Operator: Thank you. And the next question comes from Joe Ritchie with Goldman Sachs.
Joe Ritchie: Hey, just maybe — can we just start on EFS margins? I know that you’ve got the acquisition going through there as well. If you kind of think about negative organic growth, the EBITDA margins now north of 30%, north of 32%. How do we think about the trajectory of these margins from here? Fully recognizing that I think that there’s a step down expected in 4Q.
Sara Zawoyski: Yes. I think here’s what I would say is, one, I think that team has done an incredible job of managing that price/cost equation. I think we’re beginning to see that productivity ramp within the four walls as we would have expected kind of heading eager into the back half. I think the other piece that’s really showing up in that Q3 number is the mix that I referred to in our prepared remarks. I mean we just had sort of an uneven mix of revenue, if you will, commensurate with what that typically looks like and that’s driving some of that 32-plus-percent return on sales for that quarter. But if we look just going ahead in Electrical & Fastening and I would just argue that this is cut across Enclosures as well, we continue to see strong underlying margin expansion opportunities and it goes back to with volume in new products.
Those new products tend to have higher margins because of the value that we’re providing to our customers, the supply chain excellence. While we’re improving productivity — improving productivity within the four walls, we’re still not at our normalized levels of productivity, if you will. So there’s still plenty of runway there to go. We’re also doing things like transportation optimization, lean automation, simplification of product families. So there’s a lot going on there as well, along with just general functional excellence that you do see the leverage we’re getting from an SG&A perspective. So there’s lots of things that we’re doing to drive that ongoing future margin improvement within Electrical & Fastening Solutions as well as the broader segments as well Enclosures and Thermal.
The only other thing I would make is that Q3 to Q4 too does include the incremental investments we plan on making within the ECM acquisition as well that’ll really begin to ramp here in Q4 and into next year.
Joe Ritchie: Got it. That’s helpful, Sara. And I guess maybe piggybacking on Julian’s question around commercial. It’s interesting, I mean, if you take a look at the starts data, it’s been pretty tough over the last several months and then you look at the performance of each of your different businesses and depending on the business, commercial resi has been growing or not growing. And just it’s kind of hard to square it all. And so maybe just kind of give us a little bit more insight as to why potentially commercial resi might be holding up a little bit better in EFS and in Thermal, if there’s anything you could add there.
Beth Wozniak: Yes. I think it has to do with our product portfolio. So if you think of what we do with our nVent CADDY brand, which is all around supporting power and data infrastructure, and you think about it’s really applicable to any type of construction or remodel. And we just think everything is getting smarter and there’s more power and data what required in a building, in a hospital, whether it’s industrial, construction, new plants, et cetera. And we’ve done a lot to invest in new products in that product line. So our new product fatality there is approaching 20%. And when we acquired EFS, it was single-digits. So seismic, just different things that we’re doing that I think that portfolio ubiquitous and where we are.
Our commercial portfolio in Thermal is not as ubiquitous just because we’re doing free switch protection or we’re doing under floor heating or we’re doing maintaining hot water heat tracing within a building. So it’s just — the applications are a little bit different and I think that’s one of the things that we’re seeing the difference there.
Sara Zawoyski: And maybe one of the things to add just to the Thermal Management business has more of the resi as well, impacting that from a growth rate perspective.
Joe Ritchie: Yes. I guess maybe that’s very helpful and appreciated all that detail. Maybe the follow-up there is what, I mean is there — should we be reading into the commercial starts data and ultimately what that means for your business?
Beth Wozniak: Well, this is one where we’ve got pockets of growth. And I think one thing we’re seeing is just construction in general, right, which tends to be a little bit more on that. Industrial construction is driving growth for some of our products. There’s a lot of investment in new battery plants and other things. And sometimes those products, we can’t — we just — we can’t tell because it may look more commercial even though it’s headed to industrial construction. I think that is another area that’s driving growth for us.
Operator: Thank you. And the next question comes from Vlad Bystricky with Citigroup.
Vlad Bystricky: So just stepping back I wanted to ask you, as we’ve seen increased pressure on interest rates recently, just what are you hearing from your channel partners in terms of how increased cost of funding their own inventory is influencing sort of how they’re approaching this destock cycle and whether you see some risk that destock could be — they could swing further in the other direction versus recent cycles just given their increased cost of financing.
Beth Wozniak: Well, they don’t really — they’re not really that explicit in sharing with us how they’re thinking about it, but we know that’s certainly one of those considerations. And we think that’s what’s played out over the course of this year that they’ve looked at their cost of capital and inventory and with supply chains improving, it’s a multitude of factors, but we certainly think that’s what’s played out here in 2023.
Vlad Bystricky: Okay. That’s helpful. And then, just maybe you mentioned, I think in Thermal, China, low-double-digits growth. So can you just talk about specifically what’s driving that in China versus not a great overall backdrop in the region? And how you’re thinking about sort of sustainability of good growth in China for Thermal?
Beth Wozniak: Well, one of the things I would say with our business in China, we’ve got a lot of project type based business, and so some of that could be on the chemical side or on the energy side. And that’s where over the last little while, we’ve been working on projects and orders and started to see some of that growth there on that industrial side for us.
Vlad Bystricky: Great. That’s really helpful. Thanks. I’ll get back into queue.
Beth Wozniak: Thank you.
Operator: Thank you. And the next question comes from Jeff Hammond with KeyBanc Capital Markets.
