SPX Technologies, Inc. (NYSE:SPXC) Q4 2022 Earnings Call Transcript

SPX Technologies, Inc. (NYSE:SPXC) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Good day and thank you for standing by. Welcome to the Q4 2022 SPX Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Clegg, Vice President of Investor Relations and Communications. Please go ahead.

Paul Clegg: Thank you and good afternoon everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer and Mark Carano, our Chief Financial Officer. Also available during Q&A will be our Chief Accounting Officer, Mike Reilly. The press release containing our fourth quarter and full year results for 2022 was issued today after market close. You can find the release in our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks.

A replay of the webcast will be available on our website until March 2. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continued operations only. You can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to today’s presentation. Our adjusted earnings per share exclude primarily non-service pension items, asset impairment charges, amortization expense and a loss on the divestiture of asbestos-related assets and liabilities. One change you will notice in our press release and our 10-K is that we have aligned our definition of segment income with the way it is presented in our earnings presentation, which excludes the impact of amortization expense and acquisition-related items.

Finally, we will be conducting meetings with investors over the coming months, including at the UBS Infrastructure and EMC Conference in Dallas as well as at Sidoti’s virtual SmallCap Conference. And with that, I’ll turn the call over to Gene.

Gene Lowe: Thanks, Paul. Good afternoon everyone, and thank you for joining us. On the call today, we will provide you with an update on our consolidated and segment results for the fourth quarter. We’ll also provide guidance for 2023. This is our first call with Mark Carano, as our CFO. Mark joined us in early January and has been quickly coming up to speed. Mark is a great fit with SPX’s growth and operational excellence initiatives. He brings a depth of experience in strategy, finance and business development. He has an impressive track record as a public company CFO and a strong background in engineered products, growth investments and operational excellence initiatives. We’re excited to have him here. Mark, welcome to the team.

Mark Carano: Thanks, Gene. I’ve already met several of you who are on the call today, and I’m looking forward to getting to know more of you over the coming weeks and months. SPX has an impressive team and a great business that is well positioned for the opportunities ahead. I’m excited to be here.

Gene Lowe: Thanks Mark. Now I’ll touch on some of the highlights from the quarter and provide some perspective on our 2023 guidance. Our Q4 results exceeded our expectations with strong performances in both HVAC and Detection & Measurement. Both segments drove revenue and margin growth, and we continue to experience solid demand across our end markets. During the quarter, we made further progress on a number of our key initiatives, including the establishment of ESG commitments, additional progress in our digital and continuous improvement initiatives and a significant reduction in legacy liability exposure. Looking ahead, we are starting 2023 with a historically high level of backlog. We are also seeing some easing of supply chain and labor constraints, which along our continuous improvement, along with our continuous improvement initiatives, is benefiting our operational execution.

Today, we are providing 2023 guidance for adjusted EPS in the range of $3.30 to $3.55, which reflects approximately 10% growth at the midpoint. Turning to our high level results, for the quarter, both segments helped drive strong organic revenue growth of more than 18% and our recent acquisitions performed well. Adjusted operating income grew 48% year-on-year with 290 basis points of margin expansion. On a full year basis, adjusted operating income grew 39%. I am very pleased with our Q4 and full year performance as well as our momentum entering 2023. Despite mixed macroeconomic data, we believe our diverse portfolio remains resilient with significant capital availability and active acquisition pipeline and multiple organic growth and margin enhancement initiatives, I am confident in our ability to deliver on our SPX 2025 plan.

As always, I’d like to touch on our progress in our value creation framework. As you look back over 2022, our teams worked hard to mitigate supply chain and labor constraints, leveraging our business system to meet strong levels of customer demand. We introduced multiple new products, made progress on our key initiatives and reduced complexity and risk by divesting our legacy asbestos liabilities. I am also very proud of our momentum on our ESG initiative. SPX is well positioned to thrive in a Paris accord world where long-term targets on carbon emissions are realized. From our highly efficient cooling towers to our inspection equipment that helps tech and remediate leaks and underground water and gas pipes, SPX offers a wide array of innovative products that enable a safer, more efficient and sustainable future.

In 2022, we more formally incorporated ESG as a key element of our strategic planning process for each business unit, significantly expanded our disclosures, adopted a human rights policy and saw considerable increases in our scores among key ESG rating entities. Recently, we adopted company-wide sustainability commitments, including a 30% reduction in greenhouse gas emissions intensity by 2030. We’re also named by Newsweek as one of America’s most responsible companies. We are honored to be recognized and pleased with the hard work of our team is being acknowledged. Another area where we have strong momentum is in our digital initiative. As the new name of our company reflects, it is more important than ever to leverage technology solutions to help our customers continue to be successful.

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Each of our platforms is focused on providing innovative designs, products and tools to enable our customers to be more efficient, productive, safer and more sustainable. A few examples of where we continue to see customer traction include our Pro Tools tech app within our HVAC heating business, which helps field technicians become hydronics experts by putting our boiler product information at their fingertips in a mobile platform. In 2022, we took market share in boilers, and we believe that our digital initiatives were a key reason for this success. In our cooling business, our CoolSpec software is enabling customers to compare, select and configure highly engineered cooling solutions faster and easier than ever before. In Detection & Measurement, we’re seeing strong adoption of Genfare Link, our modular cloud-hosted fare processing platform, which provides valuable data and analytics and efficient management of transportation networks.

With Genfare Link transportation authorities can now offer account-based rider management, website and portal support and customer service functions all in one place. At this point, we have won more than 50 accounts on Genfare Link, and our CS branded net software platform continues to develop new ways to drive efficient management of critical infrastructure, in municipal water authorities, including the use of AI to prescreen potential areas of concern and the ability to geotag maintenance priorities with LiDAR-enabled robotics. I will now turn the call to Mark to review our financial performance.

Mark Carano: Thanks, Gene. We are very pleased with our performance for the quarter and full year. In the fourth quarter, our adjusted EPS grew 33% year-on-year to $1.17. Full year adjusted EPS was $3.10, also up 33% year-on-year. The most notable adjustment to our GAAP results is a loss on the previously announced divestiture of our asbestos liabilities and associated assets. Other customary adjustments include the removal of mark-to-market pension gains, acquisition-related costs, amortization expense, and asset impairment charges. In addition to the segment drivers, which I will review momentarily, a higher effective tax rate created a year-on-year headwind to adjusted EPS in the fourth quarter of approximately $0.12 compared with an unusually low effective tax rate in the prior year.

A review of our results reflects strong growth across our company. Revenues increased 22.7% year-on-year, including 18.4% organic growth with strength in both our HVAC and Detection & Measurement segments. Acquisitions contributed inorganic growth of 6.3% related to Cincinnati Fan and ITL. Partially offsetting our top line organic and acquisition growth was a 2% FX headwind resulting from the strong dollar. As a reminder, currency fluctuations generally have a little effect on our overall profitability due to significant natural hedges in our cost structure. Segment income grew by $23.2 million or 34.5% to $90.5 million, while margin increased 190 basis points. These increases were driven by strong performance in HVAC and to a lesser extent, in detection and measurement.

In addition, price/cost remained a modest tailwind in both segments. For the quarter, in our HVAC segment, revenues grew 29.5% year-on-year. Heating and cooling both contributed to organic growth of 21.1%, driven by increased volume and price in both platforms. During the quarter, we also benefited from improvements in the availability of labor and the easing of supply chain constraints. Inorganic growth was 9.4%, reflecting the acquisition of Cincinnati Fan. The strong dollar was a modest FX headwind. Segment income increased by $19 million and margin increased 320 basis points, reflecting improvements in throughput from favorable operational execution, particularly in cooling and favorable price cost trends in heating. Overall, bookings remained solid.

And in the fourth quarter, segment backlog increased by approximately 7% year-on-year to $243 million. For the quarter in Detection & Measurement, revenues grew 12.2% year-on-year. Location and inspection, Commtech and Aton were all strong contributors to organic growth of 14.4%. The strong dollar resulted in a 3.7% currency headwind. Segment income increased by $4.2 million and margin grew 20 basis points. We continue to experience solid run rate demand and a strong environment for project sales. Segment backlog at quarter end was $250 million, up 63% year-on-year, primarily due to large project orders. Turning now to our financial position at the end of the quarter, our balance sheet remains strong, and we have significant liquidity available to support our strategic growth initiatives.

At quarter end, we had cash of $157 million and no borrowings under our revolving credit facility. Our cash balance included the impact of divesting our asbestos liabilities, which was funded with approximately $139 million cash on hand. As a result, we concluded the year with net leverage of 0.4x. For the full year, adjusted free cash flow was approximately $97 million. In 2022, cash generation was affected by strategic working capital investments related to supply chain management. During 2023, we anticipate a return to a more normalized run rate of cash generation. Moving on to our guidance. We are initiating 2023 guidance for adjusted EPS in a range of $3.30 to $3.55. The midpoint reflects year-on-year growth of approximately 10%. One notable change between 2023 and prior years is that we now anticipate an effective tax rate of approximately 24% compared with an effective tax rate of approximately 21% in 2022.

The change is due to a higher percentage of income in the United States and higher statutory rates in certain jurisdictions. In our HVAC segment, we anticipate revenue in a range of $935 million to $955 million. Segment income margin is anticipated to be in the range of 15.25% to 16% or an increase of approximately 80 basis points at the midpoint, reflecting more efficient production in our heating and cooling facilities and a favorable price cost environment. In our Detection & Measurement segment, we anticipate revenue in a range of $565 million to $585 million. Segment income margin is anticipated to be in the range of 20.5% to 21.5% or a modest year-on-year increase at the midpoint. In 2023, we anticipate significant project revenue at lower than typical project margins due to the amount of pass-through content in certain large projects.

With respect to the cadence of the quarters, we anticipate that it will be similar to 2021 when approximately 43% of EPS fell in the first half of the year and 57% in the second half. As always, you will find modeling considerations in the appendix to our presentation. I’ll now turn the call back over to Gene for a review of our end markets and his closing comments.

Gene Lowe: Thanks, Mark. Overall, current market conditions remain supportive of solid growth in 2023. Across our HVAC businesses, supply chain and labor constraints remain, but are improving. In HVAC cooling, we continue to see solid demand for our products in North America and the APAC region. In our heating business, bookings remained steady, driven by commercial and industrial demand and residential replacements. And in Detection & Measurement, our run rate demand is solid overall with some regional variations while the environment for project orders remains attractive. In summary, I’m pleased with our very strong close to the year and our momentum on multiple important initiatives. We are beginning 2023 in a strong position to achieve full year earnings growth of approximately 10% at the midpoint of our guidance.

With a solid balance sheet and an active M&A pipeline, we are well positioned to continue compounding our growth through strategic acquisitions. I’m proud of our highly capable experience team, and I’m confident in our ability to continue executing on our value creation road map for years to come. As we look ahead, I’m excited about reaching our SPX 2025 targets. With that, I’ll turn the call back to Paul.

Paul Clegg: Thanks, Gene. Operator, we are ready to go to questions.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Damian Karas of UBS. Your line is open.

Damian Karas: Hi, good evening, everyone.

Gene Lowe: Hi, Damian.

Mark Carano: Hi, Damian.

Damian Karas: Hi. So I wanted to open by asking you about your sales outlook. Gene, I know you guys try to be very prudent about setting achievable financial targets. But just hearing some of your commentary related to the healthy backlog, continued orders growth and kind of what you’re seeing across your business, I guess, kind of the 4% or so sales growth maybe just sounds a little bit light. I was wondering, is that related to just kind of the tougher comps that you’re going to have? Or are you factoring in some potential macro weakness in our year €“ this year? Really, any color on kind of how you’re thinking about the sales outlook.

Gene Lowe: Yes. So I think it’s a good question, Damian. I think if you look at it, a very positive year in €˜22, we had approximately 33% earnings growth, about 10% this year. I do think when we put together our plan, we did look at the macroeconomic environment. As you know, GDP is expected to be relatively flattish or no growth in North America, which is really the bulk of our sales. Having said that, where we sit to today, we do come in with a very strong backlog. And in our end markets, we’re seeing solid order rates. So what I would say is what we have out there for our guidance is what we believe is the appropriate guidance have out there. Having said that, we are always looking to achieve higher than that, so that’s €“ you always want to achieve higher. And I don’t know if you have any other comments you guys would like to share.

Mark Carano: Yes, Damian, I’ll just kind of add to that. Listen, there is a number of factors out there that are going to probably impact how we fall within the range that we put forward. As Gene mentioned, the macro environment, right, the signals are mixed out there today, look at things like non-resi and some of the leading indicators that folks look at unclear what they are signaling they are probably flashing yellow. Supply chain and labor, those are moderating for us. But I would say we’re not out of the woods on both of those issues yet, getting better, but not back where they were. And while price cost has been a tailwind for us in the first half, what we expect it will be in the first half of the year, we don’t have a lot of visibility on what that might look like in the back half of the year.

So if you sort of think about the businesses and some of the elements you would think about on our HVAC business, particularly on the heating side, weather is obviously a key element in that business. That obviously is something that will play out more in the back half of the year, but it definitely drives that business and its performance. Cooling, despite my comments on the leading indicators and caution around those, while we aren’t seeing weakness there, our visibility is limited in that market out up to about 6 months. So it’s hard for us to see much beyond that. And then on the D&M side that has a slightly different profile. But as you know, a portion of that business is short cycle, particularly the radio detection business, which is more sensitive to the economic environment and in the event that there is weakness towards the back half of this year.

And we would expect that business would be impacted by that. So I think net-net, I mean, our view is it’s a reasonable range and targeting kind of this 10% earnings growth based off of the revenue and segment income guidance that exists.

Damian Karas: Understood. Appreciate all of that. And then my second question is with respect to the Detection & Measurement margin guide. So you’re expecting some nice top line growth, kind of mid-single digits, but more flattish type margin trajectory. So is that primarily mix related? Or maybe if you could just kind of lay out the margin bridge for D&S and how you’re thinking about that.

Gene Lowe: Yes. Damian, I mean, I’ll start. It’s really €“ you hit on it. It’s primarily a mix issue, right? We’ve got some large project orders in there that we mentioned that you saw or we referenced in the backlog and they include some pass-through revenue, which ultimately results in what, I guess, I would call a lower than average margin that we see from these projects and in that business.

Damian Karas: Got it. Makes sense. I will get back in the queue. Thanks, guys.

Gene Lowe: Thanks, Damian.

Operator: Thank you. Our next question comes from the line of Bryan Blair of Oppenheimer. Your line is open.

Bryan Blair: Thanks, guys. Great finish to the year.

Gene Lowe: Thanks, Bryan.

Bryan Blair: Obviously, EPS came in solidly ahead of expectations. Maybe offer a little more color on the sources of the $0.20 beat. And I guess, I’m particularly curious if we should consider anything one-time-ish in that regard.

Paul Clegg: So Brian, first of all, just €“ I’ll start. The €“ this is Paul speaking. A lot of it was really around really strong execution. You’ll see that we have very strong results in our HVAC business in both heating and cooling, where we have large backlogs. And as supply chain improved and our labor position also improved, we were able to get through nice amounts of that backlog and drive better throughput in our plants in HVAC.

Gene Lowe: Yes. And I think, I mean, just adding on to that, right, that’s really what drove the margin increase you saw in HVAC quarter-over-quarter, year-over-year, the 320 basis points, right, as supply chain is as or the labor environment and its impact on some of our plants receded somewhat. We were able to really drive throughput.

Bryan Blair: Understood. Results were excellent. Maybe offer some additional detail on infrastructure opportunities, the SPX platform is most likely to benefit going forward and where and when we may see those tailwinds really accelerate and read through to growth?

Mark Carano: Yes. Brian, I’ll give you some color on that. I think that the most immediate place we see when we look at that is more in the Detection & Measurement side, I’d say the first place that we’ve seen it would be on transportation, our fair collection platform, where there is been a lot of activity and you see the municipalities, some of the larger projects that they have out there are really starting to move to fruition, and we see that as something that’s actually happening right now. If you kind of look across our portfolio there is a lot of different places that the infrastructure monies could be beneficial. Having said that, it’s not all at the same time. It’s not all year one. You look at, for example, our lighting business, where we provide lighting solutions for wind mills or 5G towers.

Those don’t typically go up in a few months. It’s typically a longer process. And so we’re typically at the tail end of that process. On the other side are things like fare collection or some other areas. So I do see it hitting a lot of areas. I would also say on the cooling side, we’re seeing some pretty interesting pockets in a couple of areas. We are seeing batteries being quite intriguing. We’re seeing semiconductor and data center activity as being very healthy, and those typically have a lot of needs for our type of cooling equipment. So I’d say that’s an area that I think is seeing some benefit from some of the government funding. It’s something that should be out there for a number of years. Paul, what €“ I think what I want to bring up is always radio detection.

Radar detection, as you know, we’re the leader in underground scanners. That’s the part of our location and inspection platform. That’s really a good proxy for economic activity because you have to scan before you dig for Google Fiber or whether you’re putting in gas lines or whether you’re putting in non-resi buildings or hospitals, educational any type of activity bridges you need to scan typically, and that is a net driver of end market demand for us. So the more general activity, you’ll see some of our infrastructure technology get pulled along with that. CUES is our last one that I’ll highlight, which is robotics for water and wastewater applications. And we have seen some monies that have gone to the municipalities there. We haven’t seen that converting into orders as of yet.

We are seeing some programs where there is some opportunities. So if you look at it across the portfolio, I do think this will be a net benefit to us over the next couple of years. We do see some areas we this provide some nice demand support for us.

Bryan Blair: All helpful detail. And if I can ask one more, the tone on your M&A opportunity is unsurprisingly positive. Any additional color you can offer there in terms of the progression of your M&A pipeline, any shift in composition of the funnel, seller expectations, actionability over the near-term? Anything along those lines would be great.

Gene Lowe: Yes. Brian, I’d say that overall, we feel really good about our strategy. So, for each of our six platforms, we have very detailed growth plans, and we’re executing against those. In terms of the activity level, I would say it is a very healthy level of activity. We did see some slower level of activity than some of the COVID years, but I would say that’s not the case right now. We are seeing very healthy levels despite where interest rates are today. So, we are very pleased. We haven’t seen €“ it’s interesting. We always get the question on multiples when things are very high, they are going up and they are €“ when things are going the other way, they are going down. We are very disciplined on our multiples. As you know, we have acquired some really good companies to put the engineered products, leading positions, typically 20% EBITDA, sometimes more good growth rates.

And on average, we have brought these in at around 10x to 11x. And we don’t see any material change in that profile. We have always said, if you look at a larger opportunity, you could get a higher return on some of those. But where I sit on our growth opportunities for €˜23, I think we have a very attractive set of growth opportunities. But having said that, as we always caution, we are going to be very disciplined here and we are going to be very careful. But I would say we are feeling very positive on the program.

Bryan Blair: Understood. Thanks again guys.

Operator: Thank you. Our next question comes from the line of Steve Ferazani of Sidoti. Your line is open.

Steve Ferazani: Good evening Gene. Welcome Mark. I do want to follow-on that last question in terms of how the €“ how well you are now positioned to hitting those SPX 2025 targets. I think we are at now almost 10 months, 11 months since the last significant acquisition. I know they hit when they hit, but any reason to start pushing that back given that the length of time between the most recent acquisition?

Gene Lowe: Steve, I don’t believe so. I think you are spot on. It was a slow year. Really, the only bolt-on we did was IPL. That was our slowest year in 4 years. There is various reasons for that. One of the ones I will point out was the magnitude of the sale of our asbestos liabilities where we had to reorganize the company, restructure, sale, did consume a lot of management time and attention. In addition to various things that happened during the year that we don’t give color on what didn’t happen, I guess you could say. But what I would say is that I feel very good about 2025, and I feel very good about our pipeline. So, we have a very strong balance sheet. We are sitting here at 0.4x net debt, and we think we have some very smart ways to deploy that going forward. And so really, it’s up to us in executing it. But yes, I don’t €“ to answer the primary part of your question, I don’t feel we need to move back our 2025 targets.

Steve Ferazani: Great. Thanks. And then also on capital allocation, Mark, you noted that you expect more of a normalization in terms of working capital, which would indicate much stronger cash flow in 2023. Any thoughts outside of M&A, would you be looking at debt reduction or anything else you might want to do with that what should be increasing cash flow?

Mark Carano: Yes. I mean I think listen, as Gene kind of alluded to, right, our first focus is on growth, whether that would be organic investing in the business in CapEx or inorganic and driving the business in that method. I think with respect to other return of capital options, we have repurchased shares in the past. That was at a unique moment where we felt like the stock was undervalued at that time. And clearly, we will have a keen eye on that and wouldn’t rule that out as an option. But I wouldn’t say it’s sort of a primary focus at the moment with respect to deployment of capital.

Gene Lowe: Yes. I would say we kind of have allocated up to 10%. And I think that’s always out there. If we see dislocation in the stock, which we had last year, I think we are very comfortable, but we do see some very attractive growth opportunity, I think so.

Steve Ferazani: On that note, it sounds like CapEx is a little bit higher this year, $25 million.

Mark Carano: That’s right. And we are looking €“ yes, we are looking at some various growth opportunities. We have probably leaning a little bit more towards the HVAC business, both heating and cooling at the plant level, where there are some strong opportunities to improve our overall throughput, efficiency and growth rates. So, that’s what I don’t anticipate that, that will be sort of a permanent feature of our cash flow. But for this year and perhaps next year, you might see a little bit of an elevated level while we make those investments.

Steve Ferazani: Great. If I could squeeze one last one in. Just to go back to the really healthy HVAC margins this quarter, and you talked about working for more backlog. But as I recall a quarter ago when you were guiding and there was some caution there that you were going to see some older priced backlog work through. I am just trying to figure out how that kind of worked itself out.

Mark Carano: Sort of how that syncs with our €“ with the margins that we

Steve Ferazani: With a higher margin if you had some much more price backlog that was sitting in there.

Mark Carano: Yes. But we were pushing through a lot more volume, Steve. And I think that’s really the driver there. As you look at those €“ there is a certain amount of efficiency that you see as you have the labor on site and have all of the pies or most of the suppliers that you need to drive efficiencies. You are not having to switch people from different lines and things like that. So, that all plays to a much nicer drop through covering those fixed costs and being able to push up those margins in the fourth quarter.

Gene Lowe: Yes. I think we feel good about where our price-cost is. I mean we feel like where we are supposed to be. And we are getting the margins associated with that. And one thing, Steve, you asked about on debt repayment, it’s probably worth noting our term loan A is locked €“ it’s low-2s. We are not going to pay back our term loan and you are sitting at 2.2% or so, though that gives us some nice again some further than it was today…

Steve Ferazani: Fair enough. Thanks. Thanks for the questions.

Gene Lowe: Thank you.

Operator: Thank you. This question comes from the line of Damian Karas of UBS. Your line is open.

Damian Karas: Hey guys. Just a few follow-ups there. First, on HVAC, I was wondering if you could maybe parse out kind of the growth expectation for heating and cooling. Is it kind of the same or expecting one kind of stronger than the other?

Gene Lowe: So really, we would see more of the growth come from the cooling side. Heating, as you know, Damian, when we enter the year, we are typically more reliant on weather in the fourth quarter to determine what that fourth quarter heating throughput is going to look like or the fourth quarter volumes. That wasn’t the case in 2022. As you know, we were looking at a fairly high backlog going into the fourth quarter, and we are able to execute well on that. But as we go into this year, that’s a consideration we have to take into account in our guidance.

Mark Carano: And I think Paul, it sort of ties back to some of the comments Gene made earlier about some of the opportunities that we are seeing for our cooling product, right, that are being driven by some of this infrastructure spend, so.

Damian Karas: Okay. Great. And then 2022, I guess from a free cash flow perspective was a little bit of a messy. Obviously, you had the asbestos matters, but working capital, also a bit of a drag. So, how are you thinking about the cash flow outlook from here? Do you think you can get back to more like a 100% conversion number this year, or is it going to take a little bit more time?

Mark Carano: I think €“ Damian, I think we think there is a path back to a more normalized range of free cash flow conversion. My expectation is it would be somewhere in that 90% to 100% range as I think about 2023. I do think working capital will normalize, particularly around inventories over time. But that may be not a 12-month period that could be a 24-month period as that normalizes. What that’s really driven by though is not everything that we are out there sourcing for inventory, but there are pockets of the supply chain that still remain constrained, if you will, on availability. So strategically, we have decided to carry more inventory there to support the business.

Damian Karas: Understood. And then one last one, Gene, you had mentioned some of the digital initiatives. Pro tool sounds like that’s more or less just a complementary service, it’s helping you gain €“ outgrow the market in boilers, but you also talked about Genfare Link and a few others and some 50 new accounts with Genfare Link. Is that €“ should we be thinking of that as an incremental revenue opportunity? Are you capturing additional sales on these accounts? Is this like a software subscription? How should we think about that?

Gene Lowe: Yes. And I think you are right. I think broadly speaking, if you think about our digital initiatives, on the HVAC side, it’s much more of tools and solutions and capabilities to really help either us or our reps, our partners in the field win. And I think we talked about the heating business, the hydronics. They had a great year. And I think the digital tools that we provided to the contractors is a key factor of why we gained so much market share this year. So, we feel really good of that. And really when you look on the detection and measurement it’s different. Most of our detection and measurement products come with software. So, it’s really part of the solution that you are providing to the customer. And in general, what you see is this software on a relative basis is small relative to the revenue of the overall segment.

You are talking in the neighborhood of, let’s say, $20 million, $25 million. Having said that, it’s extremely, strategically important because this the software we provide provides data, analytics, oftentimes €“ a lot of times, it’s asset management and it engenders customer loyalty such that once they buy our equipment, they buy all of their equipment with us. And so for example, on the €“ specifically on the Genfare example, once a municipality goes on our platform, they are on our platform for the next 20 years, let’s say, typically. And so every piece of equipment that attaches into that fair collection area will be the Genfare solution because it plugs into their software. But to your very specific question, yes, we are building revenue streams.

Now, I would still say those revenue streams were smaller, relatively speaking, to the equipment. So, like let’s say, on the Genfare side, the amount of software we are selling, it’s SaaS software typically is growing every year. And it’s doing very well, and we keep winning more accounts, but it is still relatively a smaller portion of the overall revenue of the business. You are probably talking high-single digits in terms of revenue and in terms of margin. Actually, it’s getting more material. You are probably talking because it’s such high margin, you are probably talking higher than that. But yes, that might give you some flavor, Damian, for how we think about it.

Damian Karas: Yes. That’s really helpful. Thanks a lot guys. Best of luck.

Operator: Thank you. I would like to now turn it back to Paul Clegg for closing remarks.

Paul Clegg: Thank you all for joining us on the call today and we look forward to updating you again next quarter. Thank you for your support.

Operator: And thank you for participation in today’s conference. This does conclude the program and you may now disconnect.