Eaton Corp PLC

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Third Quarter Earnings Call. At this point, all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions. If you'd like to ask a question on the call today, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you should require any assistance during the call, please press star-0, and an operator will assist you offline. As a reminder, today's call is being recorded. I'll turn the call now over to Mr. Yun Jin, Senior Vice President, Investor Relations. Please go ahead.

Hey, good morning. Thank you all for joining us for Eaton's third quarter 2022 earning call. With me today are Craig Arnold, our Chairman and CEO, and Tom Okre, Executive Vice President, Chief Financial Officer. Our agenda today, including the opening remarks by Craig, then he will turn it over to Tom, who will highlight the company's performance in the third quarter. As we have done our past course, we'll be taking questions at the end of Craig's closing commentary. The price release and the presentation we'll go through today have been posted on our website. This presentation includes adjusting earning per share, adjusting free cash flow, and other non-GAAP measures. They're reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include the statement related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and presentation. With that, I will turn it over to Craig. Thanks, Sean.

And we'll begin with the highlights of the quarter on page three. And I'll start by noting that we delivered another very strong quarter and have again posted a number of all-time records, including adjusted earnings per share of $2.02, which is up 15% from prior year. This, despite negative impact of FX and the divestiture hydraulics business, which took place in August of 2021. Our organic revenue growth also continues to accelerate in the quarter, up 11% in Q2, to up 15 percent in Q3. And I think, encouragingly, we had strength across all of our businesses, with exceptional growth in electrical Americas, in vehicle, and in mobility. We also posted all-time record segment margins of 21.2 percent, up 130 basis points over prior year, and above the high end of our guidance, with incrementals of 38 percent in the quarter. I'd also note that our team continues to manage price effectively, more than fully offsetting the impact of inflation. As noted here, orders continue to accelerate in the quarter as well. On a rolling 12-month basis, electrical orders increased 27% versus 25% last quarter, and our aerospace orders increased 22% compared to 19% last quarter. This order strength, I'd say, also led to another quarter of record backlogs in electrical, which were up some 75%, and our aerospace backlogs increased by 17%. Lastly, you know, we did start to generate positive momentum in our cash flow results. We had a strong year-on-year performance with operating cash flow up 29% and a 30% increase in free cash flow. And our free cash flow as a percentage of sales was 15.6% in the quarter. So as expected, we're starting to see improved cash flow from both higher earnings and improved working capital performance. Moving to page four, and before I turn things over to Tom to go through the quarterly results, I want to highlight a few of the key themes that are really underpinning our confidence in our long-term growth outlook. As noted here, we continue to benefit from the three secular growth trends that we reviewed earlier, electrification, energy transition, and digitalization. And while still in the early stages, we booked some $700 million of new wins in the quarter that are directly tied to these trends. Within electrification, you've all read the announcements of the very large number of manufacturing projects in the U.S. that include new semiconductor facilities, big investments in new electric vehicle manufacturing plants, new EV battery investments, and investments in EV charging infrastructure. In fact, there's been some 1.3 trillion of new projects announced this year alone. And the impact the stimulus bill has yet to show up in these numbers. These incentives will point towards large investments that are tied to improving electrical infrastructure and will deliver significant benefits over the next few years. The next large growth driver is energy transition, the move away from fossil fuels to renewables that's taken place for a number of years now, and this trend will only accelerate. And with every renewable resource addition, it requires electrical infrastructure. But it's not just, I'd say, connecting power to the grid. It's also investments in technology to keep the grid stable, to manage different sources of electrical power, investments in batteries to store excess energy. And these are all products and services that we naturally provide. Beyond renewables, we're also seeing an increase in investments relating to improving grid resiliency, which has become a priority due to extreme weather events and really the demand for and need for energy independence. And lastly, our emerging digital society will drive higher selling prices as we add intelligence to our legacy products. We'll sell new value from data and insights and create new software solutions, all of which require data centers, an important growth segment for Eaton. These, I say, are just a few of the reasons why we remain confident in our electrical businesses and their ability to deliver higher levels of organic growth for some years to come. And as slide five reflects, we have a number of attractive growth drivers in our industrial businesses as well. I'll begin with the most notable one, vehicle electrification. Here, the outlook for EV penetration continues to accelerate with new announcements coming almost every week. And I say here not just in passenger cars, we're also seeing increasing need for electrification projects in commercial vehicles, some for the entire system, but often for a subsystem of the vehicle. And I'd also note here the opportunities we're seeing tied to the acquisition of royal power are much larger than we anticipated, and our e-mobility pipeline continues to be very robust. Just as a point of reference, you know, our opportunity per vehicle on an EV is some 18 times higher than the opportunity that we have on a traditional internal combustion engine. And you'll recall, We expect our e-mobility segment to become $2 to $4 billion in revenue over the next number of years. The next growth driver is tied to what we're doing in our legacy vehicle business, which is finding new applications for existing technology. We're seeing a number of new opportunities for our commercial engine brake technology, for our mechanical gears that are used in electric vehicles, and for our advanced valve train actuation technology. And in all three cases, we've already booked significant new wins here. Third, we're benefiting from the aerospace industry growth cycle, which over the next several years will continue to accelerate. Commercial passenger growth is continuing to improve, and it's translating into significant growth in commercial aftermarket orders, which, by the way, were up some 40% year to date. And commercial OEM bill rates are forecast to grow some 15% over the next four years. Lastly, I'd note that with our positions of Syria and mission systems, we expect to see even better growth given our position on high-growth platforms and as we begin to realize sales synergies. So overall, just stepping back from this particular set of initiatives, we've delivered some $250 million of wins in industrial, and when added to what we noted in electrical, we delivered almost a billion dollars of growth tied to these secular growth trends in our markets. So, with that, what I'd like to do at this point is turn it over to Tom and ask him to walk through the quarterly results.

Thanks, Craig. I'll begin with noting a few key points regarding our Q3 results. Our revenue is up 8 percent with organic growth of 15 percent, partially offset by a 4 percent foreign exchange headwind and a 3 percent unfavorable net impact of acquisitions and divestitures. Related to the acquisitions and divestitures, the acquisition of Royal Power increased revenue by 1 percent, while the sale of hydraulics reduced revenues by 3 percent, by 4 percent, sorry, for a net of 3 percent. With total revenue growth of 8 percent, we posted solid operating leverage with 15 percent growth in both operating profit and adjusted EPS. It's worth noting that the foreign exchange headwind of 4 percent had an 8 cents impact on adjusted EPS, which was larger than our 3 percent guidance estimate. Further, growth in adjusted EPS of 15 percent would have been 22 percent, excluding the 8 cents impact from FX, and the $0.03 net impact from acquisition and divestiture. All in, stronger organic growth and higher margins enabled us to report adjusted EPS of $2.02 that was above our guidance midpoint. Finally, as we did last quarter, we continue to raise the bar with all-time records in adjusted EPS, segment operating profit, and segment margin. Moving to the next slide, Electrical Americas had another very strong quarter. We set all-time records for sales, operating profit, and margin. Revenue growth accelerated to 18 percent organically, driven by strength in all end markets, with particular strength in commercial and institutional, residential, industrial, and utility end markets. Operating margin at 23.5 percent was up 180 basis points versus prior year, benefiting from higher volumes. With respect to price, we continue to manage price effectively to more than offset inflationary pressures in the segment. In addition, our demand continues to remain very strong. Orders on a rolling 12-month basis accelerated sequentially coming in at 36 percent year-over-year versus 29 percent in the prior quarter. Our orders were strong across the board with particular strength in data center, utility, and industrial end markets. These order growth translated into another record quarter of backlog, up 97 percent. On a sequential basis, backlog is up 14 percent versus the prior quarter. In addition to the robust trends in orders and backlog, our major project negotiations pipeline more than doubled year over year, driven by especially strong growth in manufacturing, data center, industrial, and utility end markets. Turning to page eight, electrical global results were also very strong. generating a Q3 record for revenue and all-time records for operating profit and margin. Organic growth was up 13 percent with an 8 percent foreign exchange headwind. Notably, this is the sixth quarter in a row of double-digit organic revenue growth. We saw solid organic growth in all regions, which, with particular strength in our global Krauthain's Beeline business, and solid growth in both Europe and Asia Pacific. We posted record segment margin of 20.6 percent, up 50 basis points year over year. Similar to Electrical Americas, higher volume was a margin tailwind versus the prior year, and we continued to manage price effectively to more than offset inflationary pressures. Orders were up 14% organically on a rolling 12-month basis with strength in commercial and institutional and industrial end markets. Backlog growth remained strong at up 22%. Before moving to our industrial businesses, I'd like to briefly recap the very strong results of our combined electrical segment. For Q3, we posted accelerating organic growth of 16%, incremental margin of 33 percent, and operating margin of 22.3 percent, with 130 basis points of year-over-year margin improvement. We also generated orders and backlog growth of 27 percent and 75 percent, respectively, with more than doubling of our negotiation pipeline in the United States. We remain very well positioned for profitable growth in our overall electrical businesses. Our aerospace segment results are captured on the next page. Aerospace also generated records in the quarter with an all-time sales revenue record and a Q3 operating profit record. Organic revenue increased 8% with 5% foreign exchange headwinds. Organic growth in the quarter was particularly strong in our commercial aftermarket and commercial OEM markets. Encouragingly, military aftermarket grew in the quarter. Operating margin of 24 percent was up 200 basis points from the prior year, benefiting from volume growth. On a rolling 12-month basis, our order acceleration continued. now 22% versus up 19% last quarter, including military OEM markets that were also up 22%. We saw order strength in all end markets as travel continues to accelerate within commercial markets and military orders strengthened consistent with our expectations for increased defense spending. Backlog remained strong with a 17 percent increase over prior year and up 5 percent sequentially. Moving on to our vehicle segment, organic revenue grew 19 percent. We also experienced a 3 percent headwind from FX. We had strength in the North America, South America, and IEMA markets. Our North American light motor vehicle business was especially strong with nearly 25 percent organic growth, while our South American business was up more than 35 percent. Operating margin of 16.8 percent was down 120 basis points versus prior year, primarily due to manufacturing inefficiencies. However, it's important to note improvement in our ability to offset higher inflationary costs with price. This is reflected in sequential margin improvement of 150 basis points from Q2. Incremental margins on a sequential basis were up nearly 50 percent with solid volume growth and continued progress on price costs. Moving to page 11. we show results for our e-mobility business. Revenues grew 63 percent, including 17 percent organic growth, 49 percent from the acquisition of Royal Power, and 3 percent foreign exchange headwind. We continued the trend of narrowing the operating loss on a year-over-year basis. This quarter, operating margin improved 800 basis points driven by organic volume growth and the impact from the Royal Power acquisition. We are seeing continued momentum to achieve our two to four billion revenue target with new platform wins for power protection solutions, including additional break tour wins. Our opportunity pipeline remains robust for innovative power distribution, conversion, and protection solutions. On the following slide, we have a summary of our guidance for the year. As noted on the chart, we are reaffirming 2022 organic growth and operating margin guidance in total. Further, we are reaffirming both metrics for all segments except e-mobility operating margin. More specifically, we continue to expect organic growth in the range of 11 to 13 percent and operating margin from 20 percent to 20.4 percent. Turning to page 13, we show the balance of guidance for 2022. We're not making significant changes to our full-year outlook. We tightened our adjusted EPS range of 7.51 to 7 .61 per share from the prior guide of 736 to 776. Consistent with the foreign exchange headwinds that we mentioned throughout the presentation, we increased the unfavorable translation impact to 600 million from 450 million in our previous guide. Our full year expectations for the other items are unchanged. With respect to cash flow, orders and backlog have grown significantly more than our expectation. In addition, we have been and will continue to prioritize customers and profitable revenue growth at the expense of cash flow. Therefore, while we have good cash flow momentum in Q3, we have work to do to achieve our objectives. Shifting to Q4, Highlighting a few key points on our Q4 guidance, we expect adjusted EPS to be in the $2 and $2.10 range, organic growth to be between 13 and 15 percent, and operating margin to be between 20.5 percent and 20.9 percent. Comparing to the prior year, Adjusted EPS and operating margin guidance at the midpoint represent over 19% growth and 140 basis point increase, respectively. Now I will hand it back to Craig to walk us through a market outlook and wrap up the presentation.

Thanks, Tom. Hey, turning to page 14, we provide an early look at our in-market assumptions for 2023. And let me begin by saying that we are expecting to see a typical model recession next year, but don't expect it will have a significant impact on our growth, given the secular growth trends, the strong orders, and the record backlog that we're sitting on. Within electrical, data centers, industrial facilities, and the utility market are all expected to see very good growth. Together, they account for approximately 40 percent of our total revenue, and, quite frankly, have some of the strongest orders and backlogs in the company. As a point of reference, industrial projects announced this year so far are up some 300 percent, so you can see really strong momentum in these segments of the business. Commercial and institutional, as well as machinery, are expected to see more modest growth. Of note, orders in CNI continue to accelerate in the quarter, with significant strength in government and institutional. And this is the segment where you'd imagine we expect to see significant benefits from stimulus spending. The one relatively weak segment is expected to be residential. And while we've not seen a downturn yet, and our orders are up some 23% on a rolling 12-month basis through Q3, we do expect a segment next year. I would, however, note that RESI only accounts for 7% of the total company sales, and that residential new-build market will be somewhat offset by the renovation market, and the renovation market accounts for some 40% of our residential sales. And I'd also note that we'd expect to see higher electrical content per home, which is what we've been seeing over the last number of years. Within our industrial sector, we're expecting it to be a big year for electric vehicles. Increasing government regulations and incentives and the large number of new EV introductions will keep this segment strong, quite frankly, for years to come. And in commercial aerospace and light motor vehicle markets are both expected to see a cyclical recovery. The need to rebuild inventories will support vehicle markets, and the aerospace aftermarket growth and the ramp-up in commercial OEM production will drive aerospace markets higher next year. Lastly, we expect commercial vehicle markets to be flat, but quite frankly, at quite healthy levels. So in total, 85% of our markets are expected to see positive organic growth next year. We'll naturally provide more details on our specific organic growth assumptions on our February earnings call, but we did want to share our preliminary thinking and let you know that we expect 2023 to be another good year of growth for the company. And lastly, on page 15, I'd like to close with maybe just a few points here. First, you know, I say I'm pleased with our future results, particularly with our strong margins, our earnings, and our orders growth. We continue to manage the business well and delivered record profits despite ongoing supply chain challenges, an inflationary environment, significant FX, and interest headwinds. The transformation of the portfolio has delivered what we promised, a higher-quality company with higher growth, higher margins, and better earnings consistency. And for the balance of the year, we remain on track to deliver our commitments, including record operating margins and adjusted earnings per share. And we're doing so despite offsetting, once again, the significant headwinds that I talked about around FX, pension, and interest. And these headwinds increase in Q4. As we look into next year, we remain optimistic despite our recession expectations. We do expect a slowdown, and we'll be prepared in the event of a more significant downturn. We know how to flex our costs and deliver attractive decrementals. But as we said, we have good reasons for optimism. Second, the growth trends are driving strong momentum in our businesses, and we have a growing pipeline of opportunities. We're going into next year with strong momentum with record backlogs, and with an expectation that many of the operational inefficiencies and supply chain disruptions will get materially better next year. So we feel great about the quarter, great about the outlook, and with that, we'll turn it back to you, Jens, for Q&A.

Hey, thanks, Craig, for the Q&A today. Please limit your opportunity to one question and one follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instructions.

And ladies and gentlemen, just as a reminder, if you wish to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. And our first question will be from Nicole DeBlaise with Deutsche Bank. Please go ahead.

Yeah, thanks. Good morning, guys.

Good morning, Nicole. Good morning.

Maybe can we just start with maybe going through expectations for 2023 incrementals? I know it's a bit early, Craig, to be giving guidance, but you were kind enough to walk us through the end market outlook. And I'm just curious if you think that it's feasible to kind of be at your long-term guidance for incrementals, at least as a starting point. Let's start with that.

I appreciate the question, Nicole. As you can imagine, we're working through our 2023 profit plans right now and have lots of activity going on and around the company to get prepared for that. But I would say that as you think about next year, I think kind of a 30% incremental rate would be kind of the right place to be thinking about running your models at this point. And we'll naturally be in a position by the time we get to the earnings call for Q4 in February to give you a more specific read on that. But we think 30% is probably a good planning number at this juncture.

Got it. Thanks, Craig. And then I guess what surprised me the most this quarter was just the huge acceleration in electrical America orders. Definitely encouraging to see that even as comps get difficult. So maybe if you could dig a little bit more into what drove the queue-on-queue acceleration.

Yeah, you know, as we've talked about and shared in some of the outbound commentary, we've had pretty, you know, broad-based strength in orders in our electrical business. I mean, in the Americas specifically. You know, data centers were extremely strong. Industrial markets, very strong. Utility markets, we had, you know, orders up some 60%. And so it really was broad-based. Even in the resi market, you know, on a rolling 12-month basis, you know, even there we had orders that were still up some 20%. And so it's tough at this point to really call out any particular market in the Americas that I'd say that, was weak, but we had really, really strong strength. And I'd say a lot of it really is tied to these, you know, big trends we talked about. Obviously, you know, the utility markets in general are certainly benefiting today from some of these investments in not only energy transition, but, you know, grid resiliency. Data centers, you know, and I know there's been lots of debate about that market and which direction it's headed in, but we'll really continue to see really strong strength in the data center market, even to the point where customers today are looking to place long-term commitments and basically hold the slot in our production plans out into 2024. So we continue to see very strong strength in our America's business, once again, tied to these trends that we've been talking about for some time, and we're absolutely pleased to see it showing up in our orders, and that will obviously convert to revenue as we have the ability to ship and we resolve some of these supply chain issues that we continue to deal with.

Yeah, just to amplify, the data centers in the Americas, on a quarter-over-quarter basis, up almost 40%, and on a trailing 12-month, over 50%. So we've been hearing noise on that of slowdown. We're not seeing it.

Thank you, guys. I'll pause it on.

And next we have a line of Josh Parkwazinski with Morgan Stanley. Please go ahead.

Hi. Good morning, guys. Hey, Josh. Craig, on this order surge that you guys have seen, anything that you would attribute to timing around – stimulus or lead times or, you know, anything else, maybe a chunky order in there that we should think about as we look out? Because, you know, we are going to continue to see some tough comps here. And I know that with the rolling 12, it's kind of hard to parse out maybe some of the quarter-to-quarter volatility.

Yeah, no, and we tried to provide a little bit of color because I know there's this question around whether or not, you know, what kind of growth are you seeing in orders in the quarter, which is why we tried to share that not just in the rolling 12, but actually in the quarter. we're seeing significant strength. Those numbers that Tom quoted were actually in the quarter, quarter over quarter numbers, despite, to your point, tougher comps. You know, I'd say in terms of the order surge question, you know, as I mentioned in my up on commentary, there have been a number of very large projects announced. And I'd say as you think about, you know, whether it's reshoring or investment in, you know, grid infrastructure or it's investment in new battery facilities, There are today, perhaps different than some of the other cycles that we've been through, a lot more very large industrial projects that tend to be more electrical intensive as an application that we're certainly seeing in our backlog, and that's certainly helping us. But that also gives us a lot of confidence as well, because these tend to be big multi-year projects that will go on for some time to come. Stimulus, to your question, not yet. We certainly would anticipate that at some point down the road that we'll start to see a meaningful impact from stimulus. Most of those programs are still probably six to 12 months away from really having a meaningful impact on the company. But once again, that's just another one of these vectors that we think will continue to give us a multiyear growth story that's pretty compelling. And as you know, a lot of those stimulus dollars are going directly into the markets in which we participate. It's about building out the electrical infrastructure. It's about grid resiliency. It's about energy transition. It's investments in efficiency. It's specifically to the point where they actually specify upgrading your electrical panel as particular parts of the program that qualify for these investments. It's just another one of these things, Josh, that gives us confidence in the long-term outlook of our electrical business specifically.

Got it. That's helpful. And just a little more color on the major projects in the U.S., you know, manufacturing in the quarter, negotiations up over 300 percent, data centers up over almost 170 percent, and the year-to-date numbers are equally strong. So, just really, really strong numbers on the major projects.

Got it. It's helpful. And then just quick follow-up on the stimulus piece, or I guess, you know, broader infrastructure spending that you guys are tracking. I know there's some big dollars there. Obviously, not all of that is electrical, but as you touched on a lot of things, you know, sort of get into Eaton's backyard at some point. How would you think about, you know, what those do to your addressable market here as those start to enter? Is that like a 5% increase, a 30% increase to address wool market, like any sort of ring fencing would be helpful.

Yeah, and I'd say it's maybe a little bit early for us to be able to put a handle on how it's going to impact specifically the relative opportunity or the relative growth. As you know, they are very big billion-dollar programs directly targeted at electrical infrastructure. But I would just say that at this point, Josh, we would hope to at some point down the road give you a better indicator of that. But it's just, quite frankly, today a little bit too early to see how this is going to all play out. But it's all going to be good. I mean, it's all going to be, you know, things that are going to help us continue to accelerate our growth, not just in the next 12 months, but quite frankly, these stimulus programs will help us accelerate growth over the next three to four years.

Yep, agreed. Thanks for the detail. Best of luck.

Next, we'll go to Andrew Obis with Bank of America. Please go ahead.

Hey, guys. How are you?

Hey, Andrew. We're doing well. Thank you.

Hey. Good morning. Just a question. Can you please give us your comments? Andrew, we're getting some background noise.

It's very tough to hear you.

We heard data centers, Andrew, but we were . Hold on.

Give me one second. Just give me one second. Let me try this. Is this better? Much better. Much better. Yeah, so just the data centers, if we could just focus on different geographies and different verticals within the data center market is just, there's a lot of noise regarding this market. What are you guys seeing? I know you're bullish, but just, as I said, more color by geography and vertical.

Yeah, and I appreciate the question, Andrew. We certainly, if you think about geographically, we're clearly seeing the strongest growth in the Americas market. Very strong growth in the Americas market, very strong growth in hyperscale. but also in colo and on-prem, if you know today, I mean, I guess some 40% of the market would be hyperscale, but this really is broad-based strength that we're seeing in the data center market, certainly in the Americas. We're seeing good growth, but not as strong growth in Europe and in Asia, two markets that are also growing. Once again, the IT channel, to really distinguish that from the broader data center markets, We have seen that tend to be a little shorter cycle, and we have seen a little bit of relative slower growth, still good growth, but relatively slow growth in the IT channel, relatively slower growth in single phase in markets like Europe and Asia. But once again, we're still seeing growth in those markets.

Great. Thank you. And just on capital allocation, you know, as interest rates have gone up, you're clearly cash generative. You're more of a strategic buyer. How has the market landscape changed from your perspective, and does it make more likely or less likely to see a deal from Eaton in the next 12 to 18 months?

I would say that what's going on in the interest rate environment needs to at some point translate into seller expectations on valuation, and I'd say there's always, as you know, a fairly significant lag between the realities of the market changing and and companies' expectations of what their value is. And so I say, in general, in these kinds of environments, you would expect asset valuations to come in a little bit, and that would therefore increase the likelihood of us doing transactions. But I would say today it's early, and we really have not seen any material change at this point in valuations or expectations. But we continue to be out on the hunt looking for opportunities and still think that's the right priority for the company. But having said that, as we've said in the past, we will not overreach. We don't intend to overpay. We've been a very disciplined buyer and we'll continue to be a very disciplined buyer. And in the event that asset valuations don't come in line with our expectations, we'll certainly use that as an opportunity to buy back our stock.

Thank you very much.

Thank you.

And next we'll go to Nigel Koh with Wolf Research. Please go ahead.

Thanks. Good morning.

Hi, Nigel.

Okay. So the 2023 end market outlook, it looks like, you know, if you had to pick a number, you'd say 5% to 6% type blender growth rates. The one I guess I'm surprised by is the CNI market where you're looking for modest growth. You know, it seems like the leading indicators there are really healthy. You know, we've got some stimulus money coming through. So just wondering, you know, what's driving that view? Is it some, you know, collateral damage from residential? Is it Europe, Asia Pacific? You know, any kind of that would be great.

You know, I appreciate it. We tried to kind of unpack that a little bit in my outbound commentary, but, you know, we're still seeing good growth in the CNI market. You know, orders on a rolling 12-month basis, by the way, globally work. up 23% in the quarter. They were actually up 27%. And so actually a very strong quarter with orders actually accelerating in the quarter. And I'd say on the commercial side, we were seeing growth, but we're seeing the biggest growth in what we call institutional and government. And as I noted in my commentary, that's really where you would expect to see some of the early indications of some of the government dollars and government spending in and around institutional and government. But that market continues to do extremely well, and we really have not really seen any signs, particularly in that market, of a letup. I think more generally speaking, you know, the Americas as a region tends to be the strongest region in the world, really across most of these end markets, but we had a very strong quarter in Europe as well. in the C&I market.

And in Asia also. Asia was very strong in commercial and institution. Actually, all the end markets grew quite strong on quarter over quarter and the trailing 12 months. I mean, Europe was particularly strong in commercial as well as government on a trailing 12 months as well as on a quarter over quarter.

I mean, so at some point, I mean, as somebody mentioned earlier, we're going to be anniversarying some really strong growth numbers, and we do expect these growth numbers to slow and moderate someplace in terms of the order intake. But also keep in mind, we're sitting on record backlogs that are up, you know, in some cases, you know, more than 100%. And so even if you have a little bit of a slowdown in some of these end markets, which, you know, you'll likely see some of that, you know, our backlogs today, you know, are giving us visibility into, you know, almost 60% of Next year is demand, and that number is about 2x what we normally see.

Right. Yeah, that's it. I mean, it all sounds great. I'm just wondering what changes in 2023. But my follow-on question is on free cash flow. We've got a pretty big fourth quarter lined up in the plan, growth rates remain really strong. So just wondering kind of the confidence and what needs to happen to drive that free cash flow.

Yeah, no, appreciate the question. We tried to touch on it in the prepared remarks. We had a very strong Q3 cash conversion cycle. We improved by seven days. Days on hand went up four days. Payables up another two days. So we felt really good about that. I think what we want to get in terms of the prepared remarks is to let you know we're going to prioritize taking care of the customer and protecting the orders, and organic growth. Recognizing that, we've got work to do to hit our free cash flow objective. No question about it. Okay, thanks.

Next, we'll go to Scott Davis with Mellius Research. Please go ahead.

Hey, good morning, guys. Morning, Scott. I don't think I've heard an answer. a price, a specific price number, and not asking for anything particularly precise, it can be a range, but of that 15% core, it's been running typically kind of a little bit more than half in price. Is that about the same this quarter?

Yeah, as you know, what we said in prior calls is that we haven't given out a split specifically between price and volume, largely because there's such a huge variation depending upon the markets, the customers, the you know, the various commodities that we're selling. And so we haven't given out a number. But I would say that within that 15% growth, we had healthy growth in both volume and price.

Okay. So throughout the year, we've seen stronger growth in volume as well.

Do you guys have a sense of, I mean, your customers, are they trying to build some inventory ahead of anticipated demand in 23? Are they trying to get ahead of some price increases? What is the incentive? Or are they just paranoid they're not going to be able to get product? I'm trying to just get my arms around the incentive to really order above actual end market growth, because that's certainly your growth rates are above global GDP levels by quite some

I would say, first of all, I'd say our end markets are doing very well. A lot of what we're seeing today is, in fact, a reflection of just heightened industrial activity, heightened investments in manufacturing. We talked about these big investments in things like semiconductors, new plants for building EV factories, and new factories for building batteries and investments in grid hardening. And so in many cases, the markets that we're participating in are really strong markets right now. Having said that, I would say that our customers would like to build some more inventory, and today they're not, and we're not seeing any evidence at this point at all, more broadly, of overstocking the distribution channel. There is some nervousness in the marketplace today around, I need to get a place in line. And so as we mentioned before, we're probably getting orders a little bit earlier in the process than we would normally get an order. So we're getting more lead time. But in general, and you can see it in some of the distributor data as well, our distributors, their sales out are very strong. If you look at some of the big electrical distributors and the numbers that they've reported.

Yeah, that's a really helpful color. Best of luck. I'll pass it on. Thank you, guys.

Thanks, Scott.

And we'll go to Julian Mitchell with Barclays. Please go ahead.

Thanks. Good morning. I think, you know, just firstly, I wanted to focus on the fourth quarter for a second. So it looks like you're assuming kind of flattish sales sequentially and margins down maybe 50 bps or so. It seems like that's very concentrated in the aerospace division where there's kind of a big margin reversal versus what you saw in the third quarter. Maybe just clarify that, please, on aero and if there's anything else kind of going on sequentially on margins in the segments.

Yeah, and as you know, Julian, we had a really strong quarter in aerospace in Q3. And as you know from this business, so much of how you perform in aerospace is really a function of the mix of your aftermarket versus OE sales. And so in any given quarter, you can have a very different mix that certainly will push your margins around one way or another. But the margin levels as implied and are still very strong in aerospace and very much in line with our guidance for the year. But in any given quarter, you can in fact see a little bit of difference depending upon how much OEM business you're shipping. And with the ramp, in OEMs and some of our major customers, you probably, you know, embedded in that numbers are probably more OEM shipments than we would typically see or certainly we saw as a mix or as a percentage in Q3. But by and large, the business, you know, is doing well. Backlog is growing. Profitability is doing well. Team's executing well. And so we have no concerns about aerospace. We think the business is in great shape.

Thanks very much. And then just my follow-up, I suppose, would be around kind of volume growth. As you said, it's been healthy in the third quarter. So assuming it's up, let's say, mid-single digit, do you think about the backlog from here as supply constraints ease? Do you think we see an incremental kind of acceleration in backlog conversions into revenues and so your volume growth could accelerate in the next few quarters even as sales slow down. Maybe just help us understand kind of that work through of orders into revenue volumes as supply chains are moving around.

You know, I appreciate the question and it's what we've been chasing really, Julian, for at least the last 12 months where we, quite frankly, we need a little bit of a slow down, quite frankly, in orders just to catch our breath and try to deal with some of these backlogs that we're building in the business. And so I'd say that, yeah, it's absolutely possible that you could have a scenario where just working off the backlog and the past dues gives you the ability to continue to grow your business despite what could be a bit of a slowdown in the marketplace. So that's entirely possible, and quite frankly, We need the ability to take a little bit of a breather to execute on some of this backlog. But to date, as you saw in our results, I mean, the orders keep coming, and they keep coming fairly broadly in the marketplace. And we think these secular growth trends that we're playing into are going to go on for some time. And so what we're responding to that is we're investing. We're investing in capacity and capability and doing things in our supply chain. to ensure that we're in a position to deal with these higher levels of economic activity, higher growth, and support what we think is going to be higher growth for these businesses for some time to come.

Great. Thank you. All right. Next, we'll go to Joe Ritchie with Goldman Sachs. Please go ahead.

Yeah, thanks. Good morning, guys.

Morning, Joe.

Yeah, so... Really, I guess maybe two clarification questions, follow-ups from what others have already asked. The first one, just going back to, you know, M&A portfolio, you guys have done a lot, Craig. I'm just curious, you know, what kind of leverage target would you be willing to go to in this environment? You know, clearly, like, your backlog's in really good shape, but I know that there's a lot of concern around the uncertainty for 2023, and it's and concern around higher leverage levels across the broader multis. And so I'm just curious, you know, for the right deal, what would be your expectation on leverage?

I mean, and as you know, Joe, you've been around the company for some years, and we have in the past levered up for the right strategic deal. And as an organization, as a company, we tend to have very good, you know, cash generation. And so for us, I would say that for the right deals, we'd be perfectly willing to lever up and go to the same levels that we've been at historically. I will tell you that those deals are not right in front of us today, and so I don't want to set an expectation around some near-term transaction that's going to require that we lever up. What you're likely to see from us are deals that are very much consistent with what we've done recently in terms of kind of bite-sized transactions that we can fund largely out of cash without the need to lever up and do larger transactions. But that's just a reality of the marketplace and the type of deals that we'll likely do. But at the same time, if we could find a bigger, more strategic one, we certainly would be willing to lever up in order to do it. Yeah.

And just to amplify that a little bit, I mean, for the baseline everybody, we're at 2.1 net leverage. So we've got a very strong credit rating, so we've got a large capacity to go up to Craig's point. And especially with the supply chain constraints starting to mitigate, our cash generation will get even better going forward. So we see a lot of flexibility.

Got it. That's helpful. And maybe just my follow-on question, I know Julian is trying to get at this as well, so maybe I'll focus my comments on the Electrical Americas business. It's hard to, like, get our head around, like, your backlog doubling a year over year at a time when, you know, you're growing, call it mid-teens this year in this business. It seems to suggest that for 2023, you've kind of set yourself up for another year of double-digit organic growth. And so just maybe just help us kind of contextualize that or frame it just for the electrical America's business.

Yeah, I mean, I think, you know, your math is not, you know, not wrong necessarily, right? That certainly given the strong negotiations, one, as you heard Tom talk about, even our negotiations, largely before we get an order, negotiations continue to be very strong into these secular trends that we're dealing with. Orders are strong, the backlog is strong, and so we would expect that to translate to revenue growth next year, even in the event of a slowdown. We're not in a position to give you a number for next year. We'll do that, as we mentioned, in February. But your math is not terribly wrong. It says we should expect good growth in the Americas next year, even with a little bit of a market slowdown. And that's kind of what we tried to do by providing some indications of the various end markets that we're in and how those end markets are likely to perform in 2023. Yeah.

I think the end market forecast coupled with the secular trends chart at the beginning of the presentation, you know, these secular trends are real. And we are seeing order flow and backlog consistent with that. And, you know, I think we're primed for a good run here.

You know, the big challenge really is, you know, to date has been we just don't have the capacity, our suppliers don't have the capacity to deal with, you know, this growth that we're seeing. I mean, obviously our growth in the quarter in Q4 would be much higher if we had more capacity in place to deal with this demand. And that's what we're addressing right now, not only in our own facilities, but also in the supply chain to make sure we are in a position to convert on these great growth opportunities.

All sounds good. Thanks, guys.

Thank you.

Next, we'll go to John Walsh with Credit Suisse. Please go ahead.

Hi. Good morning, everyone. Good morning. So I apologize. I'm going to try to come at this volume question again just because I think it's really important. Are you seeing accelerating or have you seen accelerating volume year-over-year growth as we've gone through 2022? Yes. In a word, yes. Yes. That's great. That's what I wanted to hear. And I just wanted to confirm that. And then, you know, you talked about top line and incrementals. We've had a couple of companies remind us about pension sensitivity, asset returns, tax already this season. I know it's early, but just anything to call out below the line as we think about next year?

Yeah, I mean, that's a great question, John. I mean, there's a lot of moving parts. Let's take pension first. We've got asset returns, discount rate, shape of the yield curve, just to name a few. And we're going through our plan for next year. Wouldn't be surprised if we had a headwind associated with that. We're trying to assess how big that headwind is right now. As it relates to interest expense, it's the same type of dynamic. You've got swap interest income. You've got FX income. You've got CP balances and increasing short-term rates. We've managed that very effectively this year and on a year-to-date basis will look good. As we indicated in our prepared remarks, we'll see more of a headwind in Q4. And we're working through what's going to happen in 2023. I guess what I would stay focused on is we had all those headwinds this year, and we were able to deliver what we said we were going to do. And, you know, we'll be focused on doing that next year as well.

And just to me, if I could just add, in offsetting, you know, some of these headwinds that will be, you know, real and Tom articulated is that You know, this year, we have just an enormous number of operational inefficiencies that we've had to offset as well. And we do expect, as I mentioned in my up on commentary, that many of these operational inefficiencies, many of which are driven by supply chain constraints, we expect those to get better next year. And so we think we're going to have, you know, an offset to a number of these because our facilities will run more effectively and more efficiently in 2023 than they have in 2022.

Great. Thanks for the color. I'll pass it along. Thank you.

And next, we'll go to Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Morning, Dean. Hey, one of the inefficiencies in the supply chain that's been nagging everyone has been the semiconductor and electronic component situation. You guys thought it might get worse in the second half, so how has it been playing out?

You know, what I'd say is, and I think what we said as a part of our Q turn, is that we didn't expect it to get better. In fact, we didn't expect it to get better until sometime, you know, probably in the second half of 2023, and I'd say it largely played out that way, that we've seen, we saw, you know, Some improvements in metal-based commodities, copper, steel, aluminum. We saw improvements, obviously, in resins. Logistics got better. But semiconductors and almost anything electronic-related continues to be a challenge. And that's a challenge we dealt with in Q3 and a challenge that we think we're going to end up dealing with probably for another almost 12 months or so before we probably see any material improvement there. So semiconductors continue to be a challenge. We're working through it, but we are seeing improvements in other commodities.

That's good to hear. And then just the follow-up, and we've touched on this before a bit in the answers to Joe's question. And, Craig, you've been around the company a long time, so you'll appreciate the spirit of this question, is in prior cycles – you would see that the company was so much more exposed to non-res and the non-res cycle. And we'd be asking you about starts and permits and value in place and so forth. But the portfolio today and the end markets, whether it's in secular drivers, data center, electrification, all of this has served to minimize the non-res cycle. I want to make sure that's correct. and should help elongate the cycle in terms of the demand given your backlog and so forth. So part of this is the question of how you're positioned better in a downturn and less dependent on non-res, and just any call around that would be helpful.

Yeah, what I'd say maybe just to clarify a couple of points, Dean. First of all, we agree with your conclusion, by the way, and the conclusion is the portfolio moves that we've made have positioned the company to be less cyclical, to be more long cycle, no cycle, and that is absolutely true, and therefore we're absolutely convinced that the company will perform very differently in the future in the event of an economic downturn. And as I mentioned in my commentary, we think there'll be a mild one next year, and yet our company and our markets, 85% of them, will continue to see strong growth. But just the term non-res, the term non-res means everything other than residential. And so today, for us, as we said, 7% of the company is residential. So non-res or 10% of electrical is residential. So 90% of everything that we do in data centers, in utility, in industrial markets, the term non-res really covers a lot of these other end markets that are certainly doing extremely well right now. And so we've tried to get more exposure to the secular growth trends tied to really growing end markets, and that's what we've really done in terms of the portfolio moves that we've done. But your conclusion is absolutely correct, that the company will be much less cyclical on a go-forward basis, and we'd expect the company to grow even in the face of a recession.

Yeah, and just to, again, I mean, we've talked about this, but just to put a couple more numbers on this, just to amplify what Craig was saying, I mean, utilities, orders on a year-over-year basis growing about 50%. On a trailing 12-month basis, about 40%. Data centers year-over-year, about 25%. And on trailing 12 months, about 35%. So these are big non-res numbers, to use your words, Dean.

That's great. Thank you.

Thank you.

Next, we'll go to the line of Chris Snyder with UBS. Please go ahead.

Thank you. I appreciate you squeezing me in. I wanted to follow up on some of the prior commentary around 2023 incrementals in that 30% range. And I know that matches kind of the targeted or more normalized levels to get to the 2025 targets. I guess the question was, it feels like the price cost is still in the company's favor. You guys mentioned earlier that productivity efficiency would return next year, so that has a margin tailwind as well. Are there any kind of offsets there that kind of push the incrementals back just down to that 30% or so? Thank you.

I appreciate the question, and I'd say that the other side of that equation is the investments that we're making inside of the businesses, and as we talk about some of these big growth trends that we're facing into, and quite frankly, we have a need to invest. And so we would intend to do that to prioritize growth and putting more feet on the street and investing in technology and the likes to ensure that we're in a great position to take advantage of this growth that we see there. So we still think 30%, we think, from a planning standpoint. We'll give you more details around perhaps a better number when we get to February next year. But we still think at this juncture, you have these countervailing forces. Tom mentioned a number of them as well, around whether it's entrant or pension or the like. And so we still think all-in 30% incrementals is still the right way to position kind of your models for now. And we'll update that as we know more next year.

Oh, thank you. Really, really appreciate all that color. And then just a quick follow-up on the reshoring announcements and the $1.3 trillion of planned investments that you guys highlighted, you know, matches a lot of the data that we've aggregated as well. You know, can you talk about how much of this is already coming through? Clearly, manufacturing construction has been very, very strong. And then also, you know, what kind of visibility does this provide? You know, these are very large, generally, you know, kind of slow-moving projects. Thank you.

Yes. No, I think to your point, and you hit on kind of, we think it's an important one, where no, we've not really seen today these 1.3 trillion of announcements. We've not seen today the impact of most of this or hardly any of this in our order book at this point. In some cases, it could be in the negotiation pipeline, which Tom indicated is up dramatically, but it's not reflected today in our order book and certainly not reflected in our sales. And so, Just another one of these things that gives us a lot of confidence around the future growth rate of our electrical business.

Thank you. Really appreciate that.

Thank you.

Next, we'll go to Joe O'Day with Wells Fargo.

Please go ahead. Hi. Thanks for taking the question. I wanted to circle back to the negotiation pipeline in the U.S. and talking about that kind of more than doubling and just a little bit more detail on kind of what you know, what you use to kind of determine or what qualifies as a major project. And then, you know, typically what you see from the timeline that goes from negotiation to order and then the timeline from sort of order to revenue generation.

Yeah, I'd say, I mean, the negotiation pipeline today, you know, I'd say it's, to your point, it's generally large projects. There's a lot of stuff that's going on today that's out in the distribution channel that we don't necessarily have great visibility to, but we do track large projects where we tend to be involved in specifying the application. And so these projects, we have historically tracked them and have great visibility to them. And as we mentioned, those numbers are going up dramatically. And I'd say in the cycle between a negotiation and order, I mean, it can vary. I mean, it can be You know, on the short end, 90 days, it can be, you know, six months. It varies depending upon the project. And from an order to a sale, once again, it can be as short as 90 days. It can be, you know, 18 months. You know, it varies quite widely depending upon the project that you're actually supporting.

Got it. And then on the distribution side of things, could you just talk about the mix of product and distribution that might be more kind of commoditized or off the shelf versus the mix that's more spec'd in and then anything that you could be seeing in terms of differing sort of inventory management trends, whether some of that more off the shelf if you're seeing inventories come down there at all as opposed to what would be more spec'd?

Yeah, I'd say to answer maybe the second part of your question, you know, today we don't really have almost any part of the business today where our distributors are saying we have more inventory than we need or want. And I think that's just a reflection of the broad-based strength that we talked about in our end markets. So, you know, some markets are growing faster than others. All of the markets are growing. And for the most part, we have distributor challenges around supporting their demand almost across the board today. Now, to your point around commoditization, we don't really sell anything that I would call a true commodity. If you think about in the electrical space specifically or even in our industrial businesses, most of what we do is highly specified. And you go from... In application engineering to designing a particular solution, you know, getting an order, you don't tend to find that you can, you know, trade stuff once you win a job or you win a project. You tend to deliver that project because it really is engineered into the solution. If you think about what we're doing in the electrical business, essentially, we're protecting assets and people. And if our stuff doesn't work, I mean, really bad things happen. And so what we really think that we sell, we sell a highly engineered solution and not much of which is what I'd call commodity. On the commodity side, you may have some wiring devices or the like that could be sold through our distributors or in some case could be sold through one of the big box retailers. But for the most part, most of what we do in our businesses are highly engineered and highly specified.

Very helpful. Thank you.

Thank you.

And we'll go to David Rasso with Evercore ISI. Please go ahead.

Hi. Thank you. In your mild recession scenario for next year, in Europe, do you see in that scenario where Europe remains in positive growth throughout the year? Obviously, the secular trends, I think, in North America for a variety of reasons, there's obviously more credibility in the ability to outgrow the market that much, outgrow a recession scenario. But do you see the same dynamic in Europe? And again, does it stay positive in your base case throughout the year?

Yeah, I mean, you know, it's a great question, Dave, and it's one that we obviously haven't fully modeled out. You know, clearly, you know, the range of possibilities around what happens in Europe is much wider than perhaps any other region of the world, given what's happening today in the Ukraine, given the uncertainty around energy and energy resilience. And so there's a wide range of possibilities in Europe that you could certainly imagine a scenario where the orders that we're currently seeing, orders continue to be pulled up well, We are also building backlog and have built backlog in Europe. But that could change quickly, you know, depending upon, you know, whether or not you have gas flowing, you know, into Germany. And so I think the range of possibilities in Europe are quite wide, which is one of the reasons why I said that, you know, while we're anticipating really good growth across the board, but we're going to be ready. And we will take a regional view. And if we need to flex, in Europe because they end up dealing with a more severe downturn than we're anticipating right now and more severe than the rest of the world. And we have a plan ready to deal with a scenario where markets fall perhaps more than we anticipated.

Would you mind sharing?

I'm sorry, go ahead.

Yeah, I was just going to add. I think it's important to note that, you know, in the quarter we did see order growth in Europe. And in some of the end markets, fairly strong for example, in commercial and institutions. So, you know, we do see some slowing, but we're still seeing growth there.

Well, you answered one of my two follow-ups there in a sense of you're saying orders are still positive in electrical global in Europe in the quarter. Any, if you share with us any sense of how large the backlog is in Europe electrical on a year-over-year basis?

I can, I mean, I don't have that number. I believe our backlog on a rolling 12-month basis in Europe is up 27%. I think the number is I have, so the backlog is still... 27 is what I have as well. Okay, so 27% is the backlog in Europe.

Yeah, and global is up 22 overall, yeah. Okay, so it's actually up more than the global number. Europe's even higher. Yeah, exactly. I think we're just trying to figure out how much coverage do you have if you can avoid cancellations into the 23 in Europe in particular to let, you know, let electrical America as an aerospace kind of drive the

You know, and as you can imagine for us, I mean, Europe, you know, as a percentage of our revenue, I mean, they're relatively smaller. So Europe today would account for, what, roughly 9%, 10% of the company sales. And so, you know, if you think about, you know, yeah, we could certainly absorb, you know, a bit of a slowdown in Europe and not really have an outsized impact on the overall company's performance, given its relative share within the organization and our mix.

I appreciate it. Thank you. Thank you.

And next, we'll go to Brett Lindsey with Mizuho Americas. Please go ahead.

Hi. Good afternoon. A lot of ground covered. Appreciate the additional thoughts on 23 markets. I guess if I work through the weighting of those arrows, I get something kind of mid-single digit, 5% to 6% range for market growth. But then I imagine you have some carryover price and perhaps some outgrow. So just curious how you would maybe dimension those other pieces.

You know, I think I'd say it's early for us to kind of give you the insight. We'll do that in February. But clearly there's going to be carryover price. I mean, you want to know that price is generally in the market data as well, by the way. And so when you think about a market index, There is some price built into that as well. You can debate how much is built in. Is it more or less than what you're assuming? But there is price built into that data. But it's just early at this point for us to give you any particular company-related growth numbers. I mean, markets are going to be good. We would expect, you know, generally to do better than markets. And so that would be a fair assumption. But it's just early to give you any more detail than that at this point.

Yeah, no understood. And just one more on the backlog, obviously very robust, but just curious if you could share some color of the margin profile of the orders being booked looks like relative to what's being shipped. I would expect there would be, you know, some favorability as material prices would come off highs, but anything you can share in terms of, you know, mix or price costs there?

You know, I'd say that, and as you know, we've talked about on prior calls, I'd say that, you know, we took, you know, some pretty unconventional steps early on, and in many cases went out and repriced the backlog. And so I would say today that our backlog today, you know, and the pricing, the margin, the backlog is not terribly different than kind of the way the business is performing today, the underlying profitability of the business today. You know, certainly there's a question around the future direction of commodity prices. and whether or not we see more or less inflation or deflation, that can change it. But the profitability and the backlog, I would argue, is not terribly different today than what we're seeing in our business.

All right, great. Appreciate the insight.

Thank you.

And we'll go to Phil Buller with Berenberg. Please go ahead.

Oh, hi. Thanks for taking the question. There's just one from me, please. I appreciate you don't break out price, but do you feel as though you're at or approaching a ceiling anywhere on price? You've clearly explained and are convicted about the demand side outstripping supply in most areas, which we can see pretty clearly in the order figures, but are there any areas that where you're now seeing price elasticity kicking back in, or have you managed to increase the price into quarter in a pretty uniform manner across the different businesses? Thanks.

No, I appreciate the question. The first thing I'll tell you is that if you think about our industries and over a long period of time, pricing tends to be sticking in this industry. Prices, once you get a price increase, they typically, you hold it. I think one of the big advantages we have is because it goes through distribution Price is obviously good for distributors. But more broadly than that, I'd say that we really today are not seeing our overall costs come down either. Because on the one hand, some of the major commodities that we buy have come off of some of their peak levels. But what we're really seeing today in the business is we're seeing, because of supply and demand, not just our supply and demand, but with our suppliers, we're seeing labor-related inflation. And so we're not today really in an environment where we're seeing deflation necessarily in our costs either on an all-in basis. But I think the bigger message is price does tend to be sticky. The idea of a ceiling, I think a ceiling is really a reflection of what happens to your input costs. And at this point, we do think that the worst is behind us in terms of inflation in aggregate. We think labor will continue to see inflation and perhaps at an accelerated pace, that'll probably offset some of the deflation that we're seeing on some of the major commodity inputs that we have. But in aggregate, we don't anticipate to go into a deflationary cycle. Okay, thanks a lot.

And with that, no further questions in queue. I'll turn it back to the company.

Hey, thanks, guys. We have reached the end of the call, and we do appreciate everybody's questions. As always, Chip and I, myself, will be available for answering any follow-up questions. Thank you for joining us. Have a great day. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.