Q1 2021 Littelfuse Inc Earnings Call
[music].
Good day, everyone and welcome to the litter fuse first quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question do other section you will need to press Star then one on your telephone.
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And quite any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker for today, Patricia taught me and head of Investor Relations You May proceed.
Yeah.
Good morning, and welcome to the little Fuse first quarter 2021 earnings conference call.
With me today are David Heinzmann, President and CEO and me know Sutton, our executive Vice President and CFO.
This morning, we reported results for our first quarter and a copy of our earnings release and slide presentation is available and the Investor Relations section of our website.
A webcast of today's conference call will also be available on our website.
Please advance to slide two for our disclaimers.
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 and the Investor Relations section of our website.
Before proceeding I'd like to mention that we will be virtually attending the Oppenheimer conference on May 5th Cowen Conference on June 2nd Stifel Conference on June eight and the Baird Conference on June 10th.
We look forward to you joining us during these outreach events.
I will now turn the call over to Dave.
Thank you Trisha good morning, and thanks for joining us today.
February 23rd we shared our five year growth strategy.
On slide four this is ultimately a continuation of the journey, we started several years ago.
We continue to build our strategy around the structural growth themes of a sustainable connected and safer world.
These are multi decade themes, which are stronger today than ever before and continue to expand the need for our innovative reliable solutions.
We have positioned ourselves to drive significant content and share gains and targeted high growth end markets, which will deliver long term double digit revenue growth best in class profitability and top tier shareholder returns.
Now, let's turn to slide five.
We are off to a strong start this year building on strength and the prior two quarters driven by our strong execution commitment to customers and our ability to manage supply chain challenges.
During the first quarter, we saw continued demand recovery across a number of our end markets.
We achieved first quarter sales of $464 million, representing record revenues for us and a 34% increase over last year.
And we delivered adjusted operating margin of 17, 1%.
Within target range, and adjusted EPS of $2 67.
Which is 107% growth year over year.
And we will provide additional color on our strong financial performance.
The Swift demand recovery has caused some broad challenges across little pieces and our customers' supply chains.
<unk> supply chain disruptions and shortages and logistics constraints.
And while there has been tremendous progress and the battle against COVID-19, and there are continuing challenges.
There are a number of countries still and and going into lockdown and the pace of vaccine and deployment varies across countries. Despite these ongoing challenges we are seeing healthy demand across a number of our end markets and our global teams remain focused on meeting stakeholder commitments.
Moving on to the performance within our segments.
During the first quarter, our electronics product segment continued to experience strong demand and all regions. Our significant revenue growth was driven by ongoing strength across a broad range of applications, including data Center and communications infrastructure factory building and home automation and.
And demand for consumer electronics.
Also contributing to our sales growth was robust demand and automotive electronics.
Exiting the first quarter, our electronics book to Bill was well above 1.0.
Our end markets remain healthy, but we believe the strong orders reflect some double bookings to ensure uninterrupted supply of components.
While weeks of inventory of our products at our channel partners remain at the low end of our normal range. We believe that some of our and customers are building extra inventory where possible.
While our lead times have increased for some of our products. We remain focused on meeting customers' needs as we continue to work closely with our distribution EMS and OEM partners.
Moving onto our automotive product segment during the first quarter organic sales grew 17% year over year with the ongoing recovery and automotive and commercial vehicle end markets.
Across passenger vehicle products organic sales grew 22% year on year significantly above global car build growth and the quarter.
We had higher content gains coming from product mix for well equipped vehicles.
Like electric vehicles, Suvs and pickup trucks and continued growth of electric vehicles.
And commercial vehicles, we saw and market strength across most geographies and sectors, including heavy duty truck and bus construction and agriculture and material handling.
We're seeing global semiconductor and resin shortages with several Oems announcing shutdowns. However, our order patterns remained healthy and.
We expect second quarter global car production to be significantly up year over year, given the very challenging quarter last year, but supply chain challenges will prevent car build from growing sequentially at a faster pace.
We expect the long term growth of our automotive segment to continue outpacing vehicle build with our expanding content opportunities.
Turning to our industrial product segment, we saw significant strength on the top line with our acquisition of Heartland controls and January along with double digit organic growth of our legacy business. The.
And the integration is going very well and we're already seeing benefits based on our combined businesses stronger customer relationships and an expanded portfolio of complementary products.
And we're seeing broad demand across HVAC and markets with particular strength in residential construction as well as continued strength across renewables energy storage and power conversion markets.
Similar to other areas of our business, we are seeing increased demand from our channel partners as they pull in orders to manage risk.
Moving onto key design wins and the end markets we serve.
And the industrial end market on slide six we are enhancing.
And our capabilities and growth and target industrial markets like HVAC AC with the Heartland controls acquisition, we had several key design wins and Hvac's during the first quarter as we capitalize on the structural growth theme of sustainability.
With our technical support and comprehensive product portfolio, we won new HVAC business in North America with a global manufacturer.
And we saw numerous design and temperature controllers air monitoring and air Conditioner power control boards, and China and Korea.
But the driver of industry four <unk>, we secured several new wins and the U S to protect motor drives used in industrial automation.
In addition, with the ongoing focus on power optimization, we won new business and the U S. Where we were designed in for a customized timer for a global manufacturer of portable power generators.
And we had a key design wins with a component manufacturer for power generation and distribution equipment.
Our business wins across industrial end markets reflect how we are able to offer more solutions to our customers to create greater value.
For transportation and markets on slide seven we continue to extend our leadership position driven by numerous electric vehicle design wins across passenger vehicle markets.
During the first quarter based on our strong relationships and execution, we secured a key design win for a new electric vehicle platform with a leading European OEM.
We also secured several additional battery and plug and hybrid electric vehicle wins globally.
Off board charging applications represent content opportunities for a broad range of products and we were designed into and electric vehicle fast charging application in Europe, and customized charging application and China.
Securing these types of new business wins will accelerate our long term organic growth and these high growth areas.
With the advancement and automotive electronics, we had a key win in Europe for and intelligent antenna module and we continue to gain content wins with the luxury vehicle and SUV space.
Our strong engineering relationships helped to secure several key design wins with a U S. OEM for their heavy duty pickup truck and North America.
As well as the new line of Suvs for the China market.
Design activity and the first quarter remained robust within commercial vehicle markets, where we are also seeing the.
Progression of electrification.
Leveraging the strength of our local sales and engineering support we went and significant program with a European OEM on their battery electric heavy duty truck and bus platform.
In addition, we also won business from a traditional heavy duty truck application and North America are.
A component knowledge and long successful history of working together with this customer were key factors and this win.
Across electronics end markets on slide eight.
Focused on leveraging our leadership and broad global access through our strategic distribution partnerships and deep OEM relationships.
With the ongoing theme of connectivity, our technical support and a robust product features continue to design and drive design win activity.
During the fourth quarter, we had and number during the first quarter, we had a number of design wins, and <unk> telecom infrastructure systems, and Japan, and Korea, and cloud infrastructure markets, and both China and Taiwan.
We continue to see good design work and the building and home automation markets when a new business for our smart meter and India and wins in Europe for Smart home applications.
We saw key wins across a wide spectrum of innovative consumer electronics applications.
We secured a new business win for and electric bike battery management system, and Asia, which is also seeing strong demand in Europe.
And the ongoing proliferation of electronics vacation, we secured design win for a maker of Wearables safety airbag system used for motorcycle riders and Europe.
We won these new business opportunities based on our local design support and customer relationships and product delivery.
We are confident that our broad product offering, which is particularly well suited for the ever evolving electronics ecosystem will continue to drive long term growth.
I will now turn the call over to me and all to provide additional color on our financial performance and outlook.
Thanks, Dave Good morning, everyone and thanks for joining us today.
So let's start with slide 10.
We continued our momentum from the back half of last year as our first quarter results were well above expectations on both sales and earnings.
Sales of $464 million were up 34% versus last year and up 16% sequentially. As we saw the continued recovery across most of our end markets.
Our non control acquisition and added 5% to sales.
And foreign exchange contributed 3% with our organic sales growth at 26%.
Adjusted operating margins were 17, 1% for the quarter, expanding 270 basis points versus last year.
We would typically expect higher incremental flow through at these volume levels, but are experiencing a number of supply chain and inflationary headwinds, including higher freight rates and input costs, especially and commodities.
Overall, we have been successful and managing through these challenges to deliver operating margins and our targeted range.
First quarter GAAP diluted earnings per share was $2 32, and adjusted diluted EPS was $2 67 and Tim.
107% over last year.
And this included 54 cents of non operating benefit versus last year, resulting from a mark to market gain from an equity investment and a year over year reduction of over 700 basis points and our tax rate.
Excluding these items adjusted EPS was up 65%.
Our GAAP effective tax rate was 26%.
Our adjusted effective tax rate was 19, 2% better than our forecast due to higher profitability and lower tax jurisdictions.
In the quarter, we generated $50 million and operating cash flow and $35 million and free cash flow and built a solid start to the year.
Our typical cash flow patterns have cash generation improving through the year with second half cash generation stronger and the first half.
We expect our free cash.
Free cash flow conversion rate of about 100% of net income for the year.
We spent $15 million and capital expenditures and the quarter led by prioritization of capacity investments we.
Continue to expect to spend approximately $80 million and capital expenditures this year.
And other cash uses beyond the Heartland acquisition earlier in the quarter, we paid down $30 million and debt and deployed $12 million of cash to shareholders via our dividend.
We ended the quarter with $573 million of cash.
The strength of our cash generation profile and solid balance sheet reinforces our financial flexibility.
We also announced that our board approved a three year $300 million stock buyback authorization.
Our stock buyback philosophy is unchanged and remains opportunistic with our primary capital allocation focus on acquisitions that enhance our organic growth trajectory.
Moving on to our segments on slide 11 and.
All of our segments grew sales over 20% versus last year with each achieving double digit organic growth.
We're benefiting from ongoing strength across many of our end markets and seeing some elevated content growth as we continue to focus our resources on higher growth and markets.
At the same time, we are seeing margin pressure across all of our businesses from the supply chain challenges I noted earlier.
These market costs dampen margin by approximately 250, and 300 basis points and the quarter across each segment and we expect these pressures to continue at this level and the near term.
Starting with electronics segment sales were up 34% and 32% organically.
Operating margins were 19, 4% and the quarter expanding more than 400 basis points over last year.
Key drivers of our ongoing volume growth led by favorable end market demand trends as well as content growth from both electrification and electronic vacation trends.
Automotive segment sales and the quarter grew 23% and 17% organically.
Operating margins finished at 15, 8% up over 200 basis points versus last year.
The ongoing demand across passenger and commercial vehicle markets drove significant volume growth along with content growth from an increasing number of electric vehicles.
We also saw expanded content growth and our passenger vehicle businesses from both larger and higher and vehicles.
Across the industrial segment sales were up 80% over last year with the addition of the Heartland acquisition and.
And up 10% organically.
Operating margin declined from last year to seven 2% and the quarter.
Beyond the supply chain challenges I noted earlier, we completed the final stages of our production transfer and the quarter and are now ramping up production and our new manufacturing site.
And typically takes a few quarters of transition to achieve expected productivity levels and margin benefits.
The segment also continues to be impacted by softness and a mix of favorable end markets, such as nonresidential construction oil and gas and mining, which dampens margin.
We continue to target high teens margin rates for the industrial segment and expect margin improvement as end markets recover and we execute our heartland integration plans.
Moving onto our outlook on slide 12.
Our second quarter forecast reflects an ongoing momentum and the demand environment, but we are keeping a close watch on the supply chain dynamics and any potential disruptions that could emerge.
We expect second quarter sales and the range of $463 million to $477 million.
Up 53% over last year at the midpoint.
We expect year over year sales growth from all of our segments.
Sequentially, we are projecting a sales decline and our auto segment due to the well telegraphed supply chain market challenges and.
Our industrial segment and now includes a full quarter of the Heartland acquisition.
We expect EPS to be and the range of $2 and 12 12 to $2 28.
Up over 200% at the midpoint with last year's challenging second quarter.
This assumes an adjusted effective tax rate of approximately 17% for the quarter and diluted share count of $25 million.
We are projecting improved year over year operating income flow through and the second quarter and bill.
Lower than we would typically expect at these volume levels.
We are continuing to see elevated cost headwinds from freight rates and input costs, especially and commodities, but are offsetting some of that through productivity and pricing actions.
Sequentially, we expect second quarter EPS to be down 18% at the midpoint. This.
And this includes 42 cents of unfavorable impacts from higher stock compensation expense and the quarter due to our equity grant structure and a first quarter mark to market gain that we are not expecting to reoccur.
As we look at the full year of 2021, we expect double digit sales growth for the year across each of our segments and we continue to project, a 2021 tax rate and the range of 18% to 20%.
And with that I'll turn it back to Dave for some final comments.
Thanks, Neil and.
In summary on slide 13, we began this year delivering strong performance within and ongoing dynamic market environment.
<unk> remains healthy, but we continue to manage supply chain and COVID-19 related challenges our sound business fundamentals enables us to effectively operate during challenging times overcoming supply chain disruptions flex and capacity and mitigating cost impacts to our performance.
We have a strong track record of successfully integrating these activities with our strategic initiatives as we empower our sustainable connected and safer world.
For our customers and their end customers.
I am confident and our company is well positioned for continued long term profitable growth.
With that I will now turn the call over to Tricia.
Thanks, Dave for participants mineral and Dave are and separate locations. So feel free to direct your questions to one or the other of them.
Rhonda please assemble the Q&A roster.
Thank you.
As a reminder, ladies and gentlemen to ask the question you May Press Star then one on your telephone.
To withdraw your question press the pound key.
Again, Thats star one to ask the question.
Our first question comes from the line of Nick Todorov with Longbow. Your line is open.
Good morning, Nick.
Good morning, Dave and Nino.
Dave.
I guess.
You guys deviate.
From the rest of your peers by calling out some inventory builds where everyone else is missing Ed I think that and of the day investors. Appreciate your honesty, but I guess from a first question what evidence do you see other inventory build.
Maybe versus strong content gains.
Now I would like to vehicles and electrification and.
And also all factory automation and all of these trends are going on and also can you parse out potentially how much was your content growth and our.
Automotive I think you talked about potentially being last quarter twice as much as your long term range due to debt.
And with favorable mix. So just would appreciate any thoughts there. Thank you.
Sure. So let's start with kind of the inventory situation and that we try to be as open with whatever information we have on inventory.
And our fourth quarter and earnings call you talked you've heard US talk about the fact that we were seeing some of our automotive customers and.
Actually build some inventory during during the fourth quarter.
Yes, so we talked about that and that was part of our outperformance and the fourth quarter.
We did not see so much of that during the first quarter and automotive and from the standpoint really.
Kind of.
Our sell through to customers matched up pretty well with the content increases we were seeing particularly with the mix of <unk>.
Vehicles being heavy on the luxury vehicle side as Oems.
Certainly diverted supply chain to make sure they they supported their most.
<unk> product lines as well as EV vehicles.
So the content you asked about the content story, we saw content growth of.
Somewhere between 8% and 10% during the first quarter. So so very very much well above.
No.
Our expected long term and thats because of that mix of vehicles being produced.
Other inventory areas, we see.
While historically, we often talk about our electronics distribution channels and inventory builds there and how they impact the business.
We have not seen inventory build at our distribution partners inventory there continues to be quite lean and <unk>.
However, we certainly do see some evidence that contract manufacturers and some Oems.
There is some evidence clearly they are where they can building up inventories to assure supply during a potential disrupted and supply chain environment. So we don't see kind of the normal buildup.
Distribution customers, but we do see a little bit at the at the OEM and contract manufacturing level.
And I hope that all Inc.
And that helps a lot of David I really appreciate it maybe as a follow up the debt what kind of measures are you taking to minimize the risks from double booking and excess inventory build and we've heard some other.
Semi and component manufacturers adopt different policies I wonder what type of measures Youre, taking you from Janney.
So that's an area of course, particularly if you start reaching constrained capacities you want to make sure. When you are shipping product you're shipping product to customers, who are actually needed for shipping product out right away as opposed to building inventory. So it's in everybody's best interest for us to focus on that which we do and we will push back and challenge at times as we get orders on that to make.
Sure. We're producing products that are that are going to go into and products and move through the supply chain rapidly.
So there are measures we take.
We do sometimes we increase lead times to push orders.
A little further out at times, we also increase the window of noncancelable orders so.
So we're kind of mandating than that as the customers order and near term that they can't cancel them. So theyre actions like that that are kind of normally taken.
But but the primary thing is really just working with customers and making sure. We're having those discussions and challenges on do you really need these products for shipping or are you building inventory.
And we do that to the best of our ability.
Got it.
Nick one more from Nino immuno can you give us some color sequentially equal between the gross margin and cash.
<unk> operating margin I guess, there are lots of puts and takes you have lower tax rate and then but a full quarter heartland and higher stock comp I guess is there a number you can direct us to in terms of.
Year over year flow through or the operating margin and also how should we think about the trajectory of gross margin opex going forward.
Yeah.
So in terms of the I'll say the general headwinds as we talk about the second quarter two buckets in general first and second quarter, we talked about the the input cost inflationary costs really for us the bulk of that is coming out of higher freight costs that we're seeing inbound and outbound as well as <unk>.
Increased commodity costs, I mentioned and the first quarter, that's running about 250 to 300 basis points across each one of our segments and and the second quarter, that's continuing actually even a little bit of a higher rate on a year over year basis, So definitely a big headwind for us on.
On top of that when you look at things sequentially and as I mentioned in my prepared comments that there was about a 42 cent impact on EPS and some of that really coming out of the higher stock compensation of about half of that coming out of the higher stock compensation and sequentially.
So net net.
We expect that our flow through in the second quarter year over year second quarter will be better than the first quarter, but not talked about in the past our target flow through range as being same and mid thirties and wouldn't expect it to be that high.
Got it thanks, guys. Good luck.
Thanks, Rick Thanks for your questions Nick will take our next caller. Please.
Our next question comes from the line of Carl Ackerman with Cowen. Your line is open and good morning Carl.
Hey, good morning.
And everyone.
Two questions from me.
And perhaps needle.
The first one.
And I understand there are Verizon and shipping costs as well as from.
Currency headwinds.
And I called out and this quarter.
But I guess I would've thought gross margins would be relatively flat.
The implied step down.
Other plus basis points.
And so I guess with many of your larger peers raising prices across the distribution channel and lead times extending.
And the instead of raising prices are you able to sign longer term volume agreement.
And your customer.
Sure and in terms of we didn't comment on for our outlook on gross margin versus operating margin, but what I would say is the headwinds that we're seeing right now are largely around gross margin. So that is part of the challenge and I just mentioned with the last question debt.
From a year over year basis, we're even seeing a increased elevated headwind and the second quarter versus the first quarter in terms of those those headwinds coming through.
But I would also say keep in mind debt.
While there is a number of puts and takes going on in terms of cash.
And whether thats and gross margin or Opex year over year. We are also seeing some opex increases and we had talked about that and actually at our last quarter earnings call. Just the fact that we are starting to see a little bit of discretionary spend pick up we really werent spending much last year, but as things are improving and pockets, we are seeing a little bit.
More discretionary spend pick up.
And also areas like variable compensation has gone up that's largely going to run through opex as well. So that's just I wanted to give you a mix between things going on and gross margin versus Opex and then as part of its part of our overall actions I had commented that we are taking a number of actions including productivity of course.
We have ongoing productivity actions going on and our manufacturing and supply chain sites debt to help mitigate some of these headwinds as well as some some pricing actions.
I would say, probably a little heavier weighted where we can.
And as long term contracts, which are a little bit more difficult on on pricing structures versus where you've got me.
And maybe a shorter term contract no contracts and distribution and that type of area.
Sure.
Okay.
Good question Rich.
David.
Maybe I'll take this and I think you referenced.
Prepared remarks, and also during the analyst day.
The subsidiary.
And really complex supply chain.
Working with simple find that.
And I'd appreciate hearing your thoughts in terms of perhaps actually bringing incremental capacity.
Given that there are well known and towards use of rigorous online sales process.
Thanks.
Yeah, I'll take that call and it's a reasonable question.
Sure.
Shortages.
<unk> the semiconductor world can we bring some of that in house to kind of help offset that from the most part where we are where the primary shortages are and the semiconductor space or not and the areas, where we have a heavy focus there are some small exceptions, even where we have some constraints on our own sensor.
Our products, where we're buying and.
Processors.
Our microcontrollers.
For those sensor assemblies and has some challenges and shortages there that we're working through there are some cases there on some of the <unk>, where we can do those internally and we are doing work to qualify them to kind of help support that.
So.
There are some areas, where we can do that but it takes a lot of time to do to accomplish that.
Thanks for your questions Karl we'll take our next caller please.
Our next question comes from the line of Matt Sheerin with Stifel. Your line is open and good morning, Matt.
Hey, good morning, everyone and just.
Another question regarding the strong bookings youre seeing Dave.
On the component side, you did talk about book to Bill above one could you be more specific and maybe compare that to what you saw a quarter ago is it higher than what you've seen previously.
Sure Matt.
We're not quoting a specific number because quite candidly the number doesn't mean a lot right now.
And bookings are extending way out and things like that it's a very large number it's slightly up from what we saw a quarter ago. So bookings are quite strong and as I talked about earlier and again.
And we see some of that evidence of double booking and even some work to try to build inventories and contract manufacturing and Oems like that and the reality is the distribution partners have not been able to build inventory they would love to build some inventory at a higher level, but it just.
Everything that we shipped to them they sell through.
So.
We remain in a pretty lean inventory situation at our distribution partners.
Got it Okay and then.
Immediately you talked about some some price actions.
And I would've thought that you'd be more successful, particularly given and.
You've got a high percentage of our compounded revenue through distribution and we're hearing that distributors are able to pass those price prices along so is there kind of a lag effect and and.
Terms of that impact to operating margin within electronics.
And get sort of bottoms out here or really depends on the cycle and depends on input cost et cetera.
Yeah.
Sure so on the.
Pricing actions, Matt when we did to your point, we did start putting pricing actions in the first quarter and as I mentioned on the previous question, yes definitely on the on the distribution side across our segments, we'll definitely see a better impact of that coming through and the second quarter, which is why and made the comment that the flow through will end.
<unk>.
Approved a little bit there.
Okay, and then just lastly.
Go ahead, Matt.
On that through traditional customers and distribution of course with pass through.
A couple of different price increases, which will begin to flow through we try to be a bit respectful and not drop it on effective today.
And that we'd like to give a little bit and notice to our end customers to kind of build some strong relationships there.
Where we have the LTI and thats, a little bit more challenging and in areas like automotive and things. However, what you do find is when youre negotiating or renegotiating LTA.
During the course of the year and this kind of environment you may positively impact the trend over the next couple of years.
Got it okay and just lastly.
And on automotive and the outlook for a down sequential quarter, which is not.
Non out of line with what other suppliers have been talking about how much is that related to some seasonality and the inability for those customers to improve production versus any kind of rescheduling.
Or any correction of inventory that you talked about.
And basically having visibility into a couple of quarters ago.
Yes, we.
We see that it's really all reflected on the belts and the build schedules with our customers.
Weekly and we're seeing different customers are having to shut down for periods of time.
The impact of that so it's really driven by the cargo and.
And particularly our core customers that are getting hit by some of the shortage is not ours, but other shortages.
Okay, alright, thanks very much.
Matt We will take our next caller please.
Our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open and good morning, Chris.
Good morning.
Thanks, Doug and maybe I'll direct the first one two days.
A lot of times when supply chains are challenged your global footprint manufacturing and fulfillment.
Position you for a little share gains some wondering with all the topsy turvy up there right now.
And there is some structural competitive opportunities that.
Debt to click.
And if they're not already yes, yes, Chris that's a great question and.
And it's clearly part of our long term strategy.
Because we don't have and overly capital intensive business, we do have as part of our strategy to try to make sure. We have the ability to flex up when we get these spikes in demand because history has shown us when we're able to perform better than our competitors.
Not all of that share gain and the near term sticks, but some of it does and ultimately helps and we clearly are seeing that.
There are cases, where we're able to outperform competitors and that gives us an advantage right now and some piece of that will carryover is it as you move through the supply chain.
Challenges.
Okay do you feel like you are on the upward curve realizing.
Debt.
Wherewithal that you've had established for some time.
Yes, I think we're we're kind of and the position we normally are.
And seeing that so GAAP, we're gaining some business right now that we wouldn't have gotten without the shortages and theres no doubt about that and a piece of that we'll stick and and as needed. We continue to add capacity ourselves, but most of the work we're doing right now and capacity is targeted for what we're looking for.
Forward to be prepared for the next couple of years not so much next quarter.
Okay and.
Just curious if you could detail the equity investment gain what triggered that I think it was about seven 7 million.
Yeah, we have.
And this has been and investment we've had for a long time.
Public and in a public company that came with an acquisition years ago and.
And there the new accounting rules from a few years back we're now required to mark to market that every quarter and because it's a public company, that's what really drives the volatility and the gain loss every quarter.
Okay, if I could sneak one more and the <unk>.
This port technology.
Technology portfolio, simplifying that was a big part.
Alright.
Your integration I think too.
Narrow focus on the most scalable technology. So wondering if you could provide an update on debt holistic process.
Yes, I can I can take that yeah, clearly there were product lines within the <unk> family. When we acquired it that we didn't see as long term strategic drivers for the business and so we have worked our way through the bulk of that activity, where we have either.
And in some cases, we've we've sold some cases, we've shut down.
Pieces of that business, where today, what we're manufacturing and the axis.
The former <unk> power semiconductor business or the core products that we expect to continue to be producing and building on as we move forward. So the bulk of that pruning and trimming is done and behind us.
Thanks, guys.
Thanks, Chris we'll take our next caller please.
Our next question comes from the line of David Williams with Loop capital. Your line is open and good morning.
Good morning, Thanks for taking the question.
Just wanted to ask maybe on the second half visibility how you see that obviously that the automotive sector.
Is challenging and the disruption that we're giving you some some difficulty reading that but how do you think about your second half visibility and where maybe could we see some some upside or maybe some downside as we think about the second part of the year.
Yes.
I think the visibility and the second half as is a bit challenging. It has just been such a dynamic time and and the last year and kind of folding into this year.
And clearly momentum and and.
And most parts of our business are quite strong right now and we would expect that momentum to carry us well beyond the second quarter into the second half.
I do think the two things that kind of hanging out there is question marks would be.
The supply chain side on auto and customer demand is going to continue to be strong as well.
And North America, and we know vehicle inventory on the lot is quite low and demand is pretty solid.
There is beginning to see some improvement and demand in Europe, and certainly in Asia, It's quite strong so.
If the supply chain can hang out.
Step up then there could be some some progress and the back half of the year, but right now we kind of see our view is the semiconductor shortages and things probably are pervasive through the course of the year and auto.
The other wildcard is really just the pandemic situation and do we get spikes do we see disruptions that could still happen in the back half of the year.
Customers are contract manufacturers are building inventory to reach.
And the level of share.
So that they're comfortable with and slow down and their orders those are the kinds of things that are out there and the back half we remain still pretty bullish, but we're cautiously optimistic on the back half.
Great.
And then maybe if you could just talk a little bit about the demand through the quarter and how you're seeing things I guess through April here are the I guess, the cadence of demand trends that youre seeing in line with what your expectations would be are you seeing anything maybe any changes and more recent weeks.
No, we really haven't seen changes or continue to see very strong demand and bookings.
Through the quarter to date.
And as expected in this environment, we continue to see those orders flow through.
Great. Thanks, so much.
Thanks, David we'll take our next caller please.
Our next question comes from the line of Luke junk with Baird. Your line is open and good morning Luke.
Yes.
Sorry about that was on mute there good morning, and Tricia, probably a couple of questions for me and on this morning.
Both margin related first question I'm going to ask really a big picture question, which is in line of another strong margin performance this quarter and both electronics and auto which of course inspite of the current supply chain situation I'm wondering how much strength and we can and should be right now to the underlying fundamentals and those businesses and we've seen.
Inc to your midterm margin targets and to what extent are the temporary benefits that you talked about last year due to COVID-19 and workforce idling and things of that nature temporary discretionary type things.
They're starting to come out or is there still a strong effect of that and the P&L right now.
Sure so.
Our Investor day back in February we talked about the long term margin targets and as you mentioned, both electronics and auto are trending to those right now yes, there are margin headwinds going on from the supply chain input cost that I talked about at the same time, I'd also say or what I call our spending.
Levels are still at a net of curtailed level right.
And people are trying to get out of COVID-19 and get out to customers and do some different things I would say our spending levels are down. So that's why I noted lots of puts and takes going on and attain a quarter still net negative for us but at the same time I would say the long term margin targets that we set out with the high teens for electronics up to.
And 20%.
Automotive and that mid teen 14% to 15% range. We still think those are the right long term targets that we have for those businesses.
And then second.
And margin related question and this is more of a near term question in terms of industrial so.
You'd mentioned in your remarks right now we're working through some of the inefficiencies of debt facility, that's coming online and of course Heartland came from the numbers this quarter and I'm just wondering as we think about the normalized level of margin and that business right. Now is that new facility ramps to full productivity and you start to better integrate heartland how should.
And we think about sort of the underlying margin trend and in industrial specifically right now sure. Yeah. Good question I think about it but it is a step function. So the endpoint, we talked about high teens operating margin target for that business, that's unchanged and we talked about that back in February I would say the.
The manufacturing transition that I talked about typical when we move factories, I'd say, a little bit exacerbated because of.
The COVID-19 situation and we really haven't been able to do a lot of things, we normally do and person as part of that transfer.
But I think that that will work itself out during the year that'll be a step function up on margins, the and market recovery that I mentioned, some markets like nonresidential mining oil and gas I would put that as another step function and that I would say, we will get us into the.
Mid ish teens range. The Heartland, one is going to take a little bit longer. We've always said with acquisitions no acquisition comes into our portfolio and our target margin range and so we typically assume a two to three year timeframe, both on and on the cost side, but also then really starting to ramp.
Up on revenue synergies that we will get the Heartland acquisition embedded in our segment and get us back into that that high teens area.
Okay, Great that was very helpful. Thank you Sir.
Appreciate your questions look thank you.
Thank you as a remark and ladies and gentlemen.
And I want to ask the question.
Our next question comes from the line of David Kelley with Jefferies.
Good morning, David.
Hi, good morning, everyone.
First question for Dave and wanted to follow up on your auto inventory comments.
We did not see that fourth quarter customer inventory build continue into Q1 are.
Are you seeing the work down inventories at all right now are customers simply maintaining stock given what feels like solid visibility to demand and production recovery once we get beyond from the shorter term disruptions yes.
Yes, I think thats.
There is not perfect visibility to that and the auto world.
With the tier ones and the Oems, but our sense is that yes. There was some inventory build that took place and the fourth quarter.
Perhaps because our ability to deliver.
Outstripped others, they kind of built up that and they are trying to kind of get some level of plan there.
It didn't we didn't see it as much and the first quarter, we have not seen and work down we haven't seen evidence of it being worked down at this point, but.
So right now we would say kind of our first quarter demand.
Our best view is that it matched up pretty well with with the faster.
Yeah.
Okay got it that's helpful and.
And may have missed it but did you reference commercial vehicle organic growth I'm, assuming there was an inflection there but was hoping for a bit more color and then maybe how should we think about margin implications and the automotive segment. If we do see an uptick in commercial vehicle recovery.
Yeah commercial vehicle and we talked specifically about passenger car organic growth at 22%.
And the other piece of that within this segment is commercial vehicle, where we also saw double digit organic growth and the commercial vehicle portion of our business there.
So healthy growth there from.
From a margin perspective.
Both of those businesses are going to tend to operate and the mid teens range.
So really the difference and the split between CVP or auto it doesn't drive so much on the bottom line performance, we kind of get similar kind of flow through from both of them, but the CVP is certainly gaining strength and healthy but by the way the commercial vehicle space has the same shortage and challenges that.
You have and the pass car world as well.
And that are getting impacted whether it's semiconductors or resins and things like that.
Okay, Great got it and then last one from me for from me and all and.
And I appreciate the color on some of the sequential input cost trends things like freight costs is there anything else, we should be thinking about raw materials come to mind, specifically debt could disproportionately impact flow through into the second quarter here.
No.
It's a good question I think I tried to highlight the biggest ones as part of my comments with the and I mentioned commodity straight and then just on sequential basis, I'd say and the operating margin the elevated stock compensation expense that we typically have and the second quarter beyond that you've heard Dave talk about yes, we are impacted with.
Some of the semi shortages and some of the resin a number of other input costs coming through but really I tried to highlight the big ones and that's really moves the needle and our margin right now with the impacts that we're seeing.
Okay perfect. Thanks, everyone.
Thanks for your question, David we'll take our next caller please.
Our next question comes from the line of David Silver with C. L. King Your line is open.
David.
Yeah, Hey, good morning, My first observation is there and quite a number of David on this call.
Bob.
About four times.
Yes.
Okay and thanks for laughing.
I wanted to maybe ask a question about your China business as a whole.
As of 2020, and Thats now your largest country market in terms of revenues.
And maybe a couple of questions, but in this quarter would you say the sales growth from China was equal to your overall company growth rate or was it greater than the company.
Total itself and.
And then maybe.
Youre looking out over the medium term, let's say through the end of 2021, I mean, how do you see the growth trends and that market.
Breast thing through the year, and then maybe I'll just throw out one other thing but.
Some other companies.
Sure.
And that have reported have indicated that in terms of the double booking or the over ordering.
There seems to be a little more of that coming out of that particular margin market.
And part just due to fears about how.
Trade trade policies may develop so maybe just that just a snapshot of what you see out of your China business and thank you for sure David.
Yes, I would say first of all you kind of got a ground yourself to a year ago, and China, where the pandemic started during the first quarter. So clearly the growth rate and China year over year comparative is higher than it is for the rest of the world because it was such a low point.
Last year and the first quarter. So clearly China is going to show and a percentage standpoint, a much higher growth rate and our first quarter versus last year.
The other regions of the world because of that.
However, if you kind of normalize that right and say, what's it look like through the course of the year, while youre going to get the opposite impact and the second quarter, where so much of the rest of the world got impacted and China was starting to turn back on line second quarter that Youll see that maybe the rest of world is growing faster than China, and the second quarter.
And you do the comparative and owner, but that's really all the day with history on what was taking place last year.
We continue to see ongoing strong order rates and demand and all segments of the business out of China and Asia in general So it continues to be quite healthy.
From a double booking standpoint.
Yes, we see double bookings coming out of Asia, but we also see them kind of globally I think it probably gets elevated from the standpoint and Asia in general a lot of contract manufacturing is going on out in Asia. So therefore, a lot of the bookings that are flowing through contract manufacturing are showing up there.
And I am not sure we would say that China, specifically is driving.
Really strong orders are evidence of double booking specifically.
Okay. Thank you for that.
I had a.
And.
Question here, maybe on the current semiconductors shortage and maybe a scenario analysis per.
Persist.
I know you've kind of come at this from a couple of different angles, but.
And my General question would be given your strong outlook and everything I mean, how well would you say your company is prepared to deal with.
And the possibility right, but the.
Semiconductor shortage and in terms of breadth and duration just turns out to be longer than.
And most people are guessing in other words worst case scenario and.
And I'm thinking not so much about your customers on thinking about your internal capabilities and I know you definitely have some capability of.
Manufacturing customizing et cetera, but.
Are you, taking any steps or it doesn't.
<unk> prudent to take any steps to kind of reinforce your internal capabilities to either produce or modify your custom mines chips in the event that.
There is a deepening of our broadening.
Of the current shortage condition.
Various parts of the market. Thank you, yes, yes, and certainly I.
And I think maybe <unk>.
Three months ago, there was some belief that maybe the semiconductor shortage would kind of lesson by kind of mid year. This year.
Our belief from I believe that that we hit that inflection point by mid year and we're <unk>.
And certainly that impact at least through the year.
And although we have some direct impacts.
And my conductor shortages there relatively small.
And as we're not really large purchasers of semiconductors and for our assemblies.
I mentioned during <unk>.
One of the other questions that we.
We do have some opportunities for some of them more.
Simple MCU is to be able to do some of that internally with our own designs.
And so certainly prudent we're working on those things to qualify them.
And so as you can imagine we're working to get qualifications and particularly on the auto side.
And it's much faster to get qualifications today than it normally is because everyone's interested and trying to get supply taken care of.
So.
Certainly some impact there that were actions, we're taking to try to shore that up.
We are continuing to increase our investments and capacity in our core semiconductor business, that's not such related to that are spaces, where the constraints are but just overall demand and continues to be strong and our opportunity to gain share over the coming years as such that we need to be adding capacity to support that.
So we are continuing to beef up our capacity capabilities, and our and our own core semiconductor business.
Sure.
Okay, Great and I'm, just going to have one more fast one here, but this will be for me now and it would have to do with the repurchase authorization that was just re upped I guess 300 million and over three years.
And if I go back to February I mean, you were very clear about kind of the criteria for the company's deployment of capital for buybacks and being opportunistic I think was at the top of the list.
And I'm looking at kind of your stock price now and certainly based on recent earnings trends I mean, the valuations have widened out a bit.
And I'm just wondering your thoughts on the optimal use for that.
Authorization over like one to two year period in other words is there a desire to offset options issuance or.
Just maybe how you think maybe and a world where opportunistic might not fit the bill for buybacks just how you think the optimal deployment of that.
Authorization might be thank you.
Sure. So just on the authorization itself and that's <unk>.
That's something where our authorization was expiring at the end of this month and so really it's always prudent and make sure you have and authorization in place.
For those who have known us for a long time, we didn't change the structure of the authorization really to align to really more our capital allocation philosophy, because it's now dollar based as opposed to share count based on the structure. So.
Nothing out of the ordinary there in terms of philosophy I would say our philosophy as you mentioned in February we tried to articulate that which is still our primary focus is still around acquisitions and acquisitions that enhance our organic growth and from that perspective right now we made our heartland controls.
<unk> acquisition earlier in the first quarter and I would say as we look at the landscape today and the markets are definitely a lot of activity. We are quite busy looking at a lot of potential targets and that continues to remain our primary focus so.
As of now I don't I wouldn't change our philosophy on continuing to be opportunistic mainly because of the prioritization that we have around capital allocation.
I appreciate your questions David that concludes our call today.
Thank you for joining us on today's call and your interest and little fuse. We look forward to talking with you during our May and June outreach events have a great day.
Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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