Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Significant margin expansion is expected in the second half of fiscal year 2024, driven by increased volume (accounting for 75% of the margin expansion), improved factory utilization, and continued progress in Lifecycle Services margins.
- Double-digit sequential order growth is occurring and expected to continue throughout fiscal year 2024, indicating strong underlying demand across key industries, including automotive, food and beverage, and process industries.
- Distributor inventories are normalizing, with excess inventory reductions expected to be completed by Q2, leading to equilibrium levels and potentially stronger sales in the second half.
- Margins are expected to remain low in the first half of the fiscal year due to supply chain constraints and unfavorable product mix, with margins in Q2 similar to Q1 (~17%) and increasing to mid-20% only in Q3 and Q4.
- Supply chain challenges are pushing shipments into the second half of the year, with delays leading to revenue being more weighted towards the second half, and an impact of $50 million to $70 million in sales deferred from Q1 to later in the year.
- The Intelligent Devices segment is facing operational difficulties, including choppy deliveries and a shift from backlog shipments to a book-and-bill environment, particularly affecting products like variable speed drives and motion control, which may impact profitability.
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Order Growth and Backlog
Q: Are orders turning up, and which markets are strongest?
A: Orders are inflecting up from the Q4 trough, with double-digit sequential growth in Q1 and expected to continue into Q2. The backlog decreased by high single-digit percent from the $4.1 billion at the end of last year. Distributor inventory is coming down as expected, and the order recovery is broad-based across industries, including auto and food and beverage. -
Margin Outlook
Q: How confident are you in margin improvement in Q3?
A: We expect margins to expand significantly in the second half due to increased volume. About 75% of the margin expansion is from volume increase while holding investment spending flat. The rest comes from improved factory utilization and better Lifecycle Services margins. -
Supply Chain Constraints
Q: What caused the shipment delays this quarter?
A: The shift from reducing backlog to a normal book-and-bill process caused some challenges. Lingering past-due backlog items, component challenges, and building safety stock impacted shipments in Q1. We expect to be substantially complete with this transition in Q2. -
Earnings Guidance
Q: Does a slow EPS start suggest modest full-year growth?
A: We are reaffirming our EPS guidance of $12 to $13.50, expecting significant EPS increase in the second half driven by volume. The first half under-reflects end-demand as excess inventory is being worked through. -
Distributors’ Inventory Levels
Q: When will distributor inventories normalize?
A: Distributors are reducing excess inventory and expect to reach equilibrium sometime during Q2. We are seeing sequential order increases, and inventory levels are coming down as expected. -
End-Market Outlook
Q: Are there any changes in end-market demand timing?
A: We continue to see strong activity in process industries like oil and gas, specialty chemicals, and mining. Some slowdown in certain EV projects, but these are continuing, and we see no major changes in vertical end-market demand. -
Capacity to Meet Future Demand
Q: How are you ensuring you can deliver future volumes?
A: We have over $10.5 billion in shipping capacity and adequate labor. We are investing in efficiency and resilience, including redundancy across plants and suppliers. We expect to exit FY24 with encouraging margins and volumes supporting growth in FY25 and beyond. -
Inventory Management
Q: How are inventories impacting production and sales?
A: We aim to reduce inventory days from 140 to 125. Finished goods inventory will not decline due to the need for safety stock, but reductions will come from raw materials and work in progress. -
Gross Margin Compression
Q: What drove the 240 basis point gross margin decline?
A: About one-third is from increased investment spending year-over-year. Acquisitions contributed 30 basis points, and the rest is due to mix and underutilization of our supply chain in Q1. -
Packaging and Mining Markets
Q: What are you seeing in packaging and mining markets?
A: Packaging machine builders are working through inventory but underlying demand remains strong. In mining, we are seeing relative strength and expect low single-digit growth.