Soma Somasundaram: Yes. Scott if you look at for the last two, three years, we have consistently expanded margins every year. And clearly there is a bit of a calendarization in our margin performances quarter-to-quarter. Given Q1 tends to be a softer quarter, it tends – Q4 to Q1, typically we’ll see a bit of a margin drop, and then we will pick up our expansion efforts from there. So when we look at 2023 or when you look at 2022 and versus 2023 at the midpoint of our guidance, we will expand margins close to 300 – a little over 300 basis points, right? So you’ll see as we go into 2023, continued expansion of that. And that will be driven by a couple of things. Number one, we do expect a positive growth for full year in 2024.
So that incremental will help. The second is our continued productivity efforts and continued growth in higher margin businesses, i.e., our Digital business and our Emissions business. So we do think that the mix of our businesses in the growth will also help. So to answer your question, we do expect continued margin expansion in 2024.
Scott Gruber: Got it. And looking specifically at drilling, that business used to post margins closer to 30%, it was closer to 25%. And I realized it’s going to take a hit here in 4Q. But just thinking about the medium-term, is 25% the new normal? Or should we be expecting something better than that high 20s, 30%? Where can that business get back to?
Soma Somasundaram: Yes, Scott, it’s a great question. I think there is a structural element around the continued drilling efficiencies that are driving the volume growth challenges in that business over a period of time. So, the business is definitely at 25% business. That’s no question in our mind. Can it get to a closer to 30% margin business is going to very much depend on volume. But what I would say is it’s definitely a 25% margin business at the state.
Scott Gruber: Got you. Appreciate the color.
Soma Somasundaram: It will take a hit in Q4 as I mentioned.
Scott Gruber: Right. Got it. Thank you so much.
Soma Somasundaram: Thanks, Scott.
Operator: Your next question comes from the line of Saurabh Pant from Bank of America. Please go ahead. And his line has just got disconnected. Moving over to the next question from Ati Modak from Goldman Sachs. Please go ahead.
Ati Modak: Hi, good morning, team. Can you mention that the Argentina revenue exposure doesn’t really exist, it’s more on the margins. And it sounds like there were activity expectations that drove the delta versus expectations for 3Q around guidance, especially some – but I’m wondering if there were any other things, maybe destocking in drilling technologies, any other factors you can provide any color on, and how do you see those going forward?
Soma Somasundaram: Yes. If you look at our shortfall to – first of all, we are disappointed with it, right? So our shortfall to our own midpoint guidance is about $35 million in top line, right? And I would say Ati, half of that is related to the U.S. land and particularly in PAT. Again, this is with respect to our expectation and PAT and drilling technologies. So roughly $16 million, $17 million of that $35 million is – shortfall is in U.S. land, in PAT, as well as in drilling technologies. The remaining $16 million, $17 million is a combination of two things. One is a shortfall in Argentina, and that is primarily driven by a delay in import certifications. And I’ll ask Ken to comment on that. Again, this is all related to this devaluation issue.
And then the remaining – another country, which where we had a shortfall compared to expectation is in Mexico. So Argentina and Mexico together contributed another about $15 million, $16 million to the shortfall. So there are three primary areas where we had shortfall to our expectation U.S. land, Argentina and Mexico.
Ken Fisher: Yes. Argentina was about $5 million of that revenue. And what drove that was we saw that government slow down or stop giving import certificates during the course of the quarter. And we weren’t the only ones that experienced that. We actually engaged with the U.S. Commerce Department and heard that a lot of imports were being similarly treated across a lot of sectors. And then the Commerce guys have actually been helpful in trying to get us those certificates and they’ve started to flow a little bit better recently.
Ati Modak: Got it. Thank you. Just as a follow-up, is there a way for us to gauge what the segment exposure is in Argentina? Is it evenly spread out? Is there a higher exposure in any…
Ken Fisher: It’s essentially – it’s all PCT.
Soma Somasundaram: Largely PCT.
Ken Fisher: There’s not a lot of PAT exposure there.
Ati Modak: Got it. And the other question I had is, you mentioned free cash flow growth over time. A lot of that from EBITDA growth and some margin expansion. I’m just wondering if there is any kind of color you can provide. You have a bunch of productivity projects ongoing. Is that the main driver? Are there other operating leverage drivers here as you think about hitting that 21% target and beyond?
Soma Somasundaram: Yes. I think the 21% target for us is, as I mentioned, is a combination of productivity and incremental revenue growth. That’s what I would say. And I think the free cash flow conversion of that 50% to 60% for us is very much intact. And I think you will see our business continues to be a capital light business and will continue to generate that 50% to 60% free cash flow conversion.
Ati Modak: Great. Thank you. I’ll turn it over.
Soma Somasundaram: Thanks, Ati.
Operator: Your next question comes from the line of Saurabh Pant from Bank of America. Please go ahead.
Saurabh Pant: Hi. Good morning, Soma, Ken. I’m sorry the line got disconnected for some reason, right when you called my name. Sorry about that, but thanks for getting me back on.
Soma Somasundaram: Good morning, Saurabh. Please go ahead.
