Operator: Our next question comes from Guy Hardwick from Credit Suisse.
Guy Hardwick: Hi good morning.
Richard Tobin: Hi, good morning.
Guy Hardwick: Rich, I think on the last call, you talked about a fundamental change in the business model in DCF. Are you ready to talk a bit more about that today?
Richard Tobin: Well, I would leave that to the Investor Day, right? I mean, I think that my comment was is that — we went through this period of EMV and then we went through this period of the overhype EV taking over the world, and we were basically saying that we believe that we can position this business to harvest profits for 20 years. And I think that we’re — we’ve made the moves in Q3 of this year to begin to position ourselves appropriately there, right? So there was no sense of doing it in advance of a rising revenue curve. But now that it flattens out, we’ve got to run the business differently on one hand. And on the other hand, we’ve been a pretty active acquirer in that particular segment as we transition to clean energy exposure, particularly in the hydrogen space. So we’re doing it — but I would — if you’re looking for, what does that mean going forward from here in a holistic way, why don’t we wait until March and we’ll surely talk about it.
Guy Hardwick: And just a follow-up. Could you clarify that backlog math? Where do you think you could be at the end of the year?
Richard Tobin: Why don’t we take this off-line because everybody’s got a different calculation of if it’s — I think that there was 20% of the annual revenue should be in backlog in a normal time. So we got what our forecast is for revenue for this year. So it’s a relatively easy calculation.
Guy Hardwick: Thank you.
Operator: Our next question comes from Nigel Coe from Wolfe Research.
Nigel Coe: Hi, good morning everyone. So Rich, a couple of ground here. But just going back to the caution. You seem to talk about inventory and your inventory management more so than projects. I’m just wondering if you have to generalize, would you say the cautions more on CapEx? Or is it more the channel partners managing inventory levels very tightly. And would you say it’s U.S. versus Europe? Would you say both are in the same camp? Or would you say the U.S. is right now where you’ve seen the more caution?
Richard Tobin: I think it’s a U.S.-centric comment. I mean if you look at our growth rate in Europe, I don’t think anybody would have modeled that considering kind of the overall caution about Europe in total, but frankly, a lot of what we do out of our production base in Europe gets — we recognize the revenue in Europe, but it may end up around the world at the end of the day. But I think — it’s more — we don’t — our exposure in terms of — our exposure is larger in North America, so it’s largely a North American comment. I don’t — I think that Europe, any kind of let’s call it destocking would have happened during this past year because they were on the front end of the curve.
Nigel Coe: Right. Okay. That’s helpful. And then just you mentioned free cash flow more loaded to the first half of the year, which is obviously very unusual. You mentioned that the bulk of your excess inventories were material. So that doesn’t seem to have an impact on your fixed cost absorption. But I’m wondering as you go through the inventory management, are you expecting there to be some margin penalty as you build inventories?
Richard Tobin: No. Actually, I think that in our models, it’s a margin credit as we liquidate it because if you look at forwards based on when we bought that inventory sequentially grew 2022. It’s actually — and you can see it in our margins in some of the sectors, that’s part and parcel to this price cost. Look, at the end of the day, yes. If I go back and look over the last couple of years, we made a significant investment in inventory and that allowed us to deliver revenue growth that was above expectation. So now lead times and availability and capacity is repaired itself. So we get almost a triple effect of — we liquidate kind of the excess raw materials that we’ve been carrying to meet demand because we slowed down production in Q4, our payables balance dropped significantly.
So from a net working capital point of view, we got the negative of shipping heavily in Q4. So there’s a big receivable balance that gets liquidated build probably in the latter half of Q1, but more in Q2, our payables expand and then we collect on that receivables balance. So all three come in, in the first half.
Nigel Coe: Makes sense. Thank you.
Richard Tobin: Thanks.
Operator: And our last question comes from Julian Mitchell from Barclays.
