Joan Hooper: Yes, I was going to say. So we have – in the plan we announced about a year ago, we have two factories closing and they won’t close to the tail end of 2024, early 2025. So the answer is yes, there will be some benefit in 2025 versus 2024, once those two factories close and it’s just, as you mentioned, a continuation of the strategy we’ve been on to right size the manufacturing footprint. So that is why, as we’ve mentioned a couple of times, 2024 margins are a little bit muted from a standpoint of the unpriced backlog, as well as the fact that the factories aren’t closed yet. So we’ll be in a position when we do Investor Day in a couple of weeks to talk about our view of 2027, actually.
Benjamin Kallo: Great. Thank you very much, Joan.
Operator: Thank you. And our next question is coming from the line of Pavel Molchanov with Raymond James. Your line is open.
Pavel Molchanov: Thanks for taking the question. Can you talk about geographic sales mix of 2023, what you’re thinking of this year and particularly what you’re seeing in the European market?
Joan Hooper: Yes. I can start and then Tom, if you want to add in. I would say our — given that our Networks business is — and Outcomes for that matter is heavily North America, the vast majority of our revenue continues to be from North America. We do have primarily our Devices business, that has a good amount of revenue in Europe and Devices was much stronger than we expected in 2023, on the backs of really strength in the water, meter and water communication modules business. So we’re seeing a lot of good water strength in Europe right now.
Tom Deitrich: And if I just fast-forward and add one more comment there, I agree fully with Joan’s commentary, that there is a push on the part of local government, specifically in Western Europe around the water market, that’s certainly helping the market overall. And we’ve seen pretty robust signals, that business tends to be a little bit shorter cycle, almost a good portion of it is turns business, meaning book and ship within the quarter and that’s one that we will continue to watch throughout the year. But Joan is right, the water market in 2023 was stronger than we had expected coming into the year, and we’ll continue to watch that through 2024.
Pavel Molchanov: Got it. And since my M&A question was already answered, I thought I would kind of frame slightly different around the free cash flow. You are building cash and the only debt on the balance sheet is a convert that you have two years on. So what’s the kind of priority ranking on how you’re thinking about that increase in cash balance?
Joan Hooper: M&A. That is the priority. We’ve been very active. We continue to be active, and we feel very good about our position now, given our cash balance in our ability, if need be for the right acquisition to actually take on more debt, given where our leverage is. So that is, by far, the number one priority is to find something that enhances our Outcome segment.
Pavel Molchanov: All right. Very clear. Thanks very much.
Operator: Thank you. And our next question coming from the line of Scott Graham with Seaport Research. Your line is open.
Scott Graham: Yes. Hi good morning. Thanks for taking my questions. Congratulations on your quarter. I hope you can answer this question. It is and I hope I’m not overly complicating it, probably will be. When you reprice, does that get you because I — you threw around the word index, and Tom, does that get you to price cost, however you want to call that price inflation neutrality? Or are you still price cost negative, even after that indexing?
Tom Deitrich: Well, it depends on the time frame that you’re talking about. So an index, just to really put a fine point on it, could be something like a PPI or CPI for the specific market that you’re dealing with. That’s what you could use to price to index pricing on a go-forward basis. And then it will depend very much on your internal productivity compared to, to that overall very visible, very trackable metric between you and the customer to make it clear. So whether you win on price cost depends on your productivity against that particular metric. And generally, it’s in a go-forward sense is how that indexing tends to work. So if you started behind or you started ahead, then you know where you are, relative to that index on a time evolution basis. I hope that helps put clarity behind it.
Scott Graham: I’ll probably have to read the transcript again on that one for your answer, but it does help a little bit. So I guess my follow-up question would be kind of the same question asked a little bit differently just for number’s sake. The big jump in gross margin of fourth quarter, was that, let’s assume that we get to or closer to price cost parity. So was that like enriched mix? Was that volume? Was it productivity? And you can say yes to all three, but then maybe rank them.
Joan Hooper: I would say, yes. I would say yes to all three, and I would say mix was probably the biggest.
Tom Deitrich: Right on.
Scott Graham: And then how does that look for 2024 gross margin?
Joan Hooper: Well, I think I commented earlier, in the full year guidance that we provided, the assumption is the gross margin is a little bit better than full year 2023. And so part of that is this headwind of the 30% non-indexed backlog coming in and that primarily affects networks. But in aggregate, we think the overall gross margin will be slightly higher than it was in 2023 — annual 2023 not Q4.
Scott Graham: Yes. And Joan, is that headwind — I assume that headwind reduces significantly in 2025?
Joan Hooper: Yes, correct. Plus you have the benefit of the two factories going offline, which will help margin as well. But yes, the — in the 30% or so of the backlog that is not price protected, we would expect the majority of that to come into 2024.
Scott Graham: Thank you.
Operator: Thank you. And our next question is coming from the line of Austin Moeller with Canaccord. Your line is open.
Austin Moeller: Hi. Good morning. Nice quarter. So I have a two part question here. Where do you view yourself in the sales cycle with the utilities right now? And do you expect further demand recovery, as interest rates decline, just given the sensitivity of utilities to interest rates?
Tom Deitrich: So I can take that one. I think that we generally see utilities looking to solve the real problems that are on their hands today. They’ve got to figure out how to balance supply and demand with more renewables on the generation side and more distributed energy resources at the edge of the network. How do they do that? They do it with Grid Edge intelligence. They’ve got more environmental pressures with floods and fires and storms or ice storms or droughts, what have you, depending on where in the country you may be, and they’ve got to make their infrastructure more resilient and they’ve got rising consumer demands. Consumers want to understand how they are buying the service, in much finer detail than the traditional utility model allowed.
Those are the pressures that drive our customers towards new technology. We see customers actively looking at new technology to address those questions. We haven’t seen shifts in buying behavior from our customers with interest rates rising over the last couple of years. Indeed, the demand picture has been, has been pretty steady and strong, looking at these new technologies. Rate cases are being approved. They’re working through the regulatory process and the return that they’re getting on those rate cases is also pretty steady. As interest rates come down, perhaps rate cases change a little bit or maybe demand goes up, the time will tell as to how that plays out. But independent of interest rates, we do expect the demand environment to continue to be stable and strong .
Austin Moeller: Excellent. Thanks for all the details.
Operator: Thank you. And I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.
Tom Deitrich: I thank everyone for joining today. We look forward to updating everyone at our March investor event and until next time. Thank you for joining.
Operator: Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.
