Nick Gangestad: Yes. There is few things impact our margin progression as we go through the second half of the year, and you are correct and we expect Q4 to be by far our highest margin quarter of the four quarters. The biggest contributor to that is going to be volume that is positively impacting the margin, particularly in software and control. That’s followed by the structural and temporary cost savings that we’re doing. And then the third is we will be having a more favorable mix of revenue that will be benefiting margins. So, volume is the largest and then followed by the cost savings and then the mix, all contributing to that sequential improvement in margin in Q4.
Operator: Our next question comes from Steve Tusa from JPMorgan.
Steve Tusa: When you talk about these investments, what’s the trend on R&D this year relative to last year as a percentage of sales or on an absolute basis?
Nick Gangestad: Yes, Steve, R&D as a percent of revenue is going to be pretty consistent at 6% of revenue. As a percent of revenue, it’s not really changing from last year.
Steve Tusa: And then I guess just more philosophically, thinking about the story and I know you guys have talked about your business being more of an intellectual property business over time, certainly part of the story at least. And I just what I struggle with a little bit higher level is whipping bonus accruals around basically altering investments based on near-term sales. I guess that just seems juxtaposed with kind of an IP type business. How do we have confidence that you’re not rocking the boat with a lot of that core, where the technology comes from, that would be kind of my biggest concern longer term? How are you guys managing that?
Blake Moret: As Nick said, our development expense remains at 6%. We continue to invest robustly in areas like new product introduction, which is actually increasing over the last few years in terms of what we’re delivering to the market, both in terms of the hardware products as well as new software as well. And so I think it would be incorrect to talk about whiplashing that piece of it. We’re looking for efficiencies that are taking cost down that had built up over the last few years of volatility, as we’ve gone from pandemic to supply chain shortages and making sure that we’re tuned for growth going forward with that. The incentive comp philosophy hasn’t changed there in that we operate in a pay for performance culture. We had great payouts last year, because we performed really well with high-teens top-line growth and even better EPS.
This is a year that is below expectations and we’re not paying a bonus, but it’s going to come back and that’s the way we’ve operated for as long as I’ve been in the business. So in no way it implies some sort of short-term activity to manage results at the expense of the long-term value that we continue to provide.
Steve Tusa: And then just one last one on the 3Q to the 4Q. I know that the second half of this year was dependent on obviously the sales being there. I mean, how dependent are we from going from the 2-ish to 4 from 3Q to 4Q on sales actually being there? Is it the same kind of dynamic as we’ve been seeing we’re seeing in 3Q, just similar to the comments you made last quarter?
Nick Gangestad: Steve, the sales dynamic is the single biggest contributor to the increase in EPS from Q3 to Q4. Followed second by on a smaller scale the cost actions. The total cost actions that we’re projecting in the second half of the year, we expect about a third of that to be impacting Q3 and about two-thirds of that to be impacting Q4. So there that is part of it, but it’s still a smaller number compared to the reliance on revenue growth occurring in fourth quarter.
Operator: Our next question comes from Rob Mason from Baird.
Rob Mason: I wanted to see if you could provide a little more color around the step up in orders that you’re expecting, sequential up in orders that you’re expecting in the fourth quarter. I know you mentioned distributor channel inventories normalizing at that point. Is that the entirety of the high-teens growth? Or are you expecting some shift in more positive shift in demand as well?
Blake Moret: There’s a few elements of what informs that guidance, Rob. The first is a significant reduction in packaging machine builder inventory. So within the OEM inventory, packaging machinery has been particularly affected by that. And the feedback we’re receiving from the conversations directly with them indicates that, that reduces significantly, as we go through the third quarter and into the fourth quarter. The distributor inventory actually is expected to clear again in regions outside of China before that. And so those two factors are an important part of it. We also see the normal seasonality in our engineered to order and life cycle services shipments. There’s always a higher shipment amount at the end of the year there, and that would include Sensia as well.
And then we see the growing impact of mega projects, and we do have a line of sight to some of those projects that are expected to come in with ordering and shipments beginning in the fourth quarter. We’re seeing some of that now. Think of that as kind of a drumbeat that increases through the year and again into next year.
Rob Mason: Should we think about the fourth quarter order level as a solid jumping off point as we go into 2025 now, absent the engineered order normal seasonality there?
Blake Moret: Yes. I mean, in this volatility that we’ve been operating in the last 4 years, I’m going to reserve a view. But I think we’re setting up the foundation so that we have an attractive cost base regardless of what orders do next year.
Operator: Our next question comes from Joe Ritchie from Goldman Sachs.
Joe Ritchie: So maybe — can I just maybe just start on that last comment on medical project spending specifically? I’m trying to square the comments around EVs earlier and some push outs. And if I think about where we’re seeing the biggest kind of like expectation for mega project pickup, it would probably be in semi-fab CapEx and then also on the like EV/battery plants. And so, help me just kind of spur the comments on EV pushing out and where you’re actually starting to see some kind of some good green shoots on the megaproject side?
Blake Moret: Yes. So I mentioned that we’re seeing some push out on EV, but we are not seeing cancellations in those projects. And it doesn’t mean that they’ve all gone away. EV is still about a third, a little bit more than a third of our total automotive business. So there’s still some of those projects, EV projects that we’re winning and getting business for now. If we look at some of the other areas of mega projects, the Facilities Management and Control Systems or Semiconductor fabs. We’ve got great capabilities there and are playing a major role in a lot of the fabs that have been announced and are currently under construction, in the U.S. but around the world, that’s been a good business for us in Asia for over a decade.
