Operator: Our next question comes from the line of Chris Snyder of UBS.
Chris Snyder: I wanted to just ask about confidence and the ability to hold utility margins at around these levels into next year. Obviously, up a lot year-on-year, and it felt like a big piece of that expansion was obviously on price cost. So kind of just talk about expectations there into next year.
Gerben Bakker: Maybe I’ll start, and Bill will fill in. And if you look at the margins, particularly to the utility but I think it’s across our business that in ’23, we looking to expand our margins there by 700 basis points, that’s quite attractive. And our view is going into ’24 is that we can grow profitably on that base. And one of the drivers is going to be volume next year. We do expect that business to grow in volume. We expect to manage through this price cost productivity equation that we talked about earlier and we’ll continue to invest in the business. So I think as a set up to think of profitable growth on top of this base is the right way in the experience. And certainly, we’ll come back in January to provide more color on the different moving pieces and where that may fall with margins more specifically.
Chris Snyder: And then maybe just on the price side of utility. I mean it seems like, obviously, there’s been a lot of price the past couple of years. It seemed like the drivers of that was obviously metal — raw materials inflating higher? And then also just supply couldn’t keep up with the strong demand, but now with deflation and it seems like some supplies in a better place, allowing the channel to destock. Any change around price push back in the channel?
Gerben Bakker: I would say on the utility, we’re not seeing it. And you mentioned a couple of things that caused the price, but I’d say beyond metals, just general inflation we’ve seen over the last year, just incredible nonmaterial inflation. And I think we talked in the past of what the pure commodities is and it’s actually a relatively small part of it. The bigger part is the purchase components, the labor and all that has inflated pretty well. The other thing that we continue to have discussions with our customer around is the investments that we’re making back in our business. And you don’t always see that reflected in our operating performance or EPS, but the level of CapEx and the elevation that we’ve done in CapEx and other areas is an area that clearly benefits our customers short term and long term.
So I think much more of the discussion continues to be around the value that we can add by the product and the services that we deliver than price first as a lever, not unimportant but it’s not the leading part of the discussion. .
Operator: Our next question comes from the line of Joe O’Dea of Wells Fargo.
Joe O’Dea: First question, I just wanted to ask if you’re seeing higher funding costs factor in the conversations with utilities and their spend plans at all in your sort of comments around ongoing mid single digit growth doesn’t really seem like it. And then just related to that, I think your kind of outlook for the transmission and substation growth to outpace distribution growth, maybe a little bit more context on sort of what’s behind in driving that.
Bill Sperry: I mean I think on — let me take the second question first. Transmission and substation growth, I think is being impacted quite a bit by renewables as well as electrification trends. So you need a new substation if you’re doing a utility size solar farm that needs to be generated and then transmitted and then step down again, to the extent you had some kind of massive data center or battery factory, so electrification impacts like that that kind of increases the demand on substations. And in addition, you just have those 53,000 substations, you just have some aging equipment that needs to be updated. So it’s not that that distribution has bad growth outlook. It’s just that the projects on the T and substation side, we just think are going to outgrow a little bit.
We did a little deep dive last quarter on that because we think it’s an interesting little subset of the space. As far as interest rate impact on project management, I think, it obviously is weighing on people’s consideration of cost of capital. And I just think the returns on their projects are just higher than the cost of capital. So we just — we haven’t seen the dialog step down because of interest rates but that means — I don’t know, we’re not — we just haven’t seen that yet.
Gerben Bakker: And the other thing that will help is the infrastructure bills that are starting to come out. We’re seeing some of those being released right now. We just recently saw money being released in those areas. A good bit of those are going into transmission projects that we’ve been following. So that gives us confidence that certainly over the more near term, that area is a little stronger. But possibly even to your interest rate question, I think bodes well for us going into next year, particularly the second half.
Joe O’Dea: And then just on the sequential margin trends in utility. I think clearly a mix impact with the comms and control strength within the power side and anything from a mix side there to be mindful of in terms of the sequential move, or was it really just the comps and controls mix?
Bill Sperry: Yes, I would say nothing inside of Power Systems would create sequential issues.
Operator: Thank you. I would now like to turn the conference back to Dan Innamorato for closing remarks. Sir?
Dan Innamorato: Great. Thank you, everyone, for joining us, and we’ll be around all day for calls. Thank you.
A – Gerben Bakker: Thank you.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
