Q3 2019 Earnings Call
Like the hand, the conference over to your Speaker today, Trisha Tuntland head of Investor Relations. Please go ahead ma'am.
Good morning.
And welcome to the Littelfuse third quarter 2019 earnings Conference call.
With me today, or Dave Heinzmann, President and CEO , and Meenal, Sethna Executive Vice President and CFO .
This morning reported results for our third quarter and a copy of our earnings release is available in the Investor Relations section of our web site.
A webcast of today's conference call will also be available on our website.
Our discussion today will include forward looking statements. These forward looking statements may involve significant risks and uncertainties.
Please review today'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 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 most comparable GAAP measures for is provided in our earnings release available in the Investor Relations section of our website.
Before proceeding I'd like to mentioned that we will be participating in the Baird and Morningstar conferences in Chicago on November 5th answer that.
We hope to see you at these events.
I will now turn the call over to Dave.
Thank you Sarah good morning, and thanks for joining us today.
Our performance this quarter was consistent with our expectations and reflects successful execution by our global teams as we continue to work through the challenging macro environment.
We we recorded third quarter sales of $362 million and while navigating the soft demand achieved an adjusted EBITDA margin of 21%.
We delivered adjusted EPS of $1.78 cents above the high end of our guidance.
We also generated strong cash from operations and remain on track to deliver free cash flow in excess of net income for the year.
We continue to see global trade tensions impacting the end markets we serve.
Across electronics sales were weaker than expected, while we saw some stabilization in Asia end market demand was weaker across North America in Europe .
In response to this weaker demand we would continue to see further reductions in inventory in the channel by our distribution partners.
Importantly, we began to see a decrease in weeks of inventory in the channel.
Though levels remain elevated.
Our electronics book to Bill exiting the third quarter was between 0.9 and 0.95.
We anticipate seasonal softness in the fourth quarter and we expect continued reduction in weeks of channel inventory into next year.
We saw lower sales from our automotive products segment during the third quarter, which is normally the weakest quarter in the year due to summer holidays in Europe and North America.
Sales levels continue to reflect ongoing global car build declines as well as softness.
As well as a softer commercial vehicle markets.
Europe saw more important improvements in car production during the third quarter. However, this was more than offset by the low single digit decline in North America and high single digit decline in China.
Near term our content growth continues to be dampened by our regional OEM mix.
In the planned reduction of our transmission sensor business with local Oems in China to drive improved profitability.
We expect fourth quarter global car production to be down low single digits.
Further while the GM strike had limited impact on our third quarter automotive product segment results. The work stoppage is reflected in our fourth quarter guidance.
Looking ahead to 2020, we're currently assuming global car production to be flat to modestly down.
Our industrial product segment continues to be a bright spot and delivered strong performance in the third quarter with organic growth of 7% and operating margins of 23% well above the company average.
Industrial end markets are providing good growth opportunities and the strategic actions taken over the past couple of years driving positive momentum.
Despite the near term challenges, we are seeing the fundamentals of our business are strong we're focused on driving long term growth profitability and cash generation as we continue to balance costs with long term strategic investments.
Growth through acquisitions remains a key part of our strategy. We continue to have an active pipeline of opportunities, which fit our M&A objectives.
We remain confident in the strength of our long term growth drivers aligned to the secular themes of safety resource efficiency and connectivity that will drive content increases across of transportation industrial and electronics end markets we serve.
Our confidence is reinforced by our ongoing business wins and healthy funnel of new business opportunities across a wide range of high growth applications.
With that introduction ill now turn the call over to Meenal to provide additional color on our financial results.
Thanks, Dave and good morning, everyone.
In the third quarter sales of 300.
Million dollars was down 18% down 16% organically versus last year.
This included a 1% headwind from foreign exchange.
Sales were slightly weaker than expected within electronics.
As Dave noted earlier, our sales continue to more flexible challenging macroeconomic backdrop.
Third quarter GAAP diluted EPS was $1.44 adjusted diluted EPS of $1.78, including 17 cents benefit not in our original guidance, resulting from a mark to market gain on a non operating investment and Castlight.
The main tax benefit with an adjustment to the company's estimated us federal tax liability for 2018.
Cost reductions.
Synergy savings were significant benefit versus last year, while unfavorable foreign exchange reduced EPS out.
GAAP operating margin finished at 13%, while adjusted operating margins were 14.6%.
Selling and related average in electronics with the largest driver of the decline in both operating income dollars and margins.
As we start to see a return to growth, we expect company operating margins to return to our strategic target range.
Volume leverage impacts were partially offset by 15% reduction in adjusted operating expense.
The reduction with a combination of both variable cost reduction, including incentive compensation as well as structural cost structure.
With our focused efforts on aligning cost structure to business conditions, we've held adjusted EBITDA margin at 21% for the quarter and year to date operating within our strategic target margins.
Moving onto capital management, the company continues to be an excellent generator of cash.
In the quarter, we generated $81 million, an operating cash flow $68 million in free cash flow.
Year to date, we generated free cash flow up $122 million, 105% conversion from net income.
We bought back nearly $50 million in shares this quarter this quarter and $95 million year to date.
We've maintained our disciplined view on share buybacks opportunistically repurchasing shares when we believe our stock prices below our intrinsic value.
Our balance sheet remains strong as we exited the quarter on 400, as we exited the quarter with $476 million in cash essentially unchanged from last quarter.
We ended the quarter with $200 million net debt.
Gross debt to EBITDA leverage at 2.0 time, and well under 1.0 times on a net basis.
Moving onto our product segments electronics products segment sales declined 23% and 21% organically.
Volume leverage continues to have the largest impacts on segment margin, which finished at 15.2%.
We've seen price erosion return to historical ranges, adding year over year pressure on margins.
These factors have partially offset by benefits from existing energy and other cost reduction actions.
We continue to make good progress on our axis related manufacturing mode with the first move expected to be completed in the second half of 2020 .
Automotive products segment sales declined, 9% and 7% organically, primarily due to ongoing carville decline, especially in the regional Oems, where we airlines.
With the steep decline in Carville's, we've seen some higher levels of pricing pressure across our passenger vehicle products also becoming marks.
Profitability continues to be hurt by foreign exchange, which was a 200 basis point margin headwind versus last year segments.
Despite these headwinds operating margins were 10.9% improving 140 basis points versus last year.
During the quarter, we continued our cost reduction efforts, while also closing our automotive sensor factoring in Italy.
These are some of that many profitability improvement step on our path to mid teen target operating margins for the automotive sector.
Our industrial product segment sales were up 6% organic sales grew 7% led by solid demand across end markets.
Operating margin of 22.7% improved more than 800 basis points over last year.
We're seeing the long term benefits of the segment cost structure reductions we've taken over the past few years as well as savings from the closure of our Canadian manufacturing plant late last year.
While the macro environment continues to present challenges our global teams remain laser focused on the factors that we control you remain prudent with our spending continuing to align near term cost structure with the demand environment, while advancing our progress with longer horizon investments to drive our five year enterprise strategy.
Despite the near term demand weakness, we've achieved 21% adjusted EBITDA margin and a 105% free cash flow conversion year to date.
We are well positioned for profitable growth what end markets start to recover.
And with that I'll turn it back to Dave and more color on end market trends.
Thanks Simeon.
Now I will provide commentary on the key end markets. We serve beginning with transportation design win activity in our transportation end markets continues to be strong the trends of safety resource efficiency and connectivity and driving content increases across automotive platforms.
Shift towards hybrids npvs within passenger cars and commercial vehicles continues to generate new opportunities on platforms, which will launch over the next several years.
Increased electrification and the increasing demand for driver assist systems are key factors for growth and automotive electronics.
In the quarter, we secured broad range of design wins.
We secured a significant win in Europe with our unique proprietary technology used to protect power electronic components against overheating.
We were awarded business in India for ignition systems in Germany for easy Battery management systems and in North America for drive training systems.
Also during the quarter, we secured wins with tier ones in North America, Europe , China, and Japan, where navigation and communication systems window lifts and seek motors.
Within our automotive sensor business, we secured new business in Asia, and Europe for solar sensors temperature sensors and next generation seatbelt buckle sensors.
For all of these wins are close collaboration with our customers and differentiated products are key drivers, we continue to secure new business.
Turning to commercial vehicles during the third quarter, we saw lower sales across most of our end markets and geographies versus last year.
Due to our position in the supply chain. We started seeing softness ahead of the North America heavy duty truck market decline as it comes off peak revenue.
Our other commercial vehicle sectors have also slowed mainly due to macro uncertainty global trade and Brexit concerns.
Our commercial vehicle business remains focused in growth beyond North America and won new business in Europe during the quarter.
We captured a key win for a power distribution module.
For electric Motors and buses.
We also won new business based on our technical expertise and customer responsiveness to develop a custom solution for promising utilities truck program, but the leading North America up better.
Our new business pipeline of global opportunities remains healthy and will drive long term growth in commercial vehicle markets.
I am confident that the increasing electrical complexity of transportation applications will drive additional content opportunities beyond the near term end market softness.
We will continue to be successful and win new business based on our strong customer relationships technical expertise and our brand reputation for product quality safety and reliability.
Moving onto the industrial end markets are strong third quarter was driven by an increase in solar power conversion and mining projects.
Near term, while us nonresidential construction and MRO markets are flattening HP AC and heavy industries, such as oil and gas of mining remains stable.
In addition, global renewables used in new power generation and energy storage our healthy.
Across most of these applications is the requirement for higher power electrical protection and power conversion.
During the third quarter, we won new business for several mining projects in Latin America, Australia, and Canada, driven by our technical engineering capabilities service and support.
Related to renewables, we continue to see strong global demand for inverter applications.
The captured energy storage system wins in Asia, and wind energy applications in Europe .
So with our electronic temperature sensors, we won business in North America for an alternative energy applications.
In Europe secured a key power semiconductor win for the manufacture of industrial machine tools as well as new business to protect motor drives and industrial elevators.
With the ongoing global focus on energy conservation, we see the expanded need for a full range of product technologies, increasing across the industrial end markets.
As a result, the new business opportunity funnel is robust and we continue to invest to expand our addressable market to gain share with new and existing customers.
Lastly across electronics end markets, we continue to see good design activity across a range of applications.
During the quarter, we secure new business wins for power supply applications and data centers and telecom base stations.
Elevator control panels, and smoke detectors for building in home automation, and Chargers and battery management systems for consumer electronics.
We also secured electronic position in the level sensor wins across multiple appliance applications.
This activity and reinforces for us that despite the near term macro pressures our long term strategy remains on track and supported by the continued secular themes of smarter and more connected devices driving demand for our products.
Our electronics business fundamentals are solid led by our global brand recognition superior product quality technical expertise and deep channel partnerships as evidenced by our sustained profitability.
We will continue to win new business opportunities by leveraging our broad product offering and our strategic relationships with far reaching access into diverse end markets.
With that I'll turn the call over to mean, although talk about guidance.
Thanks, Dave.
Moving on to the fourth quarter, we expect sales of 333 million to $345 million.
The midpoint of the guidance reflects a 16% decline in total sales versus last year, and a 15% organic sales decline with currency estimated to be about a 1% headwinds.
We expect fourth quarter adjusted diluted EPS to be in the range of a dollar six to $1.20.
Our guidance midpoint represents 6% sequential sales decline, which is typical given holiday and customer shutdowns.
Our fourth quarter forecast also assumes an ongoing reduction in weeks of channel inventory at our electronics distribution partner.
Across our automotive products, we've assumed at low single digit decline in car build our forecast reflects a last month of production at GM.
Lower volume and leverage across electronics is the main driver of fourth quarter EPS decline over the last year.
Foreign exchange is also estimated to be an eight cents EPS headwind based on current rate.
Offsetting these headwinds we're targeting adjusted operating expenses, excluding amortization to be about $290 million for the full year by $10 million lower and our view last quarter.
This represents a 50 million dollar reduction versus 2018 largely across SGN eight.
Our fourth quarter adjusted effective tax rate is projected to be in the range of 19% to 20%.
This year in rate is higher than last year's fourth quarter. When we received a full year 2018 retroactive foreign tax holiday.
We've assumed 24.6 million diluted shares for the fourth quarter, which incorporates the share buyback today.
Looking at the full year foreign exchange has been a headwind throughout the year impacting EPS about 35 cents.
2019.
Our interest expense and amortization expense estimates are unchanged versus our view last quarter with interest in the range of $20 million to $23 million and amortization approximately $40 million.
With the benefit of the tax adjustments in the third quarter, we're expecting a 2019 tax rate of approximately 18%.
We now expect to spend approximately $60 million in capital expenditures this year.
Bill our near term capital investment needs have come down with the volume reductions were seeing we continue to invest for our long term growth.
Mansion and cost saving initiatives.
Despite the breadth of macro environmental and geopolitical factors, we've seen during the year our teams have risen to the challenges presented.
Keeping the long view in mind, we expect to maintain 2019 adjusted EBITDA margins in a low 20 percentage range and a free cash flow conversion rate over 100% both measures within our five year financial target range.
We remain fully committed to driving enhanced performance into the future.
And with that I'll turn it over to Dave for some final comment.
Thanks Bill.
With the ongoing backdrop of this challenging macro environment the fundamentals of our business remains strong our.
Our long term growth drivers are closely aligned to the secular themes of safety resource efficiency and connectivity.
We continue to work hard to navigate the current environment, our remaining well positioned when stronger demands return we remain confident that we will deliver ongoing superior value to our stakeholders.
I'll now turn the call back to the operator for QNX.
Thank you as a reminder to ask a question you will need to press star one on your telephone to try to questions press the pound Q.
First question comes from Shawn Harrison with Longbow Research.
Receiving your question.
Good morning, Hi, Good morning, this morning, sorry for any background noise and traveling.
Any gave you could talk about what you're hearing from you or distributors arrow future et cetera, where they are the inventory for actions that we as we ended the fourth quarter will they be more than halfway through the third through and any insight and kind of where they are directionally, yes, as restocking would be helpful.
Sure Yeah, Sean so what we've kind of see as we've talked about in the past that kind of normal range for us on average is 11 to 14 week.
Of inventory and we've talked about the fact, we've been operating its higher end of that and in previous quarters, Although absolute inventory dollars were coming down because of the sell through dropping.
The weeks of inventory were flat.
The good news is that we saw kind of late in the third quarter.
We really began to see a reduction in they actually the days and weeks of inventory so kind of for the first time, we've started to turn the corner little bit, whereas starting to drive down weeks of inventory.
So we made progress in the third quarter, we're expecting that certainly in the fourth quarter and probably through the first quarter of next year.
Okay, and then is a brief follow up Meenal, you said Opex was down 15% year over year, saying that obviously is.
Temporary fits perfectly elements. Other is permanent is there a way to update us on how much in the opex reductions year over year will be from and it has been limited 2020.
Yes, it's Sean as we've been looking at the Opex reductions the overall I would still say that they're about 50 50.
50% doing what I call variable linked to sales and other variable compensation items.
And 50% of more structural like our cost synergies and other cost structure take down that we've made throughout the year.
Thank you so much.
Thanks. Thanks.
Take our next question please.
Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Sir you May proceed with your question.
Good morning, Thank you Hey, good morning.
So just broad stroke, if you look electronics revenues this year, you'll be down maybe hundred 60 million, maybe a little more.
Wondering if we could kind of think about.
That.
No 160 million in terms of how much you might describe the channel corrections.
Versus maybe some share reversion against gains you had when the industry supply chain was strained.
Or and then demand just you're kind of thoughts around that.
Yes, that's a complex question, Chris what I would say is our view is that although end market demands were certainly robust over the last two or three years.
I think when we look back and look at the data we would say kinda in the fourth quarter of actually 27 team as we win the channel and began to in earnest build inventories.
And so through the course of late 2017 in through most of 2018, there clearly was a build of inventory.
Clearly in 2019, there's been an effort to derive that back down so the challenge in the comparative of 28 team to 2019 is yes, the GAAP of both.
The swing up in the swing down in that so it's a meaningful part of that $160 million swing data I don't know the we have an exact number on that but but a significant portion of it obviously in markets have been softer as well as the Pos from our distributors have been down.
So.
Yeah, I don't think we have an exact kind of mix on that but the swing from building inventory to reducing inventory from 18 to 19 is is significant chunk of that number.
Okay that makes sense and.
Just curious about how your acquisition pipeline looking and.
If you have how your operational bandwidth stands to entertain onboarding deals.
Are you doing a fair amount of restructuring and internal operations.
Sure.
I think our our strategy on M&A has not shifted it continues to be a key part of an enabling growth platform.
So as we look to M&A, it's really about getting into markets or technologies or applications that allow us to fundamentally grow our business faster that's still the driver.
Clearly, yes, a lot of heavy lifting we've been doing and continue to do on the integration of the access business.
However, I think our bandwidth to take on additional acquisitions is good clearly our balance sheet is such that.
We have the flexibility to look at acquisitions so.
The good news for US is most parts of our of our portfolio there are opportunities for us to do tuck ins and bolt ons.
To enhance the business. So let's say, we we've kind of stay the course on where where we've been on M&A activity and when we if there are eight opportunities that meet those strategic requirements and the fundamental financial returns will absolutely take those steps forward.
Thanks, Dave minimal.
Sure. Thank you we'll take our next question please.
Thank you. Our next question comes from Matt Sheerin with Stifel. You May proceed with your question.
Yes, thanks, good morning.
Yes, good question regarding the transportation markets.
If you talked about.
Incremental weakness in the.
Heavy truck or commercial vehicle area.
Both he and Sensata. This morning on their call is called that out as well talking about.
Supply chain inventory correction.
In addition to just end market weakness, how do you see that playing out over the next few quarters do you think guys see that getting worse in do you also see those inventory issues.
Yeah, clearly there are some inventory issues I wouldnt say necessarily inventories specific we don't sell the bulk of that through channels. Some of it does but much of it as direct.
So certainly inventory in the supply chain in general what the tier ones are Oems that we're selling too.
We have seen impacts already.
Clearly North America, heavy truck, which is a meaningful part driver for our business, but not the whole driver.
Kind of hit its peak and is now kind of certainly expected to drop down dramatically. The number vehicles being produced we saw that hitting already expect that to actually get worse as we move forward.
Construction agriculture, that's been a bit challenged depending on the regions of the world than that those challenges will continue we also sell into a material handling which is a nice growth part of our business material handling with were particularly have a lot of business there in Europe with this general.
Slowing of the the European economy, and Asian economies that dampens growth in those areas. So yes, we've we've been doing well and commercial vehicle, we've seen that shift to more of a negative and expected to.
Continue to challenge us through through the bulk of 2020.
Okay. Thanks for that in and then just a broader question.
Regarding your operating margins your EBIT margins, which are obviously down pretty significantly it looks like sort of down double what's the revenue declines have been you have cost cutting you talked about access integration. So what should we expect in terms of.
Does it have margin margin contribution as volumes come back is that is just a matter of volumes coming back or are there other drivers there.
Yes.
Matt I would I would say volumes coming back or definitely the largest part of.
Operating margin working their way back to architect strategic target range I mean, it's not going to happen overnight, because we would expect growth will be gradual but right now Dave talked about weakness, we're seeing in commercial vehicle, we're seeing market weakness of course on the passenger vehicle side the electronics for us.
Beyond that market weakness is going on on the Pls side.
We are seeing a higher impact because of the distribution de stocking. So we've got to start to see some turnaround in some of the end markets and getting through the stocking destocking rest to start to see the margin improvement come back.
But I think a point to kind of emphasizes if you look through the data and look at what's really driving the kind of the steep decline in our operating margin dollars over the last few quarters. If you look through the data you'll see the electronics portion of our business is driving the bulk of that decline.
The good news is we look at the fundamentals in that portion of the business to still be very sound. So when we get through inventory burns get that more normalized and kind of stabilized.
I think it certainly has an outsized impact on our ability to kind of rate return to margin levels. We've we look forward.
Okay. That's helpful. Thanks very much.
Thanks, Matt will take our next question please.
Thank you. Our next question comes from David LICA with.
There you May proceed with your question.
Good morning, This is air and welcome back on for David.
First question for you is just if you could extrapolate a little bit on the regional color you provided on electronic especially given the mention of an up tick up the ended the quarter. So whether it's it's really that Asia piece stabilizing that you're talking about or if you are seeing at least.
Signs of maybe life.
Demand standpoint, and either North America, Europe , which you called out is as weaker markets.
Yes, I don't I don't know that we really saw an uptick at the end of the quarter. We saw an increase in inventory week reductions at our distributors kind of late in the quarter.
So what I would say as if we kind of look across the major reasons.
While Asia, certainly has been pretty challenging for awhile, what we're seeing there is it seems to kind of be finding its footing.
And it's kind of stabilized so we don't see further declines now it's it's kind of stable, it's not necessarily growth mode, yet, but it's got to stabilize first and we're kind of seeing that there.
I think North America in Europe General European Pls continues to slow.
As does the need to continue to drive down inventory North America, which has been candidly. The most stable. This in the last few quarters of demand in the electronics cycle softening a bit in Pos.
But in addition to that as the inventory burn that that's happening as well. So I don't know that there is a wouldn't call a sign of life sort of thing.
But it does certainly feel like we're kind of starting to see some of those things kind of find their footing.
Okay. That's helpful. Thank you and then just a second question. If you could provide an update on me sensor business in China, and if the competitive environment is stabilizing there at all.
Yes, so and that part of the business.
As a reminder, specific to transmission sensors with Chinese Oems in the region right and that's the area, where we've seen over the last year and a half for so.
Much stronger.
No.
Pressure from local competition.
And we made the decision a few quarters ago that it just wasn't a profitability profile that worked for us in a long term. So we began to step back from that now that's a process in the auto space. So it's not happening all at once so we certainly have seen some of that pullback and there will be additional decline of.
That over the coming year or so.
So it's a it's in that range we've talked about.
It's it's material to that segment, but not overall, it's less than $10 million, we're talking about and other sensor businesses in China that we're participating and continue to look good and we're winning new business. So it's really kind of isolated to that one area.
Yes, and we're kind of part of the way through that and they'll continue to burn through.
Great. Thanks for taking my question.
Thank you Karen will take our next question. Please.
Thank you. Our next question comes from Karl Ackerman with Cowen You May proceed with your question.
Good morning kind good morning.
Hi, good morning.
Dave you talked about certain improving data points of sales at distributors.
Same time, I think inventory days still increased this quarter and maybe walk us through potentially how lead times are looking at this stage even into October .
And I guess as lead times and backlog backlog normalize what are you seeing in terms of pricing across your various segments have a follow up.
Okay. Yeah. So first of all to be clear in a you know.
I don't believe we're seeing improvements or upticks that Pos at our distributors at this stage. So if we left that impression that's not accurate.
Clearly Pos continues to be challenged at our distributors in the electronic segment.
What we did talk about was the inventory burn where.
In the last few quarters.
Their Pos was dropping kind of at the same rate they were Dracula dropping absolute inventory dollars. So the weeks of inventory of our products in their channel were flat.
What weve, what we've talked about is and it's reflected in kind of the lower demand on US is theyve reached that stage, where they are more aggressively driving down inventory. So the weeks of inventory are starting to move down so the good or bad or that the good news is you have to get through that phase before you can find them.
Bottom and get a return to kind of more normal demand patterns linked to Pos.
From a lead time perspective.
Our lead times during kind of the strong periods, a year year and a half ago were extended a bit but really only extended by a couple of weeks are we attacked our lead times have been normalized than a normal levels for several quarters is kind of really no change in that.
You ask about kind of the electronics or the particularly in electronics I guess the pricing dynamics.
We've talked about that in the past where previously those were favorable tailwind from us for us where a typical environment for us is somewhere in the 4% to 6% price erosion.
We were running at about half of that a year ago.
And what we've seen now is it's kind of return to more normal situations in electronics.
So we've seen a bit more pricing pressure, but kind of back to normal for us.
The kind of happens over most most environments.
I just want to add just one other point to Dave's comments on the inventory and we're starting to see a decline in inventory sitting in the channel, but to be able to do that especially with the inventory weeks, we have a much greater decline in Pos we expect that to continue in the fourth quarter and very likely in the first quarter as well.
Continue to expect to see those kinds of trend right.
That's helpful Matt.
Well that dovetails on my next question, which it looks like your gross margins will be down I don't know, maybe roughly 200 basis points in the fourth quarter, but if we fast forward six months from today when the distribution overhang.
Should abate I think.
He is the future margin uplift, primarily driven by volume or are there other company specific or mix effects.
In the various segments that we should consider or that would drive margins back toward that 40% level you have attained not just in 2018 when you said.
And we were building inventory, but also you know it really since May 2016.
Yes, so yeah I'd clarify a couple of things. So you mentioned a 40% gross margin that is when we think about our strategic target range, we talk about our gross margins in the 40% range knowing that at various points in time.
And we'll be up or below that having said that on your your specific question for US, yes volume and the related leveraged to volume is absolutely the largest driver for us from a margin not just growth margin, but operating income and further to that electronics for us because of the size of the business, but also.
So the incremental margin variable margin profile at now Unfortunately, the the decremental margin that we're seeing that has a big impact on the company margin profile overall, so yes, when we start to see.
Some growth maturing, we you know we level out on the de stocking the turn to see some growth returning we would expect to see especially because of electronics improvements in the company margin.
Thanks, Carl we have our next question please.
Thank you. Our next question comes from Steven Fox with Cross Research you May proceed to your question.
Good morning time good morning.
So first off I, just wanted to make sure I'm clear on the pricing commentary.
So it sounds like you said something similar to last quarter, which is that pricing is pricing pressures equal returning to more normal pricing that you used to.
So when we think about the price erosion you called out in the prepared remarks are electronics does that imply that.
Pricing was relatively similar Q3 versus Q2 or will you still seeing some price pressures and if you could sort of add some color around like what kinds of products are under most pressure that'd be helpful.
Yes, Steve.
You are right, we had been making that comment over the past couple of quarters about our electronics.
Price erosion returning to the more historical ranges in the 4% to 6% I'm. The only reason we wanted to clarify that in its in a few quarters is when you look at that on a year over year basis last year with a very strong year, we were not seeing those same level at the same level of pricing pressures. So you are correct. It on a sequential basis Theres no change.
To the trend, but on a year over year basis, when you're looking at margin that is one of the drivers of the market impact on a year over year basis.
And with the Sandy thing be true for when you called out the pricing pressures on the passenger vehicles side and auto.
Yeah, I would say, yes, we're just starting to see some of that now more recently because if you go back about a year end time.
Auto Carville, we're still we're still doing okay at that point, we refer to certain areas like in China transmission sensors, as an example, where wheeler starting to see pressure there, but I I would say, we're now seeing it much more broadly this year because this is more of the same downturn that we're saying.
That's helpful and then Dave.
One question for you and I'm going to Miss this is kind of unfair, but I'm going to ask anyway.
If you think obviously the inventory you're looking at it playbook for inventory reductions through the channel and that your customers out on your own balance sheets and on the other side. It seems like Theres an inherent in assumption that you know, there's some kind of typical recovery, but there's some atypical things going on in end markets right. Now I mean can you just sort of talk to your car.
Finished level.
And how things play out on on the back end of of what seems like a fairly aggressive.
Inventory work down that goes on between now and the into March.
Yeah, It's you know it.
That's.
A challenging.
Viewed a truck.
Hi, they get our arms around right now there's a there's a lot moving on or around.
Trade tensions, yes, we don't know what might change in those sorts of environments.
On Friday user Bad days, you never know when you might get you know a change in position on those things.
So what I would say is historically or so so this inventory cycle or we're going through its not completely abnormal.
Maybe inventories at the contract manufacturers and Oems and things like that were up.