Q3 2020 Littelfuse Inc Earnings Call
[music].
I'm 20 conference call.
Today's call is being recorded at this time I will turn the call over to head of Investor Relations Tricia <unk> <unk>. Please go ahead ma'am.
Good morning.
And welcome to the Littelfuse third quarter 2020 earnings Conference call.
With me today are Dave Heinzmann, President and CEO, and Meenal, Sethna Executive Vice President and CFO.
This morning, we reported results for our third quarter 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 web site.
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 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 in the Investor Relations section of our website.
Before proceeding I would like to mention that we will be participating in the beard and Stifel virtual conferences in November and we look forward to engaging with you during these outreach opportunities.
I will now turn the call over to Dave.
Thanks Trisha good.
Good morning, and thanks for joining us today and I hope all of you and your families are well.
I want to take this opportunity to once again personally thank each of our little piece associates around the world I'm extremely proud of the extraordinary leadership demonstrated by our global Associates and business partners. During these challenging times.
As a result of our ongoing efforts intelligence all of our facilities are operational and serving customer demand.
It's a remarkable focus of our entire team enables us to execute consistently.
We've stated clearly our top priorities during this pandemic first protect our global associates their families and the communities in which we operate second support our customers and third preserve the long term financial health of the business.
Because of our focus on these priorities, we delivered strong third quarter results.
Our ongoing commitment to operational execution enabled us to meet stronger than expected demand from our customers.
We recorded third quarter sales of $392 million, which is up 8% versus the prior year period signaling our return to growth.
Sequentially net sales were up 27% largely due to higher than expected demand in automotive end markets and strength in several end markets like consumer electronics gaming appliances medical equipment, HPC and renewables.
Our focus on serving critical customer needs enabled us to fulfill much of our backlog demand, resulting from second quarter cobot mandated manufacturing shutdown.
Incremental revenue improvement along with our ongoing disciplined cost management actions delivered an adjusted operating margin of 17% and adjusted EBITDA margin of 23%.
We achieved an adjusted EPS of $2.16, an increase of 21% year over year.
I mean, it will provide additional color on our strong financial performance.
During the quarter, our electronics products segment saw robust demand led by Asia, particularly in China.
With a strong COVID-19 recovery.
In North America demand rebounded post second quarter shutdowns.
Europe also showed signs of recovery.
Our third quarter electronics revenue growth was driven by higher than expected demand from ongoing work study and stay at home trends.
These lifestyles are driving particular demand for passive components in semiconductors and applications such as data centers fiveg infrastructure white goods and appliances laptops tablets gaming devices and medical equipment.
Weeks of inventory of our products at our distribution partners are flat at the lower end of our normal 11 to 14 week range.
Exiting the third quarter, our electronics book to Bill was around 1.0, which indicates the sustained healthy level of demand for our products into the fourth quarter.
We continue to work closely with our distribution partners to proactively manage inventory consistent with demand patterns.
Moving onto our automotive products segment during the third quarter, we experienced a meaningful sequential improvement in sales cross passenger vehicle markets. Our revenue grew over 75% coming off historic lows during the second quarter.
Continued content gains allowed us to grow above market.
China saw robust in customer demand.
Europe saw solid demand, partially driven by emissions regulations, and North America experienced a strong recovery, especially for Cvs and pickup trucks.
Revenue for our commercial vehicle products was down year over year.
However, sales rebounded during the third quarter as our manufacturing plants and customers reopened following second quarter shutdowns due to the pandemic.
For the full year 2020, we expect the global car build of approximately 73 million cars, which is down nearly 20% versus 2019.
The ongoing recovery will depend on consumer confidence economic recovery and COVID-19 containment.
We expect our long term growth to continue outpacing global car build with our ongoing content opportunities.
In our industrial product segment focused during the third quarter is where it was our manufacturing ramp up to meet backlog demand following the second quarter shutdowns due to the pandemic.
After second quarter lows, we did see better demand in some end markets, including renewables power conversion and HPC we.
We continue to see soft demand in the us non residential construction oil and gas and mining markets.
We are confident our industrial business will continue to drive long term profitable growth are increasing number of design wins and our strong project call.
We're about a month into our fourth quarter and continue to see from demand in many of our end markets. However, the COVID-19 situation remains uncertain and could create risk to end market demand and supply chain disruptions.
Our global teams remain focused on what we can control to limit disruptions to our business.
We originally adhering to global safety requirements and stocking additional raw materials and finished goods to serve the critical needs of our customers.
The long term secular growth themes of a safer greener more connected world continue to drive strong design activity.
In today's environment quality of life is playing a greater role in People's everyday lives driving an acceleration of these themes and their long term sustainability.
We have proven that our leading technologies in circuit protection power control and sensing are critical to enabling the ecosystem of applications surrounding those themes as.
As a result, we continue to expand existing positions and gain market share.
During the third quarter, we capitalize on our design activity with several strategic wins and high growth industrial electronics and transportation applications.
Our customers and their engineers continue to remain focused on new product development as we jointly navigate progress and an ongoing remote environment.
Our engineering teams are helping drive customer focused innovation and design activity remains robust across industrial applications.
Based on our ability to pair the right product and application expertise with customers needs.
We have demonstrated capability differentiation.
For example, in many instances it develop efficient solutions to address higher power requirement and smaller spaces with lower installation costs.
During the quarter, we had key design wins across multiple regions and renewable energy and energy storage factory automation Hvdc power conversion motor drives and industrial safety.
We continue to increase our content with our broader portfolio of industrial fuses and relays power semiconductors note.
Notably we won new business in Europe, with our high powered bipolar semiconductor modules for motor drives and marine ice breaker ships.
Wins like this further diversify our presence as a heavy industrial space.
In industrial safety applications companies across the spectrum of industries continue to prioritize innovative safety enhancements for employees that work there electrical power.
With recent changes to the us national electrical code or any c.
We have been proactive in our response to customers inquiries in regards to compliance to new standards and safety guidelines. This.
This is helping drive new opportunities for our industrial safety products.
One of the recent highlights of our industrial business is the expansion of our protective relay offering.
Our newest solution is the only industrial grade ground fault circuit interrupter on the market that meets UL requirements.
This offering allows customers to meet recently adopted NDC codes, ensuring personal personnel safety when employees or near higher power electrical loads and liquids are present.
This protection is mandatory we're already seeing strong customer demand.
We secured a key strategic design win within the food and beverage industry and are well positioned to leverage these technologies to other customers in the space.
Broad industrial design in activity further diversifies, our business across many industrial markets.
The long term macro trends of greater electronics content and the expansion of connectivity have been key drivers for electronics applications for many years, we are seeing those trends amplify in the current environment.
Our innovative diversified solutions engineering support and customer relationships continue to set us apart from other suppliers we.
We secured broad regional design wins in the quarter for battery management systems and power supplies for cloud computing and consumer electronics as well as key censor wins for smarter more complex large and small appliances as well as building and home automation applications.
Connected data rich devices continue to drive demand for our products and data center telecom infrastructure applications.
For transportation applications, we see good customer engagement and strong design activity across several X TV platforms. The global long term outlook is bullish and the industry is seeing momentum in areas like commercial vehicles and high in passenger cars.
With our global infrastructure technical expertise and deep OEM and tier one relationships, we are well positioned to continue our growth and ongoing TV opportunities.
In the quarter, we secured over a dozen ex HPV design wins broadly across Asia, Europe, and North America, We won new business for battery management systems in North America, Japan, and a number of other countries in Asia.
We also continued our wins electric vehicle infrastructure applications.
In the US we won new business for off Board energy storage systems and commercial charging station.
We also secured automotive electronics wins, and ex ERP applications in China and India.
In addition, our high power semiconductors secured strategic wins for heavy industrial transportation applications in Europe for two high speed passenger train applications.
The evolution of the standard internal combustion engine vehicle also continues to increase the content for our products.
Our proven technical expertise and product performance continues to drive robust design activity.
In our passenger vehicle business, we secured key wins for on battery harness and Master fuse protection applications in Japan, Europe and China.
In addition, we captured new business for seat and motor.
And window motor applications in Japan, and North America.
Furthermore, our automotive sensor portfolio continues to enable enhancements and safety comfort and convenience.
We saw strategic wins for seat belt, buckle, and tailgate applications in China and North America.
We also continue to see strong pipeline of new business opportunities for our commercial vehicle business and secured a wide range of key design wins during the quarter.
Customer responsiveness and operational execution helped us win new business with a European manufacturer of electric Street cleaning vehicles.
Infrastructure projects in China are driving many new opportunities in the construction equipment market, where our portfolio of high quality switches is being designed into a line of excavators from a leading local manufacturer.
Material handling remains a strategic growth market that continues to drive new design activity.
We won new business in the quarter for electric forklift platforms in China for our relay products and in North America for our temperature sensor Assembly.
We're also identifying opportunities in vertical markets light commercial vehicles to carry over our traditional passenger car sensors, where we won new business in the heavy equipment application.
Let me take a moment to again recognize the ongoing contributions of our global associates, which make little fuse a stronger more resilient company we've.
We take pride in the performance of the billions of components, we manufacture and deliver everywhere every day.
In recognition of our focus on operational excellence, we received two prestigious awards.
For the second consecutive year, our teams in countless Lithuania earned a supplier quality Excellence award for General Motors, recognizing their hard work dedication and zero compromise on quality.
And our India team has been recognized for the fourth consecutive year for a best protective device award for its technology and product innovation.
These awards showcased the efforts of our highly skilled associates around the world and their commitment to strengthening our global brand and reputation.
I'm proud of the team's contribution which make these awards a reality.
I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.
Thanks, Dave Good morning, everyone and we appreciate you joining us today I hope everyone. In those close to you have continued to stay safe and healthy.
Since the early days of pandemic, we implemented a number of pilots across the company, including building on our strong financial foundation to resume our profitable growth trajectory.
We made great progress during the third quarter with our higher than expected sequential sales growth of 27% and growth of 8% versus last year.
Growth was led by a combination of stronger than expected demand and our team's responsiveness in meeting customer requirements around the world.
Adjusted operating margins were 16.9% for the quarter up 230 basis points versus last year, and a function of higher volume leverage and continued cost management.
This also drove sequential operating margin flow through of 50% better than we had forecasted.
Adjusted EBITDA margins finished over 23% in the quarter and our over 20% year to date.
Third quarter GAAP diluted earnings per share was $22.25 with an effective tax rate of 17.9%.
Adjusted diluted EPS for the quarter was $2.16 up 21% last year due to sales growth and improved profitability.
Adjusted diluted EPS also finished much better than expected due to the higher than expected sales growth and a lower than forecasted tax rate.
Our third quarter adjusted effective tax rate was 15.7% is we've reduced our full year tax rate estimate due to improved profitability in lower tax jurisdictions.
As weve. According to give you a reduction in our tax rate the lower rate improved our adjusted EPS by 22 cents in the quarter.
Moving onto our segments all had significant sequential margin improvement in the quarter due to higher sales volume.
Electronics segment sales were up 14% sequentially and up 12% over last year.
Sales growth, coupled with our cost management activities drove an 18% operating margin in the quarter, a 280 basis point improvement versus last year.
Auto segment sales were up 69% sequentially.
Teams did a fantastic job managing through a record demand decline in the second quarter, followed by this quarter's faster than expected recovery in the market.
Margins improved sequentially to 14.7% in the quarter.
Margins were up 380 basis points versus last year, a result of last years right sizing activities cost management efforts and foreign exchange benefit.
We stated our target margins for the segment or the mid teens and this quarter showed our execution to achieve our goal.
Sales were up 43% sequentially in our industrial segment.
Sequential margins improved to 15.6% this quarter versus a loss last quarter.
Margins were down versus last year due to additional costs, we are incurring from manufacturing plant transfer as well as pandemic pandemic related supply chain efficiencies.
Our balance sheet remains strong.
We ended the quarter with $642 million in cash.
About half of that in the U.S.
Solid working capital contributed solid working capital performance contributed to $51 million of free cash flow in the quarter on.
On a year to date basis, we generated $123 million in free cash flow with the net income conversion rate of well over 100%.
We repaid $60 million on our revolving credit facility ending the quarter well under 1.0 times net debt to EBITDA.
So in summary, this was an exceptional quarter, both operationally and financially while we resumed our topline growth trajectory.
Moving onto our outlook, our third quarter finish reflects the demand environment is stronger than we expected 90 days ago.
But we are continuing to monitor the macro dynamics, especially pandemic, uncertainties, which appear to be getting worse in many areas around the world.
Assuming no new disruptions weeks.
We expect fourth quarter sales to grow in the range of 7% to 10% versus last year with growth across all of our segments.
We typically see a sequential decline in all of our businesses going into the fourth quarter.
But given current market signals, we expect sequential sales growth across our auto and industrial segments.
We do expect our electronics segment sales to be seasonally down.
After exceptionally strong third quarter.
We are assuming car production of $22 million for the quarter.
And we're assuming about a 40% year over year operating income flow through.
On other financial items, we expect interest expense of about $21 million for the year and amortization expense of $40 million.
We are forecasting an adjusted effective tax rate of 19% to 20% for the year.
The lower end of the tax rate range assumes that we receive approval for a pending foreign income tax holiday that would be retroactive to the beginning of 2020.
And we are maintaining a full year capex forecast of $60 million to $65 million.
I'd like to also thank our teams around the world for their ongoing dedication and resilient if they continue to serve our stakeholders through these challenging times.
And with that I'll turn it back to Dave for some last comments.
Thanks Meenal in summary, we delivered strong third quarter performance and are pleased to see a return to year over year growth.
As we near the end of 2020, we are confident the actions we have taken this year position us well for sustained profitable growth.
Our fundamentals are solid.
And as always we are balancing our attention to ongoing design in activity and investments for growth, while maintaining our operational excellence.
As we near 2021, the latter portion of our current five year growth strategy I'm excited to share that on February 20, Threerd, we will host a virtual investor and analyst event.
We look forward to sharing the specific details with you than which reinforce how we will continue to deliver ongoing value to all stakeholders.
With that ill now turn the call back over to Trisha.
Thanks, Dave for participants Nealon, Dave are in separate locations. This morning, so feel free to direct your questions to one or the other answer them operator, please assemble the queue in a roster.
To ask a question you need to press star one good telephone until the second question. Please to tacky. Please standby, we compared to Q anywhere.
And our first question comes from.
Ackerman with Cowen you May proceed.
Good morning, Carl Hey.
Hey, good morning, everyone.
So we'd like to see the material improvement in your results and outlook relative to the first half of the year. However.
However, I'm curious given the fact that you just guided the December quarter in line with seasonality.
Is there any reason not to think your revenue trends would grow in line with seasonality in the first half of 2021.
Yes, I'll take that Karl and thanks.
Yes, so obviously, we guided to season normal seasonality in the electronics portion of our business.
Actually not normal seasonality in the industrial and the automotive portion, which typically are also seasonally down in the fourth quarter in both cases industrial and automotive, we believe will actually be sequentially up.
I think electronics is a very strong.
Third quarter.
And with that.
Strong third quarter and the comparative of the sequential.
We're seeing kind of normal downturn there.
What that bodes for next year, there's just a lot of variability out in the marketplace and what's going on we're not giving guidance on what next year looks like.
However, one of the strong things in electronics is the fact that our our inventory positions are quite healthy.
At the lower end of our normal range. So we won't have inventory corrections and things like that to impede our ability to grow next year.
Very helpful.
David for my follow up.
You know one of your peers earlier today spoke about the industry shift towards electric vehicle powertrain.
Particularly from Asia Pac.
Today, you are a little bit less exposed to Asia from a geographical basis, but at the same time, you have internal capability for Gan on silicon carbide from the likes acquisition.
It seemed to apply very well to electric vehicle powertrain and charging capabilities.
I think you mentioned in your prepared remarks, some compound semi design wins for trains but.
I guess, what sort of opportunities and design wins are you winning for your Gan on silicon within electric vehicles. Thank you.
Yes. So of course, yes from a technology standpoint, we do not have Gan technologies that we have in the marketplace. We do have silicon carbide in the marketplace.
And where our focus is in the space.
In our power semiconductor business is really in the charging infrastructure the bulk of our opportunity in the near term exists and charging applications, particularly the higher speed charging applications, where you get more of a DC to DC type of high speed charging content opportunity and the opportunities are significant.
The larger than on type one type two types of Chargers, So thats where were seeing today, the best opportunities for ourselves and we are getting design wins in those spaces.
Thank you.
Thanks, Carl will take our next caller please.
And our next question from Chris you Chowdhry with long.
Longbow Research you May proceed.
Good morning, good morning, good morning Selwyn.
To the auto production peer of Yours, just noted that they expect the fourth quarter to be peak in production.
Sorry to decline from there. So it's just one quarter is a peak how do you think about operating margins within auto and maintaining it within that mid teens range that you spoke about and then if you have any thoughts on inventory levels within auto to that would be helpful. Please.
Sure. So we have we haven't really given guidance to what next year's volumes look like.
And I know the period, you are talking about in there and their financial.
Calendar shows that as the beginning of the year.
Certainly were expecting.
Car builds in the fourth quarter for us being the peak this year.
We haven't really given particular.
Detailed view on what next year is there just too many wild cards out there how extended or the pandemic related shutdowns that seem to be getting a little worse right now.
What is the economic confidence in different regions of the world.
So we believe certainly that there will be a bit of a challenge going into next year on on car builds to continue to drive significant growth there and from a car build standpoint.
However, we do expect that car build next year, we'll have high single digit growth, maybe as high as 10% growth compared to a very soft year. This year. So those things will support.
Ability to to keep margins at a reasonable level in the automotive business.
But as a reminder, there are a lot of costs today.
That are we've reduced costs overall.
Some of those costs that we've reduced our temporarily cost reductions whether.
Whether they be reductions and compensation and those types of things reduction in travel.
Some of those hopefully we'll come back during the course of next calendar year.
Which will make a bit of a challenge for us to continue to drive growth to our bottom line.
Okay and then.
If I can just Gaussian just on your question on margins to add to what Dave was saying we've talked about our target margins for auto segment in that mid teens I call. It the 14% to 15% range and with with the current sales levels. We had but also as Dave pointed out with a much lower spend then we would exceed.
I'd like to see because of all the discretionary cuts. We took write that margin I think we'll continue to see a balanced sales will grow but spending will start to resume a little bit more on the discretionary side. So we stick to our target margins at the 14% to 15% for the auto segment.
Okay, Great. That's helpful. Thank you.
We got to the electronics market can you just provide some.
Detailed on the book to Bill of one is how did that look by region and then is there.
The seasonally down is that typically down mid single digits is that the right way to think about it there.
Yeah. So first of all I think normal seasonal pattern for us and electronics. If you look at sequential third quarter to fourth quarter kind of normal is in the high single digits to low double digits is kind of normal seasonally Dick.
Declines that we see in the fourth quarter.
Book to Bill.
Exiting the third quarter was right around one and.
And we Didnt see a huge differential and book to bill across the different regions of the world and keeping in mind. When you look at book to Bill regions of the World really relate to manufacturing locations, which don't necessarily very crisply to end market drivers and where the sale.
As of the devices are coming so we didn't see a huge differential between the regions for a for ourselves.
During the third quarter.
We've continued to see solid bookings also through into the fourth quarter. So we feel feel good about that.
Thank you.
Thanks for your question Scott the I will now take our next caller. Please.
And our next question comes from Christopher Glynn with Oppenheimer You May proceed.
Good morning, Thank you Hey, good morning.
So a lot of operating discussion, but your operations in your demand patterns are normalizing here. So it was kind of curious about the balance sheet.
You know the Actionability acquisition pipeline your appetite and.
Notional thoughts on share repurchase.
Meanwhile, if you take that yes, I can I can take that so.
From a balance sheet perspective, our view hasn't changed much in the past quarter and we've talked about want to make sure that we have a strong balance sheet I would say, yes, we are seeing recovery recovery today, but as Dave commented is still a lot of uncertainty out there still a lot of lack of future visibility right. Now so we want to make sure we have that.
Solid ground we are.
Are absolutely looking at M&A, we have the balance sheet to do that and that was always the intent, but I would say right now the M&A market has not really returned to what I would call any sort of normal pattern right now.
In general a lot of folks are still sitting on the sidelines don't know that this is necessarily the environment from a seller perspective that they want to look at things. So we're looking at that but we'll see how the market continues to evolve from an M&A standpoint, and then as it relates to share repurchase our philosophy on on.
Capital allocation is always been share repurchase for us is more opportunistic we always prefer to look at M&A first in right now given the environment, we're holding onto more we'll keep an eye on M&A and share repurchases just sitting on the shelf right now for us.
Okay and then just.
I was curious on the margin guidance for the fourth quarter, the 40% incrementals year over year.
Implies kind to.
75% sequential decrementals at the midpoint of the revenue guidance.
Are you see you planting a lot of cost restoration or that number seems a little high just wondering if you kind of have in your normal cost base.
Re loaded into the fourth quarter.
Yes, so I would say on your comment on the sequential EPS.
You go back to Dave's earlier comments also around we talked about a normal sequential decline in the quarter and that's on the electronic side, our electronics business. We've always talked about tends to have the higher margin flow through above the company average. So when you look at it sequentially, it's not a surprise for us that we would.
See a bit of a higher decremental, but again, our normal incremental range on a year over year, we're talking about 40% as well and in the range that we talked to our normal incremental range on a year over year basis, I think it's just the business mix on a sequential basis.
Okay. So there are no particular cost restorations into the fourth quarter from your belt tightening activities throughout Europe.
Nothing out of the ordinary now.
Okay. Thank you.
Thanks for your questions, Chris we'll take our next caller please.
And our next question comes from the chunk with Baird. Your line is open.
Good morning, I'm wondering yes.
Yes, no I was just wondering first if it would be possible, maybe just to put a finer point on some of the temporary cost factors in your auto margin this quarter.
I guess I'm, just trying to think of the normalized margin to build on from here in that segment.
Yes, I would say, we've not gone in detail for each one of our segments margin by margin, but what I'd said from a total company perspective is over a two year period from 18 to 20, we will have taken out about $80 million in opex about.
About half of which I again, I've talked about is more fixed opex headcount and we took a lot of those actions in 2018 into 2019, and we're still seeing some benefits from that the other half being more discretionary or variable spend and that that was a little bit of daves comment there so think about things like compensation.
Variable compensation items, we really don't have people traveling et cetera. So you can assume that that 80 million. There's a portion of that going into automotive some of that will come back next year, we'd like to put the variable compensation back for our employees and we'll see what happens with things like travel expenses. So thats thats part of the addition.
Will cost we've been talking about at the same time, we do expect as we get through the next several quarters, we'll see a pickup on sales so.
How that timing works between the add back versus the sales growth I think is going to be a 21 question.
Okay, Great and then Dave for you just bigger picture maybe you.
If you could talk a little more about the opportunity in vehicle charging for easy specifically.
Election coming up.
Knows whats going to happen, but it's.
There is a change administration one of the buttons proposals would include investments in either charging infrastructure and just if you could talk about how little fees should be positioned to benefit as that as that comes to fruition potentially.
Sure.
Great question.
I would say that.
He be charging in general is a.
An application, whether it's on vehicle or off vehicle that creates opportunities for our little future core products.
In the off for charging is certainly an area it really depends on which types of charging devices.
You know that we're talking about.
Because there's three levels of charging.
For sure the high speed charging is where the content is the richest for us and.
The opportunity there exists in our traditional path.
Passive components that exist in our industrial type of fuse products in it and then exists in our power semiconductor products the.
The challenge a little bit on where you capture that as.
Much of that Doesnt show up in our automotive segment much of that ends up showing up in electronics as well as in our industrial business. So it kind of gets spread amongst those but a meaningful opportunity for us. We've had good design in activity. We continue to be very robustly engaged there are many many different Oems that are worth.
King on charging systems, there is a leader certainly but theres many.
You'd be charging companies out there.
Some of them.
Most of US have never heard of some of them are our large Oems as well involved in that globally. So it's a nice opportunity for us.
Great. Thank you.
I appreciate your questions Luke will take our next caller. Please.
And our next question comes from Shawn Harrison with loop capital.
Hi, everyone. Good morning wanted Mike It might I wanted my congrats on such a strong quarter.
Wanted to talk about the electronics business and just what feedback you're getting from distribution knowing that demand is so strong yet tail inventory at channel is still at the lower end further.
Are there any signs they look to add inventory and just within that context, where your lead times right now for your products that go through distribution versus normal.
Sure Yes, as you can imagine these are discussions that are ongoing all the time, but particularly in these kind of volatile environments and and where of course our revenues.
Sell in.
In electronics were quite robust in the third quarter.
We did not see an increase in inventory in the channel. So it's obviously our sales in we're flowing through as our point of sales were up nicely for our products.
So its quite well matched and that.
Our lead times at this stage continue to remain pretty pretty sound.
There were a couple areas, where we had a bit of catch up we had to do after mandatory shutdowns in the second quarter, but our capacity has enabled us to respond to that pretty rapidly. So we really haven't seen strong increases in lead times for our products.
So I don't think there is a huge indication right now of a need to increase weeks of inventory because of our ability to respond to pretty strong increases.
If theres sustained point of sale increased trend.
Then I think.
Our distribution partners will have to evaluate that and consider the ability to do it and as you know our distribution partners big differentiation between the public guys and the nonpublic guys and how they view those things.
So right now we continue to have those discussions and watch it we don't see any particular.
Message that there's a solid effort to try to increase inventory for our products at this stage.
Very helpful. And then Meanwhile seats, maybe speak about hikes this and just the integration and using this calendar year, where will you be at in regards to that and integration.
I'm also looking at whether there is some additional savings from that that will flow in the 21 that that youre not seeing right now or any other kind of permanent fixed cost reduction actions that you've taken your in 20 that could.
Maybe help us leverage and 21.
Sure.
So really what's left for us with the axis integration, we've talked about in the past few quarters, but it's really what I'd call supply chain manufacturing footprint, we had talked about a few different consolidation efforts. We were going through we just completed one of the smaller ones that we have to do so we expect you know its a.
A small amount of benefit coming from that in in 2021, where we did to us plant consolidations. So really our larger activities are a consolidation from a couple of our European sites into a new facility in the Philippines, That's really going to go on through all of 2021 for us So I.
I think as we get into the back half of 21, we'll start to see a little bit at the savings I would also say part of our challenge right now given the fact that you're not really traveling across the ocean anywhere, yes, we had a little bit of slowdown in some of the transfer is not just from our side necessarily but even customers.
I want to come and qualify products. So thats why I would say this is stretching to 2021, so I think a little bit towards the backend, but we really would expect to see some good savings coming out at about 2021.
Include savings is that a few million dollars is that $5 million just.
Always trying to put a fine point on anything.
Yes, what I would say is what we will get into more detail later, let's just call. It several million dollars and as we get further into 21, we'll talk about that.
Thanks, So much sure thing.
Thanks, John for your questions.
Good.
And once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your Touchtone telephone.
And our next question comes from David Kelley with Jefferies. You May proceed good morning, David.
Hi, good morning, Dave being on and Tricia and maybe Meenal I wanted to follow up on the auto margin discussion.
Curious if there were any onetime cost in the quarter things like overtime to help me what was clearly outsize ramp that might be getting lost in the shuffle given your strong execution in the third quarter.
Yes, you know what I would generally say is yes.
We touched on the fact that what you see not just in automotive that in all of our businesses is there is a fair amount of discretionary what we call the variable of discretionary spend that just isn't happening right now right. We've cut out a lot of variable compensation, we have and we really don't have anybody travelling hardly any travel no trade shows things like.
That so thats a benefit that we're seeing coming through.
I'd say right now, it's a little bit more benefit than we are seeing additional cost from things that you talked about whether its inefficiencies that we're seeing in some factories and things like that so that's why I think we had an earlier question on that I had mentioned that as we get into 2021 and beyond and we start to see.
Lets start to add back some of the discretionary spend but at the same time, we would expect sales to continue to improve we mentioned in our prepared commentary as an example that are commercial vehicle parts of our business are still down as the market improves we'd we'd expect that improvement. So net net how the timing will work between expense.
Add back in the quarter versus sales growth remains to be seen but that's why we're saying really our target margin remains to that 14% to 15%.
Okay got it that's that's really helpful and maybe a question for Dave.
Could you give us a sense of channel inventories and auto is its been a popular discussion over the last few days of this earnings cycle. I was just curious if you're seeing customers build inventory or or can they even build inventory I think one of the questions out there is the supply chain just simply trying to keep pace with demand at this point.
So and again, just curious to hear what you're saying, yes first of all its many many customers. Many many different regions and so it's hard to kind of make blanket statements we did not.
No see wholesale shifts in inventory that we can identify right obviously.
OEM.
Vehicle manufacture there has been a fill of inventory as inventory at dealers have been depleted and things like that that certainly has driven some of the in demand, but from a supply chain perspective, there are certainly areas, where we've seen some customers increase their inventory as they've tried to ramp up.
There's also cases, we're seeing people bleed off inventory if you remember actually kind of late last year going into the beginning of this year. There were some inventory increases that took place.
So yeah, I don't know that it's been a huge driver for us and in the the performance in the quarter.
Okay got it thank you and maybe if I could just squeeze one more in there.
Dave can you talk about the commercial vehicle orders.
Trajectory, you're saying it sounds like exposure improved sequentially, but its trailing auto recovery and maybe if you could just remind us of your commercial vehicle exposure that'd be great.
Yes for the commercial vehicle exposure kind of if you look at our automotive segment, it's about a quarter of that segment is our commercial vehicle revenues.
And from a order pattern obviously.
The overall.
Commercial vehicle space is coming off kind of pretty challenging times, a year and a half ago pretty strong and went through kind of cycle and kind of a down cycle.
We are seeing some improvement in some of the construction vehicle types applications for us heavy truck in North America, which had been down meaningfully is beginning to kind of turn that quarter and show some strength, although Europe is not showing as much strength in the heavy vehicle side.
Of things.
So you've got a lot of movement, a lot of different directions in different parts and regions as a business, but we do believe we're gaining some momentum there and we do we do think we'll see year over year growth in that segment in the fourth quarter.
All right great. Thanks again, everyone.
Thanks for your question Stephen well take our next caller. Please.
And our next question comes from Matt Sheerin with Stifel. You May Chrissie good morning, Matt.
Yes, Hey, good morning all.
You've answered most of the questions here.
I guess, one follow up Dave regarding your commentary on the electronics business and it looks like you saw strength across several end markets and guiding to seasonally down but we're hearing from other pockets of the supply chain that we are seeing peak numbers in end demand and things like work from home.
On.
Pcs consumer electronics.
Concerning that.
That that market is going to start to tail off in any any read there on any of those end markets or is it just seasonal at this point, yes, what I would say is that's an area where there has been pretty strong demand out of those spaces in the last quarter end and which were our are certainly moving into.
Fourth quarters fourth quarter as well, we continue to see demand there, but there are certain the question is how long will that be sustained or not we are seeing some improvement and kind of if I would say the industrial electronics portion of our business. So we see that as maybe a more sustained improvement level through the course of next year to help continue to balance.
Yes, and and create opportunities for for growth for us and in that business as well.
Okay Thats it for me thanks, so much.
I. Appreciate your question, Matt that concludes today's conference call. Thank you for joining us andr interest in little fuse, we look forward to talking with you again soon be safe and stay healthy.
Okay.
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