Operator: Your next question is from Nigel Coe of Wolfe Research.
Nigel Coe: So going back to the commercial HVAC growth in Q3, which was obviously spectacular, but especially in the Americas, the pickup Q-over-Q was quite something. So you called out obviously the strength in the verticals. Was there any kind of supply chain sort of loosening or kind of flush there that maybe drove that? Understand demand is very strong. And then within that, education, I think there’s some concerns out there with the stimulus funding kind of reaching a peak, perhaps that maybe education falls off in ’24. So any visibility on education would be helpful.
David Regnery: Yes, I’ll start with the latter. The education, we haven’t seen a cooloff yet. We still have a lot in our pipeline as well. There’s still a lot of money to be spent out there. As I said, I think if we had a — we were playing baseball, I’d say we’re in the sixth inning. There’s still some funding to come there. We’ve been strong there for an extended period of time. The other question was…
Nigel Coe: Yes. Just obviously, supply chain constraints have been a factor in the applied business, yes.
David Regnery: The supply chain, it’s — I wouldn’t say it’s normal but it’s pretty close to normal. We always have some noise that you’re going to see in the supply chain, but our teams have done just a great job there. So I wouldn’t say it was — I would not say our third quarter performance was because supply chain suddenly got better because it’s been [indiscernible].
Nigel Coe: Okay. And then on the comment…
David Regnery: We’re executing very well on the front end of our business. We’re executing very well on the operations side of our business and you really see it in our results.
Nigel Coe: Okay. Just quick — another crack at the pricing question. Chris, you mentioned basis points spread versus inflation is what you target. It does feel like some of your competitors are taking a much more aggressive policy towards pricing. So I’m just curious on 2 aspects. Number one, the potential to really be a bit more aggressive on price as you go into ’24. And then secondly, as this commercial HVAC backlog starts to convert, is there sort of embedded pricing in that backlog that’s going to emerge over the next 12 months?
Christopher Kuehn: Yes, I’ll start with your second question, Nigel. As we think about the backlog that runs out 1 year, 1.5 years, we’re making sure that we’ve got the right cost escalators built in. And it could be a reference to an external index or it could be where we’ve put cost inflators into the project to ultimately make sure we’re pricing effectively. So I think we’ve got that embedded in the backlog right now on a best view. And the teams have done an outstanding job with this over the last 3-plus years in the inflationary environment to stay ahead on inflation. Yes. Look, I think pricing will remain a way for us to continue to drive with our innovative products, making sure we’re pricing effectively. It’s going to be healthy.
I just want to get 3 more months ahead of us here before we dial it in for 2024. But I am confident that as we think about the cost environment and the innovation of our products, we’re going to make sure we’re pricing effectively. And again, making sure we’ve got long-term customer relationships here, as Dave described, with the applied business, we want to make sure that the services business continues to grow with that, which we can and it will. And that, of course, brings with itself healthy margins. So we’re well positioned for next year. Just give us a little more time to dial that in.
Operator: Your next question is from Deane Dray of RBC Capital Markets.
Deane Dray: Maybe to circle back on China, you had good bookings. It was impressed that even though you had lighter margins — lighter revenues, the margins were much stronger. So how did China play out for you?
David Regnery: I’m very happy with our performance in Asia Pacific overall, so thanks for the question. You think about — I’ll start with orders, right? I mean, orders were up in the low teens, up 12%, okay, for the region. And China had high single digits and the rest of Asia had mid-teens, so very strong performance on order rate. On revenue, we were flattish, down a bit. But remember, last year, we had 30% growth in Asia Pacific so it’s really just a comp issue. The team there is performing very well. I was very, very happy with the incoming order rates in that region. And the pipeline is strong as well.
Deane Dray: Great. And just as a follow-up to that September customer experience event in New York, can you give us a sense of the — on the applied business, both the backlog and the funnel, how much is — are customers opting for this thermal management feature? We still — since you’re like using the baseball analogy, is it — are we in the early innings of adoption? Where does that stand?
David Regnery: Yes, thermal storage. Yes, I mean, we have adoption that’s continuous there. We’ve been selling thermal storage systems for quite some time. I do think that one of the elements of IRA that could accelerate that is that would be included there. And we’re still dialing in what that exact rebate would be and how it will be applied. But that could be significant and really drive that. And just so everyone’s aware, thermal management — our thermal storage systems are great ways for energy efficiency but they’re also great ways to help balance the grid. And if you have a need and a peak period to shut off power or limit power, this is a great way to do it because you burn ice versus running your compressors on your chillers. So we’re excited about the technology. We’ve had it for a while, and IRA could be a catalyst to even have it grow faster.
Operator: Your next question is from Andrew Obin of Bank of America.
Andrew Obin: A question on gross margins, I guess. Look at my model, I think gross margins are hitting all-time highs. And I know you guys don’t look at other companies but we do. And I’m just wondering how much price cost, the spread between price cost is a benefit. And I guess the bigger question is, have we rebased gross margins? Because clearly, you guys have done a lot of work on cost cutting, right? It seems that you have an aggressive stance on maintaining the spread. But also how much of it is timing, right? It’s just the peak between the balance between price and cost. So if you could just talk about, are we in the new normal with gross margins or should we expect the gross margins normalize somewhat going forward?
Christopher Kuehn: Andrew, I’ll start. As I think about the third quarter, we really were able to execute across all parts of the P&L to drive leverage and gross margin expansion. So the price execution versus inflation, as I said earlier, it was positive on a margin and dollar basis. There are areas, though, of inflation, especially in tier 2 around wage and energy inflation that are impacting the business. So it was a positive. The incrementals on volume and 5 points of volume in the quarter so we like those incrementals. And we’ve continued to invest in the business as well, right? We’re still targeting for the full year around 70 basis points of incremental investment above a 40 basis point normal. So all parts of the P&L are really working. But I would tell you the productivity opportunity for us as price comes back to a bit more of a normalized level, that is really the opportunity for us going forward to really continue to drive 25% or better incrementals.
