Trisha Tuntland: Thanks, Luke. We’ll take our next question please.
Operator: Your next question will come from the line of Joshua Buchalter with Cowen. Please go ahead.
Trisha Tuntland: Good morning, Josh.
Joshua Buchalter: Hey, good morning. Thank you taking my question and congrats on the record 2022. So, I guess I wanted to, I guess, hone in specifically on gross margins. You gave a lot of helpful color on the operating margin line. I was hoping you could give us a little guidance on what we should be modeling for gross margins, particularly as it sounds like utilization rates are coming down and there is inflationary pressures. I guess I’m trying to understand the trajectory of that line and what that implies for OpEx for the year. Thank you.
Meenal Sethna: Yes. We don’t usually provide any specific guidance around gross margin. So I’ll come back to what I was talking about with our different segments. In general, when we think about stronger growth on the top line, with the capacity that we built across our network, across the company, we tend to see good variable margins stronger across electronics with the higher margin profile but still very, very solid across our Transportation and Industrial. So when we see growth, the margin profile ends up being good, that comes through the gross profit line. I would say just some OpEx commentary in general through the past few years despite the amount of sales growth we’ve had, we have definitely leveraged — we’ve had good leverage on OpEx, and we have not like other companies you hear out there, we didn’t add to the same level as others did.
So we feel pretty good about our OpEx levels. We continue to invest for organic growth trajectory, short term and long term. But we’ll continue to monitor the situation and the broader environment. If we have to make adjustments in OpEx, we’ll do that.
Joshua Buchalter: Got it. Thank you. I appreciate the color. And I guess I wanted to — also on the channel digestion topic that you are on inventories. It’s well above where you’ve typically run, but it’s also a very different environment after a couple of years of shortages, and you’ve done a bunch of acquisitions. I guess — you mentioned where levels are in the channel and what the target is there. Can you provide any similar metrics of how you’re thinking about your on-books inventory and where we should expect that to move the next couple of quarters? Thank you.
David Heinzmann: Sure. I think that’s — it’s a great question. And I think the challenge that we deal with like many of our customers deal with is it’s been a pretty volatile time over the last two or three years. And there’s still a lot of volatility going on in the fourth quarter with the COVID situation in China and major disruptions going on there that took place kind of in the fourth quarter, it seems to be rebounding nicely after people are coming back after Chinese New Year. But I think the question mark for ourselves, too, as demand continues to be still relatively robust on us. What level of increased inventory do we carry versus maybe our historical norm? Keeping in mind that we, like many of our customers and other peers, a lot of that increase in inventory is not volume related, it’s cost related, because we’ve dealt a lot with a lot of inflationary cost in our materials and our components that we’re acquiring.
So there’s a big step-up that takes place just not in volume, but actually just in the inflationary cost. So that’s reflected in a higher level. But also volumes are up as we’ve kind of dealt with higher demands and that volatility. For sure, it’s an area that our teams are working on, and we would hope over the course of the year to begin to burn that level down — to begin to kind of come back to a more normal environment as we kind of exit the year. I think that’s an opportunity for us and our teams.
Joshua Buchalter: That’s really helpful color. Thank you.
Trisha Tuntland: Thanks for your questions, Josh.
Operator: Our next question will come from the line of David Kelley with Jefferies. Please go ahead.
Trisha Tuntland: Good morning, David.
David Kelley: Good morning, team. Maybe also a follow-up on the margin discussion from end and specifically, the Electronics segment margin, you’re guiding to above 20% for the full year, really impressive in light of the channel destocking. So, if we take a step back, can you walk us through what has changed structurally in your Electronics business that sets you up in this destocking period versus prior cycle downturns?
Meenal Sethna: Sure. Thanks, David. Yes, a lot of it I’ve been talking about the past several quarters, right? There’s a lot of structural work that we’ve done over the past few years as we’ve added capacity, we got to the point where we’ve added capacity. And we’ve been able to improve our outlook through the capacity we have. So just financially, what that does is that, it helps us drive better margins. You can drive more production, more capacity out of your same footprint. So that’s been a positive. As always, we don’t talk about all this anymore, but we continue to do footprint work through the past few years. So versus where we were in 2019, we’ve got a more streamlined footprint of a lot of things we’ve done, we had talked about that as part of the integration, and that was the last piece.
So that’s how they’re — and then other work I talked about productivity initiatives, which are part of our DNA of things that we’ve done. So a lot of that has definitely helped. And then the last piece is, we’ve gone through a couple of years now of price realization really to offset some of the inflationary pieces. And yes, I would expect that we’ll get back to some normal trends in pricing that will be a little erosion, but I don’t expect that to happen overnight or quickly, and we still feel good about where we are today.
David Kelley: Okay. Got it. Thank you. Last point, can you still be or do you expect to still be positive price costs in electronics in 2023? Or should we model that rolling over a bit this year?
Meenal Sethna: Yes. I think from where we sit today around our thoughts on both pricing and where inflation is going. I would say, from a company perspective, we’ll probably be closer to neutral. Again, that’s where we sit today. We talked about it in the prepared commentary, there’s still pricing that we are going after with customers because our costs continue to go up, so there’s pricing there, but not necessarily on the electronic side.
David Kelley: Okay. Thank you. And then maybe if I could squeeze in one more. On the Transport business, and I appreciate the color on the ongoing customer inventory unwind there. We’re starting to see signs of supply chain improvement in autos that’s enabling some better production and capacity utilization. So in light of that, where are we in the process with the customer inventory unwind? How is the visibility to that into 2023?
David Heinzmann: Yes. So clearly, we also see that — in talking to our customers that some of their limitations on supply chain are beginning to ease. There’s still some out there, but some are using, and that’s a positive sign, certainly. We’ve gone through a fair amount of inventory rebalancing in our Passenger Car business in the course of 2022. And what I would say is we’re through the bulk of it. We do expect to continue to see some inventory correction in the first quarter, maybe it bleeds into the second quarter, but for the most we see working our way through it in the first quarter. But we’re through the bulk of that in the passenger car side. We mentioned in the prepared portions as well. On the commercial vehicle side, we also saw where there’s some inventory rebalancing, particularly on the Carling products.
So the Carling business that we acquired. I mentioned it, but — if you take our Carling business in 2022 compare it to the stand-alone year under the previous ownership, we grew that 20% last year, which was very significant. When we acquired the business, it came with a really strong backlog. The teams worked very hard to ramp up production and capabilities, and that’s one of the values that we bring sometimes to acquisitions as the disciplines and the ability to drive things at the factory level. And we were quite successful at doing that and grew that business 20% from when we acquired it. So customers have been dealing with long backlogs there prior to our acquisition. We’ve cleaned that up. And then the customers and distribution partners have reached that point where, okay, well, now lead times are significantly lower.
You guys are delivering very rapidly on that. So therefore, they’re pulling back a little bit on inventory, too. We see that also kind of impacting — continue to impact a bit in the first quarter as well.
David Kelley: Okay. Got it. It’s really helpful. Thanks team.
