Eaton Corporation plc (ETN) — Q3 2022 Earnings Call Transcript

Hi, good morning. Thank you for joining us for Eaton's third quarter 2022 earnings call. With me today are Craig Arnold, our Chairman and CEO; and Tom Okray, Executive Vice President, Chief Financial Officer. Our agenda today includes the opening remarks by Craig, then he will turn it over to Tom, who will highlight the company's performance in the third quarter. As we have done on our past calls, we'll be taking questions at the end of Craig's closing commentary. The press release and the presentation we'll go through today have been posted on our website. This presentation includes adjusted earnings per share, adjusted free cash flow, and other non-GAAP measures. They're reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation. With that, I will turn over to Craig.

Thanks, Yan. We'll begin with the highlights of the quarter on Page 3, and I'll start by noting that we delivered another very strong quarter and have again posted a number of all-time records, including adjusted earnings per share of $2.02, which is up 15% from the prior year. This, despite the negative impact of foreign exchange and the divested Hydraulics business, which took place in August of 2021. Our organic revenue growth also continued to accelerate in the quarter, up 11% in Q2 to up 15% in Q3. Encouragingly, we had strength across all of our businesses with exceptional growth in Electrical Americas, in Vehicle, and eMobility. We also posted all-time segment margins of 21.2%, up 130 basis points over the prior year and above the high end of our guidance with incrementals of 38% in the quarter. I'd also note that our team continues to manage price effectively, more than fully offsetting the impact of inflation. As noted here, orders continued to accelerate in the quarter as well. On a rolling 12-month basis, Electrical orders increased 27% versus 25% last quarter, and our Aerospace orders increased 22% compared to 19% last quarter. This order strength also led to another quarter of record backlogs in Electrical, which were up some 75%, and our Aerospace backlogs increased by 17%. Lastly, we did start to generate positive momentum in our cash flow results. We had a strong year-on-year performance with operating cash up 29% and a 30% increase in free cash flow. Our free cash flow as a percentage of sales was 15.6% in the quarter. So as expected, we're starting to see improved cash flow from both higher earnings and improved working capital performance. Moving to Page 4. Before I turn things over to Tom to go through the quarterly results, I want to highlight a few of the key themes that are really underpinning our confidence in our long-term growth outlook. As noted here, we continue to benefit from the three secular growth trends that we reviewed earlier: electrification, energy transition, and digitalization. While still in the early stages, we booked some $700 million of new wins in the quarter that are directly tied to these trends. Within electrification, you've all read the announcements of the very large number of manufacturing projects in the U.S., which include new semiconductor facilities, big investments in new electric vehicle manufacturing plants, new EV battery investments, and investments in EV charging infrastructure. In fact, there's been some $1.3 trillion of new projects announced this year alone, and the impact of the stimulus bill is yet to show up in these numbers. These incentives will point towards large investments that are tied to improving electrical infrastructure and will deliver significant benefits over the next few years. The next large growth driver is energy transition. The move away from fossil to renewables that's taken place for a number of years now, and this trend will only accelerate. With every renewable resource addition, it requires electrical infrastructure. It's not just connecting power to the grid; it’s also investments in technology to keep the grid stable, to manage different sources of electrical power, and investments in batteries to store excess energy. These are all products and services that we naturally provide. Beyond renewables, we're also seeing an increase in investments relating to improving grid resiliency, which has become a priority due to extreme weather events and the demand for energy independence. Lastly, our emerging digital society will drive higher selling prices as we add intelligence to our legacy products. We'll sell new value from data and insights and create new software solutions, all of which require data centers, an important growth segment for Eaton. These are just a few of the reasons why we remain confident in our electrical businesses and their ability to deliver higher levels of organic growth for some years to come. Slide 5 reflects we have a number of attractive growth drivers in our industrial businesses as well. I'll begin with the most notable one, vehicle electrification. Here, the outlook for EV penetration continues to accelerate with new announcements coming almost every week. Not just in passenger cars, we are also seeing the increasing need for electrification projects in commercial vehicles, some for the entire system but often for a subsystem of the vehicle. I'd also note that the opportunities we are seeing tied to the acquisition of Royal Power are much larger than we anticipated, and our eMobility pipeline continues to be very robust. As a point of reference, our opportunity per vehicle on an EV is some 18 times higher than the opportunity that we have on a traditional internal combustion engine. You’ll recall, we expect our eMobility segment to become $2 billion to $4 billion in revenue over the next several years. The next growth driver is tied to what we're doing in our legacy Vehicle business, which is finding new applications for existing technology. We're seeing several new opportunities for our commercial engine brake technology, for our mechanical gears that are used in electric vehicles, and for our advanced valve train actuation technology. In all three cases, we have already booked significant new wins here. Third, we're benefiting from the aerospace industry growth cycle, which, over the next several years, will continue to accelerate. Commercial passenger growth has continued to improve, which is translating into significant growth in commercial aftermarket orders, which, by the way, were up 40% year-to-date. Commercial OEM build rates are forecasted to grow about 15% over the next 4 years. Lastly, I'd note that with our acquisitions of Souriau and Mission Systems, we expect to see even better growth given our position on high-growth platforms and as we begin to realize sales synergies. Overall, just stepping back from this particular set of initiatives, we've delivered some $250 million of wins in industrial. When added to what we noted in Electrical, we delivered almost $1 billion of growth tied to the secular growth trends in our markets. So with that, what I'd like to do at this point is turn it over to Tom and ask him to walk through the quarterly results.

Thanks, Craig. I'll begin by noting a few key points regarding our Q3 results. Our revenue was up 8% with organic growth of 15%, partially offset by a 4% foreign exchange headwind and a 3% unfavorable net impact of acquisitions and divestitures. Related to the acquisitions and divestitures, the acquisition of Royal Power increased revenue by 1% while the sale of Hydraulics reduced revenues by 4%, for a net of 3%. With total revenue growth of 8%, we posted solid operating leverage with 15% growth in both operating profit and adjusted EPS. It's worth noting that the foreign exchange headwind of 4% had an $0.08 impact on adjusted EPS, which was larger than our 3% guidance estimate. Further, growth in adjusted EPS of 15% would have been 22%, excluding the $0.08 impact from FX and the $0.03 net impact from acquisitions and divestitures. All in all, stronger organic growth and higher margins enabled us to report adjusted EPS of $2.02 that was above our guidance midpoint. Finally, as we did last quarter, we continue to raise the bar with all-time records in adjusted EPS, segment operating profit, and segment margin. Moving to the next slide, Electrical Americas had another very strong quarter. We set all-time records for sales, operating profit, and margin. Revenue growth accelerated to 18% organically, driven by strength in all end markets, with particular strength in commercial and institutional, residential, industrial, and utility end markets. Operating margin at 23.5% was up 180 basis points versus the prior year, benefiting from higher volumes. With respect to price, we continue to manage price effectively to more than offset inflationary pressures in the segment. In addition, our demand continues to remain very strong. Orders on a rolling 12-month basis accelerated sequentially, coming in at 36% year-over-year versus 29% in the prior quarter. Our orders were strong across the board, particularly strong in data center, utility, and industrial end markets. These order growth translated into another record quarter of backlog, up 97%. On a sequential basis, backlog is up 14% versus the prior quarter. In addition to the robust trends in orders and backlog, our major project negotiations pipeline more than doubled year-over-year, driven by particularly strong growth in manufacturing, data center, industrial, and utility end markets. Turning to Page 8, Electrical Global results were also very strong, generating a Q3 record for revenue and all-time records for operating profit and margin. Organic growth was up 13% with an 8% foreign exchange headwind. Notably, this is the sixth quarter in a row of double-digit organic revenue growth. We saw solid organic growth in all regions with particular strength in our global Crouse-Hinds B-Line business and solid growth in both Europe and Asia Pacific. We posted record segment margin of 20.6%, up 50 basis points year-over-year. Similar to Electrical Americas, higher volume was a margin tailwind versus the prior year, and we continue to manage price effectively to more than offset inflationary pressures. Orders were up 14% organically on a rolling 12-month basis with strength in commercial and institutional and industrial end markets. Backlog growth remained strong at up 22%. Before moving to our Industrial businesses, I'd like to briefly recap the very strong results of our combined Electrical segment. For Q3, we posted accelerating organic growth of 16%, incremental margin of 33%, and operating margin of 22.3%, with 130 basis points of year-over-year margin improvement. We also generated orders and backlog growth of 27% and 75%, respectively, with more than doubling of our negotiation pipeline in the United States. We remain very well positioned for profitable growth in our overall Electrical businesses. Our Aerospace segment results are captured on the next page. Aerospace also generated records in the quarter with an all-time sales revenue record and a Q3 operating profit record. Organic revenue increased 8% with 5% foreign exchange headwinds. Organic growth in the quarter was particularly strong in our commercial aftermarket and commercial OEM markets. Encouragingly, military aftermarket grew in the quarter. Operating margin of 24% was up 200 basis points from the prior year, benefiting from volume growth. On a rolling 12-month basis, our order acceleration continued, now 22% versus up 19% last quarter, including military OEM markets that were also up 22%. We saw order strength in all end markets as travel continues to accelerate within commercial markets and military orders strengthened consistent with our expectations for increased defense spending. Backlog remained strong with a 17% increase over the prior year and up 5% sequentially. Moving on to our Vehicle segment. Organic revenue grew 19%. We also experienced a 3% headwind from foreign exchange. We had strength in the North America, South America, and EMEA markets. Our North American light motor vehicle business was especially strong with nearly 25% organic growth, while our South American business was up more than 35%. Operating margin of 16.8% was down 120 basis points versus the prior year, primarily due to manufacturing inefficiencies. However, it's important to note improvement in our ability to offset higher inflationary costs with price. This is reflected in sequential margin improvement of 150 basis points from Q2. Incremental margins on a sequential basis were up nearly 50% with solid volume growth and continued progress on price cost. Moving to Page 11, we show results for our eMobility business. Revenues grew 63%, including 17% organic growth, 49% from the acquisition of Royal Power, and 3% foreign exchange headwind. We continued the trend of narrowing the operating loss on a year-over-year basis. This quarter, operating margin improved 800 basis points driven by organic volume growth and the impact from the Royal Power acquisition. We are seeing continued momentum to achieve our $2 billion to $4 billion revenue target with new platform wins for power protection solutions, including additional Breaktor wins. Our opportunity pipeline remains robust for innovative power distribution, conversion, and protection solutions. On the following slide, we have a summary of our guidance for the year. As noted on the chart, we are reaffirming 2022 organic growth and operating margin guidance in total. Further, we are reaffirming both metrics for all segments, except eMobility operating margin. Specifically, we continue to expect organic growth in the range of 11% to 13% and operating margin from 20% to 20.4%. Turning to Page 13, we show the balance of guidance for 2022. We're not making significant changes to our full year outlook. We tightened our adjusted EPS range to $7.51 to $7.61 per share from the prior guidance of $7.36 to $7.76. Consistent with the foreign exchange headwinds that we mentioned throughout the presentation, we increased the unfavorable translation impact to $600 million from $450 million in our previous guidance. Our full year expectations for the other items are unchanged. With respect to cash flow, orders and backlog have grown significantly more than our expectation. In addition, we have been and will continue to prioritize customers and profitable revenue growth at the expense of cash flow. Therefore, while we have good cash flow momentum in Q3, we have work to do to achieve our objectives. Shifting to Q4, highlighting a few key points on our Q4 guidance. We expect adjusted EPS to be in the $2 to $2.10 range, organic growth to be between 13% and 15%, and operating margin to be between 20.5% and 20.9%. Comparing to the prior year, adjusted EPS and operating margin guidance at the midpoint represents over 19% growth and a 140 basis points increase, respectively. Now I will hand it back to Craig to walk us through market outlook and wrap up the presentation.

Thanks, Tom. Turning to Page 14, we provide an early look at our end market assumptions for 2023. Let me begin by saying that we expect to see a typical mild recession next year but don't expect it will have a significant impact on our growth given the secular growth trends, the strong orders, and the record backlog that we're sitting on. Within Electrical, data centers, industrial facilities, and the utility market are all expected to see very good growth. Together, they account for approximately 40% of our total revenue and, quite frankly, have some of the strongest orders and backlogs in the company. As a point of reference, industrial projects announced this year are up some 300%. You can see really strong momentum in these segments of the business. Commercial and institutional as well as machinery are expected to see more modest growth. Of note, orders in C&I continued to accelerate in the quarter with significant strength in government and institutional segments. This is the segment where you'd expect to see significant benefits from stimulus spending. The one relatively weak segment is expected to be residential. While we've not seen a downturn yet and our orders are up some 23% on a rolling 12-month basis through Q3, we do expect some softness in this segment next year. I would, however, note that residential only accounts for 7% of the total company sales, and the residential new build market will be somewhat offset by the renovation market, which accounts for some 40% of our residential sales. We also expect to see higher electric content per home, which is what we've been seeing over the last number of years. In our Industrial sector, we're expecting it to be a big year for electric vehicles. Increasing government regulations and incentives and the large number of new EV introductions will keep the segment strong, quite frankly, for years to come. In commercial aerospace and light motor vehicle markets are both expected to see a cyclical recovery. The need to rebuild inventories will support vehicle markets, and the aerospace aftermarket growth ramp-up in commercial OEM production will drive aerospace markets higher next year. Lastly, we expect the commercial vehicle market to remain flat, yet at quite healthy levels. In total, 85% of our markets are expected to see positive organic growth next year. We'll naturally provide more details on our specific organic growth assumptions on our February earnings call, but we wanted to share our preliminary thinking and let you know that we expect 2023 to be another good year of growth for the company. And lastly, on Page 15, I'd like to close with just a few points here. First, I’m pleased with our Q2 results, particularly with our strong margins, our earnings, and our orders growth. We continue to manage the business well and delivered record profits despite ongoing supply chain challenges, inflationary environments, and significant FX and interest headwinds. The transformation of the portfolio has delivered what we promised—a higher-quality company with higher growth, higher margins, and better earnings consistency. For the balance of the year, we remain on track to deliver our commitments, including record operating margins and adjusted earnings per share. We’re doing so despite offsetting significant headwinds around FX, pension, and interest, which will increase in Q4. As we look into next year, we remain optimistic despite our recession expectations. We do expect a slowdown, and we'll be prepared in the event of a more significant downturn. We know how to flex our costs and deliver attractive decrementals. But as we've said, we have good reasons for optimism. The growth trends are driving strong momentum in our businesses, and we have a growing pipeline of opportunities. We're going into next year with strong momentum, with record backlogs, and we expect that many operational inefficiencies and supply chain disruptions will get materially better next year. So we feel great about the quarter and the outlook. Now I’ll turn it back to you, Yan, for Q&A.

Thanks, Craig. I will now hand it over to the operator to provide you with the instructions.

Maybe can we just start with expectations for 2023 incrementals? I know it's a bit early to give guidance, but you were kind enough to walk us through the end market outlook. I'm just curious if you think that it's feasible to be at your long-term guidance for incrementals, at least as a starting point. Let's start with that.

I appreciate the question, Nicole. As you can imagine, we're working through our 2023 profit plans right now and have lots of activity going on around the company to get prepared for that. But I would say that as you think about next year, I think kind of a 30% incremental rate would be the right place to be thinking about running your models at this point. We'll naturally be in a position by the time we get to the earnings call for Q4 in February to give you a more specific read on that. But we think 30% is probably a good planning number at this juncture.

Got it. And then I guess what surprised me this quarter was just the huge acceleration in Electrical America orders. Definitely encouraging to see that even as comps get difficult. So maybe if you could dig a bit more into what drove the Q-on-Q acceleration.

Yes. As we've talked about and shared in some of the commentary, we've had pretty broad-based strength in orders in our Electrical business. Specifically in the Americas, data centers were extremely strong, industrial markets very strong, utility markets, we had orders up some 60%. It was really broad-based. Even in the residential market on a rolling 12-month basis, we had orders that were still up some 20%. It's tough at this point to really call out any particular market in the Americas that I'd say was weak, but we had really strong strength. A lot of it is tied to these big trends we talked about. The utility markets in general are certainly benefiting today from some of these investments in not only energy transition but grid resiliency, data centers. There has been a lot of debate about that market and its direction, but we're seeing very strong strength in the data center market, even to the point where customers today are looking to place long-term commitments and hold their slot in our production plans into 2024. We’re pleased to see this showing up in orders, which will convert to revenue as we have the ability to ship and resolve some of the supply chain issues that we continue to deal with.

Just to amplify the data centers in the Americas, on a quarter-over-quarter basis, orders were up almost 40%, and on a trailing 12 months, growth was over 50%. We've been hearing noise about a slowdown, but we're not seeing it.

Craig, on this order surge, anything that you would attribute to timing around stimulus or lead times or anything else? Perhaps a chunky order we should think about as we look out? Because we are going to continue to see some tough comps here. I know that with the rolling 12, it’s tough to parse out maybe some of the quarter-to-quarter volatility.

Yes. We tried to provide a little bit of color on this question around the growth you're seeing in orders. We've shared that not just in the rolling 12 but in the quarter, we're seeing significant strength. Those numbers that Tom quoted were in the quarter; quarter-over-quarter numbers, despite tougher comps. In terms of the order surge, as I mentioned in my commentary, there have been several very large projects announced. As you think about whether it’s assuring or investing in grid infrastructure, there are many large industrial projects that tend to be more electrical-intensive applications that we’re certainly seeing in our backlog, which gives us confidence. These are big multi-year projects that will continue for some time. In terms of stimulus, not yet. We expect at some point down the road to see a meaningful impact from stimulus, but most programs are still probably 6 to 12 months away from having a meaningful impact on the company. This is just another vector that we believe will continue to give us a compelling multiyear growth story, particularly tied to electrical infrastructure and energy transition.

Just a little more color on the major projects. In U.S. manufacturing in the quarter, negotiations were up over 300%. Data centers up almost 170%, and year-to-date numbers are equally strong. Just incredibly strong numbers on the major projects.

Got it. That's helpful. Just a quick follow-up on the stimulus piece or broader infrastructure spending you guys are tracking. I know there's some big dollars there. Obviously, not all of that is electrical. A lot of that gets into Eaton's backyard at some point. How would you think about what those do to your addressable market as those start to enter? Is that like a 5% increase, a 30% increase to addressable market? Any sort of estimates would be helpful.

I'd say it's a little early for us to assess how it will impact specifically the relative opportunity or growth. They are very large billion-dollar programs targeted at electrical infrastructure. We hope to give you a better indicator as it develops, but it's a bit early to see how this will all play out. But it's all good and will help accelerate growth over the next 3 to 4 years.

Can you provide more color on data centers? I know you're very positive, but could you talk about system protocols that have been debated?

Andrew, we're getting some background noise. It's very hard to hear you.

We heard data centers, Andrew, but we were...

Is this better?

Much better.

Yes. Just on data centers, if we could just focus on different geographies and different verticals within the data center market. There’s a lot of noise regarding this market. What are you seeing? I know you're bullish, but just as I said, more color by geography and vertical.

If you think about geographically, we're clearly seeing the strongest growth in the Americas market. Very strong growth in Americas, in hyperscale, but also in colo and on-prem. Today, about 40% of the market is hyperscale. This is broad-based strength we're seeing in the data center market, certainly in the Americas. We're seeing good growth in Europe and in Asia. The IT channel tends to be a little shorter cycle. We have seen relatively slower growth but still good growth in the IT channel, single-phase markets like Europe and Asia.

Great. And just on capital allocation, as interest rates have gone up, you're clearly cash generative. You're more of a strategic buyer. How has the market landscape changed from your perspective? Does it make it more or less likely to see a deal from Eaton in the next 12 to 18 months?

What’s going on in the interest rate environment needs to translate at some point into seller expectations on valuation. There's always a significant lag between the realities of the market changing and company expectations of value. You would expect asset valuations to come in a little bit in these types of environments, which would increase the likelihood of us doing transactions. But I would say today, it's early, and we have not seen any material change in valuations or expectations. We continue to be on the hunt looking for opportunities and still think that’s the right priority for the company. However, we will not overreach. We don't intend to overpay. We’ve been a very disciplined buyer, and we'll continue to be a very disciplined buyer. If valuations don’t align with our expectations, we’ll certainly use the opportunity to buy back stock.

For the baseline, we're at 2.1x net leverage. We have a very strong credit rating, which gives us the capacity to go up. With supply chain constraints starting to mitigate, our cash generation will improve going forward. We see a lot of flexibility.

The 2023 end market outlook looks like if you had to pick a number, it would be a 5% to 6% growth rate. What’s surprising to me is the C&I market where you’re looking for modest growth. There seems to be healthy leasing, and stimulus money coming through. What's driving that view? Is it some collateral damage from residential? Is it Europe, Asia Pacific? Any color there would be great.

The commercial side is seeing growth, but we noticed the biggest growth in institutional and government. That’s where you’d likely see early indications of government dollars being funneled into. The C&I market continues to do extremely well. We’ve seen strong quarters in Europe as well.

In Asia, we saw very strong commercial and institutional growth. All end markets grew strongly on a quarter-over-quarter basis and on a trailing 12-month basis. Europe particularly showed strength in commercial and government as well.

At some point, we'll be anniversarying some very strong growth numbers, and we expect some moderation in order intake. But right now, we’re sitting on record backlogs—up in some cases more than 100%—which gives us visibility into 60% of next year’s demand. That number is about 2x what we normally see.

I'll appreciate the question regarding free cash flow. We had a very strong Q3 cash conversion cycle. We improved by 7 days. Days on hand went up 4 days, payables up another 2 days, so we felt good about that.

I don't think I've heard a specific price number. It's been running typically kind of a little more than half in price. Is that about the same this quarter?

We haven’t given out specifics between price and volume largely because there's huge variation depending upon markets and customers. Overall, we’ve seen healthy growth in both volume and price.

Strong growth in volume as well.

Do you have a sense of whether your customers are trying to build some inventory ahead of anticipated demand in ‘23? What is the incentive there?

Our end markets are generally doing very well, which reflects heightened industrial activity and increased investments in manufacturing. We’ve noticed our customers are not overstocking today, and there is some nervousness in the marketplace. We are receiving orders a bit earlier than we would normally get. Strong sales out from distributors indicate we’re not in a situation where we see significant overstock.

I wanted to focus on the fourth quarter for a second. It looks like you're assuming flattish sales sequentially and margins down about 50 basis points. Is this heavily concentrated in the aerospace division?

We had a really strong quarter in Aerospace in Q3, and profitability here can vary based on the mix of aftermarket versus OEM sales. It's important to note that margin levels are still strong in aerospace and consistent with our guidance for the year. We do not have concerns about aerospace.

Just my follow-up would be around volume growth. If you think about the backlog from here as supply constraints ease, do you think we see an incremental acceleration in backlog conversion into revenues? Could volume growth accelerate in the next few quarters as sales slow down?

It’s possible that working off the backlog could allow us to continue to grow the business despite a slowdown in the marketplace. We need to catch our breath and deal with backlogs. We are investing in capacity and capability to handle higher growth levels.

Can you share what kind of leverage target you would be willing to go to in this environment? Clearly, your backlog is in really good shape. I'm curious for the right deal, what would be your expectation on leverage?

Historically, we have leveraged up for the right strategic deal. For the right deal, we'd be inclined to go to the same levels we've been at historically. However, it's early, and we don't have any near-term transactions that would require that. We'll likely pursue smaller strategic transactions that we can fund largely with cash without the need to leverage up.

I would like to amplify by saying we're at 2.1x net leverage. We have a strong credit rating. So we’ve got a large capacity to increase.

In your mild recession scenario for next year, do you see Europe remaining in positive growth throughout the year? It seems like other regions will have more credibility to grow through a recession.

The range of possibilities around what happens in Europe is much wider given the ongoing situation. There’s a wide range of possibilities where orders could hold up well, but we have contingencies ready to address more severe downturns than we anticipate.

In the quarter, we did see order growth in Europe. In various end markets, we had fairly strong performance, particularly in commercial and institutional. So we still see growth in Europe.

As you can imagine, Europe represents a smaller percentage of our revenue, 9% to 10%. It would take some downturn there to have an outsized impact on the company’s performance.

If I work through the weight of those arrows, I get growth in the mid-single-digit 5% to 6% range for market growth. But I imagine you have some carryover price and perhaps some outgrowth. Could you dimension those components?

It's early for us to give insight. We'll do that in February. Clearly, there is carryover price. But it is too early to provide specific company-related growth numbers.

Understood. I wanted to ask about the backlog. Clearly, it’s robust, but could you share color on the margin profile of the orders being booked, possibly favorability in material prices to come off highs?

Our backlog's pricing and margin are not terribly different than business performance today. There’s a question around the future direction of commodity prices, but the profitability in the backlog is similar to our business profitability today.

Thanks, guys. We have reached the end of the call, and we do appreciate everybody's questions. As always, Chip and myself will be available to answer any follow-up questions. Thank you for joining us. Have a great day.

Thank you.