David Heinzmann : Yes. We’ve been — like a lot of companies, particularly on the semiconductor side, particularly for us in the power semiconductor side, there has been an extended lead times there for quite some time. And we’ve talked in the last couple of quarters how we’ve been working on that and showing improvements in throughput to be able to bring that sort of inventory level down or the backlog down. We had a really strong quarter in the third quarter in the power semi business, where we were able to clean up the vast majority of that backlog to kind of get into a more stable environment there on the power semiconductor business. So it becomes a bit business as usual. We’re seeing some pockets where there’s some softness.
That’s — if you recall, that’s a very heavy industrial customer base. So we’ve seen some softness there. But we also have areas where we’re seeing strong growth from there. Some other industrial applications like renewable, we also have a medical business there that is quite strong right now as well. So although we see some of these kind of broader-based softness, there’s these pockets. We’ve talked about it in the industrial side, where kind of broader-based industrials are beginning to slow, we’re still seeing some growth driven out of these pockets of things like renewable energy, industrial safety and things like that, that help balance that. So it’s a complex business with a lot of different end markets that we’re serving. And it’s actually part of the strength of the portfolio, is that we do serve many different applications we’ve targeted that helps to balance it a bit.
Operator: We’ll be going next now to Matt Sheerin at Stifel.
Matthew Sheerin : A question regarding your guidance on profitability. It looks like — just backing into operating margin, it’s going to be down roughly 600 basis points — I’m sorry, 300 basis points sequentially, down significantly year-on-year. I know that the negative volume leverage plays into that. But is there a pricing or other factors? Because it looks like that the margins will be basically where they were during the pandemic, so the lowest in 4 years. So does this mark the bottom in terms of margins? Or are there other things at play here?
Meenal Sethna : Thanks, Matt. Good question. So what I would say is, and we’ve talked in the past, for us, sales volume tends to be a pretty large driver for us in terms of margin profile as you look quarter-over-quarter, especially when you have near-term trends that are going on. So the case of the fourth quarter, as I mentioned in my prepared comments, with the sequential sales decline that we have, really the margin — expected margin decline, and I’m not going to comment on the exact margin here. But the expected margin decline really is a function of that sales volume. As I take a step back and think about our overall margin expectations for ’23 compared to past cycles, we get reminded a lot of times of what life is like in ’08, ’09, where our margin profile was sub-10%.
And even during the pandemic period, the 2019 cycle, that ’19 to ’20 period, our margins finished off at about 14.5% or so. And so our expectation is, with all the work that we’ve done in the past few years from an execution perspective, from a pricing perspective, portfolio diversification, I expect that we will finish better than that margin profile for 2023.
Matthew Sheerin : Okay. And could you talk about the pricing environment? I know you’ve had success in the last couple of years in terms of passing along higher input costs. Are you seeing pressure the other way here?
David Heinzmann : Yes, Matt, I think the pricing environment, it’s been — we get question a lot on that and what we’ve seen, and I think it’s kind of broad-based actually. It’s not different than when I talk to our peers. Our distribution partners are seeing quite similar, that we do see pricing pressures, but the pricing pressures are more of a return to kind of our normal environment. The last couple of years have been abnormal, where we’ve been able to pass along the cost increases to our customers, and that’s really driven pricing up meaningfully. We’re not seeing that retrenching but we’re kind of seeing a return to a more normal environment. The reality is, there’s still a lot of cost pressures that we’re dealing with, and we share that with our customers.
So right now, what we see is, kind of the big increases that we had to make to cover the cost increases over the last couple of years are holding, but it kind of gets to return to that normal environment where you do lose over the course of the year, a couple of percent on the pricing side.
Matthew Sheerin : Okay. And just lastly, Dave, you talked about demand in China auto being a little softer. Could you talk about your position there with China OEMs, local OEMs versus international OEMs and content trends, anything positive or negative going on there?
David Heinzmann : Yes. Actually, our comments were that our third quarter was quite strong in China. There were preparations for a lot of platform launches. As you may know, well, the Chinese OEMs have lots of platforms. And as they’re launching those, we have a strong position both with multinationals, but also with the local Chinese OEMs. And with a lot of launches going on there, we had a very strong third quarter in China. Car build in China, we expect to be okay, not particularly strong going forward. But we feel pretty good about it. We’ve been open with the fact that on the high-voltage side, we expect we may not be able to maintain the same level of share with Chinese OEMs as we do on the low-voltage side, but we continue to have tremendous success on the low-voltage side and pockets of success with Chinese OEMs on the high-voltage side as well.
Operator: We’ll go next now to David Williams at Benchmark.
David Williams : First, congratulations to David on the new role there. Looking forward to working with you. And just kind of going back to the inventory situation, is there a way maybe to size the magnitude that you think it still needs to be digested across your end markets? And you talked about maybe this lasting into next year. But do you think this is the end of maybe 1Q or is it into the first half of the year? Just trying to get a sense on how big of an inventory destocking we have still remaining.
David Heinzmann : Yes. That’s the question we wrestle with regularly as visibility is not perfect. Certainly, visibility to our distribution partners’ inventory is quite good. But to their end customers, and that’s maybe a difference we’ve seen a little bit in this cycle than what we’ve maybe seen in previous cycles, perhaps end customers carried a bit more inventory than they normally did. So that’s impacted the speed at which our distribution partners, and we’ve been able to drive down the inventory and the channels. So it’s not perfect visibility there. Clearly, we would say, if we look at our distribution channels in the Electronics side, we still have a few weeks of extra inventory there. So that kind of methodically will wind down as it’s been doing.
