Q1 2022 Littelfuse Inc Earnings Call

May 4, 2022

Good day, everyone and welcome to the first quarter of 2022 earnings Conference call. Today's call is being recorded at this time I will turn the call over to the head of Investor Relations Trisha <unk>.

Please proceed.

Good morning, and welcome to the little thing and its first quarter 2022 earnings conference call.

With me today are Dave Heinzmann, President and CEO , and Nino stuff now executive Vice President and CFO .

Yesterday, we reported results for our first quarter and a copy of our earnings release and slide presentation is available in 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 discussions today will include forward looking statements.

These forward looking statements may involve significant risks and uncertainties.

Please review Yesterdays press release, and our Form 10-K, and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward looking information.

Also our remarks today refer to non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website.

I will now turn the call over to Dave.

Thank you Trisha good morning, and thanks for joining us today.

Let's start with slide four building on our noteworthy success in 2020, one our global teams delivered tremendous performance substantially above our expectation to start this year.

We achieved record revenues and earnings per share growth as we successfully executed on our strategy and continued to outperform the markets we serve.

Across our electronics commercial vehicle and industrial businesses, we obtained double digit organic growth compared to last year, while our passenger car business outperformed global car build.

End market demand continues to remain strong and our team has resilient managed supply chain disruptions.

Our organic growth trajectory combined with our strategy led acquisitions.

To strengthen and diversify our business.

As a result of our persistent execution, we remain extremely well positioned to further capitalize on current and future growth opportunities within the global structural themes sustainability and activity and safety.

That said, we are operating within a more volatile macro environment compared to 90 days ago, given events related to Covid and the war in the Ukraine.

In particular.

Cut downs in China due to COVID-19 have impacted our operations, which will impact our second quarter sales and earnings.

Our teams achieved outstanding results driven by increased increasing demand creation across the industrial transportation and electronic markets, we serve and worldwide execution.

I would like to recognize and thank all of our associates around the world for their ongoing determination to drive record growth by winning new business, making significant strides with additional strategic acquisitions.

And meeting customer demand within a challenging macro environment.

Our strong performance through these unprecedented times is truly a reflection of our great people and the strength of our business.

Moving on to performance within our segments.

Our electronics products segment achieved remarkable results, we drove significant revenue growth across all regions driven by our diverse product offering far reaching go to market strategy and our team's ability to overcome ongoing macroeconomic challenges.

Demand for our products was driven by a broad range of applications, including data centers telecom infrastructure industrial automation.

Appliances and automotive electronics.

We expect to capitalize on the ongoing themes around connectivity automation and electrification.

Exiting the first quarter, our electronics book to Bill remained above one and.

And weeks of inventory at our distribution partners are without our normal range underscoring sustained strong ongoing demand.

This demand set up is positive but.

But we're working through the resurgence of COVID-19 in China, which directly impacts our electronics business.

Our teams continue to maintain focus on this dynamic environment.

Our transportation products segment delivered solid performance within a challenging supply chain environment.

Our passenger vehicle business was impacted by OEM shutdowns and their lower production levels driven by their ongoing material shortages and the war in the Ukraine.

Withstanding. This we continued to outperform global car build given our increasing product content in passenger vehicles.

We see a number of ongoing content growth opportunities and expect to continue our market outperformance despite lower global car build protections.

Our commercial vehicle business drove strong demand for our combined portfolio of legacy and Carling technologies products, driven by our deeper and broader presence across material handling.

Heavy duty truck bus construction and agriculture equipment Marine power sports market.

We have a strong order backlog, which sets up for continued performance.

Turning to our industrial products segment, our strong performance was an outcome of our global teams ability to serve new customer applications increased new product sales and leverage our broader product portfolio.

We saw robust demand in our strategic markets, including industrial safety.

H B C and renewables.

In North America, we are seeing improving trends in oil and gas and nonresidential construction.

Sustained strength in mining and in industrial MRO markets, while electrical distributors inventories remain lean.

I mean, it will provide additional color on our strong financial performance.

Our ongoing results and successes reflect both the strength of our teams execution and the power of our strategy, which is shown on slide five.

Since launching our five year growth strategy and early 2020 one.

We have aggressively advanced our strategic business initiatives.

We are investing for growth.

Organically and through acquisitions.

The structural growth themes of sustainability connectivity and safety.

These investments include resources to partner with our customers as they deploy their applications related to these themes.

We have expanded our product content captured share gains globally and high growth markets.

During 2020 one we also completed two acquisitions aligned closely with our strategic goals.

<unk> controls and HVAC, and Carling technologies, and commercial vehicles telecom infrastructure and renewables all higher growth end markets, adding approximately $300 million in annualized sales.

In April we announced two additional acquisitions.

Encase switches and embed.

Turning to slide six we are looking forward to welcoming C N K employees to the little fuse team upon closing of our announced acquisition.

C N K is a leading designer and manufacturer of high performance electromechanical switches and interconnect solutions with annualized sales of over $200 million in it.

It has historically had EBITDA margins of approximately 20%.

In addition.

K C N K expands our product portfolio addressable market and growth globally across industrial automotive and Datacom markets, serving as a platform for continued growth.

Our complementary go to market models will continue to strengthen our partnerships with distribution channels.

N K as technology leadership, and high precision manufacturing miniaturization, haptics and operational footprint will broaden our capabilities, we expect to close the transaction late in the second quarter and look forward to getting the integration underway.

Moving on to slide seven.

Let me begin also by welcoming and bad team too little fuse.

<unk> is a proven provider of embedded software and firmware developed for a broad range of applications.

This acquisition will help us to better serve our customers by expanding our software design engineering and technical expertise.

This capability is critical given the complexity of vehicle electronic vacation and electrification as well as the proliferation of communications and applications driven by Iot trends in industrial markets.

We now have additional capabilities to deliver broader hardware and software solutions to our customers.

Such as electronic control modules and systems for transportation applications.

Our auto nation and controls for industrial applications.

The addition of embed will unlock new growth opportunities across the transportation and industrial markets we serve.

Since early 2021 we are on track to deploy $1 billion in capital for acquisitions aligned with our long term growth strategy.

Adding approximately $500 million in annualized sales to further diversify and strengthen the end markets, we serve and expand our organic growth opportunities.

Our disciplined approach towards M&A positions us so that newly acquired businesses accelerate our success in higher growth markets through diversification.

Expand our geographic presence and leverage our core competencies and creating value for all of our stakeholders.

We are very excited about these businesses and their close alignment with our strategic and financial objectives.

Now, let's move onto highlights and design wins in the end markets we serve.

Then our industrial end markets on slide eight we.

We continue to generate increased business wins across a broad range of applications to grow our business.

We have developed technologies to address new electrical safety standards and expanded our portfolio with acquisitions.

During the first quarter, we captured business in the commercial kitchen, and food and beverage industries and enable our customers to meet tighter safety requirements.

Our ability to provide strong technical support across a broad set of higher voltage products have allowed us to secure a global design wins.

As a result, we secured business and renewables across a variety of applications, including solar wind and energy storage systems.

In HVAC, we continue to secure more business with our expanded product portfolio.

With the breadth of our high quality offerings, we are increasing product content with leading customers and we expect this to continue given our global brand and our sustained focus on safety and sustainability.

Turning to our transportation end markets on slide nine.

We continue to increase our product content to outperform the market.

Within electrification, our high voltage products secured global business for battery management systems, and onboard charging applications and passenger vehicles.

Commercial vehicles captured business for power distribution, and two wheelers onboard charging in buses and rail traction for training.

We also expanded our business in electric vehicle charging infrastructure applications.

With the increasing complexity of vehicles, we secured business based on our engineering capabilities for heavy duty trucks.

<unk> handling and construction and agriculture.

We're also leveraging products from our successful integration of Carling to grow our business in these end markets.

Within safety comfort and Adas applications, we captured wins based on our product performance.

With our investments for growth and expanded capabilities and portfolio with the additions of Carling and embed, we're very well positioned for continued growth within transportation applications.

Moving on to slide 10.

Electronics end markets, we are seeing significant growth from innovative products targeting key end markets.

During the quarter, we capitalize on the proliferation of electronics content across a wide range of application centered around connectivity.

We secured business for data centers and telecom infrastructure with our responsiveness to customize solutions.

In appliances, we expanded our presence with existing customers based on our long term engagement.

In addition, our product features want US business, we're building security systems and general purpose electronics.

Our ongoing success of winning business and our announced acquisition of C. N K will serve as a platform for continued growth.

Across the high growth industrial transportation and electronics end markets, we serve our pipeline of new business opportunities is very active and we are confident in the continued success, we expect to have winning this business.

The organic growth from these new business wins, coupled with our acquisitions.

Enhance and sustain our growth and position us to continue expanding our market presence.

I will now I'll turn the call over to Neal to provide additional color on our financial performance and outlook.

Thanks, Dave Good morning, everyone and thanks for joining us today.

Start with slide 12.

Our team delivered a quarter of record financial performance exceeded the high end of our guidance.

Revenue grew 34% year over year to $623 million with organic growth of 22%.

The Carling and hybrid acquisitions added, 14% and foreign exchange reduced revenue by 2%.

GAAP operating margins were 24, 2%.

Adjusted operating margins were 25, 6% 850 basis points higher versus last year.

First quarter GAAP diluted earnings per share were $4 70.

Adjusted diluted EPS was $4.99.

87% over last year.

The strength of our results for the quarter was led by our electronics segment, but overall demand was stronger than we had expected which included improved shipping rates as we work through religious Dick's challenge it.

We would also risk adjusted our first quarter forecast for potential COVID-19 related production slowdowns, but our teams were able to continue our operations during the first quarter. Despite the Covid surgeons.

Our operating margins reflected strong sales volume and related leverage.

We ended the quarter positive on price cost as our teams remained focused on offsetting ongoing inflationary headwinds.

Given the current market conditions and the ongoing customer discussions we're having on pricing we expect to stay positive on price cost for the remainder of the year.

And as I've been referencing the past several quarters.

Can you can have margin benefits from lower than typical discretionary spend.

Even as we continue to invest for growth across our businesses.

We generated $52 million in operating cash flow in the quarter and $22 million in free cash flow.

This reflects the higher working capital and.

Capital expenditure investments, we've been making to support our revenue growth.

In higher cash compensation payments related to last year.

We've also continued our strategic direction to carry higher inventory levels to help mitigate supply chain risk and sustained service levels to our customers.

Turning to slide 13, our capital allocation priorities remain in full alignment with our growth strategy.

We continue to prioritize reinvesting in our business.

Both organic growth and for acquisitions to diversify and expand our value proposition to our stakeholders.

Since we shared our updated five year strategy with you last year, we've committed to deploy $1 billion in capital to further our growth trajectory from acquisitions.

Our constant focus on cash generation is allowing us to find more than half of that deployment directly from our balance sheet.

We plan to take on additional debt in the near term for these acquisitions, our leverage will remain comfortably within our target level.

Moving on to our segments on slide 14, let's start with electronics.

Revenue in the quarter grew 28% and 29% organically.

Operating margins were 33%, reflecting strong price cost benefits.

Favorable regional and product mix and ongoing volume Olympics at these record revenue.

Our teams continue to drive operational efficiency and ongoing automation investment, adding to the margin expansion.

In these current market dynamics, we expect our electronics segment to maintain an operating margin averaging in the mid 20% range.

Moving on to transportation, formerly known as our automotive segment sales were up 44% and up 3% organically. The main difference being the Carling acquisition.

Sales in commercial vehicles were up 21% on an organic basis with positive market and content trends across our vertical.

Sales across passenger vehicles were down 3%, excluding foreign exchange on a mid single digit global car build decline.

Operating margins were 14, 3% offsetting continued metals headwinds and dilution from the newly acquired Heartland.

Sales in industrial grew 50% in a corner and 32% organically with the main difference being the Heartland acquisition.

Operating margins were 17, 1% as we drove improvements in operational performance price increases offsetting cost headwinds and strong volume leverage.

Overall in the first quarter, we had an excellent operational execution across the board and strong financial performance and what continues to be an uncertain and volatile macro environment.

Moving to slide 15, we continue to see broad strength across the end markets we serve.

This remains the case for automotive and consumer demand does new and ongoing supply chain issues have dampened carved out the protection impacting us.

Our customers and suppliers.

Recent design from the tragic Ukrainian nation to China, Covid have also elevated uncertainty across the macro environment.

However, we continue to successfully manage through market challenges across a number of times and had been incorporated market conditions as we see them today into our forecast.

For the second quarter outlook, we expect sales in the range of 594 $608 million or growth of 15% versus last year and 7% organic growth at midpoint.

This includes about a 300 basis point currency headwind versus last year.

At current foreign exchange rates, we expect an approximately $50 million sales headwind for the full year.

We're projecting second quarter adjusted EPS to be in the range of $3 95 to $4 11 up 18% at the midpoint.

This is to a 16.5% tax rate in the quarter.

We are maintaining our full year adjusted effective tax rate in the range of 16% to 18%.

The China Covid, driven Lockdowns that began late in the first quarter are affecting some of our operations largely in our electronics segment as well as impacting some of our customers and suppliers.

Due to these lockdowns our guidance includes a 300 basis point sales headwind versus last year.

Well its cost we are incurring to support our operations and our employees.

Consistent with our historical accounting convention, our second quarter guidance also includes higher stock compensation expense in the quarter of approximately 35 in EPS.

We closed on being bad acquisition in April , but don't expect it to have a material impact to the P&L or cash flow in the quarter.

Our Q2 guidance excludes any financial impact for C. N case, which is in.

Interest expense from the new debt.

Slide 16 includes some additional full year forecast considerations.

We expect $50 million in noncash amortization expense for the year, excluding C N K.

And we're projecting $18 million in interest expense, excluding interest expense premium death.

We are maintaining our projection of 100% free cash flow conversion and estimate.

$110 million to $120 million and capital expenditures for the year.

Yeah.

C N K switches has annualized sales of over $200 million and has historically had EBITDA margins of approximately 20%.

Dave discussed Halcyon K closely aligned with our target markets and portfolio and it will also align well with our financial profile.

We see a number of opportunities to enhance the in case growth and bottom line performance.

We anticipate the transaction closing late in the second quarter inspect and expected to continue being earnings accretive after including noncash deal amortization.

I'd like to conclude by thanking our associates around the world for continuing to deliver on our commitments to our customers and shareholders amidst these challenging times.

And with that I'll turn it back to Dave for some final comments.

Thanks Neil.

In summary on slide 17.

Had an accelerated start to delivering on our five year strategic goals.

With our ongoing develop deployment of resources and capital to enable customers applications, we remain extremely well positioned to further capitalize on our current and future growth opportunities within the global structural themes sustainability connectivity.

Safety.

We continue to focus on what we can control to drive our performance in a volatile market, which is reflected in our second quarter outlook of continued double digit sales and earnings growth.

I am confident our talented associates around the world investments for growth and operational excellence will deliver ongoing value for all of our stakeholders and with that I will now I'll turn the call back to the operator for Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

My first question is from Luke Young with Baird. Please go ahead.

Good morning, and thank you for taking the questions.

Our first question probably for them you know just wanted to better understand the electronics margin from here and what elements of the current side are sustainable or more specifically, how you define the current market dynamics that would support a mid twenties margin in this business. Alternatively, what has to go wrong. If you will drive to drive the business back to.

The low 20% level you had previously assumed in your through the cycle margin target is that still the right target for this business through the cycle in light of the improved productivity and automation investments you referenced.

Alright, Thanks Luke.

Yeah, Let me just step back for a second you know we're in a market that really we've never seen before a lot of unique factors going on ranging from the demand increases that we've seen pretty sharp demand increases.

Inflationary environment and then we're in a price realization mode versus a business that typically sees price erosion every year. So.

Well when you asked about hey, what are the market dynamics that are going on that have caused us to think about the margin profile. That's what I call. The current market dynamics I would say we have worked very hard on a couple of things one around pricing and as I mentioned last year. We were we were working to catch up a little bit with the inflationary environment.

And we've done that now from a price perspective, but we've also done a lot of internal work really around productivity efficiency investing in automation and so what.

What I would say with these current market dynamics with what we've done right now you know for the for the foreseeable future I see it's in that mid mid 20% range margin profile I think we just need to continue monitoring the environment and see how things evolve over time.

Okay. Thank you for that and then my follow up question also margin related and I'm wondering about the sustainability of transportation margins in the mid teens.

You know as you mentioned a number of headwinds still this quarter be it inflationary headwinds where the level of light vehicle production is right now [noise] Halloween related impacts on the margin profile of that business right now what's baked into the second quarter guidance here.

Very near term and is the outlook here for the terrific margins sustaining.

The next few quarters. Thank you.

Sure.

They are our target profile for this segment remains mid teens margins and you're saying that the business in a lot of the factors. There's a lot of choppiness going on one of the biggest things that I've talked about in the past or are things like input cost, especially metals really impact this segment the most.

We've seen a lot of Choppiness a lot of inflationary price increases there. So I wouldn't say again, our target remains the same its going to depend on some a lot of the market dynamics more than anything else between things like car build the continuation of growth that we're seeing around <unk>.

Round end markets not just in auto but also in commercial vehicle and then we're doing what we do best which is were working on managing through the environment. We're working on productivity initiatives automation initiatives to work on mitigating it and working to keep it in that mid teens margin.

Okay, Great I will leave it there. Thank you so much.

Thanks, Luke for your questions, we'll take our next caller please.

The next question is from Nick Todorov of Longbow Research. Please go ahead.

Nick.

Good morning, everyone and then congrats on great results and execution are really impressive results.

Questions first on on China impact can you help us understand the assumed impact sequentially, both from a revenue and cost standpoint.

Related to trying to look at them.

Yeah, Nick I'll I'll talk a little bit on the revenue side, and let me I'll speak to any cost issues associated with it but.

Yeah, we talked about that 300 basis point headwind in the second quarter that we're facing and it really comes from a couple of areas primarily it shows up in our electronics business impacts our electronics business.

We have a couple of manufacturing sites and the greater Shanghai area that had been shut down for a few weeks and we expect them to begin to ramp back up in the coming weeks, but it clearly has an impact on our ability on some smaller product lines that we have at those locations. So that's that's certainly a headwind.

And for US and of course it has.

Some indirect impacts honest with customers on the auto side.

But then also on the electronic side that their supply chains are disrupted there.

Inability to operate impacts us as well so that's really kind of what we incorporated in that 300 basis point headwind.

Sure and then on the.

Cost side, Nick Yeah, I'd say a couple of things one is were incurring operational costs right. Now you know Dave mentioned that we've had a few plants shut down for a few weeks now we've got it you know there are still a number of fixed cost I'm going on that we're continuing to maintain including you know continuing to pay our employees as well.

Well as we talked about providing employee support it's it's quite a difficult personal challenging time right now and so we're doing everything we can to support our employees personally as well.

And in a lot of different areas. So the combination of those two costs I wouldn't say a big chunk of our sequential earnings decline, it's really coming from what I'd call. It a temporary situation with the China Covid shutdown.

Okay. That's very helpful. And then another question related to margins.

<unk> seen this is specifically in electronics I would call it volatility you've had this.

A very strong third quarter margins and a little bit of a moderation in <unk> now at a very strong first quarter margins you know I'm I'm guessing you mentioned mix played a major role can you. Please help us understand what <unk>.

<unk> families you know are driving that high accretion.

And the electronics margins.

Yeah, No. It's a great question Nick.

I would tell you that a few different things going on you know I talked about a few quarters ago mixed played played a outsized role in terms of our margin profile from geographic mix also that helps you know some stronger margin profiles as we think about North America, Europe , a little bit different different in Asia. So.

Mix was was a piece there at the same time, you know with the earlier question I answered I mentioned, we've been doing a lot of work due to catch up with the inflationary environment around pricing. So I'd say the past few quarters, and that's where we're seeing some bigger benefit is part of that catch up and also just really around.

Productivity and automation you the operational excellence that you count on us for and we've been spending a lot of time and frankly, a lot of investment and making sure that that we are doing what we need to let our own house to really improve our cost position. So that's that's really some of the dynamics there I'd say, what's adding to the Choppiness frankly is a lot of these.

Supply chain environment, I know, an overused term, but especially around logistics, where we're moving product in many cases from Asia to North America or internally and we saw some choppiness in the fourth quarter, which caused some of the margin decline we work through that it got better in the first quarter, but that's still I'd call. It.

Good day to day Battle for Us right now.

Got it very helpful and if I can squeeze one more just if you look at the organic growth very strong 22%. Despite a tough comp I guess can you help us understand how much of that is coming from pricing on a year over year basis. It sounds like you're also starting to gain traction on price to cost in the trans.

Appreciation in industrial markets. This.

This quarter. So can you help us on the rear basis, how much of the 22% organic growth comes from pricing.

Yeah, I would say really theres just overall, we have very strong end market demand kind of across our businesses that are really driving the bulk of the organic growth. So it's really more related to end market demand.

Yes pricing helps and uplifts that particularly in areas like electronics and in industrial but the bulk of that is really end market demand drove him Dennis I would add the work that we've been doing really to enable us to meet that end market demand and you know I keep coming back to the investments we've been making.

Our operational efficiency the productivity and then the automation investments and that's honestly that's allowed us to be able to meet the demand that we've seen in that pretty pretty quick slope that we've seen.

Got it congrats thanks again on the results.

Thanks, Nick appreciate your questions, we'll take our next caller please.

The next question is from Josh Buchalter of Cowen. Please go ahead.

Josh.

Good morning, Thank you for taking my questions.

Awesome results.

And quarter I believe it isn't that you thought your distribution partners.

Great.

Point that it matched and demand I guess, given the China locked down David first of all is that still the case and secondly, it should be then interpret the current resulting guide as a function of really just being pulled in by in demand and less so any sort of channel or or distribution inventory builds.

Sure. It's a great question and it's a very dynamic environment across the businesses, but are in the electronics distribution portion of our business. Obviously, we monitor inventory positions there are very regularly.

We would say is for the most part they're they're pretty much kind of in a normal range.

Our business with some particular product categories that continue to be linear.

So we don't see a potential near term problem with inventory positions in our distribution channels and electronics.

I mentioned in the prepared remarks that in the industrial portion of our business actually electrical distributors, which we sell through particularly here in North America their inventories are still quite weak.

So we see inventory is something to watch, but we clearly are not seeing an outsized inventory problem at all a factor. So some areas, where we're still lean and a need to do more to kind of fill those jobs.

Yeah, and maybe just and just adding one thing non operationally one of the headwinds we talked about year over year, even though sequentially as foreign exchange rate with the euro has gotten weaker that's definitely a headwind for us on the top line.

Got it. Thank you and then also you had previously mentioned that you.

You had that there could be some restocking that came into play for your your transportation Roche in 2021.

It seems that IHS SAR numbers, but getting your your results came in well above expectations I guess could you just walk us through some of the bigger chunkier content growth drivers that you have that are allowing you better insulating you from units whether its E V related or.

Sounds of commercial vehicles in particular have been strong. Thank you.

Yeah, Yeah, clearly if you look at the transportation segment as we reported yeah. It starts approaching kind of 50 50 on how much is passenger car versus commercial vehicle and we saw tremendous organic growth on the commercial vehicle side of things and quite frankly, I think our customer.

Or limited by their supply chains.

The demand remains pretty robust there and our ability also really our revenues were driven by our ability to support them as well at times. So we see really strong demand there and it's really across the board.

Heavy truck bus construction and agriculture material handling. These are all areas that we see quite strong demand for our products, which are component level, but also power distribution systems and those applications, where we see nice growth by the way. We're also beginning to see traction in electrification.

And in the commercial vehicle side, as well, which creates further content opportunities for us that on.

On the passenger car side, it's still the big drivers for us that are in the electrification of vehicles or certainly a content increase for us.

The product mix for our customers, where they tend to be when they have limited supply chain focused on higher end vehicles would have slightly higher content for us. Those are those are key areas that are driving kind of content and outsized growth in the transportation sector.

Thanks, guys and congrats again.

Thanks, Thanks, Josh well take our next caller please.

As a reminder, if you have a question. Please press Star then one the next question is from David Kelley of Jefferies. Please go ahead.

Good morning, David.

Hey, good morning team I wanted to double back to the revenue guidance and how you're thinking about trends into the second quarter, you pointed out the China disruption, if we adjust for that 300 basis points headwind I'm still coming up a bit below typical seasonal trend. So can you walk us through some of the incremental.

And youre seeing in other markets or maybe there is an element of risk adjustment here similar to your your first quarter guide.

Yeah, David So what I'd say in addition to the China headwind, we talked about I just mentioned on an earlier question the foreign exchange headwind.

Especially with the weaker euro, but we've seen that that's been impacting us on the top line and I said similar to China being a 300 basis point headwind in the quarter same sort of.

Range also from foreign exchange I'd say that and I would also say we had some really good strength in the first quarter. So I think some of the historic seasonal patterns that we've seen or had sort of gotten thrown out a little bit, but we feel good about you know REO.

We would have been pretty close to sequential honestly from Q1 to Q2 had it not been for these headwinds.

Okay got it. Thank you and then maybe following up on the Trans Mountain discussion.

I guess, how should we think about pricing offsets in that segment to potential metals inflation.

We're hearing about.

<unk> from a variety of tier one suppliers, which happened frankly once every 10 to 15 years. So curious if that's been a meaningful opportunity for you.

Last couple of quarters or maybe it's an opportunity.

Going forward to help offset some of that gold ongoing metals.

Metals inflation I'm sure everyone's saying.

Yeah David.

We've talked about in the past the differences in our ability to pass along cost increases in different segments and different customer basis, and what I would say is if you look at our transportation segment.

Passenger car is probably the toughest place for us to be able to do that we tend to have long term contracts with our customers.

And so.

Annually, you get a chance obviously to address those sorts of things.

And in many cases.

So that isn't in the pass car side is an area where were not have not been able to keep pace. If you will with cost increases. So it is still a headwind for us on kind of the price cost mix in the passenger car portion of the business.

The commercial vehicle side of the business gives you a little more latitude and the ability to pass along those inflationary costs to customers. So we've probably done a better job at trying to kind of neutralize that in the commercial vehicle side of it.

But it's an ongoing battle.

You talked to a lot of tier ones, but as a tier two we continue to work with our customers to try to pass along where we can but in some cases, we're not able to close that gap.

Okay, Great. That's helpful and maybe just one quick follow up on a point of clarification on C U K.

Just given their distribution channel exposure, the 20% EBITDA margin you referenced is that a longer term through cycle average or are they currently are tracking at those levels.

That's that's where they've been operating in the recent past. So you have that data at this point.

Obviously, the distribution channel exposure that they have matches very well with the distribution exposure that we have in our electronics business. We see that is certainly one of the areas for synergy as we continue to engage with a partner with our distribution partners to maximize the opportunity for growth there.

So we think that's where they've been operating EBITDA area recently, but.

But we think there's lots of opportunity for us.

Okay, great. Thanks, so much.

Thanks, David I appreciate your questions, we'll take our next caller please.

The next question is from Matt Sheerin of Stifel. Please go ahead.

Good morning, Matt.

Yes, hi, good morning, just a couple of follow ups from previous questions. One one on inventory, Dave you talked about distribution channels being lean, but we're seeing other customer basis, specifically E. M. S N Oems.

Build inventory at record levels, and we don't know exactly what that mix is.

Hum.

So are you getting I mean, I know in the last quarter, you talked about E. M. S inventories, maybe creeping up do you have any insight there on that inventory picture and how that plays out through the year in terms of your orders.

Yeah, Yeah, I think our view on that is it's a little unusual in this cycle that the level of inventory build at the end customer as well as OEM. So of course, it's an added thing to consider in the mix.

Not sure that we have seen specifically any meaningful increases for our products in those areas in the last quarter.

The Big question, it's come down too.

What will be the behavior patterns over time.

Our view is with the current volatilities in the market and supply chain activities, whether they are COVID-19 related weather there.

Trade war related a number of disruptions that have kind of impacted our industry and in the recent couple of years.

The question Mark is how long will it take to return to a more normal kind of inventory environment.

We don't see that changing in the near term.

We do see that over time will that begin to work its way down sure I think it will but we see that as more of a long term trend not kind of a short term because just like ourselves.

Even if we have supply available to us we need to have less limitations.

Yeah, the volatility and to be able to ship the ability to ship products around the world and other disruptions, we're probably going to carry a bit heavier inventory for for the foreseeable future.

We see that same trend with customers, we're talking to as well.

Okay. Thank you for that and then I just wanted to go back to the the issue of pricing and how that's benefiting your business specifically electronics.

<unk> revenue grew.

Call it $24 million sequentially, but your operating income was up 40 plus million.

So clearly the pricing environment is beneficial and I know you've put through price increases and as have your competitors, but could you quantify it for us and you know how much of that you know that uplift was pricing versus versus leverage and other moving parts.

Yeah, I mean, we've been talking Mad really about what we're doing around the different levers that we've not gone into detailed quantification, but what I would what I would say is.

We've done a lot of work in the past few quarters.

Really around catch up right around really making sure that that the value, we're bringing to our customers is recognized them given the fact that our costs have gone up due to a lot of market factors. So there's a lot of work that was done in the past few quarters and we're seeing the benefits come through from our margins and really it's it's a catch up at the same.

A lot of work done to really improve our capacity through efficiency and some automation investment. So I'd say both of those have been strong drivers for San Martin.

Okay. Thank you and then given the headwinds the manufacturing and production restrictions that you're seeing in in the June quarter.

I know, it's hard to look beyond one quarter here, but are you expecting I mean I would imagine your backlog is building and would you expect September .

To bounce back somewhat in electronics.

Yeah, Yeah, it's really challenging to see.

It's pretty volatile space.

And our current view is that.

The current disruptions in China, specifically impacting us in the greater Shanghai area, we're expecting those to moderate through the course of Mei and hopefully begin to get back towards normal by the end of the second quarter. So I think that headwind will likely yield.

Lesson for us however.

Who knows you know our other parts of China or other reasons that we're all going to get impacted by you know additional waves from COVID-19.

It's just difficult to say at this point, so kind of our our strategy and our approach is to make sure that we have the capacity in place to respond to the demands of their customers need to have the teams in place and supporting them and just be prepared to react to.

Changes in direction, there, but we're hoping the specific problems were talking about.

Are behind Us certainly by the third quarter.

Okay fair enough, thanks, and thanks very much.

Appreciate your questions, Matt we'll take the next caller please.

The next question is a follow up from Luke junk of Baird. Please go ahead, yeah. Just one follow up question wondering if you could comment comment then Carling acquisition, especially key observations now that you've had your first full quarter of ownership. There. What have you learned that you didn't necessarily know coming into making that deal and zoom.

Back and look at the strong organic results that we saw on the commercial vehicle part of the transportation portfolios. This quarter, that's certainly a strong outcome to what extent.

Curling already adding to what you're seeing there. Thank you.

Yeah I think.

Yeah first of all we feel.

At least as strong maybe stronger about the opportunity with the Carling once we've had a chance to actually spend some time at the factory locations spent some time with the engineering teams or sales teams. So we feel very bullish about that we like the commercial vehicle space. We think it's a it's a great place to operate in a lots of opportunity.

<unk>.

The added scale of Carlin certainly creates.

Being a more important supplier in the electrical systems for the commercial vehicle space that are evolving pretty rapidly and pretty dynamically Carla.

Carling has some unique capabilities that are primarily focused in the marine space with more sophisticated modules and systems. We think there's an opportunity longer term that takes some of that capabilities more broadly into the commercial vehicle space and Oh by the way the embed acquisition we made.

<unk>, which is adding about 35 embedded firmware software engineers to our team.

Well help us enable those sorts of activities as well as we see opportunities in commercial vehicle as well as the industrial side.

So we feel pretty bullish about.

Thank you your final question Luke.

Do you have another question Luke.

I don't know if that was all I had thanks alright.

Alright. Thank you we'll take our next question please.

Next question is a follow up from Nick Todorov of Longbow Research. Please go ahead.

Yes, hi, thanks for allowing the phone to follow backs.

A question on Opex.

How should we think about the opex and into the second quarter I'm, asking because it's a need gift versus the trend we've seen in the last three quarters and <unk> you talked about 30 cents incremental uptick in and in a stock compensation any color your additional or how should we think about.

Absolute level of Opex and <unk> that would be helpful.

Sure Yeah, no great question I think one just on the trends a little bit when I talk about things being choppy from quarter to quarter, we've seen that a little bit on the Opex side also a lot of that being an outcome frankly related to Covid you know discretionary spend starts to tick up and then something happens and it comes back down.

Again, just because you know can you get out can you travel can you see customers can you go to site. So that's been some of the wins that we've seen on our Opex spend frankly and that's awesome.

Right now I'd say in the current market dynamics. That's been you know one of the unique drivers that that we're just not spending at the level we would.

Some areas on Opex.

Specifically as it relates to the second quarter.

The 30 cents of stock compensation accounting I mentioned, it's just a it's a provision in some of our stock comp grew.

Grants that we have out there related to retirement provisions and rather than taking the cost for some parts of the stock comp over a few years, we have to take it all in a corner. So don't think of it as an outsized additional cost, but more just from a timing issue and so we tried to give everybody directionally what that is.

I mean every year in the second quarter.

Got it got it.

One question for Dave a bigger picture question.

Dave obviously in the financial markets are getting worried about a potential slowdown in economy, and even recessions and at the same time you have an inflation.

Potentially being persistence, so creating a stagflation environment I guess I would be interesting to hear your views on how the business in the industry.

Gave in an environment, where we have a stagflation potentially.

And to you know not so distant future.

Yes, great Great question and one we talk about regularly debate regularly.

It's pretty difficult.

The abnormal situation for the last couple of years right in situations were in today are a bit abnormal.

So we talk about it regularly.

We feel that the transportation, particularly the pass car area, it's going to continue with increasing demand theres just been pent up demand that hasnt been being able to be supplied and because of the supply chain disruptions. So we don't see even with the.

Kind of potential global <unk>.

Financial trends changing we see demand on the transportation side continuing to be quite strong for the foreseeable future. So we don't see that as a concern.

Obviously, you know if you know.

The balance between inflation and slowing economies.

We'll have an impact on us.

But we have not seen a lot of evidence of anything yet.

The markets and in the spaces that we're operating the demand patterns that our customers continue to mean it remained very very strong.

Very helpful. Thanks, I appreciate it good luck.

Thanks, Thanks for your follow up questions, we'll take our next caller. Please.

Next question is from a follow up from Josh Buchalter of Colin. Please go ahead.

Hi, Josh.

Thank you for the follow up just one for me you called out the impact.

China Lockdowns in our revenue guidance I was wondering.

Anything any impact the inventories there and the reason I ask you a few of your peers have mentioned that they were able to build parts, but not ship them due to logistic challenges in China. So I was wondering if you saw any sort of similar dynamic as well as we think about modeling inventories as the rest of the year. Thank you.

No or limited impact on inventory that our challenge really that's impacting us directly as we have factories do are locked down and shut down so we're not producing.

It is difficult to ship in and out of Shanghai. So other locations, we're finding ways to ship other routes in and out of China, rather than sort of Shanghai for it but or impacts are more directly related to our ability to produce so I think it's less impactful on the inventory, yeah, and I would say the you know the elevated <unk>.

Inventory that we've been carrying a service customers is actually paid off a little bit and mitigated a revenue headwind for the quarter, because we've been able to ship out of inventory right. Now. So that's been part of the mitigation that we've been working really fortunate to be able to continue to help our customers continued business.

I appreciate the color. Thank you.

Thanks, Josh we appreciate your follow up question. Thank you for joining us on today's call and your interest in little fuse. We look forward to talking with you again soon have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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Yes.

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Yes.

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Good day, everyone and welcome to the first quarter 2022 earnings conference call. Today's call is being recorded at this time I will turn the call over to the head of Investor Relations Trisha <unk>.

Please proceed.

Good morning, and welcome to the little fused first quarter 2022 earnings conference call.

With me today are Dave Heinzmann, President and CEO , and <unk>, <unk> Executive Vice President and CFO .

Yesterday, we reported results for our first quarter and a copy of our earnings release and slide presentation is available in 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 discussions today will include forward looking statements.

These forward looking statements may involve significant risks and uncertainties.

Please review Yesterdays press release, and our Form 10-K, and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward looking information.

Also our remarks today refer to non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website.

I will now turn the call over to Dave.

Thank you Trisha good morning, and thanks for joining us today.

Let's start with slide four building on our noteworthy success in 2021, our global teams delivered tremendous performance substantially above our expectation to start this year.

We achieved record revenues and earnings per share growth as we successfully executed on our strategy and continued to outperform the markets we serve.

Across our electronics commercial vehicle and industrial businesses, we obtained double digit organic growth compared to last year, while our passenger car business outperformed global car build.

Broad end market demand continues to remain strong and our team has resilient Lee managed supply chain disruptions.

Our organic growth trajectory combined with our strategy led acquisitions.

Turning to strengthen and diversify our business.

That said, we are operating within a more volatile macro environment compared to 90 days ago, given events related to Covid and the war in the Ukraine.

In particular, the shutdowns in China due to COVID-19 have impacted our operations, which will impact our second quarter sales and earnings.

Our teams achieved outstanding results driven by increased increasing demand creation across the industrial transportation and electronic markets, we serve and worldwide execution.

We'd like to recognize and thank all of our associates around the world for their ongoing determination to drive record growth by winning new business, making significant strides with additional strategic acquisitions.

Meeting customer demand within a challenging macro environment.

Our strong performance through these unprecedented times is truly a reflection of our great people and the strength of our business.

Moving on to performance within our segments.

Demand for our products was driven by a broad range of applications, including data centers telecom infrastructure industrial automation.

Clients as and automotive electronics.

We expect to capitalize on the ongoing themes around connectivity automation and electrification.

Exiting the first quarter, our electronics book to Bill remained above one and weeks of inventory at our distribution partners are within our normal range underscoring sustained strong ongoing demand.

This demand setup is positive.

But we are working through the resurgence of COVID-19 in China, which directly impacts our electronics business.

Our teams continue to maintain focus on this dynamic environment.

Our transportation products segment delivered solid performance within a challenging supply chain environment.

Our passenger vehicle business was impacted by OEM shutdowns and their lower production levels driven by their ongoing material shortages and the war in the Ukraine.

Withstanding. This we continued to outperform global car build given our increasing product content in the passenger vehicles.

We see a number of ongoing content growth opportunities and expect to continue our market outperformance, despite lower global car build projections.

Our commercial vehicle business drove strong demand for our combined portfolio of legacy and Carling technologies products, driven by our deeper and broader presence across material handling.

Heavy duty truck bus construction, and agriculture equipment Marine and power sports market.

We have a strong order backlog, which sets up for continued performance.

Saw a robust demand in our strategic markets, including industrial safety.

C and renewables.

In North America, we are seeing improving trends in oil <unk> gas and nonresidential construction.

With sustained strength in mining and in industrial MRO markets, while electrical distributors inventories remain lean.

I mean, it will provide additional color on our strong financial performance.

Our ongoing results and successes reflect both the strength of our teams execution and the power of our strategy, which is shown on slide five.

Since launching our five year growth strategy in early 2021, we have aggressively advanced our strategic business initiatives.

We are investing for growth.

Organically and through acquisitions.

Within the structural growth themes of sustainability connectivity and safety.

These investments include resources to partner with our customers as they deploy their applications related to these themes.

We have expanded our product content and captured share gains globally and high growth markets.

During 2021, we also completed two acquisitions aligns closely with our strategic goals.

Heartland controls and HVAC, and Carling technologies, and commercial vehicles telecom infrastructure and renewables all higher growth end markets, adding approximately $300 million in annualized sales.

In April we announced two additional acquisitions.

C N case switches and in bad.

Turning to slide six.

Looking forward to welcoming <unk> employees to the little fuse team upon closing of our announced acquisition.

C N K is a leading designer and manufacturer of high performance electromechanical switches and interconnect solutions with annualized sales of over $200 million and it has historically had EBITDA margins of approximately 20%.

In addition to.

K C N K expands our product portfolio addressable market and growth globally across industrial automotive and Datacom markets, serving as a platform for continued growth.

Our complementary go to market models will continue to strengthen our partnerships with distribution channels.

<unk> technology leadership, and high precision manufacturing miniaturization, haptics and operational footprint will broaden our capabilities, we expect to close the transaction late in the second quarter and look forward to getting the integration underway.

Moving on to slide seven.

Let me begin also by welcoming and bad team little fuse.

Bed is a proven provider of embedded software and firmware developed for a broad range of applications.

This acquisition will help us to better serve our customers by expanding our software design engineering and technical expertise.

We now have additional capabilities to deliver broader hardware and software solutions to our customers such as electronic control modules and systems for transportation applications.

Our nation and controls for industrial applications.

The addition of embed unlock new growth opportunities across the transportation and industrial markets we serve.

Since early 2021.

We're on track to deploy $1 billion in capital for acquisitions aligned with our long term growth strategy, adding approximately five.

$500 million in annualized sales to further diversify and strengthen the end markets, we serve and expand our organic growth opportunities.

Our disciplined approach towards M&A positions us so that newly acquired businesses accelerate our success in higher growth markets through diversification.

Spanned our geographic presence and leverage our core competencies, creating value for all of our stakeholders.

We are very excited about these businesses and their close alignment with our strategic and financial objectives.

Now, let's move on to highlights and design wins in the end markets we serve.

Then our industrial end markets on slide eight.

We continue to generate increased business wins across a broad range of applications to grow our business.

You have to develop technologies to address new electrical safety standards and expanded our portfolio with acquisitions.

During the first quarter, we captured business in the commercial kitchen, and food and beverage industries and enable our customers to meet tighter safety requirements.

Our ability to provide strong technical support across a broad set of higher voltage products have allowed us to secure a global design wins as a result, we secured business and renewables across a variety of applications, including solar wind and energy storage systems.

In HVAC, we continue to secure more business with our expanded product portfolio.

With the breadth of our high quality offerings.

<unk> product content with leading customers and we expect this to continue given our global brand and our sustained focus on safety and sustainability.

Turning to our transportation end markets on slide nine we.

We continue to increase our product content to outperform the market.

Within electrification, our high voltage products secured global business for battery management systems, and onboard charging applications in passenger vehicles and.

In commercial vehicles recaptured business for power distribution and two wheelers onboard charging in buses and rail traction for trains.

We also expanded our business in electric vehicle charging infrastructure applications.

With the increasing complexity of vehicles, we secured business based on our engineering capabilities.

Heavy duty trucks material handling and construction and agricultural equipment.

We're also leveraging products from our successful integration of Carling to grow our business in these end markets.

Within safety comfort and Adas applications, we captured wins based on our product performance.

With our investments for growth and expanded capabilities and portfolio with the addition of Carling and embed.

Very well positioned for continued growth within transportation applications.

Moving on to slide 10 <unk>.

Electronics end markets, we are seeing significant growth from innovative products targeting key end markets.

During the quarter, we capitalize on the proliferation of electronics content across a wide range of application centered around connectivity.

We secured business for data centers and telecom infrastructure with our responsiveness to customize solutions.

In appliances, we expanded our presence with existing customers based on our long term engagement.

In addition, our product features want US business, we're building security systems and general purpose electrons.

Our ongoing success of winning business and our announced acquisition of C. N K will serve as a platform for continued growth.

The organic growth from these new business wins, coupled with our acquisitions.

We'll enhance and sustain our growth and position us to continue expanding our market presence.

I will now I'll turn the call over to Neil to provide additional color on our financial performance.

Thanks, Dave Good morning, everyone and thanks for joining us today.

Let's start with slide 12.

Our team delivered a quarter of record financial performance that exceeded the high end of our guidance.

Revenue grew 34% year over year to $623 million with organic growth of 22%.

The Carling and hybrid acquisitions added, 14% and foreign exchange reduced revenue by 2%.

GAAP operating margins were 24, 2% adjust.

Adjusted operating margins were 25, 6% 850 basis points higher versus last year.

First quarter GAAP diluted earnings per share was $4.70 adjust.

Adjusted diluted EPS was $4.99.

87% over last year.

The strength of our results in the quarter was led by our electronics segment, but overall demand was stronger than we had expected which included improved shipping rates as we work through the logistics challenges.

Our operating margins reflected strong sales volume and related leverage we ended the quarter positive on price cost as our teams remain focused on offsetting ongoing inflationary headwinds.

Given the current market conditions and the ongoing customer discussions we're having on pricing we expect to stay positive on price cost for the remainder of the year.

And as I've been referencing the past several quarters, we continue to have margin benefits from lower than typical discretionary spend even as we continued to invest for growth across our businesses.

We generated $52 million in operating cash flow in the quarter and $22 million in free cash flow.

This reflects the higher working capital and capital expenditure investments, we've been making to support our revenue growth.

And higher cash compensation payments related to last year.

We've also continued our strategic direction to carry higher inventory levels to help mitigate supply chain risk and sustained service levels to our customers.

Turning to slide 13, our capital allocation priorities remain in full alignment with our growth strategy.

We continue to prioritize reinvesting in our business for both organic growth and for acquisitions to diversify and expand our value proposition to our stakeholders.

Since we shared our updated five year strategy with you last year, we committed to deploy $1 billion in capital to further our growth trajectory from acquisitions.

Our constant focus on cash generation is allowing us to find more than half of that deployment directly from our balance sheet.

While we plan to take on additional debt in the near term for these acquisitions, our leverage will remain comfortably within our target level.

Moving onto our segments on slide 14, let's start with electronics.

Revenue in the quarter grew 28% and 29% organically.

Operating margins were 33%, reflecting strong price cost benefits.

Favorable regional and product mix and ongoing volume leverage at these record revenue level.