Tony Hunt: But I think the most important piece on depreciation and facility cost is that, it’s a fixed cost, right? And so as our volumes increase, right, margins are going to improve. So we’ve made this big investment, as everybody knows, over the last three years to build out capacity to give us dual manufacturing capacity and business continuity plans. So this is going to pay off as we go through the next few years and margins will improve.
Jon Snodgres: And I think even the second half of 2023 should improve from the first half of 2023. So that’s kind of the scaling that we talked about and the layering in; lighter first half, better second half.
Matt Larew: Okay, great. Thanks for the questions.
Operator: The next question will come from Brandon Couillard with Jefferies. Please go ahead.
Brandon Couillard: Hi. Thanks. Good morning. Jon, on the mix dynamics, could you just stack rank the segments from highest gross margin to lowest gross margin? Aside from the COVID runoff, what exactly are the mix in ’23, where those come from?
Jon Snodgres: In 2023? So the declining revenues from much of the COVID related volume was high margin filtration, right? So it’s hallow fiber, it’s flat sheet filtration, which are really high margin products for us, the consumable components. We don’t give specific margins for every product, Brandon, but I can tell you those are very high contribution margin products. And they’re coming in being replaced with OPUS, being replaced with systems and fluid management products that are coming in at a lower pace. And we think as we’ve got facilities built out, as Tony and I talked about earlier, as we start to pump volume through our facilities, so those costs will get spread out better and we’ll gain margin traction over time. But I can tell you the OPUS margins, you’ve known that for a long time, are a bit lower than the others and then systems and fluid management are a bit lower clearly than the filtration stuff, the specific filters and consumables.
Brandon Couillard: Got it. And then Tony, how are you feeling about the M&A pipeline? Obviously company valuations reset at all and then the portfolio ?
Tony Hunt: Yes, you broke up a little bit, but I got the gist of the question. I would say M&A pipeline is pretty similar in 2023 as we saw in 2022. We continue to be active in the sense that we have lots of different companies that we’re talking to. I think our pace of M&A, Brandon, is not going to be too dissimilar to what we’ve seen over the last four or five years. I think we had a big pickup in 2020-2021 during COVID where we were systematically building out our fluid management business. But I think a deal a year pace is probably a good assumption. And to your second part of that question, I do think that the multiples have come down a little bit, but it’s all in the eye of the beholder.
Operator: The next question will come from Matt Hewitt with Craig-Hallum. Please go ahead.
Matt Hewitt: Good morning. Thanks for taking the questions. Maybe for the first one, I’m trying to piece two different comments that you made together. First, you were talking a little bit about the resin availability and some of the inventory issues, and then also the fact that obviously those resins are acquired by your customers and then shipped to you. Does that create or lengthen the inventory channel issues that you’ve kind of been facing over the past couple of quarters where the customers are having to churn through inventory? Does this kind of exacerbate that problem or is it a completely different issue?
Tony Hunt: I think it’s a different issue, Matt. I think it’s more that if I looked at the last two or three years, and I’m certain that the major resin suppliers would give you this exact same view I think the demand is exceptionally high. I think customers are placing orders six to nine months out. That has not come in, whereas the rest of the industry has, as capacity has come online. So that’s the one area in our industry where it really hasn’t. It’s come down a little bit in terms of lead times, but not enough to change the order pattern or the length of time it takes for those resins to get, a, procured and then delivered, whether it’s directly to the customer or a drop ship to us.
Matt Hewitt: Got it. And then obviously you built out a lot of capacity the last couple of years. As far as hiring plans are concerned, are you feeling that you’re in a pretty good place from headcount standpoint or do you anticipate needing to fill some more roles given the demand that you’re anticipating in the back half of the year and into ’24? Thank you.
Tony Hunt: Yes. I would think that on the headcount piece, we’ve been — even during the days of COVID, we tried to be pretty prudent about where we hired, what we hired, which facilities. And as we went through Q4 and again here in Q1, we continue to optimize, right? We’re looking at where the demand is, what headcount we need to support the forecast that we have for the year, and we’ve done a lot of that optimization over the last couple of months.
Matt Hewitt: Understood. Thank you.
Tony Hunt: Thanks, Matt.
Operator: The next question will come from Conor McNamara with RBC Capital Markets. Please go ahead.
Conor McNamara: Hi, guys. Thanks for taking the question. I appreciate it. If you just look at the guidance that you’re giving, it’s about 4% cut relative to what you were talking about in Q3. And by my math, that’s about 25 million in sales. So is there any way to break that out? How much of that is the inventory destock at the customer level versus the resin impact versus anything else?
Tony Hunt: Yes, so there’s a 1 point of FX, right? So I think depending on how we all do the math, it’s somewhere between 3 and 4 points versus what we were talking about in January timeframe. I think the majority of that is really coming from chromatography. And I would say it’s kind of — the rest of it is just dispersed across the other business. There’s no one business where I would look at it and say, we — it might be 1% lower or 2% lower than we were thinking overall. But the main difference where we were in January versus where we are now is chromatography.
Conor McNamara: Got it. Thank you. And then just longer term margins, if you get towards that ’27-’28 targets of $2 billion, what can gross margins go longer term? Can you get back to the high 50s or should we be thinking about longer term kind of in the mid-50s gross margin range? Thank you.
Tony Hunt: I would say that it’s obviously challenging to give you exact numbers on where we think margins are going to be five years from now. But I think between the investments that we’ve made — capital investments we made in 2021, especially in 2022 under some finishing off work we have to do in 2023, that pretty much gives us capacity all the way out to that 2027 timeframe. So our expectation is margins are going to go up. Our expectations next year is that we can add 100, 200 basis points onto our gross margin line. And maybe after that, it becomes 50 basis points or whatever it is, 50 to 100 basis points, just hard without knowing what the product mix and what M&As we might do over the next few years to give an exact number. But it will definitely march up, Conor.
Conor McNamara: Got it. Thanks for that, Tony. I appreciate it.
Operator: The next question will come from Justin Bowers with Deutsche Bank. Please go ahead.
