We’re beginning to get to healthier levels there where we would say we’re probably 85% of the way through the inventory burns that need to take place there. So there’s still a little more to go. But keeping in mind, the big opportunity for us as even if end market demand remains fairly muted, when we reach that inflection point of getting down to the inventory levels that are appropriate, we’ll get gains in sales driven by that. And we also think there are some positive signs on the demand side and the broader electronics part of the business. Industrials are a little softer, that impacts, as Meenal said, the power semi side. But we’re beginning to approach a healthier position on the inventory side.
Matthew Sheerin: Got it. Okay. All right. Thank you very much.
David Heinzmann: Thanks for your questions, Matt.
Operator: Your next question comes from the line of Joshua Buchalter from Cowen. Your line is open.
Joshua Buchalter: Hey, guys. Thanks for taking my question. Maybe following up on the previous one. So it sounds like you moved from 70% to 85% of the way through the inventory digestion. Do you expect the vast majority of the remaining 15% to be wrapped up by the June quarter? And if so, I know it’s generalizing across your total business, but maybe you could remind us, like, if you were to ship to end demand in the back half of the year, maybe help us with what normal seasonality would look like? Thank you.
David Heinzmann: Well, I’m not sure what normal seasonality is anymore with the amount of disruptions that we’ve seen in the last several years. But what I would say is, it’s always a little challenging to pick exactly when you hit that inflection point and it’s really by product line, by distributor, where we have some product lines that are there already. They’re kind of target inventory levels and are quite healthy and others that they’re still a little farther to go. But we think the bulk of the channel destocking, we will work through in the next quarter. That’s kind of the math as it has worked out and what we’ve been seeing the burn rates on our inventory position, we think we’ll probably head into the back end of the year in our passives products that are pretty healthy inventory position.
So the challenge then becomes what’s normalized from a calendarization, because we’ll have both impact normal calendarization. And typically, third quarter is a little stronger than fourth quarter. Second and third quarter are kind of similar. That will be normal calendarization. But you throw on top of that destocking ends. So you’ll still — we would expect, if all things play out, that we’ll start to see some things turning in the back half of the year because that end of destocking or slowing of destocking will help drive that and actually could produce better than normal seasonality in the back half of the year.
Joshua Buchalter: Got it. Thank you for all the color, Dave. And then on the second quarter guidance, it looks like a decent 100, 200 basis points of operating margin expansion back of the envelope based on a 1% revenue growth. Maybe you could help us understand the drivers across OpEx? Or is it gross margin, whether mix volume or pricing? Thank you.
Meenal Sethna: Yes. I would say margins overall as sales pick up a little bit, and again, there’s been cost work that we continue to do when we see businesses that are in decline. So whether that’s discretionary spend, some cost work, a little bit of margin recovery on things that we’ve done. So I think those are positive as we think about the second quarter. The other things I wanted to mention that are also in the slides and prepared comments were the fact a) with foreign exchange, as we’ve seen strengthening dollar and the mix of currencies that we have. FX is a headwind for us on the margin, about 90 basis points for the second quarter. And then I think those who have been with us historically know that we have this bit of a second quarter phenomenon on our stock compensation where just because of the provisions in some of our stock grants, there’s a little bit of what I call a bullet vest that happens in the second quarter.
And so while it’s not an outsized cost. It’s just that we have to recognize it all in the second quarter versus taking it over a longer period. So that’s about $0.30 impact in the second quarter, if you’re just looking at sequential pieces. That’s a little bit of a hit there too.
Joshua Buchalter: Got it. Thank you, Meenal.
David Heinzmann: Thanks for your questions, Josh.
Operator: Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Christopher Glynn: Thanks. Good morning, everybody.
David Heinzmann: Good morning.
Christopher Glynn: I had a question about the pruning. So you took it down, I think, from 6% to 8% to a 5% impact. Is that related to market dynamics and market timing and customer service considerations? Or just curious about the narrower scope there. And if this is a couple of year process or this is predominantly a 2024 adjustment?
Meenal Sethna: Yes. No, great question, Chris. So on the pruning side, if I take a step back, where really, for us, the pruning is really taking a look at more granular pieces of the portfolio, really understanding the customers, the products and the profitability on both of those pieces. So for us, it’s really trying to ultimately balance the profitability and return in where we can as much as possible, we prefer to retain customers. We prefer to continue doing business with the customers, but it has to incorporate the value that we bring at an expectation of a profitability and return. So in this specific case where we brought down the numbers a little bit, as we’ve gone back to a number of customers and even internally looked at ways to improve profitability, we found that, hey, maybe we have to prune a little bit less, and Dave talked about some of our pricing being sticky.
In the case of our Transportation segment, we had price up this quarter. And we went back to a number of customers again around price and we expect that to stick. So that’s really what’s really driving a little bit of that trend where it’s less pruning. And I would say, yes, this will go through this year. But I would also say this is not a one and done either. This is something that we constantly look at. We don’t always talk about it as much. This is just because we’re going through a bigger effort through the Transportation segment right now. But this is something that we look at continuously. I just don’t expect it to continue at this level as we go into ’25.
