Q4 2019 Earnings Call
Ladies and gentlemen, please continue to hold your conference call will begin momentarily.
Ladies and gentlemen, thank you for standing by and welcome to the Littelfuse Inc. fourth quarter fiscal 2019 conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you would need to press star one on your telephone please be advised that's it.
This conference is being recorded.
If you require any further assistance. Please press star zero I when I like to hand, the conference over to speaker today, Trisha Tuntland head of Investor Relations. Thank you. Please go ahead ma'am.
Good morning.
Welcome to the Middle <unk> fourth quarter 2019 earnings conference call.
With me today, or Dave Heinzmann, President and CEO , and Meenal, Sethna Executive Vice President and CFO .
This morning report results for our fourth quarter and fiscal year 2019, and a copy of our earnings release is available in the Investor Relations section of our website.
A webcast of today's conference call will also be available on our website.
I just got to say, we'll put forward looking statements. These forward looking statements may involve significant risks and uncertainties.
Please review today's press release, and our Form 10-K in 10-Q for more detail about important risks that could cause actual results may differ materially from our expectation.
We assume no obligation to update any of this forward looking information.
Also our remarks, they 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 in the Investor Relations section of our website.
I'll now turn the call over to Dave.
Thank you Trisha good morning, and thanks for joining us today before continuing I'd like to first mentioned the top of mind.
For us as our for our company is the safety health and wellbeing of our global associates their families and communities given the Corona virus outbreak in China. Our first priority is to our people.
We've taken proactive measures to protect our people well continue to take necessary actions. In addition, our global business continuity teams are closely monitoring the situation to limit disruption to customers.
Now I will provide an update on the performance of our company.
Littelfuse navigated a challenging macro environment in 2019, a global teams remain focused on driving long term growth profitability and cash generation, we actively manage costs to align the business conditions, while advancing several strategic initiatives across transportation industrial and electronics end markets. We.
Sure demonstrating our ability to balance short term cost containment with long term strategic investments.
Our fourth quarter performance was consistent with our expectation recorded fourth quarter sales of $339 million and we delivered adjusted EPS of $1.17 cents at the high end of our guidance.
For the full year, we recorded sales of $1.5 billion and achieved an adjusted EBITDA margin of 20%.
Our disciplined cost management actions helped mitigate the impact of the soft demand and channel inventory corrections to deliver adjusted EPS of $6.82.
We generated $183 million and pre cash flow, representing a 132% conversion from net income exceeding our 100% target.
We returned $140 million of our free cash to shareholders through dividends and share repurchases.
This deployment of capital during a period of soft demand reinforces the strength of our balance sheet confirms our commitment to deliver ongoing value to our stakeholders.
Since late in 2018, we have seen a volatile global economic environment impacting the end markets we serve.
In response to uncertain demand electronics channel partners, and then customers have been rebalancing inventory and automotive manufacturers have lowered production.
These conditions impacted volumes within our electronics and automotive segments during 2018.
Across our electronics products segment, our fourth quarter sales were generally in line with our expectations.
During the quarter, we continued to see inventory destocking with distribution, Yemen, and OEM partners as end market demand appeared to bottom.
As a result inventory levels in the electronics channel drop meaningfully and are now approaching the midpoint of the normal range and our electronics book to Bill exiting the fourth quarter was above 1.0.
These improvements suggests that sell into distribution should begin to align with sell through by the end of the first quarter and we expect modest sequential recovery through 2020.
Our deep strategic relationships with our channel partners remain a significant factor and our long term that's across our electronics products segment.
And we view our distribution partners is an extension of our global sales teams.
While this exposes us to greater sales volatility given more than 75% of sales in this segment are fulfilled through distribution.
These valuable relationships jointly drive demand in customer partnerships and profitable growth as we execute our strategy and served more than 100000 in customers every quarter.
Fourth quarter sales from our automotive product segment. We're also generally in line with our expectations.
Sales levels continue to reflect an ongoing global car build decline, which was down mid single digits compared to last year.
Our passenger car fuse business, which was impacted by the GM strike outperformed global car build due to increasing content related to the electrification of vehicles.
This growth was offset by customer program delays in our sensor business and softness in our commercial vehicle business.
As we work through this period of soft end market demand, we continue to focus on profitability improvement for the automotive products segment.
We made significant progress this year and achieved double digit operating margins during the quarter and for the full year later Mena will provide an update on our momentum.
We expect fourth first quarter global car production to be down low single digits.
And for the full year 2020, we expect global car production to be modestly now.
Our industrial product segment continues to deliver strong performance.
In the fourth quarter, we exceeded end market growth and achieved organic growth of 7%.
We also achieved an operating margin of 22% above recent performance.
These results were driven by our continued operational execution and strength across a broad range of industrial applications, including renewable energy and power conversion.
We are confident this business will continue to drive long term profitable growth.
During 2019, we executed several strategic initiatives, we secured key design wins electric vehicles solar energy storage motor drives telecom and data centers across our target end markets.
We continued integration activities across our semiconductor business and broke ground on a new facility that will expand our capabilities.
As a testament to our global execution oriented culture. We earned the association for manufacturing Excellence award for the fourth consecutive year.
Operational excellence remains the foundation of our strong business fundamentals.
When developing our five year growth strategy, we contemplated and expected a period of soft demand and experienced this in 2019.
We are confident that the secular themes of safety resource efficiency and the ever increasing connected world remain key long term drivers of our above market growth targets.
Strategic M&A remains a key enabler of our growth strategy, we remain disciplined closely examining fit to ensure opportunities aligned with our M&A criteria of core consolidation technology or platform building geographic expansion and end market access.
During this past year, we undertook several actions to optimize our cost structure and made investments to expand our worldwide capabilities and embark and are embarking on others during 2020.
These actions will position our company for profitable growth through the course of 2020 and thereafter.
Our leading technologies global footprint.
Close customer relationships and talented associates against the backdrop with strong secular trends that helped drive the long term growth of our business.
With that introduction I will turn the call over to meet will provide additional color on the financial results.
Thanks, Dave now from highlights from our fourth quarter 2019.
We finished the year with fourth quarter sales of $339 million down 16% on a reported based until the last year and down 14% organically.
Sales were in line with our guidance, reflecting ongoing end market challenges.
Across our electronics products segment, our sales decline continued to reflect ongoing channel and customer inventory reduction.
As expected automotive Kotick sales were impacted by continued global auto production declines.
Delay in auto sensor program in softness and commercial vehicle market.
Our industrial product segment grew 7% continuing its above market growth trajectory.
Foreign exchange also reduce your sales growth to 1% over last year due to the weaker here about.
Fourth quarter GAAP diluted EPS was 92 cents.
Adjusted diluted EPS of $1.17 for the quarter with at the high end of our guidance range.
Benefits from a lower than expected tax rate contributed 11 cents EPS, partially offset by six cents of Unfavorability from foreign exchange.
Outside of these we essentially finished at the midpoint of our guidance range.
GAAP operating margins were 9.5% with adjusted operating margins of 10.7%.
Adjusted margin finished slightly below our expectations as foreign exchange with a 50 basis point headwind versus our guidance.
Lower volumes in associated leverage across the electronics products segment had the biggest impact to margins both year over year and sequentially sales in the quarter, where the lowest we've seen in two years.
For the full year 2019 sales finished at $1.5 billion declining, 13% overall down 11% organically.
This was our first sales decline in 10 years led by numerous macro factors impacting end market demand, coupled with inventory destocking across our channels and customers.
GAAP diluted EPS finished at $5 in 60 cents and adjusted diluted EPS was $6.82 for the year.
GAAP operating margins were 12.8% and adjusted operating margins finished at 14.3%.
We mitigated our margin decline versus 2018 with $50 million in cost reductions during the year split between reduction in variable and ongoing operating expenses.
For the year, our GAAP effective tax rate was 16.2% and our adjusted rate was 16.7%.
Our tax rate favorability versus our forecast with largely due to certain discrete items and adjustments related to additional regulatory update in the us tax Act.
Now let me provide some additional highlights by segment for the fourth quarter in full year.
Electronics products segment operating margins for the quarter were 8.8% in 15.1% for the year.
As we discussed through the year sales decline coupled with associated volume leverage with the main driver of margin reduction versus last year.
We moderated the impact of topline decline with both cost restructuring and synergies from I guess this acquisition across both gross margin and operating expenses.
As we start to see a return in sales growth, we expect to see a commensurate improvement in our segment operating margin.
Automotive product segment operating margin finished at 11.5 and 10.9% for the quarter end the year respectively.
We are seeing the benefits of the cost reduction activities, we undertook in the past several quarters as margins continued to improve through the year.
This improvement more than offset foreign exchange headwinds, which reduced 2019 operating margins by 200 basis points versus last year.
We have initiated additional activities that will drive further cost reductions with savings started in the starting in the back half of this year. This will continue our path back to target operating margin in the mid teens for the segment.
Our industrial product segment achieved at 22.4%, 19.6% operating margin for the quarter and full year respectively.
Above market growth organic growth, coupled with cost reduction activities. We've undertaken over the past few years have led to best in class margins for the segment.
Moving onto cash flow, we generated $61 million during the quarter and $183 million in free cash flow for the year, resulting in a free cash conversion of 132%.
Our strong finished with the combination of our ongoing focus on working capital optimization and deferral of certain capital earmarked for capacity expansion in light of the 2019 demand environment.
We maintain the strength of our capital structure and remain well positioned to achieve our dual strategy of accelerated organic growth coupled with strategic acquisitions.
During the year, we repatriated over $200 million in cash back to the us.
We finished the year with $531 million of cash on hand, with net debt leverage well under 1.0 times.
We took advantage of the market volatility buying back $95 million in shares this year at an average price of $164 per share.
For the year, we returned $140 million to our shareholders via share repurchases and dividends.
And with that I'll turn it back today for more color on business performance and end market trends.
Thanks, Meenal now we'll provide commentary on the key end markets. We serve beginning with transportation development of advanced driver assistance systems or eight us continues to outpace expectations.
Enhancements beyond level to around the near term horizon bring significant upside for content opportunities.
Increasing global safety efficiency and connectivity requirements or are propelling, an electrical architecture revolution, and cockpit transformation key factors for growth and automotive electronics and electrical systems.
In the fourth quarter, we had strategic design wins across a wide range of applications in all regions.
In the electric vehicle space, we won new business to protect battery systems and on vehicle Chargers were manufacturers in Europe and Japan.
The planned launch of nearly 30, new electric vehicle models in 2020 with a broad range of automotive manufacturers, where we are designed in remains a positive for our content opportunities.
Our product quality and strong customer relationships helped to secure new circuit protection wins in Japan, and Korea, including design wins to protect window lift motors and power seat motors.
We won new power semiconductor business in India for ignition systems for two and three wheeled vehicles.
With our excellent engineering support customer responsiveness and reputation for quality and reliability. We had several key wins in China in Europe Cross, our automotive sensor poke portfolio from solar speed in position sensors, the fluid level sensors.
Turning to commercial vehicles during the fourth quarter, we continued to see soft demand across most of our end markets and geographies versus last year.
We expect these conditions to persist through the majority of 2020 as the North America heavy duty truck market continues to come off of peak revenue and build rate and build rates slow in agriculture and construction.
Commercial vehicle business continues its push to expand beyond North America with key design wins in all three regions and across diverse end markets, our product performance and durability helped when business with the European truck maker in China strong customer relationship helped us secure new volume with the manufacturer buses.
And in North America, We continued our recent success with vehicle up Fitters. This time, providing our configurable off the shelf solution.
Where manufacturer of walk in vans and truck bodies used in package delivery operations.
With our ongoing strategic execution and strong funnel of global opportunities, we are well positioned for long term content growth across transportation end markets.
Across the majority of our industrial end markets, we're seeing an increased demand for industrial protection and safety.
And evolution that requires higher power electrical protection and power conversion.
This transformation affords us the opportunity to deliver differentiated value by positioning our application engineers in front of customers leveraging our technical expertise to meet the evolving specifications of these applications.
During the quarter, we continued to see good design win activity for solar projects with wins in North America in Europe .
Energy storage continues to deliver growth as we secured new design wins in Korea.
We secured wins in North America for temperature sensor assemblies for use in a factory automation applications as well as automated industrial Hvdc systems.
In addition, we captured new business in North America, and Asia with a manufacturer of commercial test and measurement equipment.
We won new power semiconductor business with a key European manufacturer of industrial motor drives for pumps, and compressors conveyors and manufacturing tool positioning systems.
We also increased our power semiconductor footprint and other industrial motor drive applications by winning additional business on a number of platforms with existing leading industrial manufacturers.
Looking ahead this year, we expect us nonresidential construction to be flat oil.
Oil and gas precious metal mining motor drive in power conversion remarks to grow low single digits and renewable energy markets to grow double digits.
As a trusted partner to our customers, we see the expanded need for a full range of product technologies, increasing across the industrial end markets.
As a result, the 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 win activity for a range of applications. Our circuit protection power control sensing products are found in many electronics end markets.
Applications are becoming increasingly connected and generate more and more data that require faster speeds and greater data storage, providing great opportunities in telecom and cloud infrastructure ecosystems.
During the fourth quarter, we saw strong wins for our circuit protection offerings as well as our power semiconductor products across data center applications as well as Fourg and Fiveg base stations.
We won battery protection business for consumer electronics in Korea.
And we secured new design wins in buildings in home automation, driven by our close customer relationships and responsiveness of our field engineering teams.
We also delivered sensor solutions for use in smart connected home security Skus systems in North America, as well as a smart meter application in China.
The continued secular themes as smarter and more connected devices are driving demand for our products design activity is were robust with programs launching on time.
We introduced a number of new products during 2018 in 2019, which were designed to the new programs with our customers.
With stabilizing end market demand, we're seeing a pickup of these programs in 2020, which we expect to bring additional growth.
Our electronics business fundamentals are solid we look forward to capitalizing on improving demand by leveraging our broad product offerings and our strategic distributor relationships with far reaching access into diverse end markets with that I'll turn the call over to Meenal to talk about guidance.
Thanks, Dave.
Now, let me start with impacts that we're currently seeing some the corona virus outbreak.
We are closely monitoring update from local authority as the potential business interruption impacts are still evolving.
Local China authorities have extended the new year holidays, one week at our production site.
Additional impact could include extended production stoppages staffing shortages as well as supplier and customer implications.
We have incorporated the cost impact of the longer new year holiday within our guidance.
Outside of this both our first quarter and our full year forecast assumes businesses usual.
As this is a fluid situation, we are not able to quantify further potential impacts to our forecast at this time.
Now moving on to the first quarter of 2020 , we expect sales of $352 million to $364 million.
Versus last year in mid point reflects a 12% decline in total sales and an 11% organic sales decline.
We estimate foreign exchange to be about a 1% headwind versus last year.
First quarter adjusted diluted EPS is expected to be in a range of $1.21 to $1.35.
This assumes an adjusted effective tax rate in a range of 18.5% to 19.5% for the quarter.
Notably our guidance midpoint reflects sequential improvement with six.
Percent sales growth, 9% EPS growth and adjusted operating margin expansion.
Our growth is dampened by an EPS headwind of about 15 cents.
Stemming from both foreign exchange and a higher tax rate.
Excluding these items sequential EPS growth would be 23%.
For the quarter, we're estimating global car build to be down in the low single digits.
Across our electronics products segment, our book to Bill is running above 1.0.
We believe the majority of excess channel and OEM inventory has been depleted and expect the remaining to burn through over the next few months.
Now, let me provide some additional guidance for the full year.
Based on the current macro economic condition gift forecasting to growth 2020 sales in the low single digits over last year.
Our facing assumes a sales decline in the first half of 2020 with growth returning in the back half of 2020 .
I will add some color on our end market assumptions.
We expect channel and OEM inventories will align to normalized levels over the next quarter.
We anticipate global car build to be down low single digits for the year and commercial vehicle end markets to be soft for most of this year.
However, we do expect content growth to enable us to outperform the weaker transportation and markets.
We expect to see year over year operating margin expansion and leveraged EPS growth the dampened versus our typical levels due to a few items.
We have additional manufacturing and supply chain footprint actions slated for 2020.
And we will communicate these new programs during the year.
Overall, we expect transition costs to reduce our EPS by 30 to 35 cents. This year with savings from these projects as well as the prior excess footprint and synergy product projects, we discussed to begin in 2021.
The combination of a higher tax rate and stronger currencies versus the U.S. dollar.
Generate a year over year EPS headwind of approximately 20 cents.
We are projecting a 2020 tax rate range of 17% to 19%.
We are estimating $22 million interest expense and amortization expense of $40 million for the year and we've added in we've assumed 24.7 million for our full year share count.
We expect to spend $80 million to $85 million and capital expenditures for the year.
This elevated level of investment incorporates the footprint programs I mentioned and the resurrection of some of the capacity expansion programs, we deferred last year.
Looking ahead, we continue to closely monitor our cost structure and spending levels proactively adjusting our activities to align with market dynamics.
Amidst an evolving macro environment, we remain focused on executing our long term growth strategy delivering additional value for all stakeholders.
And with that I'll turn it over to Dave for some final comments.
Thanks Meenal in summary during 2019, we made significant progress across our business segments. As we continued to execute our growth strategy in a challenging market.
Looking ahead, we are confident that our strong business fundamentals and operational excellence position our company for profitable growth through the course of 2020.
The evolution of our company continues to highlight the importance in value of our board of directors and consistent with this I'm pleased that Maria Green retired senior Vice President and General Counsel of Ingersoll Rand will join our board effective February one.
Maria brings a wealth of global public company leadership experience will be a great addition to the Littelfuse Board.
On that note I want to thank our Littelfuse associates around the globe for the commitment in 2019, and I look forward to their country contributions in 2020 and beyond as we create additional value for all little few stakeholders.
With that we'll open the call for questions.
Thank you Sir as a reminder to ask a question you need to press star one on your telephone.
So which are your question press the pound key please standby, while we compile the county roster.
I sure first question comes from Shawn Harrison from Longbow Research. Please go ahead.
Hi, good morning, everyone.
Wanted to delve in more into the the operating profit margin in the electronics business I have to go back to 2011 to find something this low and I understand.
Volume in the incremental margins associated with that are high but.
It was surprisingly low and it seems like at least a lift implied in the March quarter guidance is going to be a little bit less than typical so if you could kind of walk me through.
The drags there and kind of how we should expect that margin to rebound as you progress through 2020 is distribution demand normalizes.
Sure Hi, Sean.
So just just stepping back the the level of of decline that we've seen in our sales across electronic site. We haven't seen this type of declining in 10 years. So the combination of the macro factors that we've seen plus the inventory destocking not just channel, but also with end customers like Dms is in Oems have had a signal.
Perfect.
Impact from an absorption perspective, and just the variable margin that we see across electronics is fairly strong. The other thing I would point out is that our margins have been running a little bit lower already with excess coming into the into the fold and there's a while weve recognized fair amount of the synergies that we've committed to.
To this still that last batch that we said that we've got to work on that's really primarily going to impact relative margin. So we also expect to see a gross margin uplift over the next.
12 to 24 months of programs get into place and we start to see those efficiencies as well.
I guess is you ramp here into the first half of the years. It feels as if you see leverage off the bottom is less than we would anticipate is there something incrementally from a cost perspective.
It's pushing down profitability be attention to cost takeout actions or something else, it's limiting leverage off the bottom.
Right I would that mean, if I if I just look at the overall company. The other piece I would also talk about a foreign exchange. That's also been a drag where if I go back to 2018 in 17 with foreign exchange, we talked about had been a nice tailwind for us.
We saw southern better pricing when when they were shortages in the market, but now we've got foreign exchange that is now a headwind for us a big headwind in 19, but even in 20 filling into the year and we've seen pricing come back to more normalized levels across electronics.
Okay, and then I guess, just a quick follow up Dave in kind of the full year view would you expect either your distributors. Your OEM reinvest customers to begin Destocking is really the baseline to you for the year that the destocking headwind you've seen stops and you just to get back to consumption.
No sell in versus sell through kind of not being normal versus anything else.
Yes, as we talked a little bit on in the prepared remark remarks ill certainly fourth quarter was pretty challenging we took significant amount of inventory out of the channels.
Which needs to happen of course to kind of reached that equilibrium point, there's still a bit more to go during the first quarter, but we're we're reasonably confident that when we get through first quarter kind of done with the stocking sorts of work and just the mere fact that as you get past first quarter.
So you can look at fourth quarter first quarter is kind of the bottom of that that.
Momentum on inventory correction.
You get an uplift just out of the matching up sell in and sell through but we also believe that will begin to see in the back half the year, some end market improvement as well with some penetration into some higher growth end markets. So first half the year is still going to be quite kind of challenging if you will begin to show the.
That improvement as we kind of move out of the the first quarter and into the back half the year, we'll see stronger growth.
Thank you.
Thank you Sean will take our next caller. Please. Thank you. Our next question comes from Christopher Glynn from Oppenheimer. Please go ahead.
Thank you and good morning, Hey.
Dave and so nice operating margin it automotive good momentum there in the back half last year.
Thats.
Still with organic headwinds fairly pronounced. This this suggests you get back to the mid teens margin.
Pretty quickly if you get topline and potentially even.
Okay.
Approach that in the back half this year.
Well, we're expecting for 2020 were expecting to see continued margin expansion in automotive is a couple of things I mentioned part of the way through my full year commentary that we're working on some footprint programs some of which we've talked about as they relate to semiconductor and I expect with us.
And at some of which are also with part of our automotive business as well so that's going to take us a little time as much as most programs do I said the second pieces with foreign exchange, we tend to see the biggest impact the outsized impact coming through automotive and so some of that is also going to depend on what happens with foreign exchange.
In a whole host to different countries. It from a year over year basis that we absolutely expect to make progress. This year I would say, it's probably going to be more like 2021, before we see that mid teens improvement.
Okay, and then just on the M&A pipeline curious if you could comment on.
First the breadth of properties sizes sectors action ability.
Those dynamics as well as your operational capacity to be active there because you have a lot going on with the footprint and all.
Sure sure and yes of course M&A, we've talked about for the last several years being critical for our strategy to drive fundamentally organic growth improvements.
That has not changed and from a an ability to take on acquisitions. We think we're at a position to be able to do that.
And if you look back in the last year and 29 team, where we Didnt completes an acquisition.
What you have visibility to of course are the things that the fact that we didnt close any which you don't have visibility as to the work that's going on and potentially areas, where we stepped away kind of final stages.
So we were quite active during 2019, but also created a disciplined to make sure we stepped away.
When things weren't quite where we wanted them to be.
So we certainly expect to continue to be active yes, I still think prototypical.
Types of deals for us are in that $40 million to $100 million short range is kind of the prototypical sweet spot for us, we obviously well stretched larger if the right opportunity comes along and if it's highly strategic will also do smaller deals that might bring in a technology or our market access the good news.
As as we have good good.
Optionality because there are many of the end markets that we see opportunities for so continue to be quite active certainly expect to continue to use as that as a growth driver as we move forward.
Thank you Dave.
Sure. Thank you Chris will take our next caller. Please. Thank you next question comes from call. It Cummins from Cowen. Please go ahead.
Good morning, Carl Hey, good morning.
Hey, good morning, Dave Meenal I appreciate Hey, I appreciate the color for the full year.
I did want to go back to gross margins from from made it clear.
Clearly the inventory overhang at distributor partners has caused.
Elevated inventory across the channel.
I think several of your peers have reported stability in order bookings than you actually made some comments in your repaired prepared remarks on that.
In electronics. So first are you seeing stability in industrial and auto markets, yet like you'll what seems to be happening in electronics.
Second.
Of the weakness and electronics, maybe juxtapose demand dynamics between passives empower sami's.
Third.
When should we expect inventory headwinds across all product lines to abate.
I think would certainly enable you to improve factory loadings in margins from here and believe it or not I have a follow up.
[laughter], that's a mouse.
Let me start a little bit to kind of talk about the market conditions and things like that meenal can speak to how that translates to gross margins.
Our industrial business.
Okay, and growing well above market, we don't see that changing we continue to have good more momentum in the industrial segments.
So we don't have an inventory overhang there that's really not been an issue for us in 2019, we don't see that in 2020.
We continue to see that reasonably stable. So although industrial markets are are not robust globally right now we've been able to grow nicely with our efforts to design and when the on North America and in specific growth areas. So we can see that certainly continue in 2020.
On the automotive side and and candidly. All these comments are really I put an asterisk as too we just don't understand the potential impact of the Corona virus, both in China and globally.
So I'll make these comments kind of based upon what we know today regards to that.
Automotive, we certainly do not see car build growth in 2020. However.
We see a little more stability so the level of drop is reducing and slowing.
The good news is we had some challenges and made some decisions to step away from some pieces of business in the sensor side of the business in 2019 in specific applications.
We're through a big part of that have a little bit more to go.
But we remain highly confident in the passenger car side that we are seeing content growth beyond car build so we do expect growth out of automotive and 2020 commercial vehicle, which falls in that segment is a bit more challenging.
And although we will have good growth with design wins in some share gains in in 2020, clearly the end markets are not moving in our direction. So that'll kind of way down a little bit on the automotive segment electronics talked about other than the previous comment we think we're through the course of the first first quarter through the inventory.
Corrections largely.
And we really begins to reach that stability level and we're really looking for.
Improvements that come from just matching sell in and sell through but also with look to see in market improvements kind of in the back half of the year. So that's kind of our view on where inventories are and how we kind of see the demand patterns looking mino, maybe you can talk little bit about how we see that.
Related to gross margins should be.
One of the point I wanted to add to Dave's comments on electronics or versus our peers that we've mentioned in the past about 75% sales in electronic segment goes through distribution into our channel partners and that's that's larger than most of the peer companies that I expect you are looking at and then we look at as well so we tend to.
I have some higher peaks and lower valleys compared to our peers and thats why it would be monitoring of the inventory in inventory correction and even just some of than in the stabilization in the channel becomes more critical for us versus some of our peers. So having said all that well we've talked about is we have strong variable margin.
Definitely across electronics across industrial and you can see that come through when we have growth.
Typically we'll see the gross margins improved fairly rapidly and that dropped down very well leveraging operating margin. So thats, what we expect to see a little of that in the first quarter, but as Dave mentioned earlier as we start to see some of the growth from back in the second half will definitely see some stronger improvements in gross margin commensurate with that.
Very helpful. If I may squeeze in one more.
Your industrial business was a bright spot in the quarter.
I know in the past you have mentioned that exists has acted as a beachhead for your industrial business opportunity.
And the sales teams.
That being existing international sales teams are I think are tightly integrated.
With ice is less than half way integrated.
Why wouldn't we see these growth rates in industrial sustaining.
The next several quarters given these synergies across your product launch. Thank you.
Capital first of all I think we're well beyond halfway integrated devices, where we're kind of nearing the final stages of that of the integration activities footprint work, we have to do certainly getting approvals from customers and things like that take longer in the footprint work on Isis, but sales integrations. This.
Comes integration those things were kind of in the back end of of those activities.
We have seen improvements in our core industrial segments. So our traditional products that have been helped by access to industrial customers from Texas. So we have seen some of that.
That synergy if you will from a sales perspective.
In those areas that's part of the help for us to grow beyond what the markets are doing and industrial.
And we'll just one other thing Karl I might add is I, just wanted to make sure and clarify our excess products being semiconductor products are in our electronics segments as Dave was talking about the industrial product segment axis is near in the electronic segment and so some of the channel issues that we just talked about we experienced with access.
Less so than maybe some of our legacy business because we've got more direct sales there, but we've also seen.
Inventory destocking with end customers like OEM. So thats also affected our excess businesses well within the electronic segment.
Yes.
Thanks, very much yet.
Well take our holler please.
Thank you next question comes from Steven Fox from Cross Research. Please go ahead.
Morning, Steven.
Morning, it's tough to fall in that long, but I'll try.
So in terms of pricing I guess pricing has been returning to normal for you fuses and power semis over the last couple of quarters like where are we versus a year ago comps are we.
When does sort of pricing equalize on a year over year basis, and I guess that would be a decent margin help as you think about the year.
Yes, so so I think when we've talked about pricing conditions.
28 key was the anomaly not 2019 right. So we probably had pricing conditions in 2018 that were maybe half of what we normally with c. So through the course of 2019, we certainly saw returned to more normalized electronics pricing pressures, which can be in that.
There are five 6% range and that's what we're seeing today in the electronics side of our business.
Thats consistent with what we've seen in its history.
Certainly our teams work hard to make sure all of our cost improvements and volume increases helped to offset those challenges. So really it's been a return to normal there and that we saw that happening kind of in the early stages of 2019. So we expect that to continue in that kind of its normal pattern.
Got it that's helpful. And then secondly, Dave you guys were.
Early in accurate in sort of quality inventory in the channel you now calling for it to sort of normalized by the end of this quarter, which is consistent with what you guys were saying, but the recovery that you mentioned sounded.
So sort of flat.
Slow steady type recovery, not not any kind of anything dramatic which.
Many of you talk to is a little little more conservative than other guys.
Is there anything you're contemplating in that comment relative to industry specific to fuses and tower semis or anything else in terms of puts and takes with content content or do you think is just a general market outlook that you are talking about there yeah. No no I don't is nothing specific we're contemplating on that I mean, we.
We did a bit of a step function improvement when the inventory destocking as Don right. Because you just you're no longer reducing sell in to take inventory is down. So you get that step function improvement that takes place, which we kind of expect to see that after the first quarter, we'll see that improvement.
Beyond that we are expecting improvement, but the improvements will really be driven out of fundamental in market improvement.
And I think our visibility as of today would say that yes. It will begin to show that end market improvement in the back half of the year.
But our visibility to that is not great.
So we don't want to overcome that you know in our kind of view on on how the end markets are going to behave in the back half of the year. So some I think we're being conservative but.
I think our view would be unless we see specific things are going to drive that in the back half of the year weren't we're not going to call. It off that much. So we hope there's some upside to that in the back half the year and as visibility improves we'll we'll certainly talk about that.
That's helpful. Thank you so much.
Thank you Steven we'll take our next caller. Please. Thank you next question comes from David Leiker from Baird. Please go ahead.
Good morning, Maintenances, Erin Wilson back on for David.
Hi, So the my first question.
Just I wanted to dig into your auto automotive segment organic growth a little bit.
Given the 8% organic sales decline so.
Based on my math, it looks like commercial vehicle could be.
Maybe as much as half of the organic sales decline within this segment I'm wondering if you can help further contextualize youre outgrowth or content growth in passenger car fuse versus commercial vehicle and then that Esensor headwinds you had talked about as well.
Yes, so when we talk about the sensor headwinds and we've been talking about that for the last couple of quarters.
Sensor headwinds in the creating a bit of.
This call it about a 1%.
No drag on organic growth to the through the automotive segment.
Certainly commercial vehicle has an impact on it.
As well as as a drag.
What we're seeing today as we look forward, we clearly are comfortable in the passenger car segment by the way inclusive of our sensor business at this stage looking forward. We clearly are seeing content growth that's in that 3% to 4% range beyond Carville, obviously car builds.
In 2020, or we're not projecting to to show growth, but the content story continues to hold water items. We look forward that looks still pretty solid for us and so we remain pretty confident enough.
Okay, Great and then my second question is just can you.
To the extent possible detailed the assumption do you have surrounding the current a virus. That's currently embedded in your guidance.
Yeah, what I would say is the impacts we have on that today is we know that in all of our factory locations in China.
And in a good part of our customers locations not all of course.
There has been a mandatory extension of the Chinese new year holiday.
Through an extra week.
Our understanding of that that allows kind of that gestation period of two to 14 days to get for the Chinese government to get better visibility of what's going to take place there.
So what's embedded right now is the fact that we're we have embedded the one additional week of shutdown in China.
We haven't embedded in our forecasting changes beyond that at this stage because it's just two foot, it's hard to predict exactly what thats going to be.
Certainly has the potential of getting worse right now we don't have that visibility.
Great. Thanks for taking my question.
Sure. Thanks, there and we'll take our next caller please.
Thank you. Our next question comes from Matt Sheerin from Stifel. Please go ahead.
Yes. Thank you.
Good morning, I, just wanted to get back to your revenue guidance for the year for up.
Honestly, which shows strong stronger back half.
In terms of.
By segment are you expecting.
Each of the segments to be up as well or would it be more slanted toward the auto and industrial given.
Given that that's a correction is still playing out in electronics and then also relative to.
Margin.
Where margin shake out this year.
Are you expecting to grow.
Operating margin and.
Operating profits this year. Despite the fact that you're still looking at some headwinds in terms of costs in transition costs and other things like that.
Yes, let me talk a little bit about the revenue growth in the meantime talk about kind of the bottom line growth associated with that.
Our current view today is that we expect growth in all three of the segments in 2020.
To varying degrees, we're not giving guidance on each one of those segments, but we are expecting growth in all three of those areas.
Certainly we know with the dynamics I talked about earlier in electronics and the comps. So if you look at electronics. It was falling steeply through the first half of 2018, so from a comp perspective, yes, we're not going to have growth in electronics in the first half, but we certainly expect kind of return to growth in the back half.
And for that to outpace the level of decline in the first half so that strong growth in electronics, and we expect with the content growth story and automotive.
Even with kind of an end market challenge of car build will have growth there and industrial we continue to see good success, we've had in in the last year.
From an operating margin perspective.
I mean I wanted to talk to share. Some added it's part of my prepared remarks on what I mentioned is with the low single digit sales growth that we guided for for the full year. We said that we would have year over year operating margin expansion that we would see leverage in our EPS growth, but it would be lower than typical levels are lower than normal so as.
An example, you don't low single digits growth, we might in a typical year, we might see mid single digit EPS growth in beyond the little bit on the lighter ended that because of the couple of things I mentioned, one being the footprint footprint activities that we're undertaking but also really I'll call in general market dynamics around foreign exchange.
Remains a headwind for us for 2020 today and then we have with our lower tax rate to 19, we have a little bit of a tax rate headwinds as well. So thats why its it's more of a diminished the leverage that we absolutely expect to grow EPS and operating margin expansion sure. So we certainly expect to get bottom line leverage just maybe dampened a little bit more than what we had low.
Like to see because of strategic investments, we're making the setup for the long term.
Okay.
And then.
You did talk about transition costs relative to some.
Further integration of axis and other things.
Is there anything incremental there that impacts the margins this year and that looking next year, you'll have even more favorable comps.
Yes. So it's part of those remarks that I mentioned is we've got footprint actions slated for some of these are these excess footprint activities that we've been talking about the best past few quarters, others are ones that we're going to embark on but we've not share yet and we will in future quarters. The combination of all those products.
We expect to have transition cost of about 30 to 35 cents related to EPS This year and just the.
The question is while Hakan, yet help me a little bit on the segment by far the bulk of that is going to be impacting the electronic segment from a year over year perspective, because a lot of that is related to the axis work and when I talk about transition costs. It means we have to do some pre hiring a new locations and we've got.
Product qualifications constant from transfer costs, that's all part of our adjusted operating margin in adjusted EPS.
Okay, So you're going to run that through the TNL then.
Yes. These are constantly run through again it ends up being duplicate staff for example, make I've got it okay.
Locations things like that.
Okay. Okay. Thank you.
Thank you Matt will take our next caller please.
Thank you I last question comes from David Kelley from Jefferies. Please go ahead.
Good morning, Good morning. Good morning, Thanks for taking my questions, maybe starting with an autos pricing question for me I think you referenced an uptick last quarter you just curious if thats persisted or maybe even subside as now that the market seems a bit more stable or or as pricing at this point more a function of the competitive landscape.
You are saying at the moment.
Yeah, I would say and pricing in the automotive.
Segment for US, we have talked about it being a little more challenging than we've seen in the past I would think today, our view would be pricing year to year kind of has this range.
Maybe we're on the higher end of the range, we're certainly not out of kind of a normal range in the automotive segment. So so we're not seeing kind of outsized pressures there.
And at the current state.
Okay got it thank you and the make if you could provide a bit more color on the sensor program delays you referenced.
And also is that light vehicle or commercial vehicle customer specific.
Most of the delays in the programs, we're talking about or in the in the passenger car light vehicle world.
And and the issues these are customer delays not little feed as delays.
And they vary Theres theres, a handful of them and they vary everything from Theres, one big program, where actually they are delayed because another supplier count supply components they need for their system. So it's pushed out the introduction of the new system and in other cases Oems have delayed the launch of change.
As to some of their systems. So there's a variety of regions reasons, there, they're not long term, they're not issues that are going to extend.
Materially, but they are delays that certainly impacted our our fourth quarter a bit.
Okay, great. Thank you last one for me and may be ending on kind of a high level question.
You referenced the eight asked the opportunity could have outpacing expectations.
Yes, how do you think about or how should we think about your addressable market and advanced data asset like the level to what's called bubble to plus content and maybe if you could just kind of high level discuss some of your content opportunities you see is as the adoption of the more advanced day Das contact grows.
Yeah. The first thing I would remind you and others is that those revenues show up actually in our electronics segments. Because they are electronic technologies that are being designed into those automotive applications. So it's not in the electrical infrastructure of the vehicle. If you will well shows up in the electronics.
Segment of our business and what I would say is these are traditional circuit protection types of products, whether they are there over voltage protection overcurrent protection over temperature protection those sorts of things, where we are designing in our electronic products with kind of automotive qualifications and they're slightly different design.
Okay and manufacturing processes that we use to support automotive requirements.
What I would say is the content growth in the electronic systems continues to grow in the vehicle our share in that space.
Still allows for us to to go after further share potential as well.
So, it's really kind of they aren't particularly unique technologies.
For our portfolio, there kind of our core core technology.
I'll focus in the automotive areas.
So we just see that lift in content and is the opportunity for us continuing to drive growth in the electronics part of our business.
Alright, perfect. Thank you.
Thanks, David and thanks for joining us on todays call and your interest in Littelfuse.
We look forward to talking with you again soon have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.