David Gitlin : I think it goes back to historical levels. I think what happened over these last couple of years is just very unique that as you saw some of the supply chain challenges that — and the underlying demand was strong. The consumer has been strong. You saw a lot of people getting in line to make sure that they had their orders positioned for when they need them. I mean, for example, light commercial. Light commercial for the school year, a lot of those replacements they want to see happen during the summer time. So people are making sure that with the supply chain uncertainty people are getting in the queue to have their position protected I think what you’ve now seen is in the shorter-cycle business, generally a return to more historic levels.
With some of the longer cycle businesses like for us, commercial HVAC, we’re still — again, where backlog is up 40% on a 2-year stack. We’re still elevated lead times and elevated backlog levels. I think that you would expect that to start to normalize. But if the underlying demand, which depending on the vertical remains strong, you’ll continue to see very strong growth in some of those key businesses. So I think there will be a leveling. That’s why we don’t get overly fixated on quarter-to-quarter orders because they can swing wildly much more than they ever would have in the past. We talked about them being up 40% or down 40%. We don’t swing with those. We look more at our backlog levels and our lead time to make sure that we see the strength that we expect to see.
Steve Volkmann : Got it. And do you think we’ll get sort of more normal by the end of ’24? Or does it take longer than that?
David Gitlin : No, I think that’s about right. I mean I think that some of the shorter-cycle stuff is starting together. We’re seeing more normal lead times in resi. I think that’s going to happen for Viessmann Climate Solutions, that they’ll start to get their backlogs back to more normal levels as you get into like the 1Q type timeframe. And then it just goes back to basics. So I think when you look at sort of the longer cycle stuff that’s sort of by the end of ’24, the shorter-cycle stuff is essentially there.
Steve Volkmann : Super. And then Patrick, as this happens, is there a chance to generate net income or free cash flow above net income for another year?
PatrickGoris: If we — it will — of course, it will depend on what’s happening with our working capital. And I think so far this year, we’ve done really well compared to the, obviously, compared to last year generally a whole lot more. We would have to make a significant additional dent into working capital. Clearly, that’s our objective, but obviously not ready to commit to that before February when we provide guidance for next year.
Operator: And our last question comes from Andrew Obin with Bank of America.
Andrew Obin : I really appreciate you guys fitting me in. Just a question on light commercial and just business mix, right? Because the growth in light commercial has been so spectacular. It’s a good margin business, and then in the face of resi declines and sort of stadia growth in Applied. As you look at North America, what does the business look like right now, sort of the mix between resi light commercial and applied? And how structural and sustainable is this mix going forward? Because clearly, it’s quite good for your margins.
David Gitlin : Well, look, the — obviously, resi’s far bigger business than light commercial. And to your point, Andrew, light commercial has been, I know, far better than many thought that we’re modeling it coming into the year, and we’ve been very pleased with the performance there. So resi is the biggest business, followed by commercial, followed by Light commercial. We think with some of the destocking that we’ll see in 4Q, we’re kind of in the switchover to 454-B in resi. We think there, we know volumes down mid-teens, sales down kind of mid-single digits for resi. We start to see recovery as we go into next year in that business. Light commercial is going to face some tough compares. But as I mentioned, a lot of those verticals remain very strong in light commercial.
And they’re also doing what the rest of the business is doing is very much leaning into connected devices and the aftermarket opportunity. And frankly, it’s a bit nascent in that space, and we think there’s a lot of opportunity there. And then I think commercial, we still are dealing with very significant backlog in the commercial side. The controls business has done extremely well. Aftermarket is doing very well, double digits there and with further growth there. So we think that with the strong backlog, we think eventually, lead times will kind of come back to normal for the North American commercial business. But they’re still elevated, still strong backlog. So they’re positioned for growth as we get into next year as well.
Andrew Obin : And just a follow-up question on commercial. Are you guys seeing the impact from mega projects? Because my understanding is that these semiconductor fabs, ABE factories require a lot of air conditioning, HVAC data centers. Can you just talk about what you’re seeing about growth and visibility in these high-growth verticals on the commercial side?
David Gitlin : Yes, Andrew, that’s been very encouraging. We’ve done very, very well on many of the mega factories, and that includes both data centers. It includes factories associated with the Chips Act and some of the new construction activity there with all the Gen AI type activities. So we have solutions not only that we’re doing more creative solutions with the high temperature and very high temperature heat pumps we mentioned. We’ve introduced new offerings like our mag bearing design for the Applied. We have a business that we bought a couple of years back called Nlyte that really complements our ALC controls business so we can provide sort of holistic controls to identify with specificity, where is the heat getting generated in a data center and how we dissipate that heat most efficiently.
It’s effectively an integrated AI tool in and of itself. So we love to see the continued construction with these mega projects, and we’ve gotten more than our fair share of new wins there.
Operator: That concludes the question-and-answer session. I’d like to turn the call back over to Dave for closing remarks.
David Gitlin : Well, look, let me just thank all of you, our investors, for their continued confidence, and let me thank our team. We have folks working tirelessly while we perform and continue to transform the business. So my hats off and thanks to the team. It’s just not only working so hard, but working so well and together as a team. And with that, we’ll conclude the call. And of course, Sam will be available for the rest of the day to everyone. Thank you all.
Operator: Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.
