Q4 2020 Littelfuse Inc Earnings and Hartland Controls Acquisition Call
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Ladies and gentlemen, and welcome to V go piece fourth quarter of 2020 earnings Conference call. At this time all participants are in a listen only mode. Neither we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then two.
Zero on your Touchtone telephone and as a reminder, this conference call is being recorded.
Thank you I would now like to hand, the conference over to your host Ms. Trisha <unk> head of Investor Relations at legal fees Ma'am. Please go ahead.
Good morning, and welcome to the little Fuse fourth quarter 2020 earnings Conference call.
With me today are Dave Heinzmann, President and CEO, and Nino <unk> Executive Vice President and CFO.
This morning, we reported results for our fourth 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 website.
Our discussion today will include forward looking statements. These forward looking statements may involve significant risks and uncertainties.
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 on the Investor Relations section of our website.
Before proceeding I would like to remind everyone that we will be hosting our virtual investor and analyst event on February 23rd at nine a M central time.
You can register for the event in the Investor Relations section of our website.
We look forward to you joining us.
I will now turn the call over to Dave.
Thank you Trisha good morning, and thanks for joining us today.
With a robust demand rebound across a number of automotive electronics and industrial end markets, we saw stronger than expected finish to the year.
We continued our return to growth and recorded fourth quarter sales of $401 million.
Up 18% versus last year.
Through our focused execution, we achieved.
Adjusted EBITDA margin of 23% and delivered an adjusted EPS of $2 23.
An increase of 91% year over year.
Despite the challenging conditions, we delivered solid performance for the full year with over $1 $4 billion in sales and adjusted EBITDA margin of 21%, while generating over $200 million from free cash flow.
Turning now to performance within our business areas.
During the fourth quarter, our electronics product segment continued to experience strong recovery across our product portfolio and in all regions.
Our revenue growth was driven by higher than expected demand from ongoing work and learning from home trends.
Consumer demand for a broad range of electronics, including laptops tablets and gaming devices as.
As well as small and large appliances data center and communications infrastructure and home automation applications continued to show strength.
We also saw robust demand in automotive electronics with recovery in automotive end market demand.
Sales to our channel partners were balanced with end market demand as weeks of inventory for our products remained within our normal range ex.
Sitting in the quarter, our electronics book to Bill was significantly above one.
While end markets remain healthy we believe the strong bookings also reflect expected inventory build.
Ahead of the lunar new year and to ensure uninterrupted supply of components in the months ahead. These behaviors can create volatility in orders and could lead to inventory build in the channel in the coming months.
Our lead times are relatively stable and we remain focused on meeting customer Denise is needs as we work closely with our distribution partners.
Moving on to our automotive products segment during the fourth quarter, we experienced a strong sequential and year over year improvement in sales cross passenger vehicle markets, we grew more than 20% sequentially and year on year.
We grew well above the mid single digit market growth in the quarter with higher content gains coming from the demand shift towards trucks, Suvs and other luxury vehicles and continued growth on electric vehicles.
We also saw growth from inventory build at Oems and tier ones as they work to catch up with market demand and build buffers to protect against any potential component supply disruptions.
And our commercial vehicle business, we achieved solid fourth quarter revenue as we continue to see good market rebounds in heavy duty truck construction and agriculture.
As well as automotive aftermarket.
We expect first quarter global car production will be down sequentially to around 21 million cars, although still significantly ahead of last year.
We expect our first quarter revenue to be significant be up significantly versus last year with content growth continuing to outperform cargo. However, we expect our sales later in 2021 to be on favorably impacted by potential inventory burn down at Oems and tier ones.
While car builds on nearing and returned to 2019 levels.
Ongoing trajectory will depend on the economic recovery and shortages of components.
We expect our long term auto growth to continue outpacing global car build with our ongoing content opportunities within our commercial vehicle products, we expect momentum to continue near term.
In our industrial product segment, we saw healthy demand in several end markets, including renewables energy storage and power conversion and steady demand in HVAC.
U S. Nonresidential construction appears to be stabilizing after bottoming out although demand has remained weak and oil and gas and mining markets continued to be soft.
As we announced in our press release last week, we acquired Heartland controls a manufacturer and leading supplier of electrical components to use primarily in HVAC.
And other industrial control systems with annualized sales of approximately $70 million.
We are excited to welcome Heartland controls associates, but little fuse as we combine our capabilities and strong customer relationships.
We are confident our industrial business will continue on a on a positive long term trajectory.
Our increasing number of design wins and new business opportunities continued expansion outside of North America and expanded opportunities in the HVAC market with the acquisition of Heartland controls will support this.
We are seeing a strong start to 2021 with continued momentum across many of our end markets and remain cautiously optimistic for the year. However, there are several factors that limit our visibility to the latter part of the year. These include the ongoing uncertainties of the pandemic trajectory and vaccine deployment and the potential.
These factors could cause across both supply chain and market demand.
So we are managing our lead times, we are seeing customer inventory builds in some pockets in response to specific component shortages.
We're starting to see this in the automotive industry, which will eventually lead to sales impacts as inventories rebalanced.
We're also experiencing higher costs in a number of areas, especially pandemic related costs.
We are seeing increasingly higher freight rates due to ongoing capacity limitations.
<unk>, our Covid employee safety protocols at all of our sites this year, but do not expect to receive international government subsidies to offset these additional costs as we did in 2020.
Also commodity costs, such as copper and silver are at multiyear highs and as discussed on our 2020 calls we significantly reduced our discretionary expense last year and plan to add back a portion of those in 2021.
Despite these uncertainties and headwinds our teams will continue doing what we do well.
Meeting commitments to our customers and other stakeholders minimizing disruptions to our business and mitigating the factors we can control.
Our products are at the center of a long term secular themes of a safer connected and more sustainable world.
Even in a year like 2020, where virtual became the new normal engineers and customers. We're still highly engaged in design activities continued.
Just on our application expertise and operational excellence, we expanded existing positions and gained market share.
And industrial end markets, we are leveraging our operational capabilities, including our global infrastructure positioning us to capture a range of new business opportunities around the world customer relationships have proven valuable on this virtual environment as we continue to work closely with leading Oems on a range of applications.
During the fourth quarter, our broad portfolio of industrial fuses and realize as well as our power semiconductor products products secured design wins in renewable energy and energy storage as well as HVAC and industrial motor drive applications.
With close customer collaboration we had a solar design win in North America, and design wins for energy storage applications with leading Oems in Korea for our high speed fuse and in Europe for discrete MOSFET.
For HP ESC applications, we secured a design win for our Tvs diodes with the Chinese manufacturer of residential air conditioners.
In addition, our line of bipolar modules won new business for industrial Motor drive applications in North America.
Our new business funnel is healthy and we are well positioned to secure on.
<unk> opportunities across a broad range of industrial end markets.
Across electronics end markets, we continue to see product architecture enhancements focused on safety and efficiency.
Our engineering and manufacturing teams are collaborating with leading customers to develop new solutions in the areas of overvoltage and thermal protection ultimately expanding our market opportunities.
For example, during the quarter, we worked closely with a strategic customer and launched a new protection product, which prevents mobile electronics from overheating when placed on our wireless charging pad.
We are now broadly marketing this new platform to other global customers. We also secured design wins for very small form factor resettable fuses protecting battery management systems used with consumer electronics.
We also won business with our new ground fault protection relay control panel.
For a data center application in Korea.
In addition, we secured circuit protection and sensor design wins for large and small appliances.
Our building and home automation vertical markets remained strong and intersect well across many HVAC applications. We saw design wins for TBS diodes for connected thermostats.
On solid state relays for building automation applications are.
Our consistent ability to deliver reliable products as evidenced that we never stand still and are committed to serving our more than 100000 electronics and customers.
For transportation end markets, we continued to experience strong momentum across EV, and automotive electronics applications with ever greater sophistication on electrical architecture and safety systems.
We leveraged our strong OEM and tier one relationships technical expertise and broad product portfolio to generate several design wins on on boarding onboard charging applications for EV programs across Europe and Asia.
We also secured a power semiconductor silicon carbide design win for an EV charging infrastructure application in Europe.
We had several automotive electronics design wins in the quarter for Tvs diodes and.
In North America for powertrain system applications and in China for our micro power distribution unit used to convert power for infotainment and telematics systems.
We secured a few breakthrough traditional fuse design wins in strategically important markets in Japan and Korea.
We believe these business wins will drive further momentum in these target regions.
Our new business opportunity funnel is strong and with our leadership in passenger car markets. We are confident in winning new business in high growth areas that will drive our content growth well above global car build.
Our commercial vehicle business continues to see growth on a number of regions beyond North America.
Based on strong customer relationships product differentiation in quality, we secured design wins with a heavy duty truck maker in China and in agriculture equipment manufacturer in Europe.
Material handling applications continue to drive design wins across our product portfolio and the regions we serve.
In North America, we won new business for our power distribution module and secured another design win from a customized timer used on a fuel cell charging circuit.
And in Europe, our temperature sensor probe will be used in forklift batteries for one of the world's largest manufacturers of batteries.
In addition, we also won new business for an electric truck platform, where several of our products support the low voltage applications on the truck.
We have made broad progress on expanding our global presence and commercial vehicle applications.
I will now turn the call over to Neil to provide additional color on our financial performance and outlook.
Great. Thanks, Dave Good morning, everyone and thanks for joining us today.
I hope everyone is off to a healthy start to the year.
We concluded a challenging 2020 with a strong finish to the year and so forth.
Quarterly results were well above expectations on both sales and earnings.
Had our second consecutive quarter of year over year sales growth, including another quarter of operating margins in our target range.
Fourth quarter sales were up 18% over last year and up 16% organically.
Sales benefitted two percentage points from foreign exchange.
Adjusted operating margins were 16, 6% for the quarter.
590 basis points versus last year, a function of our strong sales growth and continued focus on cost management.
This also drove year on year, adjusted operating margin flow through of 49% stronger than we had forecasted.
Adjusted EBITDA margin finished at 23% in the quarter up 510 basis points versus last year.
Fourth quarter GAAP diluted earnings per share was $2 and 39% and adjusted.
Diluted EPS was $2 and 23 of.
91% over last year, despite a much higher fourth quarter tax rate versus a year ago.
For the full year 2020 sales of $145 billion were down 4% versus last year, both in total and organically.
Adjusted operating margins were 14, 3% flat to last year, despite our sales decline.
Notably adjusted EBITDA margin finished at nearly 21% up 50 basis points versus last year and in our target financial range.
We managed the decline in our operating margin dropped through to 14% for the year versus our typical 35% to 40% range.
This was an outcome of our operations quickly responding to the demand recovery and our teams taking early.
Early action to reduce costs and pursue government financial subsidies, all while preserving jobs for our associates during the down period.
I'm proud of our company's performance during this unprecedented year.
GAAP diluted EPS finished at $5 29.
And adjusted diluted EPS was $6 40 down 6% versus last year.
Our full year GAAP effective tax rate was 19, 4% and our adjusted effective rate was 18, 3%.
Our tax rate favorability versus our forecast was primarily due to higher than forecasted profitability in lower tax jurisdictions.
Moving on to our segments fourth quarter Electronics segment sales were up 17% over last year.
Operating margins were 17, 1% in the quarter up over 800 basis points over last year with the strong volume recovery and focused cost management.
For the year sales were down 2%, while margin improved to 16, 3%.
Automotive segment sales in the quarter were up 22% with margin, finishing at 16, 9% up over 500 basis points versus last year.
We saw improved profitability from the sales recovery and also benefited from a 300 basis point margin benefit in foreign exchange rates net of higher commodity costs.
For the year sales were down only 8% despite passenger and commercial vehicle end markets down significantly higher than net.
Margins finished at 10, 5% as our teams did a terrific job managing through a significant amount of volume volatility through the year.
Across the industrial segment fourth quarter sales were up 13% over last year and up 5% organically, while for the year down, 2% and down 5% organically.
Margins were 11, 4% on a quarter and 10, 7% for the year helped down versus last year.
During the year, we saw margin impacts from sales mix as a number of our higher margin end markets declined in 2020.
We also incurred additional costs related to pandemic related supply chain efficiencies and from a plant transfer which will be completed in the first half of 2021.
A top priority during the pandemic has been preserving our financial strength and liquidity and we finished 2020 in a stronger financial position.
We generated $258 million in operating cash flow in the year and $202 million in free cash flow, both higher than last year and with a free cash flow conversion of 155%.
We ended the quarter with $688 million in cash on hand.
The strength of our balance sheet and strong cash flow generation capability provides us ongoing financial flexibility, we continue to prioritize reinvestment for best in class organic growth and adding acquisitions that align to our growth strategy.
We will continue investing in key building blocks, including operating expense investments to enhance our capabilities and critical capital expenditures to meet our volume growth.
While we deferred from planned capital spend in 2020, we are ramping up capacity investments that we are well situated to capture the ongoing growth and demand spikes.
We expect to spend approximately $80 million and capital expenditures in 2021.
We are off to a strong growth start this year with our acquisition of Heartland controls.
We fund we funded the purchase from our cash on hand, and remained well positioned to fund additional acquisitions from our balance sheet.
We remain committed to returning capital to our shareholders through our dividend program as well as through periodic share repurchases.
Moving on to our outlook, our first quarter forecast reflects a demand environment that is continuing its strong momentum that we continue to monitor the uncertainties, we see across the globe.
We expect first quarter sales in the range of $418 million to $432 million.
Up 23% over last year at the midpoint of the range.
We expect about three percentage sales growth to come from two months of ownership of Heartland and also expect to growth from all of our segments.
And while we typically see a sequential growth into Q1, we expect our automotive and industrial segments to be down sequentially with the atypical seasonality we saw in the fourth quarter.
We expect EPS to be in the range of $1 76 to $1 92, with 43% growth versus last year at the midpoint of the range.
This includes an adjusted effective tax rate of approximately 21% for the quarter.
550 basis points lower than the first quarter of 2020.
We are projecting a 20% to 25% year over year operating income flow through in the quarter lower than our typical average of 35% to 40% with a few cost wins driving this.
As Dave noted the largest impact stemmed from record high commodity prices and freight rates and ongoing COVID-19 costs that arent mitigated by government subsidies, we received last year.
We're also reinstating a portion of our variable costs, including compensation.
These items are collectively about a 15% drag on our operating income flow through.
I'll provide a few other items to consider in your full year modeling.
For 2021, we expect sales growth for the year across all of our segments.
Our results will also include approximately 11 months of Heartland, which we expect to be about $65 million in sales and six to 10 cents of EPS net of ongoing deal amortization.
In addition, we will have an extra week in our fourth quarter of 2021.
As this will be during the holiday period. It will include only a few extra billing days for us and expect it will add approximately 100 basis points to our full year sales and EPS guidance.
And we are projecting a 2021 tax rate in the range of 18% to 20%.
And with that I'll turn it back to Dave for some final comments.
Thanks Neal.
In summary, 2020 was indeed, an extraordinary year with no shortage of challenges to navigate.
I wanted to thank our global team for their tremendous efforts throughout the year, especially related to the COVID-19 pandemic their commitment sacrifice and determination.
During these uncertain times has been remarkable.
Day in and day out, but we'll see as associates worked hard to support one another and they have consistently demonstrated an unwavering commitment to serve serving our customers around the world.
We made significant progress across our businesses and have entered 2021, well positioned to deliver continued profitable growth and value for all stakeholders.
With that I will now turn the call over to Tricia.
Thanks, Dave for participants Neil and Dave on separate locations, so feel free to direct your questions to one or the other of them.
Operator, please assemble the Q&A roster.
And ladies and gentlemen, if you have questions at this time. Please press Star then the number one key on your Touchtone telephone.
Our first question comes from the line of Luke junk from Baird. Your line is open.
Good morning.
Good morning, everyone.
On the first question on I wanted to ask maybe this would be a good questions for Dave in terms of the impact of the <unk>.
Shortage I'm thinking of.
The impact on electronics, specifically could you maybe just talk a little bit more about the puts and takes there in terms of what.
It means from a demand side fundamentally on on underlying basis for the electronics segment, and then the supply chain impacts.
Some increased cost potentially coming along there.
In terms of what a potential increase in inventory might be for the business in terms of channel inventories this year.
Sure sure. So the chip shortage certainly gets a lot of press related to the auto industry, but also it's a broader issue first of all our products. We have relatively stable lead times. So we are not seeing significant shortages from from little fuse components.
But we certainly see history would show that when there are shortages and electronics components in particular.
Technologies it is quite common debt.
Orders will come in heavier as there is an effort to drive some inventory increases either distribution or even at EMS providers or or at Oems.
So it certainly has the impact of increasing.
Order rates and we have seen some of that.
We actually saw.
Some tendency towards putting inventory in place from our customers in the automotive segment.
During the fourth quarter, we have not seen inventories rise in the electronics side yet.
But thats something we continually look for and certainly shortages and strong order patterns certainly do increase cost challenges as you mentioned.
Okay. Thanks for that and then second question in the week.
So heartland controls deal and your commentary that you could on just on M&A.
Clearly off of whats on the balance sheet right now what I'm wondering is how you're finding the market for M&A right now clearly a lot of disruption last year with respect.
The environment with respect to the ability to do due diligence.
Traditional fashion, just curious what youre seeing in terms of your pipeline.
In terms of the let's say the availability of assets and sort of the meeting buyer and seller expectations and congrats on the pricing as well yes.
I think there clearly is a bit of a trend where people have become a little more custom to this new sense of normal on how to deal through challenges I think visibility has improved a bit and what's going on in the markets.
Theres, a little less volatility in most regions of the world's or not.
Locking down manufacturing for periods of times and things like that so that stability I think has kind of helped with that we continue to drive a healthy funnel and a significant effort to continue to build in and curate our funnel if you will.
So I think we have found that people have found other ways to deal.
With diligence and questions and management meetings and things like that so I think it is an improving environment for from an M&A perspective, and certainly a key strategic part of our our growth initiatives.
Great. Thank you for that I will pass it on.
Thanks, Luke we appreciate the question, we'll take our next caller please.
And our next question comes from the line of call a Cayman from Cowen. Your line is open good morning.
Carl.
Hey, good morning.
Team and David on Neal, it's nice to see a very strong finish to the year.
From my first question to me your full year outlook implies Heartland has operating margins in the mid single digit range.
So could you discuss any cost.
Our operational initiatives from this acquisition.
That could help drive margins towards the company average and I've got a follow up.
Once you take that sure sure. Thanks, Carl good morning.
So I'd say, we just closed on Heartland last week very early stages right now.
A couple of things looking at it remember that one anytime we put the company into our portfolio you automatically start with a drag with deal amortization and so.
On one of the companies that leads the the amortization in our numbers so that automatically will take margins down a little bit. It's still early so we have some estimates on there and we'll refine those as the year goes on and I would say just overall in terms of operating synergies right now for US you heard Dave comment about some of the <unk>.
Opportunities across some of the industrial end markets, especially in the HVAC space. Our focus is really around revenue and revenue growth and where we can.
Leverage our common portfolios and common customers together.
Understood I appreciate that.
Perhaps.
Sorry, David perhaps another question from needle if I may share I.
I guess, we've heard several suppliers across the supply chain have raised prices, particularly given shortages across boundaries.
You spoke about some higher input costs in your prepared remarks.
I guess, well I guess, maybe a question per day to what is your strategy regarding the trade off between pricing and volume commitments from your customers I guess I'm, particularly interested in electronics given that has typically seen the largest annual price decline. So if you could comment on that that'd be very helpful. Thank you.
I'll take that Carl.
Pricing is certainly a dynamic environment and it's different by different end markets. So there's a little less flexibility on the automotive portion of our business as we have long term contracts with customers that kind of defining some of those things.
However, as you stated electronics is where you tend to have seeing higher price declines annually on things like that and it's also if you look back in history during strong demand patterns, particularly if there are shortages pricing becomes a little less unfavorable.
So clearly as we manage our business we look at.
What our cost basis or what.
From the variables that are driving our cost and certainly commodities are very unfavorable for US right now freight costs are quite high so costs are certainly.
Increasing particularly in the electronics part of the business there.
And if strong demand continues.
It does lead to an environment, where price erosion is not quite as heavy as customers focus more on supply.
<unk> a supply of demand and as we frankly pass along cost increases that we're incurring so if these patterns continue through the course of the year than we would expect.
A little more favorable pricing environment.
Yeah.
Thank you Karl we appreciate the questions, we'll take our next caller. Please.
And our next question comes from the line of David Kelley from Jefferies. Your line is open.
Good morning, David.
Hey, good morning team.
I appreciate you taking my questions maybe to start a question for Dave.
Really strong auto outgrowth in the quarter, you referenced customer builds to work through some of the SME shortage age you saw content gains as well and then clearly we are seeing LBP turn positive led by China could you just provide a bit more color on the on the various drivers of that outsized ramped on the fourth quarter share.
Yes, it was.
It was clearly a very strong fourth quarter on the auto side for us.
And.
As we've talked about.
Long term, we believe our content growth above car build is in that 3% to 4% range.
Clearly during the fourth quarter, we saw growth well beyond that.
Both on the content side as well as this inventory.
That took place.
We think the content outgrowth beyond kind of our normal view of what it will be in the long term was driven by the mix of customers.
And the types of vehicles, so very strong demand on light trucks on SUV.
Suvs and luxury vehicles those vehicles tend to have a higher content in general.
Then other.
Other vehicles, so that mix of business, certainly influenced that and we would say probably our content growth.
Maybe as much as double of our long term outlook during the fourth quarter. The remainder of the outgrowth is really inventory built being done by.
Tier ones and Oems as they're looking to try to make sure. They don't have other areas of shortages.
As they deal with the chip shortages.
Thank you David.
Thank you sorry about that I was on mute can you hear me, yes, we can yes. Okay. Thanks, maybe one follow up on that David and apologies again.
Just on the inventory build comment we've heard from others that most of the inventory is immediately being spec for vehicle production in the industry is still playing catch up. So just curious as do you think we're in an inventory channel inventory build phase yet or.
As most of the order ramp immediately going through to production and delivery.
I would say from our perspective on our particular products. We believe there is some inventory build taking place in the channels now, perhaps that because of our ability to respond to orders faster than others.
But clearly there is kind of a catch up going on.
As vehicle inventories, particularly like here in North America have been low there is certainly that catch up that's happening that's impacting demand that's kind of flowing through to vehicles, but we clearly are seeing that there is also some effort to build some inventory buffers.
And Thats, why we kind of warn that put it in the prepared remarks, a warning debt.
If those inventory buffers.
Have built.
At some point when things kind of normalize and supply chain kind of gets healthier.
On the auto industry, they'll go back to more normal conditions, which could have in the bag.
Back end of the year could have a negative impact on on our on our revenues and the auto segment. So we clearly are seeing some inventory build of our particular components.
Okay perfect. Thank you.
Thank you David we appreciate the questions, we'll take our next caller. Please.
Our next question comes from the line of Nick Todorov from Longbow Research. Your line is open good morning, Nick.
Hey, good morning, Thanks, everyone.
Maybe can you talk about your ability to improve margins of the first quarter, you talked about a longer list of impact. It seems like some of them are within your ability to control and some of them are not and also do you see the first quarter is the low point of profitability for the year.
Well certainly.
There are.
Headwinds that are impacting our ability to get to kind of normal flow through on on growth that we would normally see and <unk> talked about some of those headwinds.
The largest headwinds are really coming from commodities.
And as we talked about earlier over time, there are abilities to kind of help to offset that with pricing in some segments of our business.
Sure.
But the commodity freight rates are quite high and continuing to increase there are at multiyear highs on on freight rates.
There is little we can do about that we will see how that kind of settles out as hopefully the pandemic situation.
It becomes more manageable in the back half of the year.
And in Covid related costs, so our costs in our factories and in our supply chain related to protection of employees and support for employees and social distancing and those sorts of things those ongoing costs are still there.
Or not we are not seeing those go down anytime soon.
And we were fortunate enough through a lot of hard work of our teams not so much in the U S, but in Europe and in Asia.
We were able to get some government subsidies to kind of help offset some of those costs in 2020, we're not expecting that to continue into 2021. So all of those things kind of create near term headwinds for us that we've kind of got to work our way through.
With regard to is that a low point.
No, we're not giving guidance beyond the first quarter, what kind of see how the year develops the visibility on how the pandemic situation stabilizes and settles out it's just it's hard to call at this point.
Okay, great and as a follow up question.
You talked about long term content growth in auto being 3% to 4%.
The industry is seeing acceleration towards electric vehicles, and you guys have a pretty decent increase in content as you move from ice to EV. So.
Is it reasonable to expect that your content growth will trend above the long term range here at least in the near term future and Conversely, why not.
We raised our long term target as the shift to EV is going to continue to grow.
And just as the additional one is there any way you can quantify how much of your sales currently come from electric vehicles. Thanks.
Sure, Yes, certainly the content outgrowth.
Yes, a great deal of our content growth is really being driven out of the electrification of vehicles.
Historically, we had good content growth that was driven out of kind of changing architectures and higher power loads in the vehicle.
And those have kind of if you will over over the last.
Five six years have been mostly adopted globally on this.
That outgrowth is kind of settle out and has become the norm. So the bulk of our outgrowth is coming from kind of electrification of vehicles.
So in the near term certainly.
In the next couple of years.
The growth of Evs as such.
Somewhat yes.
Restrained.
By supply chain specifics, whether it's batteries and those types of things.
Certainly on the longer term as evs gain a stronger position. We're seeing next year, it's in that range of maybe 10% of vehicles.
However, only just around a third of those are battery electric vehicles, the others are really hybrids.
So it's the battery electric vehicles that drive the largest increase for us.
So, it's still representing 3% to 4% of the global car build.
So as that continues to penetrate and certainly maybe more favorable environments today.
Then there have been recently with regards to that.
That content story could begin to grow at a faster pace in the back end portion but.
For the foreseeable future, we see it in that $3 to 403% to 4%.
Thank you Nick we appreciate the questions, we'll take our next caller. Please.
Our next question comes from the line of David Williams from Loop Capital. Your line is open good morning, David.
Hey, good morning, Thanks for taking my question and congrats on the progress.
Thank you.
I wanted to touch a little bit on the some of the inventory build dynamics that you've mentioned and do you have a sense on maybe from from a.
Term.
How much of your revenue might have been from the inventory builds or just maybe quantify the magnitude of what the builds look like today.
Yes.
First of all the only place we saw inventory builds in the fourth quarter were in the automotive portion of our business. We saw no inventory builds in the electronics portion of our business day during the fourth quarter.
As kind of.
Demand on our distribution partners and our fill to them matched up very well.
So specifically, we see in the automotive portion of our business.
Again, we saw perhaps our kind of normal content above car build being maybe as much as double as our normal so let's call that 66% to 8% was kind of content increase the remainder of the growth in that segment, we see was driven by inventory builds.
So substantial.
Okay, great appreciate the color.
And then maybe from an industrial standpoint are there are there any areas that youre seeing maybe better or maybe softer growth in income even what do you think about that outlook for the year, just kind of given some of the dynamics that we've seen in auto and just the strength that we've seen through two other areas.
Yes. So if you look at our industrial segment there are different pieces to it that are really kind of drive our growth.
So.
A big portion of our business and industrial segment flow through North America distribution channels, those North America distribution channels, which are our highest margin portion of our industrial segment.
Our serving MRO, they're serving nonresidential construction on.
Oil and gas mining those types of end markets.
Generally those have not been positive those have been pretty soft so that portion of our industrial segment has been quite.
Quite soft through 2020, and we really haven't seen that rebounding much yet a little bit on the MRO side, but non resi construction is not.
Our products tend to be at the late stage of non resi construction. So we're not seeing anything there and of course oil and gas on mining is not not strong either.
Offsetting that we have seen pretty strong demand and growth for us in other portions of our business, which tend to be.
More global so North America, but also other parts of the world and as I talked about those are things like renewable energy.
There are things like the Hvac's space, So motor drives those types of things have been more favorable.
So it's kind of a balancing act right now.
To get back to the levels of growth, we'd like to see and candidly profitability in the industrial segment.
We're going to need to see some improving fundamentals and non resi construction and on kind of our distribution business in North America.
Thank you David for your question.
And once again, if you have it.
If you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open good morning.
Chris.
Hey, good morning, everybody.
On.
Ask about about Hartland there.
<unk>.
How long EBIT looking at that company.
What's kind of the customer breadth and diversification and.
Why is why are you guys kind of a better or the right on or for that.
Sure Gregg Chris Yeah, So heartland as a business we've been looking at for some time.
Yeah.
As with a lot of.
On the M&A sorts of activities, certainly 2020, certainly slowed those sorts of activities down and communication down there.
You have heard us talk quite a bit in the previous quarters about the hvac's space is a space that we like and that we have organically you've been building and working towards so we've got a nice fundamental base business and the HVAC.
Markets in our core industrial segment.
And Heartland controls is kind of squarely in that space they sell into other regions, but primarily there they're focused on the HVAC space.
So the attractiveness for US is they have very strong relationships, particularly with North American HVAC customers also some in Asia.
But.
It strengthens our position into that marketplace.
The combination of their technologies our technologies.
We believe that together, we'll be stronger and so that so the bigger strategic reason for that is we like that space for the long term and as customers continually work to drive better efficiencies and more environmentally friendly approaches and more sophistication in there their systems, we think thats attractive long term growth pattern.
And Heartland controls gives us a stronger position there.
More access to customer customers and more importance to key customers there.
Thanks.
And then kind of a longer range question you know it's been a couple of interesting years with the.
Corrections and destock in 2019, and then the pandemic here, but before that on gross margins were pretty consistently 39, 40% plus.
Is that a good reference level to think about.
Over time for you guys or are there some.
Different investment in mixed profiles debt.
Make debt not a relevant comparison.
Mono line as you take that sure yes, Chris.
I guess.
<unk> back and thinking about what are what are some of the things that we're seeing on margins today clearly overall volumes are still debt lower than when we were at from a peak perspective that you heard both Dave and I talk about some of the cost headwinds that we're still seeing which really all impact gross margin for the most part neither of these.
This ongoing COVID-19 costs that were incurring and some of the inefficiencies that are going on the headwinds from.
From commodities and freight and the bulk of all that and gross margin. So we still we still expect the improvements in margins to continue some of those headwinds <unk> got a dissipate a little bit and I would expect that over time, but we're not going to be in this COVID-19 state forever and things will start to settle back but.
Elvira I'd still say in the near term those are still things that are pulling down the gross margin flow.
Okay.
Thank you for that.
Thank you Chris So we appreciate your questions we will take our next caller. Please.
Our next question comes from the line of Matt Sheerin from Stifel. Your line is open good morning, Matt.
Yes, hi, good morning, everyone.
Just wanted to ask.
Another question regarding the electronics sector.
Just backing into your seasonal guidance on the other sectors. It looks like that could be up 9%, 10% plus sequentially, which is certainly better than seasonal you talked about good sell through last quarter is still relatively lean inventories.
What is your take on on sell through and POS So far this quarter and are you seeing distributors start to layering in inventory as lead times across your product categories and competitive product categories continue to go out.
Which could lead to as you said earlier, Dave from volatility.
<unk> as we get through the year based on inventory and supply demand levels.
Sure Matt Yeah. So.
I would say is we have not seen.
Inventory builds at our distribution partners yet so we have not started to see inventory increases that arent matched through with sell through.
So we're not seeing days of inventory.
<unk> go up.
We were still at the kind of the bottom half of our kind of normal weeks of inventory were in the bottom half of that so quite healthy inventory positions right now bookings.
Bookings are quite strong many of the bookings are may be extended further out than normal.
Which.
Tends to be kind of an early sign of our people and making sure they want to be in line with orders and get orders booked out a little further in case, we see further demand increases that are significant.
So orders are very robust.
Certainly.
So right now it's hard to match up maybe long term order patterns with sell through.
But certainly so far with demand and sales today and sell through it.
Pos at our distributors, it's well matched right now so we're kind of putting some some verbiage in there just out of experience as we see these things over time.
It certainly has some indications of some some times.
That some inventory increased.
<unk>, maybe coming haven't seen them yet, but there is some of those early signs that we're kind of putting out there just to kind of make sure everybody kind of keeps those top of mind as you look at the next coming quarters.
Okay.
The strength Youre seeing are you seeing in all geographies, including North America, and Europe, which has obviously been lagging Asia.
Yes, yes, we're seeing we're seeing really across the board and the order patterns.
It's not exactly level across all regions, but but strong order patterns on all three regions right now.
Okay. Thanks for that.
Wanted to get a.
A little bit more color on the on the cost headwinds that you're seeing you did talk about on your last answer about gross margin being impacted perhaps most on.
Although you've got opex costs are going up but sort of on an absolute days basis in terms of dollars are we talking about.
10, 20% increase in SG&A year on year on based on those costs you talked about yes.
Yes, Matt.
Two ways one is the bulk of the increases that we're seeing that I talked about really are coming out of the debt commodity input costs freight.
Covid relief as it relates to Opex, what we've been talking about for probably the past year sales has been the fact that we cut about $40 million over the course of 19 and 20, we cut about $40 million of discretionary spend over the course of two years because volumes were down and then all of Covid last year.
We were expecting in 'twenty, one that we'd add back somewhere between a third and a half of that during 'twenty, one and thats still our projection from an increase perspective, I'd say, it's a range now because honestly I think it's going to depend on.
How things start to recover in the trajectory of the recovery and how much traveling really happens in going out but.
It absolutely includes things like the variable compensation piece, the other discretionary spend remains to be seen.
Okay, Alright thats helpful. Thanks, so much share.
Thanks, Matt for your questions, we'll take our next caller please.
And we have a follow up question coming from the line of Nick <unk> of Longbow Research. Your line is open.
Hello, Nick.
I think from a launch will follow ups.
Wanted to touch back on <unk>, just to clarify a couple of things David I Didnt last quarter, you talked about seeing calendar 'twenty, one light vehicle production up at least high single digit I Wonder if you have any color or update on how you're thinking about production of autos in 2021 and also can you just quantify.
Hi.
How much was auto production in the December quarter from your perspective, any way either in absolute basis or from a year on year growth perspective versus <unk> of 19.
Sure, Yes, so kind of our view of 2021, and we just we don't have a different view than what the professionals are that are paid to look at it is.
It's in that low to mid eighties.
It was probably what global car production is in 2021.
I think it's a little unknown what supply constraints may have impact on that some of that will be response from a handful of semiconductor suppliers and the ability to support that level, but as a reminder, that's still not back to 2019 levels.
So still well below 2019 levels.
And.
Certainly below 2018 levels.
Nice recovery, but not back to kind of record levels at all in 2021 is kind of our view spa.
Specific to the fourth quarter, yes.
We believe that car build.
Globally was up.
Low to mid single digits.
Compared to the fourth quarter, the previous fourth quarter. So that's kind of our viewpoint on carbon.
Yes.
Thank you good luck.
We appreciate the follow up question. Thanks, Nick Thank you for joining us on today's call and your interest in <unk>. We look forward to talking with you on February 23rd at nine a M central time during our virtual investor and analyst event be safe and stay healthy.
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