Q2 2022 Littelfuse Inc Earnings Call
[music].
Good day, everyone and welcome to the Little Fuse, Inc. Second quarter 2022 conference call.
Today's call is being recorded.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
At this time I will turn the call over to the head of Investor Relations Trisha Chaplin. Please go ahead ma'am.
Yes.
Good morning, and welcome to the <unk> second quarter 2022 earnings Conference call.
With me today are Dave Heinzmann, President and CEO .
Now executive Vice President and CFO .
Yesterday, we reported results for our second 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 discussion today will include forward looking statements. These forward looking statements may involve significant risks and uncertainties.
Yeah.
Please review yesterday's press release in our forms 10-K, and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.
We assume no obligation to update any of this forward looking information.
Also our remarks today refer to non-GAAP financial measures.
A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website.
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 which provides an overview of recent highlights we.
We delivered very strong second quarter results.
Which were above our expectations. Our continued outperformance within a volatile environment was driven by strong customer pull and a persistent operational execution of our associates.
We achieved revenue growth of 18%.
And expanded adjusted earnings by 25% compared to last year.
Across our electronics transportation and industrial segments, we attained double digit sales increases driven by demand creation for a broad range of products and our leverage our capabilities and resources from our recent acquisitions.
Our first half.
Sales and earnings growth is a testament to our global team's execution across the breadth of our end markets within the structural themes of sustainability connectivity and safety.
Advancing our strategic initiatives on July 19th.
We completed our previously announced acquisition of TNK switches.
I am excited to welcome <unk> to our organization.
TNK significantly expands our ability to serve our customers with market, leading technologies capabilities and talent.
Later, I will share more on the strategic rationale for TNK.
Consistent with our capital allocation priorities, we have increased our quarterly cash dividend by 13%.
This deployment reflects our confidence in our long term growth of the business and commitment to return ongoing value to shareholders.
I would like to thank all of our associates around the world for another great quarter.
Our global teams have relentlessly overcome daily obstacles to fulfill customer demand while working safely.
Sean also show them their ongoing passion and commitment to advancing our sustainability initiatives across the organization and we look forward to sharing our continued progress when we publish our report later this year.
I'm, particularly proud of our sustained success, which is an outcome of our highly skilled people and the innovative reliable solutions, we deliver to customers, which continues to differentiate our company.
Moving on to performance within our segments.
Our electronics products segment delivered revenue growth across all regions, along with strong profitability driven by our diverse product offering and go to market strategy.
In particular demand for our products was driven by our customers' applications, enabling greater connectivity and sustainability.
Factoring in building automation and data centers telecom infrastructure energy efficiency electrification of vehicles and charging infrastructure.
Exiting the second quarter, our combined electronics book to Bill was hovering around one with continued strength in sell through from our channel partners.
Average weeks of inventory at our distribution partners are at the upper end of the normal range. However, where there are some pockets where inventory remains Lee.
Our transportation products segment delivered solid performance in a tough.
Environment.
Our passenger vehicle business was impacted by tier ones unwinding last year's inventory build.
And lower OEM vehicle production due to the ongoing material shortages COVID-19 lockdowns in China and declining carville forecasts.
Since 2019, our passenger vehicle business has grown high single digits on a compounded annual basis, while global car production has declined high single digits.
We see a number of ongoing content growth opportunities with electrification electronic vacation and Adas and.
And expect to continue our long term market outperformance.
Within our commercial vehicle business, we have a robust order backlog driven by demand for our combined portfolio of legacy <unk> products and our record revenue reflects our ability to fulfill demand, notably we've been able to drive strong output increases at our Carling factories.
And as a result, we are realizing growth above our initial expectations for this acquisition.
Looking ahead, we see a healthy backlog pattern with particular strength in demand for our carling product groups.
And our target markets continue to show strength across material handling construction and agriculture equipment.
Turning to our industrial product segment, our ability to cross sell.
<unk> solution sets to include multiple technologies, while enhancing operating efficiency and productivity delivered record revenue performance and strong profitability.
We continue to capitalize on our robust demand in our strategic markets across electrical safety.
Renewables and HVAC.
A large part of our success comes from enabling our customers' applications focused on sustainability.
Solar energy storage systems, and charging infrastructure to support vehicle electrification.
We're also seeing robust demand for general industrial electronics applications like data centers and cloud computing.
Looking ahead, the underlying fundamentals within our strategic markets remained strong.
Nino will provide additional color on our strong financial performance and third quarter outlook.
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.
We are investing for growth, both organically and through acquisitions within the structural themes of sustainability connectivity and safety.
Early 2021.
I'll add $1 billion in capital for acquisitions, adding approximately $500 million in annualized sales to further diversify and strengthen the end markets, we serve and expand our organic growth opportunities.
Building on our acquisition of Heartland controls and HVAC.
Carlin technologies in commercial vehicles telecom infrastructure, and renewables and embed in transportation and industrial applications. We are pleased to complete our acquisition of <unk>, which serves a variety of end markets.
We continue to make organic investments in the business to advance our new product development capacity expansions digital presence and sustainability initiatives.
We are confident the investments we are making and will continue to deliver long term profitable growth and returns for our shareholders.
TNK brings over 90 years of experienced a little fuse and is a leading designer and manufacturer of high performance electromechanical switches and interconnect solutions.
The strong global presence across industrial transportation, aerospace and Datacom and markets as reflected on slide six.
We are very excited about the addition of CDK and its close alignment with our strategic priorities.
Our disciplined approach towards M&A positions us to accelerate our success in higher growth markets through diversification expands our geographic presence and leverages, our core competencies, creating value for all of our stakeholders.
Moving on to slide seven.
The combination of our companies significantly expands our technologies and capabilities, enabling us to deliver a comprehensive solution offering to our broad customer base.
<unk> enhances our technical and application expertise.
Engineering and design capabilities, and our technology leadership and high precision manufacturing miniaturization and haptics.
Our businesses are highly complementary and enable us to leverage our collective partnerships with distribution channels OE.
AUM relationships and global footprints, including expanded capabilities in India and Vietnam.
The integration is underway and we look forward to leveraging our respective strengths.
Now, let's move on to highlights and design wins in the end markets we serve.
Within our industrial end markets on slide eight we are generating new business with our applications knowledge and breadth of products, we are expanding solutions that focus on sustainability.
During the second quarter, we secured business by delivering multiple technologies or large scale and home based energy storage systems with a large scale battery manufacturer our product was designed in into battery formation equivalent.
In HVAC, we captured opportunities based on our customer relationships and cross selling capabilities.
Within industrial safety applications, New standards continue to drive elevated design activity to achieve compliance with our reputation for engineering and reliability.
Spaniard our market position in commercial kitchens for electrical systems in buildings.
With our major restaurant chain and with a beverage equipment supplier.
We also won business for welding equipment used in electric vehicle collision repair shops.
<unk> and elevators and industrial power grids.
With our diverse high quality offerings, we are increasing product content with leading customers and expect this to continue.
Theyre intensifying focus on sustainability and safety.
Turning to our transportation end market on slide nine.
We are expanding our wins with the electrification of vehicle platforms.
During the second quarter, our investments in engineering, and new products allowed us to increase our positions across multiple applications within an electric vehicle, whether a hybrid or full battery electric vehicle.
Our early engagement reputation for quality and strong high voltage technology portfolio secured several opportunities in battery management and protection high voltage power distribution and onboard Chargers for off board of electric vehicle charging our technical support and product performance secured siggi.
<unk> new business.
With the global ongoing transition to electric vehicles, our company is playing a tremendous role, enabling our customers applications and we look forward to expanding our presence with them in this high growth end market.
Or traditional passenger vehicles, we expanded our leadership with our wide range of products, given the increasing functionality and complexity and architectures.
In automotive electronics, we won global business, our long term relationships and reliability for telematics infotainment and comfort and convenience applications.
In commercial vehicles, we captured business and our strategic end markets.
With an existing European customer and heavy duty trucks are unique technical solution met stringent customer requirements, which won us new business.
In electric buses, we secured a project with our high quality Carling products.
We are pleased with our early integration success, when we see a broad range of sales synergies ahead of us.
And electric two and three wheelers, we won business for battery management systems and powertrain control modules.
For commercial vehicle charging infrastructure, we expanded our wins for forklift applications.
With our investments for growth, including expanded capabilities portfolios with the addition of Carling and embed, we're seeing new business opportunities, which continues to position us well for continued growth within transportation applications.
Moving on to Slide 10, electronics end markets greater connectivity requirements continue to drive favorable macro trends during the second quarter, we won business for data centers and telecom infrastructure based on product features and delivery support.
These wins also included products from our Carling acquisition based on a strong global presence and telecom applications.
We're building solutions are far reaching go to market model and deep portfolio enabled us to secure a multi technology business wins for security systems and smart doorbell.
Our long term engagement support and the ongoing push towards expanded efficiencies and safety drove wins and appliances and general purpose electronics.
Our pipeline of new business opportunities is robust and further expanded with our completed acquisition of <unk> and K U.
We look forward to building on our collective market positions with our various industry, leading brands. Our combined successes of winning business will serve as a platform for continued growth.
We are extremely well positioned to expand the proliferation of our electronics content across a wide range of applications centered within sustainability connectivity and safety.
Our new business wins have been significant.
And represent a diverse range of end markets and applications.
We've also worked hard to build a robust pipeline of new business opportunities that I am confident we will succeed we will secure with capabilities and differentiated solution.
We fully expect that the organic growth from all of our new business activities, coupled with our acquisitions will enhance and sustain our long term growth.
I will now 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.
Let's start with slide 12.
We delivered another strong quarter of performance exceeding the high end of our sales and earnings guidance.
Revenue was $618 million up 18% over last year and up 10% organically.
Our Carling acquisition added 11% for.
Foreign exchange reduced revenue by 3%, mainly due to the weaker euro.
GAAP operating margins were 21, 7%, while adjusted operating margins were 22, 6% up 310 basis points versus last year.
Adjusted EBITDA margins were 27% up nearly 300 basis points over last year and solidly above our 21% to 23% EBITDA margin target.
Second quarter GAAP diluted earnings per share was $3 48, and adjusted diluted EPS was $4.26 up 25% over last year.
Our GAAP effective tax rate was 26%, while our adjusted effective tax rate of 17, 3% slightly higher than we'd expected due to earnings mix across jurisdictions.
We continued our strong performance led by our growth and positioning across a number of diverse end markets, we'd call out headwinds related to the China, lockdowns, which extended longer than we had expected.
We recovered quickly and we're able to offset some of the sales impact with strength across other markets.
Our teams have continued to manage pricing to offset the ongoing inflationary pressures. This along with continued focus on productivity improvements as reflected in our above target margin performance.
We were price cost positive again, this quarter and expect to remain positive for the remainder of the year.
We continue to invest across our businesses for growth and for scale, while maintaining discipline on overall spending levels.
We had a strong cash flow quarter generating $114 million in operating cash flow.
We generated $87 million in free cash flow, 100% conversion of net income.
The continued depth of our cash generation gives us ample capacity to execute on our capital allocation priorities shown on slide 13.
Our first focus remains ongoing investments to enhance our organic growth.
And with the acquisition of <unk> K, we deployed $1 billion in capital on for acquisitions in the past 18 months diversifying our end market reach by adding capabilities and talented teams across the company.
Our board of directors approved a 13% increase in our quarterly cash dividend last week.
Since inception in 2010, our dividend has grown 12% on a compounded annual basis, reflecting the power of our long term strategy and resulting earnings growth.
Over the past few months, we've strengthened our balance sheet by reducing costs and improving terms on over $700 million credit facility and outstanding debt.
Through mid July we took on $400 million of additional debt to support our growth investments.
Incorporating this activity and the acquisition of <unk> K, a pro forma debt to EBITDA leverage remains at the low end of our target range.
Let's move to commentary by segment on Slide 14.
We've added an EBITDA margins by segment to provide enhanced comparability, given the breath of our organic and inorganic investments.
Starting with electronics second quarter revenue grew 13% organically.
Operating margins were nearly 30% with EBITDA margins approaching 34%, both expanding over 600 basis points over last year.
We continue to drive positive price cost and to pursue productivity enhancements.
We expect the combination of our execution and current market dynamics will sustain segment operating margins averaging in the mid 20% range.
On slide 15, our performance across transportation reflects the very dynamics across our markets.
Our commercial vehicle business grew 6% organically and we're pleased with outperformance across our recently acquired carbon business.
Organic sales across passenger vehicles were down about 8% affected by tier one unwinding last year's inventory build in global auto production decline.
Operating margins were 10, 1% and EBITDA margins nearly 16%.
Currency negatively impacted margins 200 basis points, along with negative volume leverage from lower auto sales, which more than offset benefits from price realization.
On slide 16 industrial.
Industrial sales were up 22% organically.
Operating margins of 19, 5% and EBITDA margins over 22% both expanded over 600 basis points, driven by price realization and ongoing operational execution.
While we also benefited from reduced logistics costs in the quarter due to the China Lockdowns, we will see the inverse impact in Q3 as we resumed operations.
Our teams have driven outstanding performance year to date with 26% sales growth versus last year over 500 basis points of margin expansion and adjusted EPS growth of 52%.
We prioritize high growth markets reinforced the value, we drive for our customers, while managing external disruptions and risks with agility.
Moving to slide 17.
Demand remains strong across our end markets, including industrial transportation and most electronic periods, but we are seeing some softness in consumer oriented end markets, such as appliances and personal electronics affecting our electronics segment.
For the third quarter, we expect sales in the range of $630 million to $644 million up 18% versus last year, and 2% organic growth at midpoint.
This assumes about 20% growth from our acquisitions.
With the stronger dollar we are estimating sales headwinds of 400 basis points in the quarter and approximately 300 basis points for the full year.
We are projecting third quarter adjusted EPS to be in the range of $3 71 to $3 87.
<unk>, 4% versus last year at the midpoint and assuming a 17, 5% tax rate.
We are projecting a full year adjusted effective tax rate in the range of 17% to 18%.
A few key points on our third quarter first on acquisitions. Our forecast includes two and a half months Marci and K acquisition, which is accretive to EPS.
With two sizable acquisitions, new to our portfolio in the past few quarters and integration in early stages, we're seeing about 150 basis point dilution the company operating margins versus last year.
We also navigated through a China COVID-19 driven lockdown at another one of our sites in July which is now back to normal operations.
The combination of this shutdown and recovery from last quarter, or a 200 basis point headwind to sales and about 150 basis point impact to company margins versus last year affecting the industrial and electronics segments.
Slide 18 includes additional assumptions for the full year.
We'll have five five months of <unk>, K, and our 2022 results, which assumes about $90 million to $95 million in sales and about 25 cents of EPS net of ongoing deal amortization.
This increases our estimated 2022 amortization expense to $55 million and a four run rate of $16 million per quarter.
With our additional debt issuance, we expect $27 million in interest expense for 2022, and a forward run rate of $95 million a quarter all at current interest rates.
We are maintaining our projection of 100% free cash flow conversion and estimated $110 million to $120 million in capital expenditures for the year.
I'd like to thank our associates for delivering on our commitments to our stakeholders, who count on us.
We were an everyday.
And with that I'll turn it back to Dave for some final comments.
Thanks Neil.
In summary on slide 19, we have delivered very strong year to date performance, which reflects our global team's unwavering commitment and hard work to drive our results.
With our ongoing deployment of resources and capital to enable customers applications, we remain extremely well positioned to further capitalize on current and future growth opportunities within the global structural themes of sustainability and activity and safety.
We continue to focus on what we can control to drive our performance within a volatile market.
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 turn the call back to the operator for Q&A.
Thank you 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 were using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Nick Todorov of Longbow Research. Please go ahead.
Yes.
Thank you Hey, good morning, everyone and congrats on another quarter of strong results and execution.
Maybe first question I would like to zoom on an.
Organic outlook.
I think you talked about mobile.
Can you hear me.
Yes, again I'm sorry.
I think you talked about multiple puts and takes but I'd just like to zoom in and kind of understand the organic outlook of 2% year over year and <unk>. So a slowdown relative to recent quarters, maybe talk about some of the dynamics impacting that and what are you seeing any signs of inventory adjustments outside of what you call. It.
And tier one automotive.
So let me start with nicotine Neil let me start with just I'll.
I'll give you a frame on sales year over year in that 2% organic.
Really starting with 18% growth overall.
We've made a significant number of acquisitions and so about 20% of the growth is coming in from from the acquisitions on a year over year basis.
We've also talked now about FX headwinds and that's that's taken off about four 5% or sell off the top line for us and Thats kind of where we frame out at a 2% organic embedded in that 2% organic as well we talked about two is doing two items in our prepared remarks, one was the.
Fact that we had an additional COVID-19 shutdown.
In July we were able to continue partial operations operate in a bubble et cetera that is hampering a little bit of our third quarter as well as the fact that with the shutdowns in the second quarter, we were able to sell related to Covid, we were able to sell out of inventory, but we've got inventory in production that we've got to build back up and that's also hampering.
Sales in the third quarter, and then I'd say lastly, we also talked about a little bit of softness that we're seeing in a couple of our end markets small portion, but what I call the consumer oriented appliances and personal electronics, that's also hampering organic a little bit.
And then you also wanted some color just overall on an electronics in general.
Yes, Nick so youre kind of asking about.
The inventory position and what's going on there first of all I would say.
POS from our distribution partners in the electronics side continues to be very robust.
Strong Pos so the end markets continue to be quite strong except for as Neil talked about.
A small portion of it.
Personal electronics sort of space. So thanks tablets small appliances white goods that kind of an area, but overall demand continues to be very robust. We also talk about what's our normal inventory level.
With our distribution partners in electronics and for our broad line distributors that normal range is somewhere in the 11 to 14 weeks of inventory.
And as we've talked about the prepared remarks.
Overall, we are in the upper portion of that normal range. However, there are still also pockets, where we have some lean inventory position still as well in the channel.
Got it very helpful.
Second question I have is.
Gross margin of 42, 5% really stood out I think if I go back in my model I think it's a record going back to 1998.
So maybe can you talk about some of the puts and takes impacting that I think I know you talked about price cost being positive.
I think previously you anticipated that to be the case in the first half and now it seems like it's going to be a second that's going to continue to the full year. Maybe can you talk some of the reasons behind that and the sustainability of the gross margins at these levels.
Yeah, So I've talked about the fact in general right price cost has been.
It has been very strong around that just the fact that our teams have done really a tremendous job, where we have seen those inflationary costs tick up.
We have gone back to our customers really we articulating the value that we're providing.
Really making sure that that that value stands out and that's where really our pricing actions have come from and also.
Robust times like this this is where our teams really shine they've done really a tremendous job around.
Ill generally call operational execution, but where you hear a lot of a lot of folks talking about supply chain challenges, we face them head on and we've really been able to navigate through those well and simultaneously. We're continuing all of our productivity initiatives that those include collateral lien activities automation you have talked about the fact that we while we are.
Not very heavily capital intensive we're very prudent about spending capital, where the automation and the payback makes sense and we continue to do that some of these past few years, so you're really seeing it really seeing that shine through in our results.
Got it thank you guys.
Thanks, Nick appreciate the questions, we'll take our next caller please.
Our next question is from Matt Sheerin of Stifel. Please go ahead good morning, Matt.
Yes, hi, good morning.
Yes.
Yes.
A question regarding your guidance if.
If you exclude the addition of <unk> it looks like Youre guiding revenue down sequentially.
It sounds like you talked about some of the issues in Asia.
Providing a headwind but are you seeing with that book to bill at normal levels within electronics and in inventories at the high end or are you starting to see adjustments are you expecting overall electronics to be down sequentially and.
I have a follow up thanks.
Yeah.
I would just go back to some of my year over year comments on sales, which are very similar to sequential.
Hey, Matt.
Sales growth coming from the <unk> acquisition about two five months is that ourselves. So that's embedded in there but on the flip side FX headwinds continue even versus last quarter, where we've seen some weaker currencies, especially the euro that's that's a bit of a headwind and then the two other pieces that I mentioned that Dave also articulated.
Around I'll call it a little bit of this COVID-19, China now because we were not expecting to have another partial shutdown in the third quarter and so that's that's hampering a bit in the third quarter and there's just a little bit of that softness in those consumer oriented market. So overall end markets remained strong, but we're seeing.
Bed softness that I would say.
We're also starting to enter into a point, where we're at a pretty peak revenue level in terms of where we've come from when we take a look at growth over the past two years. So the growth is continues to be strong.
We've grown so much over the past six to eight quarter and said youre going to see a temper off a little bit.
Hey, Matt on the electronics side.
Other than the small pockets, where you talk about the mainland mentioned are and we mentioned in the prepared remarks.
Yes.
Personal electronics space small appliances that kind of thing, which particularly in Asia, where a lot of that demand for from our customer base has softened a little bit but the broader electronics market continues to be still a really strong Pos that we're seeing so we're not expecting some major.
Shifts there.
Could you remind us what percentage is the personal electronics segment is of your electronics business lessons.
Yeah overall as a company less than 10% certainly within electronics as well below 20%.
So.
That's an important aspect, but it's certainly not the majority of the business.
Okay. Thank you and then.
On the margins it looks sort of backing into operating and gross margin. It looks like gross margin could be below 40% for the reasons you talked about but as we think about Q4 would you expect to see some.
Some of those offsets actually come back and improve in Q4, I know that typically Q4 your margins are down because some of your markets are down, but how should we think about margins going into the back.
Over the last quarter of this year.
Yes.
I'll talk about Q3, a little bit and then we can think about Q4.
If I just talk ally margins first I can write a lot of which is gross margin.
Made now some pretty significant acquisitions over the past few quarters and as we've always said we have an integration plan, we have value drivers that we're going after but in the early tenure of owning those acquisitions they tend to be a little bit margin dilutive and that's that's also going to affect gross margin.
Because thats, where a lot of where our value creation comes from so that's about 150 basis points. When you think about that in terms of margin dilution.
Secondly, as foreign exchange rate that has a direct impact also on gross margin. So that all that don't know where rates are going to answer that the impact of that on the fourth quarter. So I'd say those are probably the two biggest ones I would expect the acquisition dilution will still be there.
As we get into the fourth quarter, I think FX remains to be seen.
Okay. Thank you and then just one quick last one.
Immuno in your opening comments you talked about.
Operating margins in electronics.
You said going forward. The target is in the mid Twenty's was that sort of a near term target or longer term I think your longer term target has been below that.
Yeah great.
Great question, Matt So what I talked about was averaging in the mid twenty's with the with the current dynamics and by the current dynamics I'm talking about at this this really unique time that we've really not seen before where you've got inflationary pressures that we've been able to to offset with pricing. So we've seen some some very strong.
Price realization, coupled with the volumes that are coming from.
We think in this current environment of current dynamics, we'd be able to maintain the average 20% through the cycle.
Through the cycle, Okay, alright, thanks very much.
Thanks, Matt appreciate the questions, we'll take our next caller please at Stifel Nick.
Next caller is Luke junk from Baird. Please go ahead.
Morning, Luke Good morning, Thank you for taking the questions two transportation related questions for me. This morning first of all let's start with the growth.
Just hoping we can impact the transportation growth down mid single digits all in this quarter.
What it would mean potentially for the remainder of the year would you anticipate any.
Impacts either year over year sequentially from channel dynamics or is there anything else that we should be baking into either the third quarter or the second half in that segment from a growth standpoint.
Sure.
As we've talked about in the prepared remarks, we saw our revenues in the passenger car portion of our transportation down.
In a market, where <unk> was kind of globally down 4%.
Stop first of all I'll kind of take a step back and remind that if you look at the last two years for US we've had mid teens outgrowth.
Two years running in the past car portion of the World and we talked about last year some of that being inventory build for our customers that were being <unk>.
Pushed by their OEM customers to build their inventory position. So some level of revenue growth last year was inventory build so if we look at our third quarter I think it's kind of a combination of two things one is well we don't have an inventory build in this year yes.
<unk> last year, so in the comparative quarter to year over year.
Yeah automatically get some decline because we're not building inventory and then on top of that we did see some inventory online. So the bulk of kind of that down portion of our revenues.
And the pass car side was driven really by that inventory kind of positioning. So we continue to still feel very strongly about.
Likely over achieving kind of the 3% to 4% outgrowth that we have in our long term strategy.
Okay, Great color I appreciate that Dave and then maybe a question for me on the margins in that location just hoping we could walk through you gave some commentary on the year over year margin Bridge I was hoping we could also look at it sequentially versus the first quarter, where the margin look more towards the mid teens.
<unk> just want.
Want to understand if there was anything onetime in nature in that first quarter number that would sort of hamper the comparable to what you reported in the first and the second quarter and then just anything else that might have changed sequentially, we should be aware of in the market.
Oh.
Yeah.
I would say.
From where we are the some of the drivers that Dave talked about from whether it's year over year or sequential Theyre really also impacting margins as well the I'll call. It the negative volume leverage from seeing some of the inventory unwind that's going on that's definitely hampered the margins I'd say that some of the newer.
Issue that we're seeing is foreign exchange also.
Our our transportation business is quite global in nature, we're selling multiple customers around the world in multiple currencies and I would say with the stronger dollar that's definitely impacted us and I would say even in parts of our commercial vehicle business, where we really operate as a tier one component prices and inflationary.
Comps there are still a little tough and so while the team has done really a tremendous job around really pushing on price realization to ensure.
That our value is recognized that's still taking longer than it would versus where you are with the OEM customer in person.
With our customer base is different.
Okay.
Okay, great. Thank you for the color I will where I go ahead or we would have.
Thanks, Luke I appreciate your questions, we'll take our next caller please.
Our next caller is Josh Buchalter of Cowen. Please go ahead.
Good morning, Josh.
Hey, good morning, Thanks for taking my question again.
Uh huh.
Okay. Thank you John .
I wanted to ask a bigger picture, we've asked a lot about the gross margin.
Let's talk about sustainability of diesel.
Yes.
They are above.
Rates that you've sort of talked to on the long term. Despite the inventories normalizing the last couple of quarters.
A reflection of I don't know any.
Realization from the customers of the value of the products you are bringing your relative pricing power I was just hoping.
Discuss the sustainability of levels going forward.
Sure Josh you were breaking up a little bit, but what I took away from your comment is.
We've had some very strong margin profile for past few quarters and youre asking about the sustainability of that is that what I heard.
In light of that.
Your inventory at your customers sort of normalizing. Thank you got that right.
Yeah, So I'll take a step back on what we've what we've been talking about even going back to our Investor day from about 18 months ago, We've always talked about across the company a target margin profile in the high teens in that 17% to 19% averaging towards the cycle. So for us what that means is.
Yeah, they're definitely going to be some quarters, where we're going to see stronger margin profiles and that I would say again I keep coming back to a lot of the operational execution that we've gone through which includes making sure customers understand the value we provide and just the internal work we're doing we've definitely driven these.
<unk> margins, but knowing that we have businesses where markets can go up and down at times.
We'll probably see some different movement in different swings thats why we tried to talk about an average through the cycles and we still stand by that in terms of our company margin high teens.
Sure.
Understood. Thank you.
In the deck, you called out a number of different <unk>.
<unk> related wins in content drivers any way that you can help us understand sort of what levels that.
Providing now to the segments revenue.
Sort of can try to contextualize, how that could help insulate for many potential digestion or continued.
Unit weakness going.
Thanks, and congrats again.
Yes.
Trying to understand exactly what EV.
EV wins are driving as a portion of the business becomes.
Kind of a complex question from our standpoint, when we're talking about end market wins, that's really about the applications in the markets we're serving.
A big portion of that certainly comes from our transportation segment, but we also see wins in E mobility, driven out of our electronics products that are being designed in heavily think.
Battery management BMS systems be it battery management systems battery protection systems.
Broader electronics in it around the Evs that.
That kind of show through as well even in our industrial products, we sell in design and products into <unk>.
We're charging in support of EV, so kind of from a broader sense, it's hard to kind of dial in exactly what that is but certainly from an outgrowth standpoint in our transportation business.
The bulk of the outgrowth is coming from the transition to E mobility.
So our content opportunity.
And a fully electric vehicle or a hybrid.
<unk> dramatically.
And that drives that content story for us because remembering that our 12 volt products. So the 12 volt systems in the vehicle continue on for the most part.
So really the high voltage systems tend to be additive to the content opportunity for us. So it's certainly the biggest driver of growth in our passenger car applications.
Thank you John for your question.
Uh huh.
Again, if you have a question. Please press Star then one on.
Our next question comes from David Kelley of Jefferies. Please go ahead.
Good morning, David.
Hey, good morning, Dave and Tricia, maybe following up on that last point, Dave I believe you noted.
Significant new business and off board charging I was just hoping you could maybe elaborate on that comment if that's a single customer win kind of multiple wins, you've been accumulating and maybe if it was specific.
Either fast charging or our level two.
Yes.
And David as we've talked about in the past our business tends to be a business of.
Yes singles or doubles, so there aren't massive singular wins that drive the business forward. So if you think about off board charging.
Had multiple wins with many different customers that we serve.
In the passenger car side, but also the commercial vehicle side.
So think about everything from our electronics kind of control systems and that side to high voltage over current protection. So some of our industrial type of users that get used in those applications. Some of our power semiconductor products that are used in the power conversion in there and we kind of get.
Winds up and down the spectrum of <unk>.
Level, one charging but certainly.
So the biggest opportunity is the content.
In high speed charging in the direct DC to DC charging.
We're getting good opportunities there as well again, both on the passenger cars side as well as commercial vehicle side of things as well.
Okay got it that's helpful and just as a follow up can you remind us of the dollar content opportunity you see in.
Yes kind of the ramp up of level, two and fast charging opportunities.
Yes.
As you're aware right. The designs of these systems vary wildly by end customer.
So the content story.
It's difficult to kind of pinpoint to a singular definition to that but if you think about a level one charging it's quite small right.
Relatively I think a couple of dollars of content.
In a level one charging but you go to all the way up to fast D. C. Charging it can be hundreds of dollars in that space, particularly when you think about power semiconductors and the applications there, but in addition to power semiconductors <unk> got industrial type fuses you can have ground fault ground track sorts.
Relays that can get designed in so really varies dramatically on whether it's fleet based charging or whether it's kind of.
Consumer oriented sorts of DC fast charging.
So lots of different opportunities every loss content.
Okay got it. Thank you and then maybe a quick follow up on the July Covid shutdown.
Just wanted to confirm that that is in the rearview mirror and back up and running and then B, maybe if you could get us give us a little bit of color on kind of the impacts.
To industrials and electronics segments, I think theres, some some cross impact there.
Yes, let me give you a little bit of color on it I mean, I can follow up with what kind of any details on it but yes, the third quarter shutdowns lockdowns that we've seen kind of outside of Shanghai that impacted us. The good news is our teams had plans in place to deal with that Curt quickly created a bubble will continue to be able.
To operate it did have an added cost to operate of course as you kind of build out a bubble.
But for the most part we were able to keep production running at a reasonable level. Unfortunately only lasted about three weeks that's behind us.
Kind of the interesting carryover if you will from Q2 is particularly on the industrial side of our business, but also a little bit on the electronics.
Think about the fact that particularly on the industrial side, where things are being built inventory that we carry to serve customers who are heavily in North America, plus everything on boats coming to and from so in the second quarter, even though we had shutdowns of more than two months.
In some operations, we were able to continue to sell out of inventory continue to sell out of stuff that's on the boat right.
Is it as it arrives.
Get into the third quarter now that hole, if you fill it created by a couple of months of shutdown.
Kind of bleeds over into the third quarter, and really has more of a revenue impact into our third quarter.
Yeah, and let me just I'll just add a couple of the financial details with all the questions on what that means for us sequentially.
Again right on the sales side with everything Dave just talked about but I call. It a transitory more of a transitory issue, where we thought we will see a little bit of a dampening on sales in the third quarter because of that inventory build and because of the bubble that we were operating in its a little lower production in the third quarter that does have an impact.
On margins operating that and that's that's where you see the.
Ally impact a little bit and then unrelated to that the other thing I just wanted to bring to your attention. When you think about EPS unrelated to the ally margins, we have taken on additional debt as part of our capital deployment strategy and all the acquisitions, we've done and the interest expense around that additional debt is also hitting.
EPS, it's about 15 cents on a sequential basis. So I just wanted to make everybody aware of that as well.
Okay, great. Thanks, everyone.
Thanks, Thanks, David with your questions, we'll take our next caller. Please.
The next question comes from David Silver of CL King. Please go ahead.
Good morning, David.
Yes. Good morning, Thank you.
So I had a couple of questions, maybe bigger picture and maybe.
A little bit more customer focus right now but.
I wouldn't have mentioned this in context, the transportation segment, but I guess, it might touch one or two others, but.
Theres been a persistent chip shortage in some other.
Shorted part shortages that have persisted now for quite a while and I know that you or your development efforts are focused not just on the current.
Generation of products, but the next generation.
And I'm just wondering if the persistence.
The.
Inability to kind of.
Run at full production.
Is that creeping into the customer thinking at all in terms of lack of confidence about the timing and the reliability of kind of their ability to get.
The next generation of automotive.
<unk> electronics or.
Parts of the EV infrastructure, either under the hood or or outside.
Words has your have the development timetables of your major customers been impacted in any way by the <unk>.
Persistence of.
Of the chip shortages and other supply chain issues. Thank you sure yes. So.
Yeah, Let me take a step back and look at that so clearly our customers in transportation and elsewhere have been dealing with shortages in ongoing issues there and so it certainly has impacted their approach to their design activities in there.
How they approached developing new products.
Two things I would say one is and you asked specifically about like E mobility electrification.
What we've seen is a very strong focus from our transportation customers on that as a primary axes of design in activity.
It does impact from the standpoint is there much more careful about how they choose what types of chips.
Are there multiple sources for them et cetera, like that impact their designs.
Because sometimes in history. They would use legacy products that have kind of been around a while and maybe arent being reinvested and by the semiconductor manufacturers, but it didn't really matter because capacity was there.
It's altered their activity I'd say E mobility has certainly been the primary focus for them.
I'd say in kind of legacy areas, where I would say is engineering efforts have been derailed a little bit if you will by the fact that they have done a lot of work on.
Qualifying alternative products and things like that that just finite resources resources has been working on that instead of doing redesigns for cost improvements or whatever.
So it certainly has an impact, but I don't see it as a kind of.
Overall arching long term impact.
To how how new development is going on in those areas.
We feel okay about it.
Okay, Great and the next question would just be on the.
M&A funnel, I guess and maybe you're thinking about the next opportunity. So you did highlight your success in concluding a number of deals. It's my opinion that may be the last step to getting those the carling or the C and K deal done was made.
Maybe some uncertainty on the part of the seller and they may be.
Kind of met your disciplined standards some of it you didn't adjust your standards they've just adjusted their asking price that's my opinion.
But I'm just wondering looking ahead do you still see a very active acquisition funnel and.
Following CK looking at your balance sheet is theres still capability too.
Move forward, maybe with the next opportunity. Thank you.
Alright, David.
What I would say is yes, our funnel activity continues to be robust. So theres a lot of optionality and a lot of areas that we continue to evaluate and look so robust activities there.
From a capacity standpoint, as <unk> talked about the prepared portions proportions of the comments.
Our leverage still remains at the lower end of kind of are comfortable range of leverage from a financial perspective from a capacity of our people within internally.
You know we tend to have.
Acquisitions, driven and owned by the business units. So it varies dramatically by business unit and how busy they are where they are focused and where they're at in the digestion of the business. So TNK in our electronics business of course, just closed so they are pretty engaged pretty pretty.
Yeah.
Ensued in those early days of integration.
Are there areas, where maybe we made an acquisition there was a year ago, a year and a half ago, they've kind of gotten through the early stages of it and they've kind of.
Got it moving forward so from a capacity standpoint from a human capital. We also continue to have capacity available to do that.
So those are kind of a reminder of the areas. We look that continue to look attractive for us are the industrial space that we like commercial vehicle continues to be an area that we think theres opportunity.
So I always consolidation opportunities for us to look at it as well so.
The final activity seems to be robust.
And we will continue to look for opportunities.
I appreciate the color. Thank you.
Thanks. Thanks for your question, David we'll take our next.
Yeah.
The next question is from Luke junk with Baird. Please go ahead.
Good morning, Thanks for taking the follow up just a quick follow up for me then alright in terms of the electronics channel from discussion of.
Your inventory at distributor customers gave you had also commented in the past and what Youre seeing in end user customers, including e-commerce customers.
Just hoping you could give an updated perspective on that part of the market as well. Thank you.
Sure sure.
Certainly if you follow and you look at Ams skies.
Public and <unk>.
Their data.
Yeah. Their inventories are elevated for sure now when you look at understanding what the absolute dollars of elevated inventory are.
Particularly semiconductors tend to be a very heavy portion of those inventory investments for <unk> or other customers.
Pricing semiconductors has grown very dramatically also over the last couple of years. So some level of that inventory increase from a dollar perspective, just cost based right. So there clearly has been an elevation in that driven by cost probably is the biggest driver also volume as well as they wait for.
Sure.
Shortages of one component they buildup other components, so inventory spend needs to be elevated it and customers in some areas, we have not seen a lot of activity.
Of customers trying to kind of pull back from that or adjust that down dramatically because the simple fact is that remains volatility in the supply chain.
So we still see volatility, whether it's coming out of China and now as we talk to customers one of the bigger issues. They talk about is well what if Europe you know what if the gas supply in Europe as a problem right is that going to disrupt things so.
There are elevated inventories out there, we're not seeing big actions taken to kind of adjust those down at this stage.
That's really reflected because a lot of that flows through distribution. That's really reflected in the fact that Pos levels at our distribution partners continues to maintain very high and very strong.
So we're not seeing that evidence at this point.
And Luke I would add I mean, we take ourselves.
Any other peer company carrying inventory as part of our strategy right now right. I mean, it's it's you've got a lot of strong companies that are managing their balance sheet. We are absolutely front and center on that and we've chosen to carry some elevated levels of inventory to make sure. We can service customers. So I think the main thing that we're looking at is is and cuts.
And customer demand and customer sales and Thats all vary.
Vast majority of our market that continued to remain strong. So those are some really positive signs.
Yeah.
Okay, great. Thank you.
Appreciate the follow up question. Thank you.
For joining us on today's call and your interest in little fuse, we look forward to seeing you during the Jefferies in CL King conferences and 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.