Q3 2023 Watts Water Technologies Inc Earnings Call
Good morning, My name is <unk> and I'll be your conference operator today.
This time I would like to welcome everyone to the Watts water technologies third quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press the star one thank you.
Diane Mcclintock senior Vice President Investor Relations and financial planning and analysis.
You may begin your conference.
Thank you and good morning, everyone welcome to our third quarter earnings Conference call. Joining me today are Bob Pagano, President and CEO and Shashank Patel our CFO.
During today's call Bob will provide an overview of the third quarter and discuss the current state of the markets and our operations. He will also update you on our recent acquisition of Bradley Corporation.
Shashank will discuss the details of our third quarter performance and provide our outlook for the fourth quarter and for the full year.
Following our remarks, we will address questions related to the information covered during the call.
Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We will reference this presentation throughout our prepared remarks any reference to non-GAAP financial information is reconciled in the appendix to the presentation.
Before we begin I'd like to remind everyone that during this call we may be making certain comments that constitute forward looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially for.
For information concerning these risks see what's publicly available filings with the SEC.
The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
That I will turn the call over to Bob.
Thank you Diane and good morning, everyone.
Please turn to slide three and I'll provide an overview of the quarter and our markets.
We delivered another quarter with better than expected results, including record Q3 sales operating margin earnings per share and free cash flow.
As a result, we're raising our full year 2023 operating margin.
Organic sales were flat to prior year as we expected due to a tough comparison to a strong third quarter in 2022, where organic sales were up 12%.
Strong growth in our Americas Nonresidential core Bell products was offset by double digit declines in our gas connectors radiant heating applications and commercial marine instrumentation.
Adjusted operating margin of 18% exceeded expectations and was supported by solid price realization favorable mix and productivity, which more than offset inflation lower volume and incremental investments.
Year to date free cash flow has been strong and we expect to generate solid free cash flow through year end our balance.
<unk> remains healthy post Bradley acquisition with a net leverage ratio of less than one times, which affords us ongoing flexibility and our disciplined capital allocation strategy.
Strategic M&A.
ROI capex and competitive dividends remain our top capital allocation priorities.
Moving to operations as previously announced we closed on our acquisition of Bradley Corporation in October.
This acquisition is highly strategic and expands our addressable market.
Integration is underway and the teams are working collaboratively to capture synergies and market opportunities I'll speak more about the acquisition in a minute.
The integration of our <unk> acquisition is going well and continues to be ahead of schedule.
With this acquisition, Australia, and New Zealand now represent more than half of our apnea region.
Next I'd like to provide an update on our end markets.
GDP continues to be positive in our key markets and this supports our repair and replacement activity in.
In Europe, some markets remained solid in the quarter as growth continued in Germany, France, and Benelux. However, we do see softening driven by a slowing residential market.
And nonresidential, new construction and the impact of changes to the energy incentive program in Italy.
In the Americas, New residential single family construction appears to have bottomed out however, multifamily new construction has seen recent declines in starts and permits which may signal slow as we head into 2024.
Nonresidential, new construction indicators were mixed the Abi fell back below 50 in August and declined further to 45 in September after several months of expansion there.
The Dodge momentum index sequentially improved in September after four months of decline due to an uptick in institutional and industrial activity.
The institutional industrial verticals have remained supportive year to date.
In the Asia Pacific Region, China data center activity remained solid, but it's being offset by declines in residential building activity.
Australia market remains healthy despite continued interest rate increases we saw strengthening markets in the middle East due to continued higher oil prices.
Now an update on our outlook for the fourth quarter and the full year.
Due to challenging comps as a result of a strong fourth quarter in 2022, we expect our fourth quarter organic sales to be lower than prior year.
We also anticipate a sequential decline in operating margins due to normal seasonality incremental investments volume deleverage and the dilutive impact of our and where and Bradley acquisitions as a result of customary transaction related costs, including amortization.
While we expect difficult comps in Q4, we are increasing our full year operating margin outlook due to strong year to date performance and anticipated higher margins in the fourth quarter due to favorable mix.
We expect Americas nonresidential business to remain solid but be offset by continuing softness in certain specialty channel products. We also anticipate Q4 to be softer in Europe due to weakening macros higher interest rates and lending tightening may also have an impact on new construction.
Please turn to slide four and I'll give you an overview of the recently acquired Bradley.
<unk>.
Bradley is a 100 year old plus business headquartered in Menominee Falls, Wisconsin with approximately 500 employees.
Annual sales of approximately $200 million split evenly between hand washing products, which include sinks and faucets washroom specialties, which includes accessories and privacy solutions and safety products, which include eyewash stations and safety showers.
The addition of Bradley to the watch portfolio is highly complementary enables us to offer a more comprehensive solution to our customers.
It expands our total addressable market with front of the wall products for commercial Washrooms and industrial emergency safety applications and broadens our exposure to North America, institutional and industrial markets.
The acquisition Leverages, the combined strength of our sales network and channel relationships to accelerate growth and leverage cross selling opportunities.
It is also expected to create significant value through greater scale and the capture of cost synergies.
If you turn to slide five I'll share how the acquisition aligns with our M&A strategy.
On the left side of the slide you'll see our previously communicated M&A strategic criteria.
Radley acquisition fits nicely with our stated priorities.
The portfolio is comprised of code and specification driven products that align with what's key long term secular growth trends of energy efficiency water conservation and safety and regulation.
Bradley's product portfolio expands our offerings with innovative water solutions as it adds front of the wall applications to our differentiated back of a wall portfolio and increases our exposure to attractive institutional and industrial markets.
Bradley as a market leader known for innovative high quality high value products and has tremendous brand equity.
The acquisition also builds on our recent acquisition of <unk>, which is a leading supplier of specialty plumbing and safety equipment used in Australian institutional commercial and industrial end markets with products and solutions that are highly complementary with bradleys portfolio.
We expect to realize meaningful run rate cost synergies by leveraging our one watts performance system through commercial and operational initiatives, including global sourcing savings, we expect to reach approximately $12 million of annualized savings by the end of 2026.
The acquisition is expected to be modestly accretive to adjusted EPS in 2024 factoring in incremental interest expense and normal purchase accounting adjustments, we expect adjusted EBITDA margins to be accretive by 2027.
We funded the transaction with a combination of cash impact.
On our line of credit.
As previously mentioned on a pro forma basis, including the transaction our leverage ratio was less than one times, leaving us ample flexibility to implement our capital allocation strategy.
With that let me turn the call over to Shane who will address our third quarter results and our fourth quarter and revised full year outlook Shashank.
Thanks, Bob and good morning, everyone.
Please turn to slide six and I will review the third quarters results.
Sales of $504 million were up 3% on a reported basis and flat organically.
Organic growth of 1% in Americas, and EMEA was offset by a 1% organic decline in Europe.
Foreign exchange, primarily driven by a stronger euro increased year over year sales by roughly $6 million or 1%.
Sales from our <unk> acquisition added $9 million or two points and are reported within the apnea region.
Adjusted operating profit was $91 million up 10% compared to last year and adjusted earnings per share increased 14% to $2 <unk>.
Adjusted operating margin of 18% was up 120 basis points as price favorable mix and productivity more than offset inflation lower volume and incremental investments.
We were able to deliver 120 basis points of margin expansion. Despite a tough comparison to the third quarter of 2022, and the dilution of the <unk> acquisition in the quarter.
Interest income in the quarter exceeded interest expense and contributed an incremental <unk> <unk> per share versus the prior year.
Adjusted effective tax rate was 25, 4% 10 basis points favorable to the third quarter of 2022.
Our free cash flow year to date was $182 million as compared to $67 million in the first nine months of last year.
The cash flow increase was primarily due to higher net income and a lower amount of working capital investment.
We expect solid free cash flow in the fourth quarter and reiterate our full year goal of achieving a free cash flow conversion of 100% or more of net income as previously communicated.
The balance sheet remains strong and provides us with ample flexibility.
Our net debt to capitalization ratio at quarter end was negative 22%.
As Bob mentioned when adjusted for the Bradley acquisition that closed last week, our pro forma net leverage is still healthy at 0.1.
During the quarter, we repurchased approximately 22000 shares of our class a common stock for $4 million and year to date, we have repurchased approximately 69000 shares of class a common stock for $12 million.
There is approximately $16 million remaining under the current stock repurchase program that was authorized in 2019 and $150 million remains available under the stock repurchase program authorized in July 2023.
Please turn to slide seven let me provide a few comments on the regional results.
Americas organic sales were up 1% slightly better than we expected due to a tough prior year comparison.
As a reminder, Americas grew 13% in the third quarter of 2022.
Solid growth in our nonresidential core valve products was largely offset by declines in gas connectors radiant heating applications and commercial marine instrumentation.
In addition to the tough comps weakness in single family residential new construction was a contributing factor.
Adjusted operating profit increased by 13% and adjusted operating margin increased by 260 basis points.
The margin expansion was driven by price favorable mix and productivity, which more than offset volume declines inflation and incremental investments.
Europe organic sales were down 1% as expected.
Reported sales were positively impacted by 7% from favorable foreign exchange movements.
Growth in our German OEM business, and our wholesale business in France, and Benelux was more than offset by declines in Scandinavia, and Italy with a reduction of government subsidies had an unfavorable impact.
Operating margin declined by 190 basis points as price and productivity were unable to fully offset inflation investments and volume deleverage.
<unk> delivered 1% organic growth.
Total sales growth of 33% was negatively impacted by 4% from unfavorable foreign exchange movements and favorably impacted by 36% or $9 million of acquired and where sales.
Double digit growth in Australia, and the middle East was more than offset by a double digit decline in China due to weak residential underfloor heating sales and project timing in data centers.
Adjusted operating margin increased 70 basis points due to higher affiliate volume price and productivity, which more than offset inflation investments and the dilutive effect of the Android acquisition.
Slide eight provides our assumptions about our fourth quarter and full year outlook.
First let's cover the fourth quarter outlook.
As Bob mentioned, we will have a tough comparison to a strong fourth quarter in 2022, when we grew organically by 11%.
We estimate consolidated organic sales, maybe down one down 6%.
Expect Americas, maybe down low single digits, and Europe down mid to high single digits offset partly by a low single digit growth in apnea.
This reduction in growth rates is due to the anticipated softening of underlying market conditions in Europe.
As previously mentioned in the Americas, We expect continued weakness in gas connectors, radiant heating applications and commercial marine instrumentation.
In <unk> the acquisition of <unk> is expected to contribute $9 million of sales.
In the Americas Bradley is expected to contribute approximately $30 million of sales as Bradley is seasonally slower in the fourth quarter.
We estimate our adjusted operating margin could range from 15% to 15, 6% for the fourth quarter up 70 basis points to 130 basis points versus the prior year.
The increase versus prior year is due to price favorable mix and productivity that are more than offsetting the reduced volume incremental investments of approximately $7 million and the approximately 90 basis points of dilution from the <unk> and Bradley acquisitions.
The sequential decline in operating margin from Q3 is driven primarily by the impact of volume deleverage incremental investments typical seasonality and acquisition dilution.
Note that Bradley a similar seasonality to watch and we expect lower operating margin in the fourth quarter.
We also expect customary and purchase accounting expense, including incremental depreciation and amortization of approximately $2 million to $3 million.
Corporate costs should be approximately $14 million.
Interest expense net of interest income should be approximately $1 $5 million for the quarter, including interest associated with our borrowings to fund the Bradley acquisition.
The adjusted effective tax rate should be approximately 25%.
We are assuming a 1.06 average euro U S dollar FX rate for the fourth quarter versus the average rate of 1.01 in the fourth quarter of 2022.
This implies a Q4 European increase of 5% year over year, which equates to an increase of approximately $6 million in sales and two cents a share in EPS versus the prior year.
Now, let's cover the updated full year outlook.
For the full year of 2023.
Our organic sales growth to be flat consistent with the midpoint of our previous guidance, which was a range of minus two to plus 2%.
As previously mentioned, we estimate sales of approximately $30 million from Bradley <unk>.
In addition, we now expect approximately $26 million of acquired sales from and were slightly ahead of our previous guidance.
We are also increasing our full year adjusted operating margin expansion to a range of 120 basis to 130 basis points.
Third to our previous outlook of.
Plus 30 basis points to plus 90 basis points.
This represents an increase of 65 basis points to the midpoint of our previous guidance.
We now expect our 2023 operating margins to be between $17 six and 17, 7%.
We expect our solid results year to date will partially mitigate the lower margins in the fourth quarter due to seasonality volume deleverage incremental investments and the approximately 40 basis points of dilution from the <unk> and Bradley acquisitions.
Our free cash flow expectations are anticipated to be in line with our previous outlook and should meet or exceed 100% of net income.
We are assuming a 1.08 average euro U S dollar FX rate for the full year versus the average rate of Euro 1.05 in 2022.
This would imply an increase of 3% and Europe sales year over year and equates to an increase of $8 million in sales and three a share in EPS for the full year versus the prior year.
Regarding other key inputs for the full year.
We expect corporate cost to be approximately $54 million for the full year.
Interest expense net of interest income should now be approximately $2 million for the year, including interest associated with our borrowings to fund the Bradley acquisition.
Our estimated adjusted effective tax rate for 2023 should be between 24 and 25%.
Capital spending is.
Is expected to be approximately $35 million.
<unk> and amortization should be approximately $45 million for the year, including the incremental depreciation and amortization from the Bradley acquisition.
We expect our share count to be approximately $33 5 million for the year.
Now, let me turn the call back over to Bob before we begin Q&A Bob.
Thanks to shrink please turn to slide nine I'd like to summarize our discussion before we address your questions.
We're excited about the addition of Bradley to our family of brands the acquisition expands our addressable market and enables us to offer front of the wall solutions to our customers integration is well underway and progressing nicely.
The third quarter was better than we anticipated with record sales operating margin and earnings per share supported by price and favorable mix.
Due to our strong year to date performance, we are increasing our full year operating margin outlook. We continue to monitor the slowing global economic indicators and are staying close to our customers. We are confident in our ability to execute in this uncertain environment.
Our strong free cash flow generation and balance sheet continues to provide flexibility to execute our disciplined capital allocation strategy.
With that operator.
Please open the lines for questions.
Thank you as a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question today comes from the line of Mike Halloran with Baird.
Your line is open.
Hey, good morning, everyone.
Good morning, Joe.
So let's start on the Bradley acquisition.
Philosophically you. My question is you know you look at the product and the content its a little bit more in front of the wall relative to maybe a core portfolio now I can certainly see the overlap with.
A lot of the maintenance stream type work you do.
And how much content you have in that area, but I'd be curious to understand if youre thinking more broadly about the solutions that you're offering today and how you think this complements with the existing business looks like.
Are you thinking more in front of the wall and then just a little more detail on how this fits with what you have already.
Yeah, Mike So yes, sir.
Certainly we really like the acquisition with Bradley, it's specifiable products in some great markets and yes. It expands our opportunity in front of the wall and allows us more content inside of a commercial building. So we're excited about the acquisition.
Or well on their way and I'm excited.
I did to have them part of our portfolio.
Just expanding on that a little bit Bob It does that mean that you're you're widening the aperture a little bit for what you look at from an acquisition perspective relative to history or has this been this brought anyhow. This has been in the works for a little longer than I realized.
No I think we will continue to look at expanding our portfolio again, it's right in our core markets residential commercial and light industrial related to safety. So yes, we're opening our aperture to that but I don't think youll see us wake up and be in the oil and gas industry. So.
And then more closer to the core to us.
Okay. Thanks for that and then second one would just be along the non res side of the business I'm curious to see how you think this is going to play out certainly recognize all the comments you made in the prepared remarks, but my question is gonna be twofold, one where do you sit in a lifecycle from a project activity.
Perspective more early mid late cycle was.
The project life, and then secondarily when you look at that.
Are you thinking about the starts and what that backlog from new project activity can look like because we had to next year.
Yeah, Mike So when I look at our portfolio I mean, we're in every segment of that from the beginning middle and end with Bradley certainly closer to the very end on that stuff. So we're watching it remember the 60% to 65% of our business is repair replace so that's a nice steady annuity with our large installed.
Base, but as we're looking at all of this I mean, we watch the same indicators as you have but the other indicators that we watch or how busy our contractors, especially in North America and they seem to be very busy our product is agnostic to.
Particular market. So if the office is down we shift to maybe data centers as an example, right. So.
Wherever there is construction and we watch the construction backlog of our customers and understanding where that is so in North America, that's healthy and again drains which as you know is a leading indicator we saw some softness in that and as we a little bit in September but not really bad.
So again I think we watch just like everyone else all of these leading indicators, but right now in particular in North America is holding up.
Thanks I appreciate it.
Thank you.
Your next question comes from the line of Nathan Jones with Stifel. Your line is open.
Yes. Thank you this is Adam Farley on for basin.
My first question is on margins and margin expansion has been much higher than the level in watches long term plan.
Have we reset the bar on margins to a level to a new level outside of.
Potential recession impact and do you believe that you can deliver that long term 30 to 50 basis point target with maybe 2023 is a rebased starting point.
Okay.
I think and I think youre looking at the long term right over the last three years suddenly we had a very good margin expansion over the last three years and that was driven by obviously volume leverage our volume is up significantly since the 2020 pandemic ear. So we had good volume leverage and then we've had good price and productivity over cost they've got good margin.
Expansion from that as we look to the future. We're still make the case that over the long over the next five years, we're still going to be driving 30 to 50 basis points of margin expansion and Thats again plenty of price and productivity and volume leverage over cost inflation.
Target.
Hey, guys. Thank you for that and then kind of shifting gears.
Post the acquisition.
Bradley your balance sheet is still very very healthy.
Is there a period, where you need to focus on integration and synergy generation or could you potentially be right back in the M&A market immediately.
Yeah.
Well listen we certainly have the balance sheet to do further M&A, but you never can predict the timing of M&A I'm not afraid to do M&A, we have a great team.
In our side of our organization that is capable of doing more so.
Bradley just one acquisition so we continue to nurture our pipeline and.
The pipeline is still full so we will continue to watch and monitor but as you know you can never can predict acquisition. So.
So, we'll keep monitoring that and we'll see what happens.
Okay. Thank you for taking my questions. Thank.
Thank you.
Your next question comes from the line of Ryan Connors with Northcoast Research. Your line is open.
Alright, Thank you good morning.
Brian.
Wanted to talk about go back to the question. The prior question around gross margin and look at that from from a standpoint of price.
And how well you've continued to do in terms of price capture on price realization, even though youre stacking multiple years of price increases on top of each other now so it's been very impressive can you just give us some perspective on on what's enabling that I mean is the market just really that tight in terms of this.
The supply side, because it does seem like the demand side has moderated a little bit at least in residential any color you can give us about how pricing has held up so well.
Brian one of the things that we've really focused on we've been investing significantly in smart and connected products and were having a higher value proposition to our customers. So you know that's one of the things that allows us to drive pricing in the marketplace is because we have a differentiated.
<unk> solution to our customers. So I think that's been the big focus.
Which is helping support that.
And then the other thing Ryan this year. The other thing that's benefited US is certainly on the cost inflation side. If you think about labor costs. They were still inflating, but on the commodity side couple of commodities have been softer than we had anticipated.
Freight has also logistics has been softer than we had anticipated that has helped the margin story as well.
And the last thing I always wanted to add is from a mix point of view.
Residential is lower margin than commercial so our residential and OEM business has been down and our commercial business has held steady or up so that we're having a favorable mix in margin. So we got to watch that as residential starts coming back.
Okay. That's good color.
Secondly, on Bradley just coming back to that looking at that more from the perspective of your channels to market and how Bradley.
Defers or similar to your existing product line in other words are there other different set of distributors and channel partners. There are there synergies potentially there or on the other hand other complications there with trying to integrate all that anything you can tell us about how these products from Bradley go to market versus your legacy.
For folio.
Well a lot of it goes through wholesalers, which are the same wholesalers we deal with every single day. So some of the rep channels are different but we're maintaining those <unk> channels and especially on the safety side right.
The safety channels different from what we've traditionally done so again overall, we feel this is very complementary to what we're doing and we havent built very much sales synergies on purpose I don't believe in sale synergies so what if.
If they happen they happen, we'll hold our teams accountable for them, but I don't do deals based on sales synergies. So this is driven by cost synergies.
Well, that's a good prudent approach much appreciate it thanks for your time thank.
Thank you.
Your next question comes from the line of Jeff Hammond with Keybanc. Your line is open.
Hey, Good morning, guys. This is David Tarantino on for Jeff.
Good morning Blake.
Just maybe back on bradleys and to attack it maybe a little bit of a different way could you talked about how it positions you guys in the front of the wall relative to what the competitive landscape looks like there and kind of how you win in that market.
Bradley is a leading brand in that market, it's known for its high quality innovative products and the higher end of the product, which is very similar to the walks portfolio right. So quality innovation.
It is exactly what they are and.
Our brands, it's been over 100 years old so again, a large following and Thats, what we really liked about the acquisition as a leader in its respective area.
Great and then maybe sticking with Brad could you talk a little bit more about the cost synergies and kind of the cadence you expect them to show through and what are the biggest opportunities are.
Yeah. We we noted that we have about $12 million of cost synergies, we think probably 40% next year, 40% and then 20% at the very end a lot of those are you know as.
As I said in my prepared remarks, the one watts performance system, which is really focused on lean supply chain and our global sourcing. Obviously so those are key attributes. The teams are working them hard right now and we have line of sight to getting to all of them.
Great and maybe if I could sneak one last one in could you maybe give a little bit more color on what youre seeing on the ground in Europe.
It seems like the guide implies some moderation there.
Okay.
The results there have been surprisingly resilient to date.
Yeah, they've been Europe in the first half of the year was performing very well leveraging a lot of what I call the subsidies, especially in Italy, we're seeing some of those subsidies starting to slow down.
And we saw that in September and October we saw some further softening on the new construction side of that market. So we're watching that very closely it's held up longer than we expected it to which has been a pleasant surprise, but we're starting to see them slow down I think a lot is dependent on how cold.
The winners there gonna have last year, they had a mild winter so people had excess funds to work on energy efficient products.
Inside their homes and I think.
Those incentives are tailing off, but we'll see if new incentives or put in next year, but right now we are.
Being cautious based on our order our order input in particular in September and October.
That's why we're being a little cautious on Europe, right now and we.
We saw strength in OEM channels in Germany, but that started something up as well and that's what we anticipate in our fourth quarter outlook.
Great. Thanks, guys.
Thank you. Thank you.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question comes from the line of Michael <unk> with TD Cowen Your line is open.
Good morning, everyone. Thanks for taking my question.
<unk>.
Yeah, just wanted to hit Bradley one more time I'm just curious on how that you know.
Fast if the consumer smart connected strategy I know you.
You mentioned.
Exposure and potentially some new distribution channels such as specifically.
Kind of on the value add front just curious if there's any specificity to provide there. Thank you.
On the smart and connected front I think that's an opportunity for Bradley I mean, they have smart products, obviously with their touchless faucets.
Bosses etcetera, but I think what we'll bring to Bradley is our connected strategy right. I think we can leverage our connected strategy with them and will further their initiatives around that area. So that's a key focus area. We've already teams have been already discussing that and leveraging our capabilities on that so I believe that's exciting.
And can tie into our overall.
<unk> system.
Great and then maybe you could just dive a little bit deeper in terms of like the end market breakdown are able to provide any specifics whether it's like industry.
Geography or aftermarket profile.
Yeah, So primarily North America I would basically say half is is new construction have is repair and replacement and as we talked about before they're highly in institutional public works and in the industrial channels, which were all favorable.
We liked so those are nice markets that we play nicely into.
Yeah.
Great. Thank you and just one more if I may.
I forgot if this was covered earlier in the call but.
What was price contribution for the quarter.
It was low single digits in the third quarter.
Great. Thank you so much.
Thank you. Thank you.
Your next question comes from the line of Joe Alice Meyer with Deutsche Bank. Your line is open.
Hey, good morning, everybody. Thanks for taking my questions.
Good morning, My first one is on the commercial business fully appreciate your short cycle nature here and pointing to the Dodge and the a b I understand that as well, but how are your conversations with your customers going at this point or does that Ryan with what youre seeing in those <unk>.
This is.
Just any any color you could out there about a further outlook into the early parts of next year.
Yeah, I think what we're hearing from our customers is especially the G. CSF is their busy they've got a strong backlog and although they're concerned way out there there are less concern in the near term based on their backlogs of what they have right now so I think the one area, we're watching and I noted it in or is the <unk>.
<unk> family side of the business because its been strong a whole bunch of capacity is coming online and we're watching that very carefully. So that's probably the area we're watching them.
But theres still some healthy backlog, especially regionally again, you have to look region by region and each area and but so.
So far so good but we're reading the same things so sooner or later, we believe some of this is going to slow I don't expect.
A major drop right, we would see that based on backlogs and we also are watching new construction, new construction hiring and that's also been decent so.
Again, we watch all those leading indicators as proxies for what it could be three 612 months out.
Right I appreciate you calling out the timing dynamics in multifamily we've heard from others that it's possible even with the starts that you're seeing now that backlogs will get you through.
Potentially most of 2024.
Curious if you would maybe agree with that particularly for some of the later stage things for multifamily.
And then just a follow up question on your costs I think you called out inflation in the quarter I'm. Just wondering if you would expect that to turn to deflation next year and if that should hit a little bit faster since your inventory turns are improving.
Improving.
I think on the multifamily front I think it's I think there's confidence maybe into the first quarter of next year at that point I think everybody continues to look at what their backlogs are and whether they'll come off of a multifamily construction and go into an institutional.
So again labor shifts and construction shifts to where the markets are so.
Again, we're not hearing directly multifamily, but they're saying, it's not as robust as it was in their backlogs are coming down.
On the inflation question right. So certainly expectation is inflation will be lower next year as far as compensation benefits, etc, but there'll still be inflation out there I think your point on deflation on commodities I think that is highly dependent on on on China and other Chinese economy does recognizing that.
A lot of comprehends steel is used in China. So I think that's something that we don't know the answer on that and we'll just see how to see how the markets react but right but.
Excluding commodities, we do expect.
Your level of inflation.
Alright, Thank you both.
Thank you.
Again as a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
We will pause for any last minute questions.
There are no further questions at this time, Bob Pagano I'll turn the call back over to you.
Thank you thanks for taking the time to join US today. We appreciate your continued interest in watts and look forward to speaking with you again at our fourth quarter earnings call in February.
Good day and stay safe.