Littelfuse, Inc. (NASDAQ:LFUS) Q3 2023 Earnings Call Transcript

Littelfuse, Inc. (NASDAQ:LFUS) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the Littelfuse Third Quarter 2023 Earnings Conference Call. [Operator Instructions] And now at this time, I would like to turn the call over to the Head of Investor Relations, Mr. David Kelley. Please go ahead, sir.

David Kelley: Good morning, everyone, and welcome to the Littelfuse Third Quarter 2023 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. Yesterday, we reported results for our third quarter, and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today’s conference call will also be available on our website. Please advance to Slide 2 for disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday’s press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available on the Investor Relations section of our website. I will now turn the call over to Dave.

David Heinzmann: Thank you, David. Good morning, and thanks for joining us today. Before I begin, I would like to welcome our new Head of Investor Relations, David Kelley. I expect many of you already know David from his prior role in equity research at Jefferies, where we were part of a sell-side coverage. David brings a strong understanding of our business and industry and we’ll continue fostering strong relationships with our investors and delivering valuable insights as we continue to drive the growth in shareholder value. Please join us in extending a warm welcome to David. With that, let’s start with a summary, Slide 4. Our global teams delivered solid Q3 results as both sales and earnings exceeded our prior guidance.

Our performance reflects strong execution, ongoing diversification and favorable content momentum within a continued challenging macro environment. We’re pleased with our overall performance, yielding strong year-to-date profitability, despite the ongoing channel destocking and pockets of end-market softness were significantly improved, our financial performance versus past market cycles. This reflects our resilient business model and continued strong underlying fundamentals on Slide 5. Secular growth themes, including sustainability, connectivity and safety continue to drive our organic growth trajectory. Our recent acquisitions have further balanced our end-market exposure while complementing our diverse technology capabilities and expanding our market leadership.

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Q&A Session

We remain well positioned to deliver on our long-term strategy. And I want to thank our global teams for their unwavering commitment and persistent hard work. Let me start with a view on what we are seeing across our markets. Through the third quarter, we continue to see inventory destocking across our electronics and commercial vehicle distribution channels. Our electronics book-to-bill remains below 1. And while we have limited visibility, we also believe some of our OEM customers are working through inventory reductions. While we expect inventory destocking to continue into next year, as inventory levels stabilize, we expect to return to normalized order rates. Regarding our end markets, we’re seeing varying demand patterns across a broad customer base.

Starting with electronics markets. We continue to see softness in consumer and personal devices as well as pockets of datacom. In industrials, we benefited from growth in renewables, infrastructure, power supplies and industrial safety, offsetting pockets of softer demand. And finally, while the UAW strike had a modest impact in the quarter, automotive demand remains solid, driven by both low- and high-voltage applications. Our automotive content expansion is benefiting from program launches, led by China, and we saw a 15% growth above car build in the quarter, strongly within our targeted double-digit range. Despite the current challenging macro environment, we continue to diversify our portfolio, build upon our design wins and fortify our market positions, and we expect a return to growth during 2024.

Broadly, across our end-market exposures, design activity remains robust, and we continue to benefit from content outgrowth. Customers remain invested in expanding secular growth capabilities, and we are delivering a robust design win cadence which supports consistent long-term outgrowth. We believe our execution through this variable macro environment is reflected in our year-to-date margin performance as well as our robust cash generation. For the full year 2023, we expect to exceed operating margins we delivered when we last experienced market down-cycles and disruptions in 2019 and 2020. We remain confident in our margin resiliency despite the current challenging macro environment, reflecting a robust outgrowth opportunity and well-positioned cost structure.

Our ability to drive strong cash flow through cycles enables us to continue investing for future growth across our portfolio, and deliver outsized long-term shareholder value. Now let’s move on to business design wins during the third quarter. For industrial end markets on Slide 6, we continue to build a robust and global funnel of new business opportunities and secured a wide range of design wins. We secured a multi-technology win for energy storage in India, and leveraged our solutions-focused product portfolio to deliver a solar design win in the EMEA region. We also secured key industrial safety design wins across the energy sector, including wins in Indonesia and North America. Taking a step back, industrial safety remains a long-term growth theme for us, given the need for safeguards against electrocution from higher power applications in an increasingly electrified world.

Turning to the transportation end markets on Slide 7. We continue to see a strong funnel of meaningful content opportunities driven by the ongoing push towards greater sustainability, connectivity and safety. For passenger vehicles, the launch of several new OEM platforms, particularly new programs coming online in China were a key driver in the quarter. Momentum with EVs and EV-charging infrastructure help secure wins for both low- and high-voltage applications. We won new business for a vehicle telematics module by leveraging product offerings from our C&K Switches portfolio. An area where we are seeing design win success is our innovative current sensor offerings, which are helping drive new business opportunities for EV battery management systems and inverter applications.

Within the commercial vehicle space, we secured a multi-technology win for medium-duty EV truck that will utilize software from our Embed acquisition in conjunction with hardware from our legacy portfolio, a great example of leveraging complementary technologies to drive revenue synergies. We also won new business for commercial truck and bus applications in South America and China. In Japan, we were able to leverage some of the rugged and reliable switch products from our Carling portfolio to win new business for construction and specialty vehicle applications. Moving on to Slide 8. In electronics end markets, design activity continues to be robust, and we’re seeing multi-technology design wins globally across a broad set of end markets. We secured a diverse range of design wins, including power tools, garage door openers, appliances and other general electronics.

We continue to see growth in medical equipment and security end markets with wins globally. Our momentum in securing meaningful design wins remain strong. We’ve achieved success across a diverse range of end markets, applications and geographies, which underscores our global capabilities and extensive reach. Our close collaboration with our customers’ engineering teams has played a pivotal role in accelerating the development of next-generation products and design initiatives. As we continue to grow organically through the new business activities bolstered by strategic acquisitions, we are well positioned to continue executing on our long-term growth strategy. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.

Meenal Sethna : Thanks, Dave. Good morning, everyone, and we appreciate you joining us today. Please turn to Slide 10 to start with our third quarter results. Revenue of $607 million exceeded the high end of our guidance, as we continued working through backlog and supported several customer product launches. Revenue was down 8% and down 11% organically versus last year. Acquisitions and foreign exchange added 3% of growth. GAAP operating margins were 15.4% in the quarter. Adjusted operating margins were 16.5%, while adjusted EBITDA margins finished at 22%. GAAP diluted earnings per share in the quarter was $2.30. Adjusted diluted EPS was $2.97 higher than our projections driven by our stronger sales performance. Our GAAP effective tax rate was 23.3% and adjusted effective tax rate was 20%.

We’ve continued to be prudent in spending while furthering investments in high-growth opportunities for our future pipeline. We’re pleased with the resiliency of our business and operating execution across multiple vectors, resulting in year-to-date adjusted operating margins of 17.4%, and adjusted EBITDA margins over 23%. The strength of our business model also shined this quarter, as we generated $162 million in operating cash flow and $140 million in free cash flow. Year-to-date, we generated $250 million in free cash flow, a 115% conversion rate to net income. We are ahead of last year despite lower cash earnings, a testament to our ongoing focus on inventory and overall working capital management. We’ve reduced our own inventory $66 million so far this year, and lowered inventory days on hand by 15 days.

With our typical fourth quarter seasonality, we expect another strong quarter of cash generation, aligned to our full year target of 100% free cash conversion as a percentage of net income. We’ve also maintained our net debt-to-EBITDA leverage at 1.4x, continuing to provide ample capacity for both organic and inorganic growth investments. Moving on to our segment results. Please turn to Slide 11. Electronics sales were down 14% year-over-year and down 17% organically. Operating margins continued at over 22% and adjusted EBITDA margins over 28%. Sales were stronger than we had expected, as we continue to work through backlog with semiconductor customers in the quarter. We’ve maintained a strong profitability profile amidst the dynamic end market environment and inventory rebalancing.

Turning to the Transportation segment on Slide 12. Sales were down 3% overall and down 4% on an organic basis. Trends varied by end market again this quarter. Our passenger vehicle business grew 12% as we supported several customers on their platform launches, particularly across China. Our commercial vehicle business was down 16%, with continued inventory destocking largely among distribution partners as well as continued weakness across China markets. Segment operating margins improved sequentially to 5.5% and adjusted EBITDA margin over 11%. We’re starting to see the benefits from our footprint reduction work across our passenger vehicle business. Across our commercial vehicle business, we are reducing the cost structure and also extending actions to optimize our product and customer mix.