Richard Tobin : Yes, I don’t think that there’s any change.
Steve Tusa : Okay. So what is it usually, sequentially or percentage of the year, maybe Brad?
Brad Cerepak : I think the normal season [inaudible].
Steve Tusa : I knew you wouldn’t want to answer this. So I’ll go to Brad.
Richard Tobin : Brad left the room, Steve. Look, I think the seasonality that we would expect is where we’re tracking right now. So Q2, Q3 up and then we leave some optionality in Q4, and that will back to your question about order rates, Q4 will be depending on how we track. So there is potential upside in Q4 if order rates continue to build.
Brad Cerepak : Yes. There’s a nuance on order rates because the state goes now out of our order book and Jack can take you through that, but we still see sequential up even covering De-Sta-Co in the second quarter and through the year.
Steve Tusa : So like 225-ish for 2Q, does that sound about right?
Brad Cerepak : You know we don’t give quarterly guidance.
Operator: And our next question comes from Julian Mitchell with Barclays.
Julian Mitchell : Maybe I just wanted to start off with the DCST segment. So I think price down a little bit year-on-year. Was that just kind of a mixed thing and then it comes back later in the year? And on the margin front for DCST, 14% first quarter, do we just assume a sort of steady sequential ramp from that point through the year?
Richard Tobin: I think it’s because of the effect — the negative effect on the heat exchanger business, which is accretive to that segment. The ramp is going to be very much predicated upon how much CO2 system volume we can get out between now and the end of the year. So I guess, to answer your question, is it will ramp but you need to take into account when you’re looking at comps that until we get into the back half of next year, we’re going to be pushing up against the reduced volume and heat exchangers.
Julian Mitchell : And on the pricing, I think it was down just a little bit in Q1, is there sort of anything to call out there? Does it flip back to positive later in the year?
Richard Tobin : Yes, I think that’s a nice to be honest with you. I mean, the pricing that we have out there is relatively hold. It’s got to be more mix related than anything else.
Julian Mitchell : And then just a follow-up, sort of more broadly, when you’re looking at your customers and then realize there’s a breadth of end market exposures. But is it your perspective that for your product that channel partners and your customers, the sort of inventories are pretty lean now for where we are in the year, any concerns around further need for inventory reduction? Or do you think we start to move the other way when you’re looking at how your channel partners are behaving based on orders and so forth?
Richard Tobin : Yes. The portions of the business that are distribution, we don’t see a build. We just see pass-through right now. So one would hope that we get a little bit of build but that will be dependent on what we see on pull-through demand from here. So we’ve talked about this quite a bit, Julian. I mean we did a lot of work and took proactive work in the second half of the year. Our distribution channel checks don’t show build, we just see pass-through right now. So it’s not going to be a headwind. Hopefully, if demand continues to inflect positively, there will be a little bit of a tailwind.
Operator: Our next question comes from Brett Linzey with Mizuho.
Brett Linzey : I wanted to come back to biopharma. You noted some potential upside moving through the year. It does sound like customer tone has improved there. Maybe you could just talk about some of the warranty expirations and some of the obsolescence of some of that single-use channel inventory that could be a multiplier effect for that business.
Richard Tobin : It’s all done now, right? If you went back and look sequentially at the biopharma business where shipments are heavy that where we’ve lapped kind of that 2.5-, 3 year time line now. So there’s still pockets of inventory out there and the system builds are relatively a headwind right now, but on kind of the processing side of the business is what is inflecting forward. So we expect orders to be up from here just because of the fact that the inventory has been cleared one way or another over the last 36 months.
Brett Linzey : And then maybe shifting over to thermal connectors, doubling of bookings. What do you think the revenue run rate is in that business by year-end? And I guess, is there any reason why this business and those applications should be growing in line with some of the liquid cooling adoption trends?
Richard Tobin : That’s what we hope. I think it’s — I’m not going to size it for you right now because of the competitive aspect of the end market. What I can tell you is we feel good about where we are positioned from a spec point of view. I think that we’re going to be a little bit of a trailer because we’re a subcomponent behind a lot of the build that’s going out right now. But what I can also tell you is we have prebuilt the production capacity that if it was to inflect kind of like what we saw in biopharma, we’re going to be able to be there with industry-leading lead times.
Operator: Our next question comes from Joe Ritchie with Goldman Sachs.
Joe Ritchie : And so maybe sticking on that Slide 9, I did actually get a chance to see some of your thermal connectors. Your customers were showing them off the data center world a couple of weeks ago. But my question is really on the CO2 systems. Like Rich, how far long do you think we are in terms of these regulatory tailwinds that’s helping this business? And maybe just kind of talk a little bit about what the path from here?
Richard Tobin : Okay. We are shipping our first platform. We’re going to be launching our second platform in the next couple of months. And then sequentially, after that, the third platform will be launched after that. What we have right now is early adopters. So there are certain retail clients that because of ESG reasons and a variety of other reasons have chosen to be an early adopter in the space and not wait for the regulatory aspect of it. And then, we’ve got a lot of customers that are buying individual units to test them out. So I think we’re in the early innings here, but we like the trajectory.
Joe Ritchie : And then — and I know, look, you guys have referenced this biopharma, it seems like we’re starting to see some green shoots here. I’m just curious, as you’re kind of thinking through the margin trajectory for that business going forward? Maybe just kind of help us with the path from here?
Richard Tobin : Yes, it’s mix, Joe. So as the revenue climbs, the margin mix is important to the segment. And a way to look at it, frankly, is to go look back a couple of years at the margin that we were at and what — we actually didn’t decline that much in consolidation because the balance of the segment portfolio actually performed quite well. So I wouldn’t think about it in terms of incremental leverage on a unit basis. I would look at it more as the revenue climbs, the segment mixes up from there.
Joe Ritchie : And maybe just a quick follow-up there. So, are we at a bottom then margins for that business expected to improve from here to sequentially if any?
Richard Tobin : We never really gave up any margin in the business. What we gave up was volume. So like I said, it’s not a business that you look at decremental and incremental margins. It’s just mix up, mix down as a proportion of revenue.
Operator: And our next question comes from Andy Kaplowitz from Citigroup.
Andrew Kaplowitz : Maybe just thinking about the segment level organic growth versus your own expectations. It seems relatively clear that DEP should continue to be best growth in ’24 and DCST is the weakest. But if you look at the other segments, how are you thinking about growth versus that 1% to 3% guide for the company? And were there any surprises versus your own expectations in Q1?
Richard Tobin : Okay. Let me think about it. I think that, as I mentioned earlier, the only business that is performing worse than what was baked into our original forecast is the heat exchanger business in Europe for heat pumps, which is about — on a last year basis, it is about 30% of our revenue. So we’re going to have to mop up some of that. Now what we have offsetting that is CO2, right? And so I just answered Joe’s questions about the trajectory in the market and to the extent that the demand continues to be solid, we should be able to mop up some of that decline. And Belvac was always baked into our forecast. So we don’t think that we will post top line growth in that particular segment until Belvac just basically bottoms from there.
And then we’d expect to inflect positively, hopefully, in Q4, depending on CO2 demand. The balance of the businesses are tracking by and large, exactly where we had forecasted. So they’re really going into the quarter because I think I mentioned that the — when we did the full year results, it was all about order momentum and so far, so good.
Andrew Kaplowitz : And then, Rich, maybe just on DCEF. Can you give us a little more color into the comment you made about margin up for the year after that Q1 start. I know you do have that cost of programs, so how does that flow in through the year and help you get to where you want to be?
Richard Tobin : Look, I mean, I think from a margin heavy lifting point of view, I think that’s where we’ve got to do the most work. I think the management team is on it. So you’ve seen us take some structural cost out of that business. What you need to understand is that business is from a proportion point of view, the one that’s most exposed to distribution, right? So it’s had a pretty good headwind during the, let’s call it, the destocking phase of 2023. So it should run that was a business that we can look to that says, okay, incremental margin should be positive as volume flexes upward.
Operator: Our next question comes from Andrew Obin with Bank of America.
David Ridley-Lane : This is David Ridley-Lane on for Andrew Obin. A little bit of a bigger picture question here. So you’re seeing broad based orders improvement, manufacturing PMI back above $50. If you had to take a cut at looking back, right, was there actual underlying demand weakness last year? Or was it all just destocking and a function of comps i.e., do you think the underlying trend is getting — demand trend is getting better now?
Richard Tobin : The demand trend is getting better now because of the headwind from destocking in the previous comps. And then after that, then you get to idiosyncratic product lines and business and geographies, but if you want a macro comment, right? And I think that we addressed it last year is even if you look back two years, unitary demand was relatively flat, right? There was a lot of pricing flowing through the marketplace, but the unitary demand was relatively flat. And then because of interest rates, you had a negative headwind last year in terms of destocking. So going into this year, you’re thinking positively, let’s say, that we’ll see about unitary demand year-over-year, whether it inflects up, but what we know categorically is that you don’t have the headwind from destocking them, right, because it’s just pass-through.
David Ridley-Lane : And then just a quick housekeeping question. What is the share count and effective tax rate assumption embedded in the 2024 EPS guide?
Richard Tobin : You can call Jack about that. Let’s not get into — I’m not going to page through all these stock units.
Operator: Our next question comes from Jeff Sprague with Vertical Research Partners.
Jeff Sprague : Rich, you would — you addressed kind of your view on what’s going on in distribution. Do you have kind of a view on what’s going on with the OEM customers? Like if we think about Europe heat pumps, do you know one way or the other, if they actually are sitting on inventory or your product or you’re just really kind of waiting for the order for kind of a view of what the underlying demand might be. So heat pumps is the one that kind of stands out, but maybe there’s some others where that’s kind of a question also.
