Nicole DeBlase: Maybe just starting with channel inventory levels, Craig. Have definitely heard some concern about distributors maybe having a little bit of excess inventory or inventory building. What are you guys seeing in your channels within Electrical?
Craig Arnold: Yes. I’d say — in aggregate, Nicole, I would say that we’ve not seen that nor have we heard that from our big channel partners in aggregate. Today, if you look at — once again, if you think about our order intake, our growth in backlog and you throw that up against — Tom did a great job of laying out what it’s meant in the context of our own inventory. And while we’re building inventory, we’re actually increasing our efficiency as it relates to a forward view of revenue. And I think that would be true for many of our distributors as well given the strength in the underlying market, certainly in the Americas. I would say that if you take a look at Europe specifically, while we’re still seeing growth in our own orders in Europe, there has been a little bit of a slowdown in Europe.
And while still growth, we have seen a little bit of a slowdown and a bit of an inventory adjustment that’s taking place with some of our European distributors. And I think — China, I think, will be going in the other direction as that market comes through COVID and begin to grow again. So very slightly regionally in aggregate. I’d say no inventory destocking to speak of at all. Regionally, a little bit of destocking in Europe with the U.S., and perhaps Asia market is still a little bit tight.
Tom Okray: Yes. Just to punch a specific number Nicole, I gave some numbers on the one chart, but our average quarterly orders in 2022 versus 2020 are up 55%, very big number.
Nicole DeBlase: Got it. And I guess, looking at the guidance for the first quarter, you got organic decelerating to the 8% to 10% range versus 15% in 4Q. I guess, can you just talk through some of the segment-level drivers there? And is that mostly a function of just tougher comps?
Craig Arnold: Yes. The revenue guide for Q1 versus Q4, I’d just say, one, we’re anniversarying bigger numbers in Q1 last year. So certainly, it’s the anniversary effect of it. We certainly have gotten quite a bit of price during the course of 2022 to offset inflation. So on a relative basis, you don’t maybe have as much lift on a quarter-over-quarter basis in price. And I’d say those are really the two. And then there’s this whole question around recession and how that’s going to impact confidence in the outlook. And so lots of uncertainty. If you think about our growth for the year, Q1 is very much aligned at 9% at the midpoint with our growth for the year. And we’ll see how the year unfolds, but those are primarily the reasons.
Operator: The next question is from the line of Scott Davis from Melius Research.
Scott Davis: Guys, you’ve been a little quiet on the M&A side since the Royal Power deal, which is fine, but there wasn’t really anything in your slides on kind of target buybacks or anything where you’re prioritizing capital allocation for ’23. Can you comment on that, please?
Tom Okray: Yes. Sure, Scott. Yes, nothing really in the prepared remarks because we’re staying the course with our same capital allocation tenets. Obviously, first, we’re prioritizing organic growth, which we think is so important, especially with all the megatrends and secular tailwinds that we’re right in the middle of. We’re going to pay a competitive dividend as well. It’s important to our investors. Having said that, we continue to be in the market and look for good acquisitions. We’re also — if you noted, we’re also shrinking the tail in terms of divestitures. We had a small one that we did in the quarter. So we’re actively doing that. And then in terms of buying back shares, this year, we did about $290 million. We guided $300 million to $600 million, and we’ll be optimistic — I mean, opportunistic there as appropriate. But it really hasn’t changed. We’re in the market. We’re always looking. And yes, staying the course on our capital allocation tenets.
Craig Arnold: And if I can just emphasize the point that Tom made is that we have just a lot of organic growth opportunities out there more than ever in terms of the history of the company. And so as we think about growing the enterprise, we don’t need to go out and do acquisitions to grow the enterprise. There’s plenty of organic growth opportunities in front of us that we’re investing to support. And — but we’ll continue to be opportunistic. If we see something that helps us strategically, maybe geographically — one of the things that you’ve seen us do over the course of the last 12 months is we’ve really, I’d say, shored up our strategic position in China. We’ve entered into a number of joint ventures, and that’s really the way we’re trying to play the China card right now given some of the risks and uncertainties.
But we entered into a number of really interesting joint ventures with local companies who have a strong position in the local market. We’ve taken a minority position. We will basically sell those products in markets outside of China, but they really do fill some really key product gaps in emerging markets in low-cost countries. And so yes, we’ve done some things on the JV side that I think shore up our position where we’ve had gaps, but there are just so many organic growth opportunities out there that we’re pursuing. That really is the priority.
Tom Okray: Yes. And just to punctuate that, Scott, with a number. If you look at our backlog for Electrical and Aerospace back at the end of Q4 in ’19, it was roughly a little over $4 billion. And as we said in the prepared remarks, we’re at $11 billion now. So there’s a lot of food on the table.
Operator: The next question is from Julian Mitchell from Barclays.
Julian Mitchell: Just wanted to understand on that cash flow guide. I think it’s at the midpoint guided up about $900 million year-on-year. Net income is about $300 million, I think, of increase. So that sort of the delta of $600 million there. Is that sort of just the $500 million miss from ’22? I’m assuming you capture it in ’23. Is that how we should think about it? And maybe on the working capital point, is it all inventory kind of shouldering that delta? Or is receivables or payables doing anything interesting?
Tom Okray: Yes. Thanks, Julian. Just a slight nuance in terms of how you characterized it, I mean, while we did miss — if we go back to that one chart, if we were able to foretell the future perfectly in terms of the order growth in the backlog, we might have guided a different number there. But coming back to the bridge from ’22 to ’23, in addition to the impact of higher income, it’s going to be working capital performance. As we noted in our prepared remarks, we can do a lot better there. It’s primarily inventory, but I would tell you it’s not just inventory. We think we can do better on DSO and collections. We think we can do better on DPO as well. I think we’ve got a great continuous improvement focus in this area. We know we’re not where we want to be. As we said, we invested prudently, but we can do a lot better, and we will do better this year in terms of net working capital.
Julian Mitchell: That’s clear. And just my quick follow-up, you talked about the first quarter sort of organic sales segment a little bit. Maybe on the margins. So I think you’re calling for the segment margin to drop sequentially about 1 point from fourth quarter into first quarter. Are we assuming kind of every segment has that similar drop and then sort of builds from there through the year? Anything to call out on that front, the sort of margins as we start the year and then move on by segment?
Tom Okray: Yes. I don’t think there’s anything particular to call out. I mean I would take you to our full year guide where we’re taking margins and we’re growing them 70 bps overall. And we’ve got margin growth in every single segment. Our EPS cadence is going to match our historical cadence of 45-55 to first half and second half. So I don’t think there’s anything specific to read into Q1.
Craig Arnold: Other than the volume piece, Julian. As you know, there’s certain cyclicality that we have in our various businesses. And that’s generally the reason why the margins generally drop between Q4 and Q1. And to the extent that we have more cyclicality in one business or the other, you could see a slightly different play-through by segment, but that’s really the primary issue.
Tom Okray: Yes. And that’s a good point, Craig. I think we see that in terms of our aero segment where we go down in Electrical and Electrical Americas as well, too.
Craig Arnold: Yes.
Operator: The next question is from David Raso from Evercore.
David Raso: The quarterly cadence of the organic sales growth, the 9% we discussed in the first quarter, the way you’re thinking about the rest of the year, is it all just sort of at the same kind of 7.5% level? I’m just trying to get a sense in particular about some markets where there’s a little more concern about a slowdown in the back half then maybe other areas that could be accelerating. So can you first confirm, is that sort of how you think of the cadence?
Craig Arnold: Yes. I think that’s a fair way to think about the cadence. I mean, I think the great news for us is we’re sitting on very large backlogs. And so to the extent that we had a little bit of an air pocket at some place, we can live off of our backlog for a very long time before it would actually impact our revenues. And so I think as we think about the year, we still think it’s a year where we’re constrained, where — but for labor constraints, capacity constraints, supply constraints, those numbers would be bigger than what we’re currently forecasting. And so I do think a similar pattern of growth is a good placeholder for now in terms of the way you should think about the year.
David Raso: And within Vehicle, the thought of auto sort of later in the year and truck later in the year, the interplay there? And a similar question on Electrical Global. Europe so far is proving a bit resilient, how to think about China and Europe in the back half of the year? Just those two interplays in those two divisions. I’ll leave it at that.
