Q2 2023 Zebra Technologies Corp Earnings Call
Speaker 1: Good day and welcome to the second quarter 2023 Zebra Technologies earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President and Vester Relations. Please go ahead.
Good morning and welcome to Zebra's second quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year.
Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties.
actual results could differ materially.
and we refer you to the factors discussed in our FCC filings.
During this call, we will reference non-GAAP financial measures as we describe our business performance.
You can find reconciliation at the end of this slide presentation and in today's earnings press release.
Throughout this presentation, unless otherwise indicated, our references to sales growth are year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. Additionally, note that our asset intelligence and tracking segment
now includes our RFID solutions, and we have recast quarterly segment results since 2021 in a schedule included in the appendix of our earnings press release. This presentation will include prepared remarks from Bill Burns, our chief executive officer, and Nathan Winter is our chief financial officer.
Bill will begin with our second quarter results, then Nathan will provide additional detail on the financials and discuss our revised 2023 outlook.
Bill will conclude with progress made on advancing our Enterprise Asset Intelligence vision.
Following the prepared remarks, Joe Heel, our Chief Revenue Officer, will join us as we take your questions. Now let's turn to slide 4 as I hand it over to Bill.
Thank you, Mike. Good morning and thank you for joining us.
Our second quarter results were impacted by weakening demand and cautious customer spending behavior across our end markets.
While these results are certainly disappointing to us, we will spend some time today discussing the drivers that are having the greatest impact, as well as the actions we are taking to control what we can in a difficult demand environment, including our expanded cost reduction initiatives.
For the quarter, we realized sales of $1.2 billion, a 16% decline from the prior year, an adjusted EBITDA margin of 21.2%, a 70 basis point decrease, and a non-GAAP diluted earnings per share of $3.29, a 29% decrease from the prior year.
Let me now put these results in context. On our last quarter call, we discussed a broader softening of industry demand as customers tighten their capex budgets and IST device spending flows.
During the second quarter, those trends accelerated, at least some more cautious spending behavior by our customers of all sizes across our vertical and markets and regions. While all in markets declined, the man was weakest in retail and e-commerce and transportation logistics, as many customers are absorbing capacity.
they build out during the pandemic. These dynamics have been exacerbated by our distributors focus on reducing their inventory levels.
which accounted for approximately 20% of our Q2 sales decline. Our distribution channel has been aggressively driving down inventory as end-user demand has slowed, product lead times have recovered, and the cost of holding working capital has increased. Although Global Macro indicators show higher high costs of active collection prices never comedied at the recognizes.
have been resilient, the goods economy has underperformed the services economy. And certain key indicators most relevant to our industry have become significantly weaker, including IT device spending.
This particular metric has been most correlated with mobile computing, where sales declines have accelerated year to date, following more than two years of very strong demand.
Growth across RFID, data capture, supplies, services, and software were bright spots in the quarter.
and improve free cash flow. Slide five summarizes key industry challenges that have intensified since our prior update and our actions to address and mitigate the impacts. These actions include reducing spending across the organization, including additional restructuring actions to drive an incremental $65 million of net annualized operating savings as we exit 2023, increasing our focus on accelerating growth in under-penetrated markets.
and continue to work closely with our customers as they continue to digitize and automate their environments. Our revised full year outlook incorporates the slowdown and deceleration across our end markets, including a significant reduction in near-term demand in the mobile computing market.
destocking buyer distributors as well as a partial year benefit of our expanded restructuring actions. Given our limited visibility in this environment, we are cautious in our assumptions in not expecting recovery in 2023. We expect the reset of our cost structure.
shift of our go-to-market resources to arrive sales growth and improve profitability as our end markets recover.
We'll continue to take an agile approach to managing through this uncertain year term environment.
I will now turn the call over to Nathan to review our Q2 financial results and provide additional details on our revised 2023 outlook.
Thank you Bill. Let's start with the PNL on slide seven.
In Q2, net sales decreased 17.3%, including the impact of currency and acquisitions, and were 16% lower on an organic basis.
strength in RFID and supplies, was offset by a decline in printing as we lap particularly strong prior year results.
Enterprise visibility and mobility segment sales declined 23.6%, driven by a sharp decline in mobile computing, partially offset by growth and data capture solution.
Additionally, we drove organic growth across service and software with strong service attach rates. Sales declined across our regions driven by broad-based double-digit declines in mobile computing. In North America, sales decreased 11%.
EMEA sales declined 24% with pronounced weakness in Eastern Europe .
Asia Pacific sales decreased 17% driven by China and India with growth in Japan and Australia.
and Latin America sales decreased 6%, partially offset by growth in Brazil and Mexico.
adjusted gross margin increased 200 basis points to 48% primarily due to lower premium supply chain costs in favorable business mix and pricing partially offset by expense deleveraging and unfavorable FX we are pleased to see gross margins recovering from the inflationary headwinds we experienced over the past couple of
in the sales, partially offset by lower incentive compensation and cost controls.
Note that as we began to see demand soften, we announced incremental restructuring plans that are expected to drive $65 million of net annualized operating expense savings as they are implemented.
including previous actions taken over the past year. Our total net annual cost savings is $85 million.
a 70 basis point decrease driven by operating expense deleveraging partially offset by improved gross margin.
non-GAAP diluted earnings per share was $3.29.
A 29% year-over-year decrease.
Increased interest expense contributed to the decline, partially offset by fewer shares outstanding.
Turning now to the balance sheet and cash flow on slide 8. For the first half of 2023, negative free cash flow of $144 million was unfavorable to the prior year period primarily due to a greater use of net working capital.
due to higher cash taxes and payments for inventory.
and $45 million of previously announced quarterly settlement payments, which are scheduled to conclude in Q1 of 2024.
partially offset by lower incentive compensation payments.
In the first half of 2023, we also made $52 million of share repurchases and invested $1 million in our venture portfolio.
We ended the quarter at a 1.8 times net debt to adjusted EBITDA leverage ratio, which is below the top end of our target range of 2.5 times.
and had approximately $1.1 billion of capacity in our revolving credit facility.
On slide 9, we highlight the impact of premium supply chain costs on our gross margin over the past two and a half years. The actions we have taken to redesign products and increase price, along with improving freight rates and capacity, have enabled us to avoid component purchases on the spot market and reduce the freight cost impact.
In Q2, we incurred premium supply chain costs of an incremental $5 million as compared to the pre-pandemic baseline.
and $51 million lower than the prior year quarter.
As we enter the third quarter, we believe these costs will have been fully mitigated, which is a key lever to margin recovery.
As we enter the third quarter, we believe these costs will have been fully mitigated, which is a key lever to margin recovery. Let's now turn to our outlook.
As we enter the third quarter, we are seeing sharp, broad-based declines across most of our product offerings.
which continues to be amplified by distributors recalibrating their inventory to lower demand trends.
Our Q3 sales are expected to climb between 30 and 35% compared to the prior year.
This outlook assumes double-digit declines across each of our core product categories.
with distributor desocking accounting for approximately one third of the decline.
We anticipate Q3 adjusted EBITDA margin to be between 10 and 12%.
driven by expense deleveraging from lower sales volume, partially offset by higher gross margin from cycling $30 million of premium supply chain costs in the prior year period. non-GAAP diluted EPS is expected to be in range of $0.60 to $1.00.
Given our Q2 results and the continued challenging demand environment, we are significantly reducing our full year outlook, expecting a sales decline between 20 and 23%.
This assumes the Q3 sales trajectory continues through the remainder of the year.
We are seeing broad-based declines across our end markets as we enter the second half with significant uncertainty in this environment.
We expect full year adjusted EBITDA margin of approximately 18%.
We expect increased deleveraging on significantly reduced sales volumes expectations, partially offset by early benefits from cost reduction actions, as most of the actions will be implemented by early Q4.
We plan to continue to align our cost structure with a long-term trajectory of our business.
We now expect free cash flow to be positive in the second half.
but negative for the year given lower sales and earnings expectations.
Our cash flow will be impacted by new restructuring charges, increased cash taxes,
do the change in R&D expects regulation and $180 million of previously announced settlement payments.
We continue to be focused on right sizing inventory on our balance sheet as component lead times have normalized.
However, we now expect minimal inventory reduction in 2023 due to our lowered sales outlook.
We are focused on achieving 100% cash conversion over a cycle, which is one of the metrics in our long-term incentive compensation plan.
Please reference additional modeling assumptions shown on slide 10.
Note that we have improved our expected 2023 non-GAAP tax rate by one point due to favorable geographic mix.
Thank you, Nathan. While sales are pressured near term, over the long term, our solutions remain essential to our customers operations, and we are well positioned to benefit from the secular trends to digitize and automate workflows across our served markets. We are focused on advancing our enterprise asset intelligence vision by elevating Zebra as a premier solutions provider through our compelling portfolio. By transforming workflows with our proven solutions, Zebra's customers can effectively address their complex operational challenges, including scarcity of labor and the need to improve productivity.
We empower the workforce to execute tasks more effectively by navigating constant change in near real-time, utilizing insights driven by our advanced software capabilities such as machine learning and prescriptive analytics.
Now turning to slide 13. I would like to highlight several key mega trends which support Zebra's growth and customer value propositions over the long term.
These include automation, mobility and cloud computing, and artificial intelligence.
Our customers rely on Zebra to help them take advantage of these key mega trends which drive their growth strategies.
As you can see on slide 14, Zebra's enterprise mobile computers are critical to the front line of business.
We're excited about our innovation roadmap and new solution launches that advance our value proposition.
Labor is a scarce resource, and leveraging technology is a key way our customers can advance their operations.
Our solutions empower enterprises to increase collaboration and productivity, and better serve customers, shoppers, and patients by enabling an expanding number of use cases across our end markets.
Our enterprise mobile computing installed base has expanded significantly over the past several years due to the proliferation of use cases.
and the investment in zebra solutions should rebound as technology refreshes are re-prioritized.
Collectively, these offerings are approaching a half a billion dollars of annualized sales and have a long runway for growth.
First, we are a leader in advanced location solutions through RFID. We have been driving strong double-digit growth in recent years with the heightened importance of real-time inventory accuracy. We are now addressing an expanding set of use cases throughout the supply chain.
Second, we believe investments in our machine vision business, which is accretive to our gross and even margins, positions us well for long-term growth. We continue to invest in innovation and go-to-market efforts to further diversify in scale in attractive subcategories. Strong growth in certain end markets, including warehouse distribution and electric vehicle manufacturing, has partially offset weakness in the semiconductor industry. An example of our recent success is a win with a U.S.-based global auto manufacturer who has been transitioning to electric vehicle production.
The ease of use of our solutions was a key differentiator as the manufacturer capitalized on disruption in the auto market to modernize its processes with more flexible solutions.
And lastly, our workflow optimization software offerings include workforce and task management, communication and collaboration tools, inventory visibility, and demand planning.
Recent notable wins include our workforce management solution for location staffing at a large North America bank.
and our retail demand forecasting solution for a North America consumer packaged goods company.
The actions we are taking to improve profitability of our software offerings, including migration to a cloud-based platform, are expected to enable software to become EBITDA margin accretive in 2024.
In closing, our long-term conviction in our business remains unchanged.
While customer spend is pressured near term, over the long term we believe we are well positioned to benefit from secular trends to digitize and automate workflows.
We will work to continue to elevate our position with customers through our comprehensive portfolio of solutions while taking the action as needed to improve profitability and position us for success both in the current environment and in the future.
Thanks, Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
Our first question comes from Tommy Mull with Stevens. Please go ahead. Good morning and thank you for taking my questions. Good morning. Good morning, Tommy. Bill, you referenced the reset of the trajectory for e-commerce, including Parcel. I wanted to dig in on that a little bit.
Do you have any sense of how long that reset appears to need going forward? How widespread is this? I ask that second part because there's certainly one fairly high profile, maybe the most high profile end user there where these trends I think are well known at this point.
Anything you could do to highlight maybe other examples would be helpful as well. Thank you. I think overall that we've said that what we're seeing in the market is that, as the goods economy is clearly weaker than the service economy, which is resulting in, we're seeing more of our customers really absorbing the capacity that they buy.
even our retail customers and into transportation logistics customers as well. And we've seen softness now spread into other markets, but specific to your question. I think that I guess maybe a good example of that is recently we've seen a large logistics company talk about really what's been
detrimental to their volumes, right? And I think it is this idea that the overall, you know, industrial economy is slowing, right? Clearly focused on goods and not services. And they've said, look, you know, that's slowing obviously because of all the macroeconomic indicators, right? Inflation, interest rates, you know.
slow down in global trade. It's also being driven by consumers buying glass, right? And then this reset of e-commerce coming out of the pandemic to the levels of purchases of goods slowing down, transportation logistics package delivery.
So we're seeing this additional capacity built out in e-commerce players. We're seeing it in in retail and I wouldn't say that as much as you know, excess capacity is is really they have what they need for now and as the Goods economy slows they eventually will come back and buy more but pretend today they've got what they need.
We're seeing it move into parcel delivery with transportation logistics, but also spread into other markets as well as, you know, in first quarter we talked about slowing down of large orders and large customers we've seen that move into mid tier and in smaller customers as well. So it's more broad based than we had seen in the past and we think it really is the
The two years of very strong demand, we've seen a special animal with computing across our entire customer base is now being absorbed and into the marketplace. And then ultimately, that's why we're seeing the decline in the short term. And that will come back as the macro indicators come back as people buy more goods than services as.
you know, they use this exit capacity within their environment, they will buy more from us. And we'll see that, you know, inflection point at some point, but right now we're not seeing it. We're clearly seeing our demand be pressured because of it.
Bill, you mentioned an inflection point, which is the theme for my second question here. I'm using the midpoints of your revenue guidance for the third quarter and the full year and just looking at what's implied in the fourth quarter. At least on the midpoints, it looks like the implication is from third quarter to fourth quarter.
revenue steps up somewhere in the mid single-digit range on a percentage basis. I just want to unpack that a little bit. Is that an inflection that you think you have visibility to? Is it just there's some ranges in here and it depends on what you want to assume within those ranges or is there anything you can point to?
maybe that's impacting 3Q disproportionately but not 4Q.
3Q disproportionately but not 4Q. Thank you.
Yeah, kind of a combination answers there probably is that, you know, overall, we would say that.
you know, um
Why do we believe our guide, right? And as we looked at Q3 and Q4, clearly in Q3, you're seeing more, you know, de-stocking from a distribution perspective than you are, you know, in Q4. But I think that we've taken an approach that basically for the guide for Q3 and full year, where we see the demand trends that, you know, will compare.
pipeline than historical levels, just because of these pushouts of large orders, by our customers. And we remove expectations really for recovery and in year end, you know, at year end and fourth quarter. But the reason you see the uptick there is really because
Um, continues to slow. So ultimately our sales out of distribution, when that slows, they. Hold a specific days on hand inventory and they need to buy less from us because they're selling less out. They need less than inventory. And I think that the, we see an oversize effect when, when end demand slows. So
In fourth quarter, we're seeing less of the destocking than we were in Q3. The destocking is also driven by the fact that our delivery times have shortened and their cost of capital has gone up. So there's pressure on inventory and to lower those inventory levels really as their end demand has slowed.
we're seeing a bit less of that in fourth quarter. So that's really the trajectory we're seeing around. You know, we believe ultimately we're, you know, seeing in the process of seeing really the bottom in Q3 and Q4 and inducing a flexion point, you know, in
But the difference between Q3 and Q4 is really predominantly based on inventory, these stocking levels. And we expect to exit year-end with the right levels of inventory for what is the end demand that our distributors are seeing. So—
We see destocking taking place through the second half year and then being really at the right levels for the demand that our distributors are seeing as we have to do the year.
Thank you, Bill. I'll turn it back.
Our next question comes from Damian Carus with UBS. Please go ahead. There are multiplegy genes addition after another experimental based family assignment which is thrombinophobia.
Hey, good morning, everyone.
Hey, good morning everyone. Morning.
Phil, maybe you could just elaborate a little bit on the demand environment for your end customers kind of.
you know, moving past the distribution, de-stocking impacts, but you know, you talked about declines across all in markets and all customers. I mean, what do you think?
are the biggest drivers of that change over the past few months here? Is it your end customers really are facing sales pressures and budgetary constraints? Or do you think to some extent, your customers are just feeling a lot better about their productivity now that supply chains have almost kind of uniformly eased?
across the globe. Yeah, maybe I'll start and then I'll add, you know, Joe can jump in as well. Really, if we look back to our May call, we talked about broader softening of, you know, industry demands and those trends really have accelerated into two as we saw.
you know, more cautious spending on the part, you know, of our customers. Again, after two years of really strong demand for, you know, our products and solutions. And we see this is really broader global macro weakness, but we've seen particular impact, you know, from that in, in China, and China we expected.
e-commerce, as we talked about a little bit earlier on Tommy's question, really is driving that trend as they're absorbing capacity, but coming out of the pandemic. But we've seen it more broad across other industries as well as we worked our way through Q2. We're seeing an increased number of push outs from a project perspective as well.
one element of it, but the end-demand clearly is slowed and that's what's driving the distribution, you know, destocking of inventory is really about end-demand. That's really, and after two years of really strong demand, we're now ultimately seeing that, you know, it really is in Zebra. We're seeing this, you know, across industry trends like IT device space.
computing market, which we see is the biggest impact of this slowdown. But it's really broad-based across.
Now, what we've been seeing is that a lot of those deals, hundreds of millions of dollars, have pushed out of the first half into the future, or in some cases have disappeared as deals altogether. Not to mention kindness against a lot of people, such as the United States.
I'll give you some examples of those, but before I do, this behavior has accelerated in the second quarter. So for example, in North America,
The amount of pushouts that we've seen relative to the first quarter has tripled.
Now, let me give you just a few examples, right? So you can, you see what's driving this and what's happening, right? At the beginning of Q3, we had a grocer.
who came to us and said, I want to buy $4 million worth of your mobile computers.
And midway through the quarter they said, we're not gonna do this deal in Q2, we're gonna do it in Q3. I'm sorry, I said Q3 at the beginning, my mistake. So they came at the beginning of Q2, said we wanna buy this and midway through the quarter, they said, we now wanna do this deal in Q3 rather than in Q2. So a good example of what we would call a push out.
But we also had another grocer who at the beginning of the quarter was indicating that they're going to buy over $5 million worth of mobile computers. And they came and said, we now want to do take these $5 million of mobile computers, but we want to buy them over the next five quarters.
and came to us during the quarter and said, my budgets have been cut.
I can't do this project right now anymore. We'll do it sometime in the future, but I can't tell you when.
So these are three different examples that all impact our Q2 revenue and indicate that our customers' budgets are under pressure to the extent that they're trying to extend out when they buy from us, which diminishes our revenue.
Hopefully it's helpful. Yeah, that's all very helpful. So could you maybe tell us like what proportion of
From orders you've actually seen canceled.
I can answer that directly. We have had no virtually no firm orders canceled. So all of what I was describing to you were movements in our pipeline. We have not seen orders that we've already taken or backlogged canceled.
Got it. Okay, appreciate it. And then I...
The bright spot in the quarter seems to be the gross margin recovery. So, should we be thinking 48% is the appropriate run rate for gross margin or given your portfolio of assets now with machine vision and amors and so forth.
is there possibly some upside to gross margin down the road? Nathan, again, as you mentioned, that's a gross margin was a bright spot in the second quarter, hitting 48%, which we haven't achieved that level since the first half of 21 when we had a revenue in the Euro was at $1.20. So,
Obviously, the bright spot in the quarter, including the reduction in the premium supply chain costs down to $5 million, and then negligible as we enter the second half of the year due to all the nice work by the team, redesigning products, getting our printer capacity back on ocean. So again, I think we feel.
We feel good about gross margin. I think that's the 48% is a new baseline. There will be fluctuations as we move quarter to quarter based on deal size. That is one dynamic that's helping us with the lack of large deals as a benefit to gross margin. But there's other tailwinds that we have going through the remainder of the year, including FX, assuming it stays at its current level.
I think that's the right watermark, but I'd say quarter to quarter there'll be fluctuations as with just general mix and business dynamics.
Our next question comes from Jim.
Please go ahead.
Think about the Q3 guidance and the implied outlook for Q4. It sounds like you're expecting, at least geographically, some worsening conditions in North America, just if we look at what the organic decline was in Q2. Is that the way to think about how the geographic distribution looks into the second half of the year? Yes, maybe I can get just a little bit more color on the guide and then to your point on some of the regional dynamics. Just to reiterate what Bill mentioned earlier...
The guide is supported by the most recent sales and bookings velocity, and we're not assuming any type of recovery as we enter the quarter or as we move through the quarter. You really see that, I'd say, across all our geographies. I think that if you look at the similarities across each region, they're very similar in terms of being impacted by.
to ensure that we have the right baseline to build from here. But I'd say the dynamics are very similar across each of the regions as we go through the second half. And does your guidance assume slowing in the areas of the business that have been relative bright spots? You highlighted data capture, RFID, and the recurring business of supply service presumably holds up a little bit better. But what kind of assumptions are you making for these areas that have been more of a bright spot for you? Yeah, I would say that RFID continues to be a bright spot and continues to be a bright spot for us.
attempt time, you know, acquisition as well. Services and software we think will be, you know, clearly bright spots in the in the second half year. Data capture is a, you know, a tougher compare in second half. So I think what you're still seeing is in print and data capture solutions, a fair amount of variation across
supply chain availability in 2022 that we're cycling through in 2023. So you see strong growth in first half, you know, um, with tough comparison, second half across those businesses, which still remain challenging from as you look at the numbers overall that you're seeing still seeing the supply chain dynamic take place, um, in comparison prior year. So
data capture solutions is just a tough compare in the second half.
is just a tough compare in the second half. because you are not shown your
Our next question comes from Meta Martial with Morgan Stanley . Please go ahead.
Great, thanks. I guess just putting into context, do you think you're seeing the greatest impact to the refresh business, which is elongating? Hardware cycles, is this just slow down in new builds or slow down in new use cases? I guess I'm just trying to get a sense of, you know, you compare yourself to the mobile IT market.
just lengthening refresh cycles that may be more permanent, or just kind of more macro impact to new builds or new use cases.
I think we're seeing, you know, clearly the refresh cycles, you know, we would say, you know, are elongated as people are, you know, using those assets and making tough, you know, business decisions at the moment. They can only hold off, you know, so long in those, you know, technology refreshes. And you've got to remember the strong demand over the last two years has put a lot more devices in the hands of.
you know, frontline workers. So when they go to refresh those devices, that will be a higher number of devices that they refresh.
In the short term, they're consuming capacity they built in e-commerce and transportation logistics and even our retail customers where they've bought a lot of devices through the pandemic. They've got to work through those devices, but eventually they will buy more. We're still seeing, you know, there's still a great opportunity for us to continue to.
I think we're still seeing that there's plenty of bright spots for new applications for our devices and leveraging our retail software, for instance, on our devices within retail and communication, collaboration, visibility, AI, and leveraging workers with more information, leveraging mobile devices....
10 no longer term trends continue despite the challenges and short term demand. And Jody, when I had that, yeah, I would underline that specifically that I think we're seeing as an extension of the sales cycles, not a diminishing set of use cases in any way. In fact, I think it's almost the opposite. So the examples I gave earlier were all
examples of extending sales cycles. And what we're seeing with our customers is that in fact they're discovering during this period how they can use their devices and the Zebra solutions for more use cases. So we're seeing more use cases in the store like communication or flexible checkout, advising customers on where to find goods and products in the store.
are being added to the devices that they have. And we're of course fueling that because we're releasing new use cases. For example, we just released the ability to take payment directly on our devices. So I would say very clearly it's an elongation of sales cycles. New use cases are alive and well.
Got it. And maybe just, do you expect any, you noted that you were renegotiating some supply agreements. Is there expected to be any cash charges with those or just anything we should be mindful of as part of the restructure? No, not as part of the restructuring in terms of, obviously the team is working on renegotiating supply agreements to maximize cash with the demand.
Our next question comes from Brian Drop with William Blair. Please go ahead.
Good morning, this is Tyler Hooton on for Brian . Thanks for taking my questions. Hi Tyler. Hi, just starting off with pricing. I believe you may have mentioned the full year benefit before and I was just wondering if that has changed due to even more.
So we expect the full year pricing benefit to be around two points.
It's a little bit higher than our previous guide with the most recent price increases that went into effect late in the second quarter. But we're actually seeing those actions hold and stick in the market. So I'd say it's, again, about two points for the year. And I think just to, again, these were very specific targeted actions, not broad-based. I think the sweet48 problem where the price has McIntosh run out,
decline is related to the pricing actions. Again, because most of these are broad based across the industry and very targeted at where there's opportunity to ensure we maintain our market share position in each of the markets and products we operate in.
Okay, thank you for that. And just following up, can you describe the opportunities that you're seeing with the government like what products, etc. And has this been an unexpected contribution in 2023? And will that be supplemental to your sales volume when other demand picks up? Thank you.
Thank you. This is Joe Hill. Yeah, so we've been working with governments around the world and have been seeing an increasing level of demand and opportunity there. And of course we have commensurately increased the resources that we have put into this.
Where we saw the North American government is the largest part of that, and of course there are multiple different levels of that. State and local has been a growth area for us for some time. Specifically, for example, outfitting police forces with tablets in their cars or parking enforcement.
handheld devices with mobile printers have been the staple of our business there, but recently where we've been successful and have expanded our engagement is with federal and state governments. And there are of course some very large contracts. You can see contracts with
defense and in logistics areas that are increasingly important. And we've seen an increase in interest in those same levels in governments outside of the US. And of course, that has a little bit to do with some of the geopolitical situation that we find ourselves in and the government's meeting in particular.
the types of solutions we provide to enhance the logistics behind some of those operations. Our next question comes from Keith with North Coast Research. Please go ahead.
Good morning guys. Yeah, I hope you could unpack the commentary regarding the customers digesting what they previously bought. You know certainly we're aware of you know more or two e-commerce guys that probably overbought but I guess the people are digesting what they previously bought. Are they questioning the ROI that they previously experienced?
I mean, perhaps just a little more color on my suggestion commentary. Yeah, Keith, I mean, I, they're not question the ROI at all. They're clearly, you know, seeing the benefit of our, you know, devices that are emission critical, you know, in their environment. What they're really seeing is that, you know,
that extends beyond e-commerce to parcel delivery, for instance. So we're seeing that in our T&L customers that are saying, if you look at what they've said around parcel delivery, the entire industry is down as the result of e-commerce resetting to kind of
pre-pandemic growth rates and they build out capacity assuming it was going to be much stronger than that. I would say in retail they've bought the devices they have so I wouldn't say it's absorbing beyond what they need in most cases. Now some bought ahead because of supply chain challenges right they knew that they needed the devices they bought ahead for
or just making tough budget decisions that ultimately they'd like to buy more, but they're leveraging what they have today instead of purchasing new because there's pressure from other CFOs and others on IT, spending in capex within their environments in a certain macro environment.
I think it's in some cases using capacity, in other cases it's just leveraging what they have today and they don't need anymore. In some cases they bought ahead because of supply chain challenges. We saw a significant increase in demand over the last two years and now we're seeing a
hasn't really changed for them, but they just see a lower demand trajectory, which then they're translating into lower purchases with us. Right? I'm looking at I have four pages of individual deals that we look through and where customers have done exactly this. And here's an example of one where it says customers working through gear. They already have on hand.
Any issues extending to the machine vision and robotics segment? Perhaps any commentary can offer on how that's progressing.
No, we feel good about our machine vision business. You know, when we acquired the Matrox, you know, at the same time, we developed organically solutions in the low end of that range and fixed industrial scanning. And we acquired, you know, adaptive vision, which gave us software capabilities around things like optical character recognition.
We knew when we acquired Maytrox that they were heavily weighted in their sales to the semiconductor industry and we all know that has slowed. But our objective all along was to really diversify that customer base as a smaller private company, ultimately they hadn't made the investments to go to market that we're making to diversify it.
We're seeing that the diversification is working. Our focus on things like electric vehicles, electric vehicle battery manufacturing, pharmaceuticals, really a broader push for us into manufacturing is working. As we're driving also into e-commerce opportunities.
Clarify so if you look at the guidance assumptions for the third and fourth quarter. It assumes similar velocity of demand. So that includes 80% of our business is the channels. So that kind of similar velocity from Q3 to Q4 that you have.
The outsized impact of Destocking in the third quarter. So we do not plan to destock as much in the fourth quarter is again the.
And that's really the driver of the sequential improvement in our revenue between Q3 and Q4 is that is that differential so the.
The expectation is that we will exit the year with our days on hand balance and the distributors.
And its normalized level, where we expect the business to be so that we go into 2024 with both that kind of run rate trajectory and the inventory balances in the channel.
Appropriate lease set sort of a clean slate as we enter 2024.
If we take a kind of three or four years, new on channel inventories. When do you expect China inventories to be back to pre pandemic levels intensive days on hand would it still be elevated relative to say 2019 2020 levels.
So again two different two different points I think from a from a days on hand, we've always stayed relatively within the boundaries, we have as a business and thats when we measure our partners and channel partners on that as part of their incentive plan.
The absolute dollars increased over the last two to three years and balance as our revenue increased and those balances are declining now that our volumes declining.
Again, we spent a lot of time with our partners ensuring that they have the right levels of days on hand inventory to support the business and those vary by product family by by region and what the business needs are so again, we're a little bit higher than that range. Today, just given the velocity declined we saw late in the second quarter.
Get that corrected here in the third and then a little bit more in the fourth so that we go into 2024 again with a clean sheet.
This concludes our question and answer session I would like to turn the conference back over to Mr. Burns for any closing remarks.
Yes, while our spend is pressured certainly a near term over the long term, we believe that we're well positioned to benefit from secular trends to digitize and automate workflows within our customers' environments to wrap up I'd like to just thank our customers partners and employees for their support and dedication over to our long term success and have a great day everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.