Louis Pinkham: Julian, I’m not the one who want to try to call the cycle here. I do think we’re coming out on PES. There’s a slight slow in IPS and parts of AMC, although other parts are very strong, medical, aerospace, data center up double digit for us and feels really good. We’re going to stay very focused on what we can control, and we’ve got a lot of levers to pull. The only difference, I’d say, perhaps from the past is that the supply chain normalization that’s going on and the incredibly strong backlog that we still have in IPS and AMC. AMC’s backlog is probably 50-plus percent over normal AMC run rates and IPS is about 45% over normal run rates. And therefore, I don’t – we’re not forecasting it’s going to be a large impact because of those strong backlogs where we stand today going into Q4 and next year.
Julian Mitchell: Thanks very much.
Louis Pinkham: Sure. Thanks Julian.
Operator: Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead.
Jeff Hammond: Hey. Good morning guys.
Louis Pinkham: Good morning, Jeff.
Jeff Hammond: Can you hear me?
Louis Pinkham: Yes. Good morning.
Jeff Hammond: Just maybe to step back, I mean, I think after the Altra deal, you talked about $18 in earnings maybe $15, if the end markets were flattish. Leverage kind of 2.5% to 3%; I think exiting 2024 and then some margin targets. I’m just wondering with this reset, how maybe we snap the line a little bit differently on some of those long-term targets?
Louis Pinkham: Yes, Jeff, I think the way you described it is its pretty spot on. What we came out with is that a statement of we have a path to 40% gross margins and 25% adjusted EBITDA margins. And with the divestiture of industrial, that path is even clearer and maybe a point above, as I shared in my prepared remarks, a plan to get to $1 billion plus of free cash flow. We feel good about that. There are still some levers to pull around trade working capital. And so then it comes down to the sales. Our original planning would have gotten 4% to 6% organic sales growth to get to $18. And I think you’re right, it’s slightly over $15 at flat sales. Now we expect through the next couple of years that the market will rebound and that we’ll see some sales growth.
What that is, I’m going to not opine upon right now. But we would expect markets to rebound. On top of that, significant investment at Regal going on right now, doubled our vitality in the last three years. We have an intention to double our vitality in the next three that will help us through expanding our serve market with new products, very focused on over servicing our A customers and our A products. And so that will help us accelerate growth. So right now we’re not ready to come out with an update on the top line. We would expect growth. It’s likely not the four to six that we were thinking a year ago it could be. But it’s going to depend on where market is. And then we’re going to definitely outgrow market is our expectation.
Rob Rehard: And I would just add, the other side of your question around the leverage as we kind of move through the cycle. We absolutely have a clear path to continue to reduce our debt and get our leverage rates down to that, that we talked about during the longer term, despite the reduction that we might see in EBITDA. So it’s very strong free cash flow generation expected going forward to do that.
Jeff Hammond: Okay. And then just shifting gears to HVAC, it seems like most of the OEMs kind of didn’t really surprise anybody. I think they were all kind of claiming destocking has run its course, which is maybe good for you guys. But I’m just surprised by the magnitude of kind of the miss in trends. Just – I don’t know if that’s – did you not appreciate the magnitude of the destock, was it more aggressive? Are there some share dynamics? Is there more some product line simplification? Just what are the moving pieces on the miss there? And then just on this refrigerant change, some guidelines came out just are you kind of indifferent to that or how does that impact? And as people redesign, how are you feeling about share opportunities? So a lot of questions on HVAC, but thanks.
Louis Pinkham: Yes. So first of all, I think it is important to remember that resi-HVAC is only about 30% of our PES segment where we saw – we do feel like the AC side has gone through its destock. We expect furnace to be to go through in Q4 and maybe a little continuation into Q1, but not significant. The bigger issue that we saw in surprise in Q3 was around the general commercial space and the slowdown in demand and the destock that we saw there. And so that was really more of the pressure in PES than it was a resi-HVAC pressure. Now the – with regards to the refrigerant change, this should be an opportunity for us. It is just all of our OEMs will need to redesign to meet that change. And we have the right product, whether it is our ECM motors, which tends to be a mix up.
It is our air moving solution, which tends to be a mix up, or it’s our drive solution, which is a new technology that we brought to bear that’s going to help achieve that system – overall system requirement with the new regulations will be a mix up. So all in should be a positive. Now, the one piece that we’re not quite clear on is the EPA guidance around what the shipment allowance will be as of January 1, 2025. And could that cause some headwind in 2024 because the OEMs are further destocking, but they’re going to have to go to a new system, and our components and subsystems really fit well to support them in achieving those new system requirements. So hopefully, hopefully I answered all those questions Jeff, happy to follow up if you have anything else.
Jeff Hammond: No, that’s great. Appreciate it, guys.
Louis Pinkham: Okay, great. Thanks, Jeff.
Operator: The next question comes from Nigel Coe of Wolfe Research. Please go ahead.
Nigel Coe: Thanks. Good morning, guys.
Rob Rehard: Good morning.
Louis Pinkham: Good morning, Nigel.
Nigel Coe: Good morning. So on the 4Q guidance, by the way [indiscernible] you have to give us the quarterly guidance from here on. But Rob, looks like you’ve taken the approach of assuming essentially flattish sequential sales and margin. And I’m just curious, just given that this is a very new portfolio, I mean, how do you expect versus normal seasonality, how would the three segments normally track? I mean, I think PES, we understand would normally be down. But how would the other two normally track?
Rob Rehard: Yes. I think – so first of all, on the sales side, slightly down sequentially, the way we would look at that. As it comes to the margin, we do expect to be a little bit better on fourth quarter margin versus the third quarter. When it comes to the seasonality, there isn’t a lot of seasonality based on what we’ve seen with the supply chain disruption. And so we’re not expecting a lot of seasonality. Our order rates support that conclusion and our backlog certainly support that. So that’s the way we’re thinking about it. There’s not a lot of seasonality in any of the businesses right now, and that’s the progression quarter-over-quarter.
