, if you look at where we’re targeting for the year, that’s coming with a pretty flat Q1. And so the Q2, Q3, Q4 will certainly be significantly better. I think you’ll start to see what the real potential is and that we’re closer to our targets maybe than it appears on a full-year basis.
The other thing is the factory in Vietnam is just coming online for motorcycles right around now. Some of the Mexico facilities have started limited production, so just like Mike said about the exit rate on the improvements in the plants, also the exit rate on the new facilities as we leave ’24 will be a lot better than it is at the start of ’24 because they’re just starting production in those, and it takes a while to ramp up to get the factories full.
Craig Kennison: Great, thank you.
Robert Mack: Thanks.
Operator: Thank you. The next question comes from Joe Altobello with Raymond James. Please go ahead.
Joseph Altobello: Thanks, hey guys. Good morning. My first question was on gross margin, the 70 to 100 basis points improvement you’re looking for this year. You talked a lot about the FX and accrual headwind, the lower shipments and the net pricing. It sounds like in terms of good guys, if you will, most of that $150 million of cost savings will hit cost of goods. And it also sounds like you’re expecting to recoup a lot of that $70 million of incremental manufacturing costs that you incurred in the second half of last year. Do I have that math right?
Robert Mack: Yes. I mean when we talked about $150 million of improvement, that’s all going to hit in GP. It’s really split between material, logistics and plants, materials and commodities would be the largest piece logistics the smallest and then the plant is in the range of getting at that $70 million that we talked about.
Joseph Altobello: Okay. And the incremental manufacturing costs, you expect to recoup all of that?
Michael Speetzen: Well, the way — I guess the way I’d come at it, Joe, is to say we didn’t get after enough of it in ’23. And so the piece that we missed is definitely coming out in ’24. We did get cost down in ’23. We just didn’t get it down near as much as we had targeted. And aside from the actions that we’ve been taking, there’s also momentum around certain commodities already starting to come down sequentially, and that obviously takes some time to roll through inventory. So Bob and the team have this pretty well pegged out in terms of the buckets that need to happen, and that’s what we’re basically reviewing on a weekly, monthly basis.
Joseph Altobello: Okay. And just one quick housekeeping question. The incremental impact from the snowmobile shipments in the ORV and marine restock in Q1 of last year. I think it combined for about $250 million of incremental revenue. Is that right?
Robert Mack: Last year?
Joseph Altobello: Yes, Q1.
Robert Mack: No, you mean the impact on Q1? No, I’d say it’s much higher than that, Joe. We said we’d be 20% down from last year.
Michael Speetzen: And it’s almost — there’s some impact in marine and motorcycle, but the bulk of it is snow and ORV.
Robert Mack: And Joe, that’s — I made the comment on the question earlier around it’s essentially the bottoming out of our performance because if you look at it, you’re getting essentially the majority of the revenue decline is in the first quarter, and it’s two things, well, three with promo. But it’s that snowmobile fixing the business, so we don’t have that hangover of late deliveries as well as the fact that we don’t have the 40 days of DSO inventory opportunity in front of us. So once you get into Q2, you’re kind of back into shipping to retail. So the stability with an industry that we’re assuming is down slightly, but we’re outperforming given our product set up. You get into a far more normalized set of quarters, Q2, Q3 and Q4.
Joseph Altobello: Got it, okay. Thank you.
Operator: Thank you. The next question is from Tristan Thomas-Martin with BMO Capital Markets. Please go ahead.
Tristan Thomas-Martin: Hey, good morning. Continuing on the margin thread. How are you thinking about segment margins, gross margins next year?
