Andrew Kaplowitz: Helpful, Rich. And then maybe just a little more color into the puts and takes you’re seeing in DCST. You mentioned the slowdown in the heat exchangers, but the strength in CO2 systems, you mentioned as well, and you did deliver strong margin. Do you still see DCST as a growth segment for you in 2024? And how would you assess margin potential from here, given what you just report in Q3?
Richard Tobin: Look, I think that I think the heat exchanger is temporal, right? I mean, we went through this incredible amount of demand. I don’t know if we were clocking up until a month ago, but it was very high demand that we had there. I think this is just a little bit of an inventory clearing thing. So we expect growth out of the heat exchanger business next year. I think that we did our highest margin quarter in refrigeration in the last five years here. We don’t think that, that’s – we’re going to give back there. Now just recall, though, that Q4, we have to take production down due to seasonality there, all right? So that has some amount of impact on margins. But the trajectory on refrigeration, coupled with CO2, which is margin accretive, we would expect margins to increase there next year.
Clearly, we’re going to – that will likely offset the negative input from Belvac, which we expect will run off its backlog next year and have a little bit of a down year in 2024.
Andrew Kaplowitz: Appreciate all the color.
Operator: The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Joseph Ritchie: Thanks. Good morning guys.
Richard Tobin: Joe.
Joseph Ritchie: Hey. Just a few quick follow-ups on just the inventory dynamics because, I mean, Rich, you’ve been doing this a while. It typically – based on what we’ve seen, it typically takes longer than a quarter to normalize inventory. And so just any color on your confidence on being able to get inventory where you need it to be by the end of the year? Or is there a good likelihood that some of this kind of spills into 2024?
Richard Tobin: Well, I mean, when we’re talking about total inventory, we’re talking about our own inventory, which we’re in control of, which is reflected in the cash flow that we’re signing up for, right? That takes working capital liquidation, a big chunk of that is inventory. I think if you look at the $600 million of free cash flow during the quarter, a material chunk of that was our own inventory reduction. When we’re talking about channel inventory, like I said before, we’re – we’ve been – the channel inventory in a lot of our end markets has been coming down progressively over the year. And now we’re adopting a posture between now and the end of the year in certain businesses to allow that inventory to clear rather than try to push revenue into either channel inventory or OEM inventory and because the only way you can do that is to start modifying commercial conditions, and we’re not doing that.
So should it clear, we believe that we’re on the front foot here. And so we think we’ll be in balance in kind of most of our end markets by the end of the year. And then it just becomes a question of what does growth look like next year and how much confidence there is in the end markets of how much that channel and how quickly they build it back. But we feel good about the trajectory we’re on. So that – it’s an end-of-the-year phenomenon based on current demand rates.
Joseph Ritchie: Got it. Okay. That’s helpful. And then I guess just a real quick one on just 4Q in DPPS. So I think you called out flat growth in the segment. So sequentially, revenue is down a little bit. I’m curious just from a margin standpoint, similar revenues – similar margins for 3Q? How do you think about the margins in 4Q for DPPS?
Richard Tobin: They’re either – it will be immaterial up or down, right, subject to mix.
Joseph Ritchie: Okay great. Perfect. Thanks guys.
Richard Tobin: Thanks.
Operator: The next question comes from Brett Linzey with Mizuho. Please go ahead.
Brett Linzey: Hey, good morning. Yes. I just wanted to ask a question on the portfolio. I guess as you consider additional pruning, is there a way to maybe quantify what percent of revenue could be under review? And certainly understand M&A is episodic, but are you seeking to find comparable sized acquisitions to offset? Or how should we think about this portfolio shuffle?
Richard Tobin: The portfolio – the whole portfolio is under review all the time. Look, no. Look, we don’t go around and say, we’ve got a business that’s got $200 million revenue, let’s go buy $100 million to $200 million revenue. No one can orchestrate that. But I think that we’ve gone over Brett, a lot about where our priorities are. To the extent that we could make a change to our portfolio that we did without touching our balance sheet, I think, is a positive. So to the extent that we could do that repeatedly, that would be great, but that is subject to a lot of timing differences both in and out at the end of the day. But just as an overall comment, what we did this quarter in M&A is what we would like to do progressively every year.
Brett Linzey: Got it. Makes sense. Just shifting back to heat exchangers and the destock in Europe and Asia. I guess, does this slow the rollout of some of those capacity additions or change the way you’re at least thinking about the near-term from a capacity standpoint? And then what is your level of visibility there in terms of these imbalances that have maybe skewed more negatively here?
Richard Tobin: No, I think the capacity is coming on sequentially. These are highly automated plants. So it’s not like we’ve got to ramp employees. It’s – they’re almost blackout plants at the end of the day. So we needed the standing capacity. Remember, heat exchangers is 40% of the revenue. So I get it, it’s getting a lot of headlines, and that’s why we wanted to address it. Our visibility is, as I mentioned, is not great because it’s an OEM sale mostly for us. So up and to the point where they decide they want to slow down, that’s what we find out. And the slowdown that we’ve been called out for the balance of the year manifested itself over the last 45 days or so. So are we worried about the capacity investment? Absolutely not.
We think that the technology is fundamental. It’s going to grow over time. There’s been a massive amount of capacity in heat pumps that’s been announced. It always seems a little bit implausible. So I think at the end of the day, the market reset is going to be on the finished goods, not so much on the consumption of the heat exchangers.
Brett Linzey: Okay. Great. Appreciate the insight.
Richard Tobin: Thanks.
Operator: The next question comes from Julian Mitchell with Barclays. Please go ahead.
Julian Mitchell: Hi. Good morning. One element I just wanted to circle back to in context of the inventory discussion is around the free cash flow margin guide. So I think that it’s very high still for this year, but maybe move down a little bit and that’s despite the good progress on the inventory liquidation that you cited in Q3. So maybe just any sort of color around the moving parts inside free cash flow, and it has been very volatile. So any sort of thoughts on maybe next 12 months as it’s more sort of normalized?
